The Work and Pensions Committee's (WPC) inquiry into defined benefit (DB) pension schemes continued this month, as industry experts responded to queries around the potential use of DB surpluses.

During a hearing for the inquiry, a number of panellists were asked about the recent funding improvements in the DB market, and whether these funds could be put to better use for both employers and members.

However, despite the funding improvements, Association of Member Nominated Trustees (AMNT) co-founding chair, Janice Turner, stressed the need for caution when looking to tap into a DB surplus, emphasising the need to review trust deeds and rules.

Furthermore, when challenged as to whether these scheme surpluses are “real and durable or a temporary phenomenon”, Turner admitted that “we do have to exercise caution because we do not know what is around the corner”.

When is a surplus a surplus?

This was echoed by Society of Pension Professionals (SPP) president, Steve Hitchiner, who stated that while trustees can make their strategy as resilient as possible, "apart from a situation where you have secured the liabilities, it is not really a surplus at all; it is an expected surplus".

Association of Professional Pension Trustees chair, Harus Rai, Chair, agreed, warning that despite the positive funding position many schemes are now in, surpluses have been eroded in the past and "we never know what is on the horizon and what might happen in five or 10 years".

"As trustees, what we are trying to do is to lock in the gains as and when that becomes possible," he stated, warning that, despite funding improvements, there is currently no incentive for DB schemes to opt to run on.

Indeed, Hymans Robertson partner and head of corporate DB endgame strategy, Leonard Bowman, argued that the "fundamental problem" is that DB "is a closed world and you are just trying to get to the end of the journey".

"If you are not building up any benefits it will always limit the ability to take risks," he continued, arguing that whilst the historical focus has, rightly, been on delivering member benefits, "we are now entering a period where that could be revisited".

In addition to this, Hitchiner pointed out that DB schemes still expose the sponsoring employer to "very, very significant financial risks".

"It is difficult to understate the level of risk that they are taking on when they sponsor these DB schemes," he said, noting that "the first two decades of this century very much saw those risks come to fruition".

"Employers had a two-decade long battle against deficits," he continued. "If you were the entity responsible for funding those risks, you would understandably want to manage those risks in a cautious way.

"Yes, we have moved on, financial positions have improved and that is a good thing, but we must not forget that it can reverse again, and we want to make sure these members are secured."

Anecdotal evidence suggested that these concerns are already on employers' minds, as Bowman said that while there are conversations being had around a runoff approach, there are ongoing concerns as to "when is a surplus a surplus".

No 'one size fits all'

However, the panel stressed that ""there is no one size fits all when it comes down to pensions", arguing that regulatory flexibility should be given to allow those schemes that want to run on the option to do so.

"There needs to be more of a balanced discussion," Bowman stated. "That will mean that some companies just buyout and use pure DC for their future employees, while other companies will look at more creative solutions.

"But the regulatory support needs to be there to have confidence to do that, for trustees to be able to support a future trust, which has new money going into it, with new designs."

The panel also emphasised that a run-on approach does not have to be adopted market-wide to make an impact, as Hitchiner said that "it does not take very many schemes to run on for that to be a meaningful amount of asset in terms of the good that that could do".

He continued: "Regulation should be more flexible in allowing trustees and sponsors to run on, to try to do good with the surplus, improve benefits and so on and so forth, but we must not lose sight of the fact that for the vast majority of smaller schemes, it is quite right and proper for them to be targeting a transaction where they secure the liabilities for their members with an insurer.

"I would not want the conversation about what larger schemes might do to distract from the fact that there are quite a lot of schemes that should be doing what they are currently doing, which is targeting that [bulk annuity] transaction."

Members against buyout?

However, the committee also heard concerns over the role of buyout and the use of DB surpluses from a number of member organisations, as BP Pensioner Group co-founder, Nick Coleman, said that the group has been "very worried about the surpluses being sequestered".

In light of this, Coleman, on behalf of the BP Pensioner Group, called for new requirements to be introduced to ensure that a surplus split is fair and equitable, arguing that scheme deeds and rules "do not go into how to make that distribution demonstrably, transparently fair".

And despite buyout being seen as the gold-standard de-risking option within the industry, those on the panel highlighted member concerns as to the impact on their future benefits, particularly given recent high inflation.

"We have nothing against buyouts," he stated. "They could be great, but they could be disastrous for the pensioners. It is all to do with the terms and conditions of the buyout."

Given this, Coleman argued that proper consultation and choices should be provided to pension fund members where trustees develop proposals for a buyout, including whether to transfer their share of the fund into an alternative pension arrangement.

"If that option were offered to members of the pension scheme at the point of buyout, it could have an enlivening effect on them and would give them more control," he suggested. "It could have many benefits."

Adding to this, Hewlett Packard Pension Association steering committee member, David Carson went a step further, confirming that he would be "against a buyout" and that the steering committee would also "resist a buyout".

He stated: "Every scheme will be different, but in our particular case, if a buyout does not deal with the discretionary increase, then the responsibility to members has been abdicated.

"You need to find a solution because as soon as a buyout takes place, then the possibility of influence and future discretionary increases will never happen."

And whilst Carson acknowledged that what to do with a scheme surplus is "not an easy answer", he argued that "our particular scheme would resist a buyout unless that problem is fixed".

Share Story: