The case for a new approach: Insight’s response on DB scheme options | Insight Investment

Insight highlighted this in our response to the call for evidence from Department for Work and Pensions on the options for DB schemes, issued alongside the Mansion House reforms announced by Chancellor Jeremy Hunt in July 2023.

The call for evidence outlined significant questions which have significant implications for the long-term future of DB pension schemes.

In the foreword to the call for evidence, Minister for Pensions Laura Trott MP writes: “we want to ensure that pension scheme money is working as effectively as it can for members, sponsoring employers and the UK economy. As part of this, we are considering whether more can be done with the assets of defined benefit schemes…We are keen to explore some of the ideas which suggest ways in which sponsoring employers and DB scheme trustees can invest differently, and the choices we could offer to help them to do this.”

The full call for evidence is available here.

Key points we made in our response include:

• The UK DB pension system is a huge success story: Pension funds de-risked, increasing investments into government and corporate bonds, due to a number of factors including the natural transition of DB pension schemes from accumulation to decumulation, as well as a desire to manage risks prudently. Despite some recent rhetoric, it was not driven by any artificial construct of accounting rules.
  This sensible and prudent management of risk has created one of the healthiest pensions regimes in the world, providing retirement security for millions of plan members.
• A win-win-win solution for the future is possible: Today, DB pension schemes are at a fork in the road. With many now in surplus, they have the ability to take investment risk with that surplus without putting at risk their ability to make pension payments.
  We believe that this could lead to an outcome where pension plan members win through potential benefit increases, sponsors win by benefiting from excess surpluses (subject to safeguards), and the UK economy overall benefits from greater deployment of risk capital by pension funds.
• Changes are needed to unlock the potential of DB pension schemes: The key is for policymakers to create the right incentives for trustees and sponsors to continue managing DB pension schemes for the long run.

For pension trustees, possible incentives include:

1. 1. Provide greater clarity and guidance that pension trustees can continue to run on pension schemes if managed responsibly, reflecting the potential upside for members and pensioners more broadly, rather than driving schemes to conduct an insurance buy-out once affordable.
   2. Increase the level of pension benefits that the PPF guarantees. This would be helpful to shift the balance of risks for trustees in favour of investing in more equities and other higher-risk assets, as it could potentially remove the risk of DB members facing reduced benefits if the scheme’s sponsor was to become insolvent.
   3. Simplify the process for agreeing discretionary increases of members’ benefits from excess surplus, particularly at times when inflation is higher than the typical caps that apply to the annual inflation linkage for pension benefits.
   4. Reduce the perceived personal liability to trustees if they choose to run on a well-funded pension scheme.

For corporate sponsors, possible incentives that could encourage run-on and the investment of some excess surplus assets into equities and other higher-risk assets would focus on improving the upside potential of schemes, such as:

1. 1. The ability for some excess surplus to be directed to a sponsor’s DC pension scheme without any tax implications, including where DC arrangements do not form part of the same trust. This could also help to close the intergenerational gap between the benefits of DB and DC pension scheme members, as well as reduce pension costs for UK companies.
   2. The ability to have some refund of excess surplus without being faced with a punitive tax rate applied to such refunds, subject to protections to preserve a pension scheme’s health.

• A public consolidator needs careful thought: While we welcome the scope for governance and efficiency gains that may be available from consolidation, especially for smaller schemes, in our view, pension schemes should be encouraged to embrace private-sector solutions to these problems including sole trusteeships, fiduciary solutions, master trusts/pooling, super funds and private-sector consolidators, before a public-sector solution is adopted.