Billions of pounds of pension wealth could be saved by putting stressed pension schemes on a sounder footing

By Amy Ripley(PR & Communications Manager), Published (Updated )

The Cass Pensions Institute says new solutions are needed in stressed defined benefit pension schemes to prevent intergenerational inequities.

The Institute has responded to the Department of Work and Pensions Green Paper, Security and Sustainability in Defined Benefit Pension Schemes.

The Greatest Good 2 paper follows up and reconfirms the findings of an 2015 Pensions Institute discussion paper which found that 1,000 occupational defined benefit (DB) pension schemes are stressed as a result of having financially weak sponsors.

Professor David Blake, Director, Pensions Institute said the slide of many of these schemes into the Pensions Protection Fund (PPF) seems inevitable because policy and regulation demand that schemes adhere to the binary outcomes of paying full benefits or going into insolvency.

“We call for the government to pursue a policy of ‘second best’ outcomes allowing schemes with weak sponsors for whom insolvency is inevitable to negotiate settlements between full benefits and the benefits provided through the PPF,” he said.

To prepare their response, the researchers interviewed experts who identified as the most pressing issues for DB occupational pensions; affordability, information provided to trustees and members, empowering the regulator, sector consolidation, and technical provisions.

Based on their findings, the paper proposes a series of measures that would help deliver second-best outcomes which the researchers say would be cost-effective.

The major findings of the paper are:

  • There is no evidence that deficit repair contributions are unaffordable or that there is a crisis that should permit schemes across the board to reduce indexation to the statutory minimum.
  • The current DB system destroys economic value because it focuses on binary outcomes, and the government could rectify this by streamlining access to new solutions such as Regulated Apportionment Arrangements.
  • PPF compensation is a ‘cliff-edge’ that is unfair for pre-normal retirement age members.
  • Using early warning measures to trigger interventions into stressed schemes would produce better outcomes for members, sponsors and PPF levy payers.
  • The Pension Regulator’s (TPR) existing powers could deliver second-best outcomes but does not use them due to government policy and lack of funding.
  • Giving TPR new powers – to alter indexation, alter benefits and interview stakeholders – would help deliver second-best outcomes.
  • Full consolidation is not viable for the occupational DB pensions sector owing to high costs and limited benefits from mutualisation, but may be worthwhile for smaller schemes.

Read a full copy of the paper, which includes recommendations, here.

Greatest Good 2 was authored by Professor David Blake, Director, Pensions Institute and Matthew Roy, Fellow, Pensions Institute. The Pensions Institute is part of Cass Business School , City, University of London.