Mansion House reforms may revolutionise investment strategy
This equates to approximately 10% of FTSE 350 defined benefit (DB) scheme assets, and two-thirds of the total dividends paid in 2022 by the FTSE 350 DB scheme sponsors.
The analysis assumes that any surplus above 105% funding on the Pensions Regulator’s proposed “Fast Track” low dependency basis would be available to be returned to sponsors.
Brave new world of pension scheme investment
The Department for Work & Pensions (DWP) has issued a call for evidence following the Chancellor’s Mansion House speech in July that focused on pension schemes embracing greater investment risk by investing in ‘productive finance’.
The intention of these ‘reforms’ is for surplus returns to be generated for the benefit of pension scheme sponsors and members, which would have a trickle down effect into the UK economy.
Not all schemes will be able to return surplus funds to sponsors in full. Some will already be undergoing buyout with an insurance company, while others will face complications from tax liabilities and demands to improve member benefits.
Barnett Waddingham also examined the impact the reforms might have on the long expected DB funding code, that is expected to be in place next year.
The new code will require DB schemes to target a low dependency funding basis over the long term. But the vastly improved funding position of DB schemes following the increase in bond yields over the past 12 months has called into question the relevance of the new code.
New code knocked into cocked hat
BW analysed how well the FTSE 350 DB schemes would be able to comply with the requirements set out in the draft code.
It said that about 80% of the FTSE 350 DB schemes are likely to pass all three of the Pensions Regulator’s (TPR’s) strict Fast Track tests as of 30 June 2023.
When TPR did the same analysis as of 31 March 2021, it estimated that only 51% might pass, reflecting how much the average scheme funding position has improved over the past two years.
Others that already comply with the strict requirements of the code, may opt for a ‘bespoke’ submission that provides a scheme with greater freedom over its investment strategy.
As about 90% of FTSE 350 DB schemes are already broadly compliant with the guidance in the code, according to BW’s analysis, is there any need for a new code to influence or force pension scheme behaviour? Many of the new requirements appear superfluous for the vast majority of schemes, so will the cost of compliance outweigh any benefits by increasing security for a falling number of underfunded schemes?
Mark Tinsley, principal at Barnett Waddingham, said: “Many pension schemes have seen large improvements in their funding positions over the past year and now have significant surplus funds. Sponsors therefore stand to benefit considerably if the rules around returning surplus funds are relaxed, as is being considered under the so-called Mansion House reforms. However, any reforms should ensure that members of pension schemes are not adversely affected, meaning that extra forms of security may also be needed.
“Improvements in scheme funding positions also call into question the benefit of requiring all schemes to target a low dependency funding level, as is separately being planned by the DWP and to be reflected in a new funding code issued by the Pensions Regulator.
“The vast majority of pension schemes are now already meeting the proposed stricter funding requirements, so the additional costs associated with requiring all schemes to comply with the proposed changes to the funding code may now be difficult to justify.”
