ICAEW REPRESENTATION
57/17
Security and Sustainability in Defined Benefit Pension Schemes
ICAEW welcomes the opportunity to comment on the Security and Sustainability in Defined Benefit
Pension Schemes published by DWP in February 2107 a copy of which is available from this link.
This ICAEW response of 12 May 2017 reflects consultation with the Pensions Sub-Committee of
ICAEW’s Business Law Committee which includes representatives from public practice and the
business community. The Committee is responsible for ICAEW policy on business law issues and
related submissions to legislators, regulators and other external bodies.
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ICAEW Rep 57/17 Security and Sustainability in Defined Benefit Pension Schemes
MAJOR POINTS
1. The paper covers a number questions arising out of recent events, such as British Steel
Pensions and BHS. We welcome the fact that these issues are being considered in a
reasonably holistic way with a good deal of relevant data having been obtained and disclosed
for the purpose. It is essential that government initiatives on pensions are developed carefully
because of the long term impact they have on people’s lives and their ability to make financial
plans.
2. On balance, we agree that the existing framework is broadly fit for purpose and there is no
‘magic bullet’ for the majority of the concerns identified.
3. As the paper is so wide ranging both in areas covered and level of detail, we have commented
only under the main question headings and on selected areas.
RESPONSES TO SPECIFIC QUESTIONS
Q1: Are the current valuation measures the right ones for the purposes for which they are
used?
4. Regarding valuation cycles, the key issue is for what purposes the valuations are used.
Trustees need to consider investment strategies on a long term basis and also monitor
performance and be in a position to take investment decisions quickly to ensure that their
strategy is delivered effectively and adjusted if necessary. Both the triennial review and 15
month period for finalisation are artificial timeframes in both of those contexts; they may be too
short for long term strategic planning against liabilities stretching far into the future and too
long for day to day risk and investment management. Even ‘low risk’ schemes need to be alert
to ensure that they stay that way.
5. For the purposes of agreeing recovery plans, or adjustments to them, a triennial valuation
seems as good a period as any. It might be possible to shorten the 15 month period for
finalisation, say to 12 months. However, this period is sometimes used not only to deal with
matters that, arguably, could have been done earlier in the process or more quickly, but also to
overcome issues that might otherwise have an impact (for instance, by putting in place security
arrangements with attendant expense that would not be incurred without an evidenced need).
It may also be a reasonable timeframe for particularly complex schemes.
6. Whether a valuation is finalised 9 months, or 15 months, after the valuation date will be
academic for some purposes; the value at the date of finalisation is likely to have changed
from that on the valuation date and, in volatile markets the difference could be material. It is
essential that Trustees and others involved are aware of this. New technology increasingly
enables trustees to monitor updated asset and liability values on a real time basis.
Q2: Do members need to understand the funding position of their scheme, and if so what
information would be helpful?
7. While practices vary, we do not believe that information (including the summary funding
statement) currently provided to members is very helpful. A typical member will not
understand the implications of the information and should not be required to do so given that
members are not typically in a position to take any action as a result, apart from exercising any
rights to transfer assets out. There is a risk that providing information on scheme deficits may
cause unnecessary concern in cases where the scheme is, in fact, sustainable.
8. Members of all DB schemes need to be provided clear information on their pension
entitlements and the possible impact should the scheme go into the PPF. If it is considered
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ICAEW Rep 57/17 Security and Sustainability in Defined Benefit Pension Schemes
useful for members to have information on the potential sustainability of a scheme and the
likelihood of it falling into PPF, then it might also be useful to provide more information on the
action they can take if they are concerned, that is, to transfer out of the scheme. This would
however be difficult to do, given that deciding whether or not to transfer out of a DB scheme is
far from straightforward, may be inadvisable depending upon the circumstances and that
members currently need to take advice in many cases.
9. Trustees should not, however, be precluded from providing more information to members if
they consider it helpful, for instance to explain decisions taken to protect members.
Q3: Is there any evidence to support the view that current investment choices may be suboptimal? If yes, what are the main drivers of these behaviours and how could they be
changed?
10. We do not believe that there is any shortage of investment choices; there are a vast number of
collective investment schemes covering different asset classes available to small, as well as
larger, schemes and many are low cost arrangements. Trustees will need requisite skills to
navigate the available choices and will typically require professional assistance. They will also
need to have appropriate skills and training to evaluate advisors and it may be that small
schemes are at a relative disadvantage to larger schemes in obtaining cost efficient impartial
advice.
11. It may be that more generic information on investment options available to trustees could be
made available by tPR to trustees, to minimise advisory costs and highlight the cost effective
options available in the market.
12. Governance statements may assist trustees in considering these issues. The requirement for
DC schemes to provide a Chair’s statement has changed behaviours in that segment and
might also promote good practice in DB schemes if extended to them. The cost implications,
particularly for hybrid schemes where there may be duplication of effort, would, however, need
to be evaluated.
13. We do not believe that regulation should seek to prescribe investment choice; we do not
believe that government has a better track record in making investment decisions than many
professionals in the private sector and it would be difficult to hold government to account
should its requirements produce results that would be judged negligent in the private sector.
Q4: Is there a case for making special arrangements for schemes and sponsors in certain
circumstances such as a different regime for employers who can afford to pay more, and/or
new or enhanced flexibilities for stressed sponsors and schemes?
14. No. While we are not insensitive to the affordability concerns outlined in the Green Paper, we
do not believe that they justify changing a regime which, in large part, provides the necessary
checks and balances and has largely functioned as might be expected. While some
businesses may regret pensions decisions made in the past and may find the liabilities impede
their future development, there would need to be very compelling reasons for government to
conclude that businesses should not live with the decisions they have taken, particularly where
the rights of individuals might be adversely affected.
15. Any solution that depends upon assessment of the position of an individual sponsor risks
upsetting the stability of a regime that is intended to operate on a fair and objective basis for all
and there is a risk that unintended consequences could result. We highlighted this concern in
our response (Rep 91-16) to the consultation on the British Steel Pension Scheme.
16. It should be noted that under the current regime there is flexibility in the approach to structuring
recovery plans and that there is scrutiny over the approach taken.
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Q5: Do members need further protection, and should this be delivered by a stronger and
more proactive Regulator, and/or trustees with enhances powers?
17. In general, we believe that members are reasonably protected by the PPF regime and
mechanisms to preserve benefits if they exceed what would be available under PPF. It is
important that members are made aware of the PPF regime and when it might apply, but it is
questionable what additional information would be useful to them; flagging that the employer’s
covenant is weak could lead to a number of adverse consequences and, in itself, would not
necessarily be helpful for the average pension scheme member. Highlighting deficits would be
of limited value without considering the employer covenant and other relevant circumstances
too. Given the difficulty professionals have in assessing the long term sustainability of pension
schemes, it is unrealistic to expect the average scheme member to do so.
18. Since the introduction of pensions freedoms, members may transfer their entitlements out of a
DB pension scheme. The implications of this need to be borne in mind in considering what
information should be made available to members generally, bearing in mind that not all
members will be able to exercise these rights at any given time and that not all members will
be equally capable of understanding the information that is provided or how it might impact
their rights in this respect.
19. We believe that the potential adverse consequences entailed in allowing tPR to prevent or
delay corporate transactions outweigh the potential benefits. The trustees might be given more
extensive powers in this context, including to refer to tPR if they have material concerns about
a corporate transaction, particularly if they have not been provided information they seek in a
timely way.
20. It is important that trustees have confidence that when matters are referred to tPR it is
sufficiently resourced and determined to exercise its existing powers and additional powers
should only be extended where there is an established need. However, if there are gaps in the
information gathering powers of tPR compared to other comparable regulators, we agree that
they should be filled. We also believe that there should be a statutory duty on employers to
provide information (or consult with) the trustees, to enable them to perform their duties to the
fullest extent possible.
Q6: Should Government act to encourage, incentivise, or in some circumstances mandate
the consolidation of smaller schemes into vehicles with greater scale and better
governance in order to reduce the risk to members in future from the running down of
closed, especially smaller, DB schemes?
21. While we understand the concerns about small schemes, it is important to note that some
operate successfully and might legitimately wish to retain their autonomy. We do not therefore
believe that small schemes should be required to consolidate, just because they are small, or
that regulators should seek to impose unnecessary cost on small schemes to produce the
same result by stealth. tPR should exercise its powers in relation to poorly governed schemes
whatever their size and poorly run small schemes might be encouraged to consolidate over
time.
22. Regarding the different types of possible consolidation, pooling of administrative resources is
already open to schemes and increasingly used. It would be good practice for small schemes
to at least consider this type of consolidation periodically and tPR might encourage this
through its guidance. Pooling of assets and administration occurs, for instance, in various
industry sector schemes such as the merchant navy. Some of these arrangements have
proved problematic with legal disputes arising with attendant costs and disruption. We do not,
therefore, believe that it would be appropriate for government to encourage this type of
consolidation at this time without full consideration of all potential issues that might arise. Full
consolidation with shared risks gives rise to numerous challenges and caution needs to be
exercised taking account of the track record of any historic schemes that pool risks.
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