The defined benefit funding challenge facing schemes and employers is “much more significant” than the position outlined in the Department for Work and Pensions' green paper, the Pensions and Lifetime Savings Association has said.
Responding to the DWP’s Security and Sustainability in Defined Benefit Pension Schemes, the PLSA’s DB Taskforce noted that schemes in the weakest solvency group allocated by the regulator only had a 32 per cent chance of reaching full solvency funding after 30 years, while schemes in the strongest covenant group had a 90 per cent chance.
In addition to this, schemes in the bottom two covenant groups, as allocated by TPR, approximately have a 50:50 change of reaching funding solvency.
As a result, the PLSA has recommended that additional work is undertaken by DWP, the Pension Protection Fund and TPR to “understand and tackle the extent of risks in the system”.
PLSA’s Taskforce explained its view that DB funding regimes are most efficient when employers and schemes work together to agree scheme funding targets and contingency plans. Issues are usually a result of ineffective regulation and poor governance, it added.
While more could be done in this area, the PLSA supported the DWP’s focus on member protections that has been spurred by the BHS case. Yet, the PLSA suggested that a “measured approach” should be taken towards improving protections.
PLSA director of external affairs Graham Vidler, said: “Millions of people in the UK rely on defined benefit pensions for a significant proportion of their retirement income but the system faces a major funding challenge which needs to be addressed. This is a welcome green paper which will start the process of getting DB back on track.
“The focus on improving scheme governance and member protection is particularly important. We support a proportional strengthening of the regulator’s powers to intervene where corporate action may put members’ interests at risk. We would also support further emphasis on making improvements to both the governance and structure of DB schemes.
“The regulatory focus needs to shift from outputs to inputs, regulating for strong governance through the encouragement of strong, diverse governing bodies. Strong governance is also one of the many benefits of consolidation and we welcome the government’s recognition of the need to increase scale in the sector.”