MPs launch inquiry into future of DB
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The Work and Pensions Committee has launched an inquiry into defined benefit pension schemes to look at “the challenges and opportunities they pose to members, trustees, employers and the Pensions Regulator”.
The committee launched the inquiry on Thursday. There are currently no evidence sessions scheduled. A wider inquiry into DB schemes was first announced in October last year.
This latest pension inquiry follows an earlier one into DB funds’ liability-driven investments during the gilts crisis last September. It revealed systemic risks from herding as closed DB pension schemes collectively move their assets into bonds and leveraged LDI strategies with a view to buyout or run-off.
“The Committee has previously heard from witnesses that DB schemes were ‘one of the best things our country ever did’, although many companies have moved away from them since the 1990s over concerns about cost,” said Labour MP Sir Stephen Timms, who chairs the committee.
“With the improvement in scheme funding levels over the last year, now is a good time to investigate whether the regulatory framework is set up to enable private sector DB schemes to continue to thrive under good governance and provide positive outcomes for scheme members. We will also examine the way [DB pension funds] can be consolidated or bought out.”
The committee is inviting written submissions until 26 April on the following questions:
- Is the right regulatory framework in place to enable open DB schemes to thrive?
- Is there sufficient capacity in the buy-out market to meet demand from DB schemes? If not, what are the alternatives?
- What should the Pensions Regulator do to improve the quality of trustee boards?
- What, if any, further steps should be taken to encourage DB scheme consolidation?
- Are there any circumstances in which consolidation should be mandatory?
- Do the recent improvements in funding levels change the future role of DB schemes in UK pension provision?
- How should scheme surpluses be treated? For example, should they remain in the scheme or be shared between employers and scheme members? Are the issues different for open and closed schemes?
- What are the implications of improved funding levels for the Pension Protection Fund?
- Should changes be made to the Pension Protection Fund, Financial Assistance Scheme or Fraud Compensation Fund to improve outcomes for members?
The Pensions Regulator came under fire in the wake of the LDI crisis as it has permitted and, some say, encouraged the use of LDI. The Lords Industry and Regulators Committee on 15 November even suggested pension schemes could be flouting the law with the use of certain LDI instruments.
Since then, TPR has agreed to follow its counterparts in Ireland and Luxembourg – where most LDI funds are domiciled – to require liquidity buffers of 300-400bps for sterling-denominated LDI funds.
The outgoing chief executive of the regulator, Charles Counsell, has also suggested that TPR could start regulating professional trustees and that it may be looking to come back to a previous proposal, whereby each trustee board would have to have at least one professional trustee.
Counsell was criticised by peers for describing trustees as the guardians of a scheme while at the same time taking the view that many trustees are essentially not fit for their role.
At the 15 November hearing, Lord Cromwell said the “numerous references to the trustees’ variable skills” sit at odds with TPR’s view that trustees are ultimately the guardians of the pension scheme. “You can’t have both positions at the same time.”