Written by:
Chief Executive Officer (CEO)
Read Time:
5 minutes
Published:
01 / 10 / 2024
Share Article:
Pensions review – which way for DB?
As the pensions review gets underway, there’s one section of the market that’s out of scope – defined benefit (DB) schemes. The terms of reference for the review which were published over the summer state: “Ongoing policy development with respect to defined benefit workplace pensions schemes will remain separate from the review.”
To exclude such a large section of the market from the government’s review in some ways feels counterintuitive. Collectively DB schemes have £1.4 trillion of assets under management and 8.9 million members.
Whilst 91% are closed to new members, the sector will remain a significant part of the pensions landscape for many years to come.
What’s the government’s rationale?
Given the maturity of the schemes, it’s likely that most will be seeking to implement investment strategies that match their assets to their liabilities. Many will have negative cash-flows as they pay out more in benefits than they receive in returns or deficit recovery payments from their sponsors. As such, they will increasingly be moving more into bond and bond-like investments which feature a regular contracted cash flow or payment.
In terms of the government’s productive finance agenda, it’s certainly true that DB offers much less potential than DC and LGPS schemes that are cash flow positive with a fundamentally different member base.
Nonetheless, DB scheme remain large investors in the UK. They are the biggest buyers of UK gilts, providing the government with huge sums of money to spend on its wider political priorities. They also support the UK through investments in corporate credit, direct lending to SMEs, infrastructure and income generating property. With this in mind, retaining an ongoing dialogue with the DB sector is in everyone’s interest.
Big questions for DB remain unanswered
The options for defined benefit pension schemes consultation which closed in April also raised a number of interesting questions that deserve to be on the new government’s agenda.
One of the biggest areas for consideration was around the potential for making it easier to return pension scheme surplus to sponsors.
While changing the rules on surplus is unlikely to result in a wholescale change of approach on asset allocation, it would provide trustees and sponsors with a much greater incentive to run on rather than buy out which could help support the government’s priorities.
More DB schemes running on would ensure continued support for the gilt market and allow UK sponsoring employers to invest in their own businesses. It could also enable sponsors to supplement their DC schemes helping to ease the growing concerns around adequacy.
For this to be effective, there’s a lot of detail that would need to be worked through but it’s certainly not insurmountable.
The consultation also raised the prospect of the PPF as a public sector consolidator. This could certainly be beneficial for smaller schemes. But, if the government is keen to see larger schemes run on, supporting innovative solutions is imperative.
The growing regulatory and reporting burden on pension schemes and the wide variation in costs and quality of governance between schemes makes this an obvious target for delivering greater efficiency and better value for money.
Closed DB schemes are also struggling to attract the quality of skills needed to operate and invest efficiently.
They can also find it harder to navigate the highly intermediated nature of the UK pensions system. All this results in significant value leakage, which could be addressed by greater collaboration and / or consolidation of the DB market.
With regulatory pressure growing on pension schemes to agree their endgames, greater certainty on the direction of travel on surplus would be welcome.
The DB sector is out of scope of the government’s pensions review but it shouldn’t be forgotten.
If you are interested in finding out more about how Brightwell can develop innovative solutions for your scheme, please contact us at hello@brightwellpensions.com.
