Are DB schemes throttling the UK economy?
They most certainly are is the view of a paper from The Intergenerational Foundation, whose publication has been timed to coincide with the inquiry by the House of Commons Work and Pensions Committee into the current inter-generational trade-offs arising from persistent debt overhangs in DB schemes (see Pensions Bulletin 2016/22).
The paper says that DB commitments are acting as a drag on the activities of companies, including investment decisions, pay decisions and the ability to buy, sell and restructure businesses. It goes on to report that UK companies are spending almost 20 times more in servicing their obligations towards each DB pension scheme member than they are in relation to each DC member. Given companies have been closing DB schemes to both future accruals and new members, younger members of DB schemes will often not be building up DB benefits and someone starting work today is very unlikely to receive a DB pension, thus creating an inter-generational unfairness. It suggests that things cannot be left as they are, saying that, with hindsight, private sector workers were given pension promises that were too generous and that these will now need to be unpicked.
After stating that large and complicated problems like this must ultimately be left to politicians to determine how the costs and benefits should be shared between the different stakeholders, the authors go on to make five suggestions, including:
- DB schemes should be compulsorily moved from RPI to CPI-linked benefits
- The accounting treatment of DB promises should move away from “marked to market” to a discount rate which tracks historic returns
- Deficit repair contributions should cease (with a commensurate reduction in accrued benefits); and
- The tax rules for DB pensions in respect of the lifetime allowance and the 25% lump sum should be made equivalent to that for DC pensions
Comment
This is a concisely written piece of lobbying, but falls short when it comes to developing its suggestions. We think that the only one that might fly is the first. But the paper does expose the concept of inter-generational unfairness which also arises in areas beyond pensions when implicit cross-generational contracts are broken.
Pensions Regulator publishes its prosecution policy and updates its auto-enrolment compliance and enforcement documents
Following consultation earlier this year (see Pensions Bulletin 2016/01) the Pensions Regulator has now finalised its “Prosecution policy“ which sets out how it will use its powers in relation to criminal offences specifically provided for in the Pensions Acts, with only minor changes from the draft version.
As a consequence to this publication, the Regulator has also updated its “Compliance and enforcement strategy“ along with its “Compliance and enforcement policy“ for employers subject to auto-enrolment duties, making references to this new prosecution policy.
EIOPA has a “remarkable” pensions year
So says its chairman, Gabriel Bernardino, in introducing EIOPA’s 2015 annual report. During 2015, EIOPA conducted the first EU-wide stress test for occupational pension schemes (see Pensions Bulletin 2016/03), resulting in “an ever comprehensive picture of the heterogeneous European occupational pensions’ landscape”.
The report goes on to reference work developing the idea of a second regime for a pan-European personal pension product (see Pensions Bulletin 2016/05), the publication of the first EU-wide register of IORPs and the report on costs and charges of IORPs in 2015 (see Pensions Bulletin 2015/08 for both reports), and the planned delivery of its Opinion on the use of a holistic balance sheet as a risk management tool for DB IORPs in 2016 (see Pensions Bulletin 2016/07).
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
