Q10: Should there be different approaches for different sizes of scheme? As an institute whose mem...
Q10: Should there be different approaches for different sizes of scheme?
As an institute whose members are involved in the operation of all types of pension scheme, from the very large to the very small, we agree that there is a need to find levels of regulation which are appropriate for the different types and size of scheme. It is true that most of the larger schemes can afford good governance and appear to be less severely affected by the MFR issues than smaller schemes.
The dividing line of 4,000 members (this is preferable to a division on the basis of assets) would seem to be sensible for the larger schemes. Any dividing line would need to be set once a year for certainty and a clear definition of those to count as 'members' will be required. There are a significant number of smaller schemes, say, consisting of less than 500 active members. The regulatory burden on them is intense and, although we would not recommend a further dividing line with a lighter regulatory regime, we feel the burden should not become grounds for closing a good occupational DB scheme.
Q11: Should the treatment of pensioners in DB schemes be changed to reflect developments in the defined contribution market? If so, how?
The main issue concerning pensioners is the increased longevity now being experienced. Coupled with the current high cost of buying an annuity at retirement, this is likely to change the future pattern of employment, either by people retiring at a later age or by seeking some form of phased retirement.
Members of DC schemes and personal pension policyholders are generally able to use the income draw-down facility, but this is only suitable for those with significant retirement funds. Under occupational schemes, if the rules allow, they are also able to opt for an investment-linked annuity instead of limited price indexation.
Q12: Are there any reasons why there should not be disclosure of the scheme solvency position and of what this might mean should their scheme cease? How might such information be nest communicated to members?
The annual transparency statement suggested by Paul Myners would be a suitable way of disclosing the solvency position to members, and to Opra. However, it is important that the statement should include up to date information in sufficient depth but not to the extent that it becomes too technical. The content proposed in paragraph 33 of the Myners report provides a good starting point, but there is a danger that the investment 'tail' might start to wag the funding 'dog'.
It is no use deciding on a brilliant strategy for the investment of assets if the liabilities are undervalued as a result of having been calculated using unrealistic assumptions.
We have already mentioned our concern that the members can challenge the trustees' governance and obtain a second 'expert' opinion. We are also concerned about the suggestion that Opra might intervene if the trustees do not act on the second opinion. We do not believe that it is right for Opra to be involved in second guessing the trustees' decisions which, as Paul Myners has clearly stated, are based on subjective judgements. There is no basis to suppose that Opra would be any more able than the trustees to take the appropriate decision. We urge that all these points become the subject of full consultation.
Q13: What might be the broader economic impact of the policy options discussed?
One of the objectives of the Myners' report was to investigate how institutional investors might be encouraged to invest more aggressively in private equity, particularly smaller high growth companies. He has identified the MFR as a big contributor to investment market distortions, notably in the gilts and fixed interest markets. Therefore, we believe that retaining the MFR in its current form, or in any amended form, will distort the markets further.
Replacing the MFR, however, will send a positive signal to those who sponsor occupational DB schemes. It will not, of course, alter any of the cost pressures resulting from the cost of annuities and other economic fundamentals, but it will prevent some employers from closing their schemes because of the volatility of cost associated with the MFR.
Whatever is put in its place, it must be credible to retain employer support for occupational schemes. It must also be a means of reassuring scheme members that the scheme is solvent, or explaining the amount of any shortfall, and what effect, if any, that might have on their benefit entitlements in different situations for example, if the scheme is continuing or is being wound up. It should be a requirement of trustees for communication to be done in such a way as to be understood by all members.
Ian Eggleden is vice president and chairman of the Pensions Management Institute
To look at the DSS document, please go to www.dss.gov.uk
View from the front row
Project Libra unveiled
Including SJP and investment trusts
Spent two years at Sanlam
Will also assess FCA's actions