New rules around DB surplus sharing risk undermining the government plans to boost investment into the UK economy, according to the Association of Consulting Actuaries (ACA).
These comments come in its response to the Department of Work & Pensions consultation on new regulations for sharing DB surpluses.
In its response the ACA warns that forthcoming regulatory guidance for trustees must make safeguarding members’ existing benefits a key focus, rather that emphasising the possibility of benefit enhancements, in order to encourage sponsor support for well-funded schemes to run on.
It says that if many schemes opt for buyout over run-on, this will undermine the government’s wider investment ambitions, as this see more money going into cautiously-backed insurance solutions rather than being invested in growth assets.
The ACA is also calling for greater practical flexibility around how trustees communicate proposed surplus payments to members.
It said trustees should be able to reduce a proposed payment without having to restart the entire member notification process if market conditions or a scheme’s funding position changes.
The association also wants schemes to be able to use a formula-based approach when determining surplus payments, allowing trustees to explain how payments will be calculated rather than having to specify a fixed monetary amount.
The ACA has also raised concerns about some of the proposed timescales. It wants the proposed five-working-day period between actuarial certification and payment of surplus to an employer extended to at least 10 working days.
At the same time, it believes trustees should have discretion to shorten the proposed three-month member notification period where appropriate.
The association is also seeking clarification from the DWP over the proposed three-year forward-looking funding test. It wants confirmation that this will be assessed on a deterministic basis rather than potentially requiring schemes to undertake more complex stochastic modelling.
There are a number of industry responses to this consolation which is due to close shortly.
ACA chair Chintan Gandhi says: “Many DB schemes are now very well funded after years of significant employer support, so greater flexibility over surplus release is welcome.
“However, The Pensions Regulator’s guidance must be balanced and avoid setting an expectation that surplus should be distributed in a particular way.”
He pointed to a recent ACA survey of scheme actuaries which found the new flexibilities had already changed behaviours or endgame targets for 46 per cent of schemes with assets of more than £1bn.
Gandhi says : “With decisions shifting, getting the guidance wrong could leave trustees and employers with less reason to keep schemes running and invested for growth, potentially undermining the Government’s wider investment ambitions.”
Talking about the need for greater flexibility Gandhi adds: “Surplus release decisions may need to respond to changing market and funding conditions. The framework should make it straightforward for trustees to take a more cautious approach where circumstances change, rather than requiring them to repeat an otherwise unnecessary process.
“We would also like the regulations to make phased surplus release a genuinely practical option. A single member notification should be capable of setting out an appropriate series of payments, with each individual payment still subject to the necessary actuarial certification.”