Up to 1,000 defined benefit schemes are at serious risk of falling into the Pension Protection Fund, most of which will leave members receiving only PPF compensation says the Pensions Institute.
A Pensions Institute report out today says many sponsors are expected to become insolvent in the next five-to-10 years. It predicts 600 schemes could fail leaving members with only PPF compensation. The remaining 400 sponsoring employers might initially survive, but may eventually fail if they are not able to off-load their pension obligations
The report challenges what it describes as the ‘flawed assumption’ that, in time, the majority of these sponsors will meet their pension promises in full.
The Pensions Institute, part of Cass Business School, says planned and coordinated action now could secure better outcomes for members than the PPF compensation floor while securing jobs and freeing up businesses to create growth.
The report, “The Greatest Good for the Greatest Number”, predicts that the businesses of hundreds of employers will become insolvent well before the end of their recovery plans, under which the trustees and sponsor agree contributions to make good the deficit over an agreed number of years.
The report argues that this worst-case scenario can be averted if the approach to managing pensions changes to one that is prepared for many more schemes to pay less than full benefits on a planned and co-ordinated basis, with all parties in agreement on how best this is achieved.
Freeing an employer from the burden of its pension fund, whilst avoiding insolvency, can create extra value which can be shared with the members to achieve a better outcome, the report argues.
The research found that of the approximate 6,000 DB schemes in the PPF Index, most of which are closed, as many as 1,000 schemes are highly vulnerable to the risk of significant underfunding and the sponsor’s insolvency as scheme funding levels continue to weaken. Around 600 schemes – 10 per cent of the total – are unlikely to ‘ever’ pay off their pension scheme debts. The businesses of up to a further 10 per cent are at risk of failure due to the DB deficit. Quantitative Easing (QE), low interest rates, and low gilt yields are all considered to add significantly to the problem, especially as gilt yields are a key factor in the assumptions used for valuations.
Pensions Institute director Professor David Blake, one of the authors of the report, says: “Government policy is predicated on the assumption that employers with DB schemes, over time, will be strong and prosperous enough to pay benefits in full. The report challenges this rose-tinted view and seeks answers to the following question: What actions should trustees take, to secure the best possible outcomes for the members they serve, if the employer is not strong, is unlikely to prosper, and, the prospect of the Pension Protection Fund ‘lifeboat’ looms?”
Nigel Jones of 2020 Trustees Ltd says: “On behalf of the five sponsors, we are delighted to be supporting this Pensions Institute report which discusses the challenges faced by trustees of private-sector defined benefit schemes who are faced with extremely difficult decisions. The report discusses an uncomfortable topic but is an important document for everyone working in the industry. There are clearly situations where all major stakeholders – members, trustees and sponsoring employers – can benefit from recognising the inability to provide full benefits from the scheme, and, in turn, looking to provide an alternative solution based on some form of compromise arrangement. The Pension Institute should be commended for starting a debate on this important issue and we look forward to continuing that debate with Government, regulators and the wider pensions industry.”