The proposed and unprecedented plan to change the basis for Tata steel members’ future pension increases from Retail Price Index to Consumer Price Index is another reality check of the real pressure faced by companies which are trying to remain competitive and, at the same time, honour generous legacy defined benefit (DB) pensions, which in many cases are not being given to current workers.
This current high-profile case clearly shows that the legislation surrounding UK DB pensions is no longer fit for purpose, especially for companies that would be perfectly viable, save for the enormous strains arising from DB pension arrangements.
In my opinion, this highlights the need for companies to be permitted to restructure legacy pension promises, especially where such companies would be viable without their DB pension arrangements.
A recent study by the Pensions Institute, based on data provided by the 6,000 or so DB schemes in the UK, suggests that around one in six of these schemes is under stress, with sponsoring employers so weak that insolvency would lead to many of their schemes falling into the Pension Protection (PPF) unless preventative action is taken now. The study suggests that almost half of these companies may well have viable businesses were it not for the DB scheme.
This apparent state of denial is known to many restructuring experts. However, the complex relationship between the actuarial, investment and covenant (or credit assessment) advice provided to trustees managing DB schemes is all too often provided in silos, with a joined-up, integrated approach a seemingly too-hard-to-crack nut.
The timely publication from the Pensions Regulator (TPR) setting out its thoughts around Integrated Risk Management (IRM) should have blown the roof off the lack of joined-up advice and does beg the question: What were they all doing before?
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Surely it was, is, and always will be, common sense, firstly, to consider all the risks facing a DB scheme holistically, recognising each above-mentioned aspect; but, secondly, also considering how these risks interact with the employer standing behind the DB scheme promise – the employer covenant – which is central to the analysis. Perhaps the learning curve was too great?
It's time for a thorough overhaul of the current situation.
For example, the going concern assumption of an employer's covenant needs a radical re-think. The Financial Reporting Council revision of forward-looking statements for listed company accounts to be much more that 12 months is a very welcome, but overdue, start.
The recent Halcrow case, where the judge commended the trustees and their advisers in their attempts to find a way to reduce members' benefits, while still providing a reasonable chance of members receiving benefits above the PPF minimum levels was only thwarted by the existing law.
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Talk of creating a government-backed zombie vehicle to sustain the Tata steel pension scheme demonstrates the risk of establishing dangerous precedents on the hoof.
What is needed is a rapid and comprehensive review of the current pension legislation to ensure it is still fit for purpose. In the meantime, TPR needs extra and new resource drawing on industry expertise, to handle these emerging integrated risk issues.
Lessons being learned from the BHS enquiry, and Frank Field's noticeable frustration with the market's inadequate response, must lead to a reassessment of what tools are in place to protect members' interests but, at the same time, allow companies that should be paying those promises, not the PPF, to survive. Worries over precedents should be dealt with by the appropriate regulation but it's clear that the current system is not suitable.
When the cry goes up "Something needs to be done!", it probably does – the sad fact is that it’s already too late for some.