Covering four broad areas, the paper considers key challenges facing DB schemes and possible options to help manage them. Trustees should review the issues covered in this paper and consider whether they want to provide feedback on the consultation questions summarised at the back of the paper. The consultation is now closed - 14 May 2017.
The paper raises questions about whether the approach to the calculation of actuarial liabilities is the right one, including whether flexibilities in setting the discount rate are being appropriately used. Questions also include whether the valuation cycle should vary in length depending on scheme risk, and whether scheme members need to have an understanding of the funding position.
The paper calls for views on whether current investment choices made by Trustees are sub optimal, exploring whether current valuation and funding arrangements influence schemes to make overly cautious and short term investment decisions.
Whilst scheme funding may improve in the future as interest rates and gilt yields rise, it is recognised that there are some 'stressed' schemes where employers are making substantial, potentially unsustainable, deficit contributions. The paper raises questions around whether there should be flexibilities for such schemes. Possible options to relieve financial pressure on such employers require careful consideration to ensure they are used appropriately in the right circumstances. Suggested changes include:
The paper also questions whether there should be measures to encourage employers to repair significant deficits more quickly where they have significant resource.
While the majority of DB scheme members will receive their benefits in full, recent cases have given cause to question whether additional safeguards should be introduced to protect members, with a more proactive role for the Regulator and/or enhanced Trustee powers. Suggested changes include compulsory clearance of certain corporate activities in limited circumstances, fines on companies for corporate transactions that are detrimental to the scheme and employer consultation with Trustees before paying dividends, if the scheme is severely underfunded.
The paper identifies that 79% of DB schemes have less than 1,000 members and suggests that, while it is not the case for all small schemes, the smaller schemes tend to have higher administrative costs and less effective governance. The paper questions whether this could be improved by the aggregation of small schemes into 'superfunds'. It is recognised that there are challenges with consolidatio,n and the paper calls for views on possible barriers and how these could be overcome, such as different funding levels and employer covenants.
The consultation on the sustainability and security of DB schemes in an ever-changing world is welcome. Consideration of the way actuarial valuations are calculated, the approach to investments, flexibilities available to employers and the Regulator's role are all important considerations. In this context it is important to remember the long-term nature of pension schemes, without too much focus on short term changes. The protection of members' benefits is fundamental, but this is best served by continuing healthy employers who can support their pension scheme.
If you would like to discuss any of these aspects further and how the changes outlined in the green paper could affect your scheme, contact your usual Crowe UK Pension Funds advisor or Andrew Penketh, Head of Pension Funds.