Defined benefit (DB) pension schemes are “slowing to a standstill”, LCP has warned, arguing that the UK should adopt a more ambitious approach to managing well-funded DB schemes in order to view them as an opportunity not a problem.

The firm suggested that although DB schemes are in a position of strength in terms of funding levels, current regulations mean that many schemes are now targeting ultra-low investment returns, warning that the drive to remove risk from DB investments could be going too far.

Considering this, LCP shared a new ‘opt in’ system for well-funded DB schemes, outlining two key changes.

In particular, the firm suggested that, in return for payment of an additional levy, Pension Protection Fund (PPF) cover could be increased to 100 per cent of member benefits, building on the proven success of the PPF approach.

Alongside this, it recommended giving the ability to extract surpluses on an ongoing basis (with suitable protections) to fund improved defined contribution (DC) savings, invest in UK plc and boost DB member benefits.

LCP argued that these changes could provide full protection to DB members’ benefits in a more efficient way than complete investment de-risking, as well as create an incentive for schemes to invest for growth and support the UK economy and transition to net zero.

LCP partner, Steve Hodder, stated: “For 20+ years, regulatory focus has been on “slowing down” DB schemes through reducing investment risk. This was right when schemes were generally poorly funded and running risky investment strategies.

“But the situation has now fundamentally changed, and I think the “slow down!” mantra is becoming dangerously ingrained. DB schemes are now slowing to a standstill, which is a disproportionately costly way to manage ever-diminishing downside risks.

“It is time to re-adjust our focus and adopt a mindset of ambition and opportunity. With member protection provided in a more efficient way, schemes can be 'unlocked' to invest for moderate growth, potentially generating hundreds of billions of pounds to benefit UK savers and the economy.”

Share Story: