CBI requests reforms to ease DB burden on businesses

Many employers are weighed down by the burgeoning cost of having one or more defined benefit schemes, as rising deficits put further strain on companies to pump spare cash into pensions.

The CBI’s recently published policy paper puts forward four main points for managing the costs of DB pension commitments.

It calls for “flexibility in funding plans within an effective regulatory system” and said that it is crucial for businesses to have “the time and space to both fund the scheme and support the company’s growth”.

The best way to protect pensions is to ensure that you’re standing shoulder to shoulder alongside a healthy, long-term, vibrant employer

Calum Cooper, Hymans Robertson

Case-by-case

The CBI also said that “the [Pensions] Regulator needs to operate on a case-by-case basis”, and urged the government to make clear that there is no single correct approach when it comes to funding plan length.

With regard to indexation methods, the CBI has said that the government must ensure all schemes are able to make the switch from the retail price index to the consumer price index as a measure of inflation.

Furthermore, it stressed the importance of “addressing the negative spiral created by a gilts plus approach to valuing schemes” while “unlocking pension scheme investment in more illiquid assets – including infrastructure”.

Improving access to illiquid assets could unleash some of the capital from pension funds into the real economy, it said.

Calum Cooper, partner and head of trustee consulting at Hymans Robertson, said “the best way to protect pensions is to ensure that you’re standing shoulder to shoulder alongside a healthy, long-term, vibrant employer”.

He added that there was a balance between allowing employers to invest for future growth, and sustainability to enable pensions to be paid in full.

Accessing the illiquidity premium

Cooper said there has not necessarily been enough focus and attention on illiquid assets, such as infrastructure, private debt and timberland.

Pension schemes “are cash flow hungry” and illiquid assets provide sustainable income streams, which can help funds avoid becoming forced sellers of assets, he said.

Accessing the illiquidity premium is not only beneficial for schemes, but also the wider economy.

“Rather than money just getting channelled into low-risk government bonds, it’s getting channelled into investments such as infrastructure, which can stimulate economic growth,” he said.

Inflation indexation

Tony Baily, client director at Cardano, agreed with the CBI’s views on modernising inflation indexation.

He said if the funding of a scheme was so bad that the scheme was likely to enter the Pension Protection Fund, and the sponsor were to become insolvent, members were guaranteed a reduction in their benefits.

Before that happens, members and the sponsor could come up with a compromise that didn't result in the members necessarily ending up in the PPF, he said. 

“It may well mean that members have a reduction in their benefits, and reducing pension increases from RPI to CPI might be one of the possibilities,” said Baily. 

However, he added that members should be able to share in any potential upside in the future. 

Measuring the deficit

Deciding on the most adequate approach to measure scheme deficits is “a really hot topic” at the moment, noted Baily.

Providers typically price their annuities based on very low risk investments such as gilts and swaps. 

“I don’t see that the gilts plus measure is a key part of the problem,” Baily said. “It’s just a way of measuring a wider problem”, which is the fact that the majority of UK pension schemes are underfunded.

The gilts plus approach is “just a way of putting a size on the deficit that is trying to be objective”, he added.