The Pensions and Lifetime Savings Association has proposed an overhaul of defined benefit pension scheme processes to improve schemes facing the challenges of underfunding, weak employer covenants and lack of scale.

In its final DB Taskforce report, Opportunities for Change, published 27 September 2017, the PLSA made three key recommendations that DB schemes could implement to protect themselves.

The first proposal is a news chair's statement for DB scheme trustees. The PLSA has suggested that schemes should be required to produce an annual statement to demonstrate that they are operating in line with best practice in areas including governance, investment performance and cost transparency.

The second recommendation is to make it easier to standardise and simplify benefits. The association has noted that the government could take action to simplify the tens of thousands of different benefit structures, while preserving each members' full benefits.

The final proposal involved exchanging covenants for funding. The taskforce report has proposed that new measures are introduced to assist schemes with weaker covenants. "Such schemes could benefit from turning the uncertain promise of future support into tangible funding," the report said. As a result this could free employers of their funding duties and schemes could move into newly created superfunds, the PLSA said.

On the third proposal, the report noted: "Trustees would have a new choice beyond PPF and buy-out. Our research indicates this would be affordable and attractive to many employers and attractive to many trustees."

According to the report, a superfund would be an occupational pension scheme regulated and supervised by The Pensions Regulator. It would aim to pay members their full benefits in more than 90 per cent of scenarios and payments would be simplified to a common structure. Further to this, these funds would be PPF-eligible, ensuring the same protection as in any other traditional DB scheme.

Almost two thirds, 65 per cent, of surveyed employers said they would support consolidation, particularly for shared administration (72 per cent), shared external advisers (66 per cent) and pooling assets under one asset manager, (54 per cent).

For these suggestions to be made a reality, the Department for Work and Pensions and the industry must work cohesively to decide on how they could be implemented, the PLSA said.

PLSA DB Taskforce chair Ashok Gupta commented: “There is a real possibility that without change we will see more high profile company failures such as BHS or Tata Steel. It is vital that action is taken to address covenant risk, underfunding and the current lack of scale in the majority of schemes.

“Our proposals have the potential to transform the industry – helping to ensure more members get their full benefits, reducing sector inefficiency, addressing the issue of stressed schemes and enabling sponsors to concentrate on growing their businesses. The industry and government need to grasp this opportunity and tackle serious flaws that threaten the security of people’s retirement.”

PLSA director of external affairs Graham Vidler added: “The UK’s 6,000 DB schemes face 6,000 different challenges and the Taskforce’s proposals create new options to tackle each of them.

“Consolidation can benefit a variety of schemes and their members but there are some key challenges for those who want to pursue this option. The new DB chair’s statement and the ability to consider simplifying benefit structures have the potential to help these schemes by removing some of these barriers and allowing them take proactive steps to manage their deficits.

“The taskforce’s analysis of a potential Superfund framework moves forward significantly the case for considering how employers can be enabled to swap covenants for cash. We call on industry and the government to work with us to further develop and test this framework.”

Across the UK, 11 million people receive or will receive a DB pension at retirement, and although £120bn in special contributions has been invested in these schemes over the last 10 years, deficits have remained at over £400bn, the PLSA highlighted. Furthermore, while many schemes will be able to reach a secure funding position, employer covenants are pressures, with three million members in the weakest schemes only having a 50 per cent chance of receiving their benefits in full.

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