Industry welcomes new DB options guidance
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The Pensions Regulator has published guidance to help trustees and sponsors of defined benefit schemes when deciding whether to choose buyout, run-on or another option for their pension scheme. The industry has welcomed the publication and expects this area to keep evolving as legislation on surplus release is set to land in the summer.
The guidance published on Tuesday aims to help trustees and DB sponsors in their decision-making about the future of their schemes.
TPR notes that its guidance does not provide an exhaustive list of options and stressed that "there is no one-size-fits all".
In an accompanying blog post, Patrick Coyne, interim director of policy and public affairs, writes: “While the path to buy-out is well-trodden, running on – and potentially releasing surplus – is a new consideration for many DB schemes. And for those schemes with scale and high governance standards, that have the right combination of employer covenant strength and funding level, it could be an option to consider.”
With the government recently confirming that it will legislate to allow DB schemes to release surplus before wind-up, Coyne added: “Surplus release won’t be right for everyone. Nonetheless it is right that well run, well governed and, crucially, well funded schemes can consider releasing surplus, should they wish. And it’s right that our latest guidance goes into more depth to support trustees in considering the range of options.”
Current legislation requires a scheme with an ongoing sponsor to have passed a resolution by 2016 and be at a buyout level of funding in order for surplus to be released, while the upcoming pension schemes bill is set to let DB schemes that are fully funded on a low dependency basis release surplus if the trustees agree.
Further guidance on surplus release expected
The guidance has been welcomed by the pensions industry, though some want to see more detail on surplus release.
Hymans Robertson’s head of DB scheme actuary services, Laura McLaren, said the guidance could be the first in “a series of instalments” about DB options in the wake of the government’s recent announcement.
“As the legislative landscape evolves, TPR will need to consult and publish more detailed guidance on the factors that trustees should take into account when deciding whether to utilise the new statutory override power and when designing a framework for ongoing surplus release,” said McLaren.
“This is a helpful first step and hopefully signals TPR’s focus in supporting this evolving area at pace,” she added.
The Association of Professional Pension Trustees said the publication is a useful guide for trustees and sponsors. APPT chair Rachel Croft said: “Helpfully, TPR does not seek to mandate any particular approach.”
The guidance was also seen as positive by the Association of Consulting Actuaries, whose chair Stewart Hastie said it appears to ‘fire the starting gun’ for trustees and employers to develop a plan for current and future surplus, including considerations for running schemes on.
“Whilst we expect more TPR guidance to follow next year on the new surplus flexibilities to be introduced in the 2025 pensions [schemes] bill, these early steps will be important in setting the scene for achieving a mindset shift about how well funded UK DB pension schemes are viewed by trustees and sponsors,” he said.
Some sponsors and trustees are over-confident
TPR's overview of the options will be helpful to some trustees and sponsors, but administration barely gets a mention, noted senior partner at Arc Pensions Law, Anna Rogers, suggesting it contains hidden risks.
She warned that some of the options could result in 'benefit leakage' with members potentially losing out.
“Good decisions about the future need to be based on a sound understanding of the present. Experience shows that trustees and sponsors may have an unrealistically high degree of confidence about their benefit structure and member data,” she observed. “It's important to test it. Thirty years of underinvestment in admin is a factor when it comes to managing regret risk.”
The factors TPR says trustees and sponsors must consider are wide-ranging, but for all the options named in the guidance, the regulator expects trustees at the very least to:
- seek appropriate and proportionate professional advice;
- assess the impact of the option(s) on the strength of the covenant to the scheme;
- understand the extent to which any option(s) entail(s) some loss of trustee control and take appropriate advice to ensure compliance with your fiduciary duties;
- manage any conflicts of interest appropriately;
- carry out a full risk assessment of the option(s) that are more suitable for the scheme and how these can be mitigated;
- stress test fully the preferred option(s); and to
- understand, if and how, any arrangement entered into could be unwound and the potential implications of doing so.
