Trustees are overwhelmingly in favour of restructuring scheme benefit structures in response to the defined benefit crisis, a recent survey has suggested, but stop short of supporting a statutory override on increases of accrued benefits.
Many schemes are still affected by a 'rules lottery' in pension increases, whereby their ability to change index and so decrease their liabilities is largely dependent on whether their documents make explicit reference to the retail price index.
But while only 43 per cent of those surveyed by law firm Sackers said they thought the government should have introduced a statutory override in response to the British Steel Pension Scheme crisis, 80 per cent agreed that the cost of accrual means it is right that companies and trustees restructure benefits.
If you can change indexation that was promised in the rules then why not accrual rates or pension ages?
Steve Webb, Royal London
Faith Dickson, pensions partner at Sackers, said the restriction on modifying benefits enforced by section 67 of the Pensions Act was in place “for very good reasons”, but that it is time to think about increasing trustee flexibility.
The Pensions Regulator’s integrated risk management framework currently asks trustees to consider covenant, investment and funding, and set strategies and funding plans accordingly.
“It seems to me that you can only flex those things so far, and we’re getting to the point where we’re getting 20 to 30-year recovery plans,” said Dickson, advocating a trustee power to modify benefits in dire circumstances.
“There are some employers and some schemes where it’s the scheme that is bringing the company down,” she said.
Dickson added that while dumping of pension schemes by healthy employers would always be a concern, the phenomenon seen as a greater problem than it actually is.
A pensions promise made...
Debate over indexation and revaluation of pension increases has resurfaced in recent weeks, after the Office for National Statistics announced that the consumer price index including owner-occupiers’ housing costs will become its preferred inflation measure from next year.
Steve Webb, director of policy at provider Royal London, said that allowing a statutory override would undermine the pension promise in its entirety.
“If you can change indexation that was promised in the rules then why not accrual rates or pension ages?” he said.
However, he added that schemes and employers taking action by altering benefits which have not yet been accrued would make sense, given the current economic situation. “When you look into the future and you’ve got an issue about costs then it’s perfectly reasonable,” he said.
Where does government stand?
Pensions minister Richard Harrington has promised a green paper on DB pensions by late winter. While supporting the principle of a switch to consumer price index, he seemed to avoid saying whether a statutory override would be necessary.
"Even if [scheme rules] said specifically RPI or specifically CPI I am sure that the intention of [...] the lawyers that drafted it was just to make sure that the pensioners were protected. It wasn't to go into some deep discussion about the difference in valuations," he told the Work and Pensions Committee.
But he also argued that pensions were no more negotiable than other company liabilities, adding: "We can't have people thinking they've been fiddled."
Is there a DB crisis?
At the heart of the debate over indexation is the question of whether the severity of the DB crisis is such that it poses a significant threat to UK plc, and therefore the economy and general public.
Industry divided over CPIH
The ONS has recently said it will make CPIH its preferred measure for gauging inflation next year, so should the government follow suit for pension indexation and revaluation?
Of those surveyed, 41 per cent agreed that the industry was in crisis, while 36 per cent said it was at least partly exaggerated by the media.
On the question of whether the balance between dividend payments and pension schemes has shifted too far in favour of shareholders, trustees were somewhat divided, with 43 per cent agreeing.
David Brooks, technical director at Broadstone, said DB pension costs are small in comparison to salaries and dividends.
“The cost of DB pensions is overplayed. The numbers are big, but they shrink in comparison to salary costs and dividend payments that employers regularly pay. In general, employers are able to manage and meet the costs of their DB plans on an ongoing basis,” said Brooks.
