By Graham Vidler
Six months is a long time in politics and even longer in economics. We’ve had: a Leave vote, a new Prime Minister, a new Cabinet, a new Shadow Cabinet, an opposition leadership challenge, British Steel and BHS pensions crises, slowdown of the economy, the rapid decline of sterling, all-time low interest rates, and Pokémon Go.
According to the Pension Protection Fund 7800 index, at the end of July the aggregate deficit of the 5,945 defined benefit (DB) pension schemes increased to £408bn, surpassing £400bn for the first time, and 5,020 DB schemes are in deficit. The Bank of England’s decision to cut interest rates and to introduce further quantitative easing (QE) is also a cause for concern.
Pension schemes have battled historically low interest rates for over eight years and further cuts will put them under even greater pressure. While the level of QE is significantly lower than previous rounds, the impact this will have on gilt yields will be an additional burden for many schemes. So where now for DB pensions?
The Work and Pensions Committee recently reported on BHS with its chairman, Frank Field, commenting: “The lessons of BHS must be learnt.” The committee has vowed to investigate “how to secure a fair and sustainable settlement” with a focus on whether the balance in the regulatory framework is correct in that it can offer both adequate protection and strong enough recourse for schemes and trustees.
To support the committee’s investigation, the DB Taskforce, launched independently by the PLSA to tackle the problems faced by DB pension schemes, has shared its findings. Made up of industry experts and academics, the taskforce is responsible for seeking views and evidence from schemes of all sizes, as well as sponsors, regulators, government and intermediaries, to get to the heart of the issues affecting DB schemes.
The taskforce’s Call for Evidence closed in July and it is currently assessing the evidence, and continues to meet with interested stakeholders and review relevant research and evidence to develop its thinking. The taskforce will examine the level and distribution of risk to member benefits and analyse the impact of deficit contributions on employers and their employees. It will also ask how efficiently schemes are run, from day-to-day administration to managing investments, and how the regulatory framework supports efficiency.
This work has informed the interim report, which we published at the PLSA’s Annual Conference and Exhibition in Liverpool this week. This set out the state of DB as the taskforce sees it and suggest areas for further exploration with a view to having proposals ready to share with government, regulators and the industry at large in March 2017.
Clearly the DB pension deficit isn’t going to be resolved in the next six months, but the DB Taskforce’s proposals should help put DB pensions on a solid footing for the future.
Graham Vidler is director of external affairs at the Pensions and Lifetime Savings Association
