In this blog, Mark Williams FIA, Chair of the Pensions Board at the Institute and Faculty of Actuaries, discusses what could arguably be the most critical pensions issue of our time.
In its latest (and longest) funding statement, The Pensions Regulator (TPR) set out its stall on what it calls the ‘equitable treatment’ of defined benefit pension schemes relative to company shareholders. In a way, TPR is pitching itself as the protector of the people against those big, bad (and occasionally reckless) corporations.
Where dividend payments are bigger than deficit contributions, TPR wants to know why, and expects recovery plans to be accelerated. If there are major concerns about the ability of the company to support the scheme, TPR expects dividend payments to have stopped altogether.
This is quite a definitive view for TPR to take, to hone in on the comparison of dividends and DB deficit payments. It perhaps signals a shift in direction from its focus on sustainable employer growth through the early part of this decade.
Whether or not you consider this intervention to be appropriate, one thing is clear – it ignores the elephant in the room, by which I mean adequacy of occupational DC schemes.
Views differ across the pensions industry around what constitutes an ‘adequate’ annual contribution to a DC scheme. We at the Institute and Faculty of Actuaries have recently commissioned some research on this point, the results of which will be published shortly.
However there is wide consensus that the current auto-enrolment minimum of 8% of qualifying earnings (of which at least 3% must be paid by the employer) is very (very) far off the level needed to provide a comfortable retirement for vast swathes of the UK workforce. Yes, many companies pay in more than the minimum, but very few schemes provide sufficient levels of contribution that are genuinely expected to provide a strong level of retirement income based on sensible investment return assumptions.
There is no getting away from it: this issue is a massive ticking time bomb. Indeed, it is arguably the most critical pensions issue of our time.
In this environment, should employers really be prioritising increasing funding to ‘gold plated’ DB schemes, rather than enhancing contributions to DC schemes?
Do we really want to motivate companies to reduce a DB recovery plan from 9 years to 7 years (say) while DC members are only receiving auto-enrolment minimum contributions?
I’d argue not.
Making modest changes to the funding plans of DB schemes will – in the majority of cases – ultimately make no material difference to the (typically very generous) benefits received by DB scheme members. However, even small changes to the levels of contribution provided to DC members could have a major impact on their retirement outcomes.
I’d also argue that TPR, as the regulator of UK occupational schemes, should be taking a view on this critical issue – on the ‘equitable treatment’ of DB and DC members – just as they have on the equitable treatment of DB schemes and company shareholders. This would seem to be entirely in keeping with TPR’s aims to protect and build people's confidence in pensions.
For example, should TPR require employers to make a minimum level of contribution to their DC scheme before increasing or accelerating deficit contributions to their DB scheme?
One potential barrier to this type of approach is the complex joined regulatory regime in which occupational DC schemes operate. The FCA and TPR published a joint regulatory strategy last autumn, which set out their central concern that people may not have adequate income in retirement. It may take some time for any joint work from these two busy regulators to see the light of day; however this would seem to provide a platform for prioritising and addressing the competing needs of DC and DB schemes.
The overarching aim here is for all people to achieve good outcomes in retirement, whatever pension arrangement they are in. In order to have any chances of achieving that aim, it is important to motivate or require employers to prioritise their cash accordingly, and thereby achieve more equitable treatment of all their pension scheme members.