The defined benefit pension system “destroys economic value” as it places a focus on binary outcomes, either by meeting full benefits or falling into the PPF, the Pensions Institute has said.

Speaking at the launch of the Pensions Institute report, Greatest Good 2, today, authors David Blake and Matthew Roy discussed how the current policy requires scheme sponsors to either ensure benefits can be paid in full or risk leaving the scheme underfunded if the sponsoring company becomes insolvent.

Instead the Pensions Institute has recommended in its second report that schemes should focus on the “second best outcome” and the “greatest good for the greatest number”. To do this it was suggested that weak schemes that are at risk of insolvency should be permitted to negotiate a settlement for their members between fill benefits and the level of compensation provided through the PPF.

Due to the unaffordability of deficit repair contributions for sponsors of schemes in PPF deficit, the report also recommends that the government establishes a statutory minimum contribution rate for these schemes.

Nonetheless, Blake noted that there isn’t any evidence that deficit repair contributions are unaffordable or that there is a crisis that should allow all schemes to reduce indexation to a statutory minimum.

Furthermore, to enable second best outcomes for stressed schemes, the report states that trustees should have access to “streamlined” Regulated Apportionment Arrangements, whereby full benefits are unlikely to be paid, that insolvency is likely and that the result is better than insolvency.

In addition, Blake and Roy noted that the report agrees with the need to award The Pensions Regulator with additional powers. Roy states the conclusion that TPR should be able to take early warning measures to achieve better outcomes for sponsors of stressed schemes and PPF levy payers. To do this, TPR should be able to collect additional funding data to create an early warning system for struggling schemes in order to trigger official interventions earlier. As well as the report said that TPR should be able to alter indexation, member benefits and interview stakeholder where necessary.

The Pensions Institute is therefore, calling on the government to “redirect government policy to focus on the greatest good for the greatest number of people” rather than focusing on paying all promised member benefits when this is unachievable. It asked for TPR to be given greater resources to assist with this and to publish a report on how it has used these powers annually.

Blake explained: “The difference between the potential value of negotiated benefits and PPF benefits represents a significant loss to members, sponsor organisations, PPF levy payers and society as a whole. Instead, seeking ‘the greatest good for the greatest number’ would prevent the destruction of billions of pounds in economic value. It would also produce a more equitable distribution of benefits for younger members who stand to lose much more on insolvency because of the way PPF benefits are calculated. But fortunately, we find that most companies can afford to make their pension contributions.

PLSA head of investment and governance Joe Dabrowski said: “We welcome the publication of this report which highlights the challenges that defined benefit (DB) pension schemes are facing and the need for less binary outcomes for pension scheme members. According to our own analysis, three million people have a 50:50 chance of seeing their DB benefits paid in full which is a real concern for the industry and Government. However, as the Pensions Institute report has highlighted, a significant proportion of members assume that “their scheme is guaranteed to deliver full benefits.

“More work needs to be done to help sustain defined benefit schemes by helping them to run effectively or consolidate if they wish to. It is time for the industry to think outside the box and consider what outcomes will provide the greatest good for the greatest number.”

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