Defined Benefit pre 1997 Pension Increases

Marcon

PeterA59 said:

Thanks for your comment. There is no suggestion that current employees would be disadvantaged by our quest on pre 97 increases. 

They could be if the employer offers bonuses based on profits.

PeterA59 said:

I am concerned that the DB scheme surplus will not be distributed in order to make the fund more attractive for buyout rather than helping pensioners.

That's not such an unreasonable stance for the employer to take, I'm afraid. If you 'bake in' additional increases, then the cost (to the employer) of the buy out will shoot up for two reasons: there is less money in the fund to accomplish it, and the liabilities are higher on a continuing basis.

PeterA59 said:

I would also like to point out that the pre 97 liability is decreasing rapidly and the cost of any increases may not be as great as some fear. 

The snag is that other members may take exception to one group getting 'super benefits' when they don't. 

PeterA59 said:

Our latest best guess is around 7% of the fund’s liabilities to provide a cpi capped at 3% but obviously we don’t have access the actuarial figures and I would welcome anyone’s input from other funds as to the likely costs. 

Based on zero relevant information (number of members, their DOB, their current pensions, spouses and their DOB, what spouse's pension is paid, what proportion of the membership falls into this category etc etc etc), nobody here could give you any sort of realistic guesstimate. No idea what you have based your guess on, but if liabilities are going to be inflated by 7% (even without knowing what those current liabilities are), it's no surprise the employer isn't going to enthuse.

Marcon

PeterA59 said:

I am concerned that the DB scheme surplus will not be distributed in order to make the fund more attractive for buyout rather than helping pensioners.

Just another thought (and apologies that they never seem to be thoughts you want to hear!) - are you aware that the buy out cost is much higher than the cost of running the scheme on an ongoing basis? Insurers charge a premium for taking on the liabilities. It's a commercial deal, and they want to make a profit, so price accordingly and on what they see as a 'realistic' basis. You'll be unsurprised to learn that never works in favour of the scheme's sponsoring employer.

The scheme may be in surplus, but on what basis? Even if it is in surplus on a buy out basis, the picture can only truly be established at the actual point the deal is done, so 'spending' it ahead of time has major financial risks/potential consequences for the employer.

PeterA59

No problem. I want to be educated to fully understand the issues and the likely scenarios. Thanks for taking the time to explain.  

leosayer

I'm playing devil's advocate slightly but introducing such legislation would impact the P&L of the impacted companies and may therefore:

- Reduce the scope for companies to pay their existing staff including future pension contributions - including those who aren't on such 'gold plated' pensions.

- Reduce the scope for companies to invest in jobs, new technologies or expansion.

- Reduce future returns for company shareholders including those invested directly via share schemes or indirectly via pensions.

- Increase the risk of companies getting into financial difficulties and relying on the PPF. This may require an additional levy further increasing costs.

- Increase the cost of doing business for impacted UK companies compared to those without such legacy costs such as start-ups or overseas companies

Most of the above also explain why companies rarely do this on a discretionary basis. Any 'spare' money (if there is any) is generally returned to shareholders somehow.

PeterA59

Leosayer, thanks for your comments. There are many reasons not to make increases but there are also people facing significant financial difficulties with rising prices and we shouldn’t forget them. There should be some kind of balance in this situation. 

Marcon

leosayer said:

I'm playing devil's advocate slightly but introducing such legislation would impact the P&L of the impacted companies and may therefore:

- Reduce the scope for companies to pay their existing staff including future pension contributions - including those who aren't on such 'gold plated' pensions.

- Reduce the scope for companies to invest in jobs, new technologies or expansion.

- Reduce future returns for company shareholders including those invested directly via share schemes or indirectly via pensions.

- Increase the risk of companies getting into financial difficulties and relying on the PPF. This may require an additional levy further increasing costs.

- Increase the cost of doing business for impacted UK companies compared to those without such legacy costs such as start-ups or overseas companies

It's the hit on P&L that usually escapes people (including some new and young finance directors until it's explained to them!), and the consequences which flow from that.

leosayer said:

Most of the above also explain why companies rarely do this on a discretionary basis. Any 'spare' money (if there is any) is generally returned to shareholders somehow.

Commercial concerns aren't the only organisations to take into account. Charities don't have shareholders to consider, but they have an even greater problem: persuading the public that donating is a good idea where a slug of those donations goes to making good a deficit in a legacy DB scheme. A lot of charities have such schemes from the days when setting one up was something of a no-brainer. Discretionary increases for people who worked for the charity decades ago would impact on the services the charity provides today...try explaining that one to donors in a way which will encourage them to increase their donation. 

Marcon

PeterA59 said:

No problem. I want to be educated to fully understand the issues and the likely scenarios. Thanks for taking the time to explain.  

In that case, may I add another nugget of information which might be interesting if not actually helpful. You've referred above to being concerned that the 'surplus may not be distributed...'. The reality is that the only point at which you know whether or not a scheme is in surplus is at the point of buy out and wind up. Until then, the fund value can and will fluctuate, as will the liabilities; the surplus is just an 'on paper' concept. As you've seen with your own scheme, it was in surplus in the 1990s and then in deficit by 2001.

So how come benefits were improved and members were given contribution holidays in the 1990s (and before then) 'because the scheme was in surplus'? All down to that wonderful thing: tax. Pension schemes can, and must, be valued on different bases for different purposes. Back in the day, there was a requirement to value them on a 'statutory surplus test' basis - and if the scheme was in surplus on that basis, a hefty tax charge followed.

Contribution holidays alone weren't enough to deal with the issue, which is why so many schemes introduced benefit improvements such as lower retirement ages, bigger pension increases and so on, to bring themselves safely below the statutory surplus test limit. Needless to say, these improvements had a major impact on the future cost of providing the scheme, particularly when financial conditions changed - hence the rush to close schemes to new members, and then to future accrual, when the consequences of these changes became unsustainable.

Had the statutory surplus test (long abolished) never existed, the world of DB pensions could have looked very different.

hugheskevi

A useful article on the topic published today in Professional Pensions, at this link.

FIREDreamer

hugheskevi said:

A useful article on the topic published today in Professional Pensions, at this link.

Behind a paywall sadly.

ewaste

@Marcon said:
You might, but the employer and/or trustees might not....see https://www.pensions-ombudsman.org.uk/decision/2023/cas-92093-n4d9/water-companies-pension-scheme-bristol-water-plc-section-cas-92093

Indeed it's all dependant on the Trust Deed and Rules of each scheme.

@Marcon said:
Interesting read: https://commonslibrary.parliament.uk/pension-superfunds-a-new-choice-for-pension-schemes/

Thanks for the link, Superfunds and what they could theoretically deliver is an interesting area. Although naturally buy out is still the "Gold Standard" although it'd be nice to see some change to provide run on and some form of additional benefit distribution. There have been discussions around even the PPF improving compensation levels beyond what it does currently, both for current recipients and higher levels of protection for eligible schemes in future.

@PeterA59 said:
Thanks for your comment. There is no suggestion that current employees would be disadvantaged by our quest on pre 97 increases. The DC scheme starts with an employee/employer split of 3/10% rising to potential of 8/15% or 23% for those who make additional matched contributions. I am concerned that the DB scheme surplus will not be distributed in order to make the fund more attractive for buyout rather than helping pensioners. I would also like to point out that the pre 97 liability is decreasing rapidly and the cost of any increases may not be as great as some fear. Our latest best guess is around 7% of the fund’s liabilities to provide a cpi capped at 3% but obviously we don’t have access the actuarial figures and I would welcome anyone’s input from other funds as to the likely costs. 

Who then carries the liability for future deficits? current employees have already arguably been disadvantaged by previous deficits as the funding had to come from somewhere.

It's good to see that the current DC scheme can be relatively generous, compared to the majority of schemes out there at the moment. Although it obviously requires employee engagement to take note of the matching and make the contributions required to receive the maximum employer contribution. 

Regarding any surplus, as has been mentioned it's a paper surplus and isn't an actual surplus until the scheme has reached buy out. However this is where Yes I think a surplus should be, whether morally or ethically etc, used for the benefit of scheme members especially in a situation like this where there are no increases to benefits whatsoever.

There are many reasons not to make increases but there are also people facing significant financial difficulties with rising prices and we shouldn’t forget them. There should be some kind of balance in this situation. 

That is unfortunate but arguably those in receipt of any benefit whatsoever are already better off than many, I'd suspect the majority of current employees have seen falling real terms pay despite continuing to work.

I'm not entirely unsympathetic, I'd very much like to see a productive way forward on the issue of pre-1997 increases albeit in a way that doesn't exacerbate or maintain the current liabilities on scheme sponsors or perpetuate intergenerational inequalities. Hence the interest in the potential of Superfunds and other ideas floating around out there, although at present the end goal is always going to be buy out and along with it essentially zero hope of discretionary benefits.