Pension

Industry voice: Govt must back DB schemes to benefit from investment capabilities – DB & Derisking


I once asked my actuary exactly how long our actuarial valuation span was, and he replied: “Until everybody’s dead.” Another way of putting it, if schemes are open, is as much as 100 years.

So, my question and challenge to the government is – are you prepared to think long term too?

I ask this because if they do think long term they would be extremely concerned about the implications of the end of the defined benefit pension scheme system which generally provides the most generous and reliable pension schemes in the UK.

It is in the government’s and the UK workforce’s interest to stop the demise of these schemes. The government needs generous DB schemes to avoid the long term increase in DWP expenditure that would be needed to keep pensioners out of poverty.

The government wants to encourage pension schemes to invest more in UK equities. A laudable aim – but it is government policy, framed under multiple administrations across decades, that has led to the decrease in UK investment that the DWP refers to in its consultation document on DB schemes, and indeed scheme closures.

Unintended – or otherwise – consequences of government policy

The introduction of market value accounting 20 or so years ago introduced substantial volatility in pension scheme funding levels. It is an utterly inappropriate way to value a pension scheme which has an investment and liability horizon of up to a century.

In addition, the short-term volatility along with regulatory pressure on pension schemes to use a gilts+ discount rate has created the demand for liability-driven investment in gilts.

But another key element in the drop in investment in UK companies was Gordon Brown’s abolition in 1997 of tax relief on UK dividends for pension schemes. At a stroke, this made investment in the UK far less attractive for pension schemes.

So, if the government wants more pension fund investment in UK companies there are two key interventions it needs to do. First, it must reform the rules around pension scheme valuation methods. Doing so would bring back greater stability and less volatility in pension scheme funding levels and reduce this huge dependency on gilts. Lord Hollick, chair of the House of Lords Industry and Regulators Committee, shared the criticisms of the current methods after his committee’s inquiry into the LDI crisis.

Second, in order to give an incentive to pension schemes to invest in UK companies, we urge the government to reinstate the tax credit on dividends received from UK companies on their shareholdings. This would have a far greater impact than merely asking pension schemes to invest without any incentive at all. Reinstating the tax credit would signal that the government is also prepared to invest in future of UK plc: if it believes that increased pension scheme investment will lead to more successful, expanding UK companies, then it would reap the dividends of its tax relief through the increased taxes paid by these UK companies and greater number of workers they employ. This is not a controversial proposal: tax relief aimed at increasing investment is already used successfully to attract foreign investment in the UK, for example from overseas film and TV production companies particularly from the US.

We would add that if the government believes that the best interests of the workforce are paramount, it needs to direct the Pensions Regulator to maintain the DB system rather than preside over its demise. Neither the government nor the Pensions Regulator should see it as anything other than a disaster that the number of members in private sector DB or hybrid schemes has reportedly fallen by 62% in a decade.

Whose surplus is it, anyway?

An additional area of concern for AMNT in the current DB proposals is the idea of returning surpluses to the scheme sponsor. In my view this Is short-sighted. Many of the surpluses suddenly appeared after Liz Truss’s disastrous economic experiment which led to the stratospheric rise of gilt yields. They could disappear as quickly. I would like to see those advocating this move provide the evidence showing that the scheme surpluses are permanent.

This is not the first time the government has intervened to reduce surpluses. Those with long enough memories will recall the Finance Act of 1986. This had the same effect as the current proposals would have – reducing pension scheme surpluses. So inevitably as soon as the UK entered difficult economic times this missing safety cushion caused many DB schemes to be tipped into deficit and this, in turn, led to many employers closing schemes.

I am sure that many trustees would believe that keeping the surplus is in the much greater interest of the beneficiaries than giving it away – especially while our schemes still have the wild volatility of market-value accounting.

And as a final point on the proposals on surpluses – why do the proposals only consider handing it to the scheme sponsor? DB scheme members pay a lot of their hard-earned wages into their pension. Many have been made to substantially increase their contributions from their pay to keep the scheme going, and have seen their future pension entitlements reduce.

So many are now paying more money for less pension. If money is going to be taken out of a pension scheme’s surplus, then it would be unfair to ignore the contribution made by the beneficiaries.

Janice Turner is co-chair of the Association of Member Nominated Trustees



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