DWP's Pension Green Paper
26th May 2017
- The Green Paper seems too complacent about the affordability and sustainability of DB pensions. UK DB pensions are the most expensive in the world and most private sector schemes are now closed as the costs have soared beyond any previous expectations. Potential post-Brexit economic uncertainty makes contingency planning for such huge asset pools even more urgent.
- Quantitative Easing has undermined DB schemes. It has inflated estimated liabilities, increased annuity buyout costs and driven excessive investment in lower-return bonds.
- UK DB pension schemes are currently misallocating resources, to the detriment of the economy and future generations.
- DB scheme advisers are too focussed on minimising risk, rather than ‘managing’ risk. Optimising returns rather than maximising returns is required, allowing for upside to outperform liabilities when schemes are in deficit. Just focussing on matching liabilities is not enough, schemes need to outperform if they are in deficit with a weak sponsor.
- DB pension assets would be better used to invest in growth-enhancing investments, rather than just chasing low-return ‘safer’ fixed income.
- The Regulator needs more powers to oversee consolidation or merger of smaller and medium sized schemes, to achieve economies of scale, improved cost-effectiveness and efficiency of investment management and better governance standards.
- Pooling assets can help ensure better standards of investment management, access to more diversified asset classes, better quality advice and professional risk management.
- Current annuity buyout requirements are too draconian. Using BHS example, the Regulator should devise a new self-sufficiency measure (perhaps technical provisions plus a margin) to allow employers to sever ties without having to meet full annuity buyout costs.
- A regime is needed for the future of closed schemes, to ensure the assets and liabilities can be managed effectively over the long-term.
- Open schemes are in a very different position from closed schemes. As most private sector schemes are now closed, their sponsors will have no economic interest in their liabilities in a few years’ time, as no staff will be accruing benefits.