Pensions: May Monthly Overview

While many of us have enjoyed the sunny weather and bank holidays this past month, the pensions debate remains as lively as ever, with key developments affecting both DB and DC markets.

Are DB schemes making a comeback?

It is perhaps unsurprising to note that, according to our analysis, funding and deficit issues remain the number one topic in the media and online debate in the past month. It is fair to say that the macro-economic changes that have taken place in last 12 months have prompted a rethink in the pensions landscape. While some DB schemes are still in the process of re-engineering their portfolios following the significant movements in gilt markets and reduction in the value of liability driven investment assets (LDIs), the majority of schemes now find themselves in a vastly improved situation, thanks to impact macro-economic conditions have had on reducing liabilities and improving funding levels.

The latest statistics from the Pension Protection Fund (PPF) show that the overwhelming majority of UK private sector Defined Benefit schemes are now in surplus and many schemes are currently in a position to consider an insurance buy-out or pension risk transfer deal with insurers. This is a significant turnaround from a few years ago, where many schemes were facing significant deficits and it, of course, represents good news for members of these pension schemes -- with their benefits (and future benefits) more secure than ever. Some of this good news does have a cost, however, as many schemes have capped inflationary increases and are therefore seeing a real terms reduction in benefits during this period of high inflation.

That said, the overall rosier picture of DB schemes is prompting a debate among politicians and industry commentators about their future – not least, that if DB pensions are now much more affordable, shouldn’t more people have them? After all, a DB pension is typically vastly more generous than a DC one, even during times of high inflation.  This is very much the focus of the Work and Pensions Committee’s inquiry and interventions from trade unions and other campaigners. While this debate could gather momentum in the coming months, from a private sector perspective, getting UK businesses to re-open their DB pensions schemes would seem to be a pretty significant, if not insurmountable, challenge.

Labour has ‘entered the chat’ on DC pensions

In certain quarters, notably Westminster and the City of London, the key focus around UK pensions schemes of late has been not so much on how they best ensure a comfortable retirement for members and savers, but how they can help boost the UK economy and invest in UK firms. This debate has been picking up steam since the beginning of the year after the London Stock Exchange suffered a string of departures of listed companies, with many UK firms looking to raise capital complaining that the UK has no domestic equity investors. This led to a fair amount of soul searching and policy proposals among politicians and City leaders, most of which centred on the idea of mandating DC pension funds to invest in ‘innovative’ UK firms. A clear example of this was the City of London Corporation’s recommendation to create a £50 billion Future Growth Fund from DC pensions schemes to provide a new source of investment into key UK industries. The Chancellor Jeremy Hunt offered support for this proposal back in April , but perhaps the most significant intervention in the past month, was from Labour Shadow Chancellor Rachel Reeves, who said that a future Labour government would be prepared to force pension funds to invest in the fund.

Reeves’ intervention represents a likely cross-party consensus on this issue and significantly increases the likelihood of further government intervention in the pensions market – and perhaps gives us an early indication of what a future Labour government would mean for pensions. There is, of course, opposition to such a move from the pensions industry and pension scheme trustees, who are totally focused on delivering the best returns from members, not to reviving the UK economy. But it is clear that pension funds are now firmly seen as a key lever to pull by UK politicians, desperate to get the economy moving, and are unlikely to leave the sector alone anytime soon.