PLSA DB taskforce: call for evidence – Sackers’ response to consultation

Background

The PLSA’s “DB Taskforce” opened a call for evidence on 9 June 2016, in relation to the challenges facing DB schemes and potential solutions.

With DB schemes “swimming against the economic and social tide in order to make sure members’ benefits are paid”, the consultation focuses on three areas in which solutions to sustainability may lie – efficiency, capital allocation and member benefits.

General comments

The call for evidence sums up a number of key issues facing DB scheme trustees and their sponsors.

We agree that the increase in regulation for DB schemes in recent years has been an important factor in their decline. A key example of this is the significant tinkering with different elements of the pensions tax system since 6 April 2006 (A-Day), which has undermined confidence in the system for sponsors, trustees and members alike.

But, in our view, the increase in regulation is not the sole, or even most significant, issue. Increasing longevity and falling gilt yields are key contributors to the challenges currently faced by trustees and scheme sponsors.

In this response, we outline some of the difficulties for DB schemes that we come across in practice, which, in our view, would merit consideration when looking at potential solutions.

Efficiency

The role of trustees

As the call for evidence notes, the DB landscape today is “incredibly complex”, and “Navigating this system with its range of stakeholders, with competing roles, objectives and motivations is increasingly challenging, and unlikely to get any easier in the near future”. And whilst DB scheme trustees grapple with increasing complexity in their general duties, for those who find themselves managing a scheme in distress, the responsibilities are more complex still.

Lay trustees continue to have a key role to play in relation to schemes in distress. For example, they bring diversity and balance to trustee boards and are an invaluable resource in terms of the knowledge and understanding they have of the history of their scheme and the employer covenant. But in a distress situation, there is often a need to navigate relatively unchartered and cumbersome processes quickly and efficiently. In our experience, it is invaluable for a trustee board to be able to rely on a professional independent trustee to guide them in these circumstances. We therefore consider that it could be helpful for all parties (trustees, employers, TPR and the PPF), if independent trustee appointments were to become a standard part of the process for schemes which are investigating avenues as alternatives to PPF entry, such as in the case of the British Steel Pension Scheme (BSPS).

Capital allocation

Investment strategy

We agree with the factors put forward in the call for evidence which inhibit the closer correlation between pension scheme investing and investment growth, including herding behaviour and regulatory drivers such as accounting standards.

In addition, we consider that investment strategy – a key focus for trustees – is an area which would benefit from closer scrutiny. The reality for many DB schemes is that they are both closed to new joiners and closed to future accrual. In these circumstances, the need to de-risk and reduce the liability of a scheme to its sponsor, the employer’s focus is often driven by its treasury function. As such, the ultimate impact of a scheme’s de-risking strategy on its members can receive less consideration. Closer collaboration between an employer’s treasury and HR teams, focusing on the position for members, may help achieve better outcomes for all parties.

Benefits

The key issues in relation to member benefits have been outlined clearly in the consultation document at pages 34/35.

Current legal framework

We agree that the binary nature of the current legislative framework generally prevents schemes and their sponsors from investigating options between full scheme benefits and PPF compensation.

Potentially, members of many schemes could benefit from more flexibility in the system, by permitting a wider range of benefit changes, either temporarily or in the longer term.

The current situation for both the BSPS and BHS Pension Scheme highlight the need for the investigation of new options, with safeguards, for changing scheme benefits.

The current system also inevitably leads to intergenerational unfairness and trade-offs between different cohorts of members. Among the biggest contributors to this are the winding-up priority order (under section 73 of the Pensions Act 1995) which is inherently age discriminatory, and the current structure of PPF compensation, which fosters intergenerational unfairness by favouring older people. Furthermore, section 73 only provides an alternative level of benefit for schemes that are in wind-up.

Regulatory intervention

Whilst regulated apportionment arrangements (RAAs) can provide an alternative for some schemes, in practice, the RAA process can be slow, expensive and inflexible, making it challenging for schemes to achieve a middle way. Likewise, the regulatory response in relation to flexible apportionment arrangements can be disproportionate.

A more proactive and commercial approach to the regulation of DB schemes could help stimulate innovative solutions for DB schemes in distress. The BSPS consultation casts light on this.

A proportionate approach

Save for certain limited exceptions, pensions legislation and the current regulatory approach are designed to apply equally to schemes of all sizes.

Our experience in practice is that, because of the potential for a greater relative impact on the sustainability of the PPF, larger schemes are more often targeted for regulatory intervention. The regulatory approach itself can also differ, depending on a scheme’s size. It may therefore be worth reviewing the practical application of the legislative and regulatory requirements to DB schemes of different sizes.

Compliance

There are some legislative requirements which in practice appear to have no direct benefit on members, which may benefit from review and/or removal. By way of example:

the level of detail required in summary funding statements: does this achieve the stated aims and communicate clearly with members? If not, the requirements could be reviewed;
internal risk registers: do they add value in practice to standards of internal controls?

Other options

Successive governments have looked at alternatives to traditional DB provision, and a broad framework for “collective DC” benefits was legislated for in the Pensions Act 2014. This could be a starting point in the consideration of possible solutions for DB schemes.

We recognise that there are concerns, as outlined in the DWP’s recent consultation on the British Steel Pension Scheme, of setting a precedent with the result that employers could seek to use any new solutions for DB schemes in a range of situations, as opposed to distress situations only. However, there is a balance to be struck here between the desire to facilitate compromises in appropriate circumstances on the one hand, and not setting dangerous precedents or scope for abuse on the other. In our view, there is currently too much weight attached to the latter.

In considering alternatives to the existing binary approach, whilst the starting point needs to be the objective of achieving the best possible outcomes for members, any potential solutions for DB schemes should also take account of the commercial context in which they operate.

We recognise that the Government is currently focussed on improving governance in DC schemes, and facilitating the full roll out of automatic enrolment. However, given the significant number of both individual pension savers and sponsors still in DB pension schemes, we support the work of the PLSA’s DB taskforce in inviting a fresh look at possible solutions to the challenges they are facing.