Options for Defined Benefit schemes: a call for evidence

The Department of Work and Pensions (DWP) has launched a new Call for Evidence in connection with defined benefits occupational pension schemes (DBPS). Specifically, the DWP seeks to gather information on
– the asset allocation strategies of DBPS,
– the motivation behind such allocation,
– current barriers to producing (additional) surplus in the schemes, and
– possible ways to get defined benefits (DB) schemes off the balance sheet of employers when a „buy out“ isn’t feasible.
The „Call for Evidence“ is very high level in nature in that it only includes a number of questions related to the above noted topics, accompanied by some limited relevant information on the issues.
#### Background
Over the past few decades, there has been a notable change in the investment approach of DBPS. A recent report from the Resolution Foundation shows that these schemes have shifted significantly from investing in equities to investing in fixed income securities. Simultaneously, they have diversified their equity investments globally rather than focusing solely on UK equities. This shift has been ongoing since before the 2000s and is largely due to the fact that DBPS are no longer accepting new members as DBPS are generally preparing to close out – naturally, because of the trend towards defined contribution schemes (DCPS).
In preparation of these close outs, trustees and employers are now more concerned with reducing risk and volatility to secure member benefits as the timeframes for their schemes shorten. Some employers seek to get off the liabilities of their balance sheets altogether to free up capital for future investment.
It is well known that fixed income securities generate little, yet secure returns, causing the schemes to run minimal surpluses. And investments in global equities do not benefit the UK economy. On top, DBPS liabilities on employers‘ balance sheet hinder additional investments in the UK economy. Therefore, the DWP seeks to explore ways to change this situation and seeks input on the below noted questions – as quoted.
#### Questions posed by the regulator
– What changes might incentivise more trustees and sponsors of DB schemes to consider investing in „productive“ assets while maintaining appropriate security of the benefits promised and meeting their other duties?
– How many DB schemes’ rules permit a return of surplus other than at wind up?
– Would enabling trustees and employers to extract surplus at a point before wind-up encourage more risk to be taken in DB investment strategies and enable greater investment in UK assets, including productive finance assets? What would the risks be?
– Would having greater Pension Protection Fund (PPF) guarantees of benefits result in greater investment in productive finance? What would the risks be?
– What tax changes might be needed to make paying a surplus to the sponsoring employer attractive to employers and scheme trustees, whilst ensuring returned surpluses are taxed appropriately?
– In cases where an employer sponsors a DB scheme and contributes to a defined contribution (DC) pensions scheme, would it be appropriate for additional surplus generated by the DB scheme to be used to provide additional contributions over and above statutory minimum contributions for auto enrollment for DC members?
– Could options to allow easier access to scheme surpluses lead to misuse of scheme funds?
– What impact would higher levels of consolidation in the DB market have on scheme’s asset allocations? What forms of consolidation should Government consider?
– To what extent are existing private sector buy-out/consolidator markets providing sufficient access to schemes that are below scale but fully funded?
– What are the potential risks and benefits of establishing a public consolidator to operate alongside commercial consolidators?
– What are the potential risks and benefits of the PPF acting as a consolidator for some schemes?
—
The above noted list of questions is far from complete. Interest parties should consult the original document to find out more about the issues raised by the DWP.