The defined benefit system in the U.K. is fragmented, inflexible and is not working as it should, shows research for the interim report of the Pension and Lifetime Savings Association's DB task force.
Ashok Gupta, chairman of the task force, issued the report at the association's annual conference in Liverpool, England, on Wednesday, and said a “thorough review of the DB system and the pressures it is under” is “well overdue.”
Mr. Gupta said sponsoring employers contributed £31 billion ($37.8 billion) into corporate DB funds last year, more than nine times the amount spent on defined contribution plans. More than £350 billion has been injected into DB funds over the past 10 years, and about £11 billion of that was paid to close deficits.
However, he said deficits continue to grow, and “employers are having to run really hard, just to stand still.”
The task force also addressed risk in the DB system. Pension funds with the strongest employers account for 23% of liabilities, and these funds “pose little risk.” There is a 6% probability of default among the pension funds that the U.K. Pensions Regulator says have strong covenants — the sponsoring employer's ability to support the pension fund financially — over the next 30 years.
The regulator has labeled the next category as pension funds with employers that are “tending to be strong,” and this group accounts for 27% of liabilities. Within this group, the risk of failure over 30 years rises to 20%.
However, the next category of pension funds is described as having weak or “tending to weak” employers, and have a 65% and 40% chance, respectively, of defaulting over the next 30 years. “There is much more risk in the system than is generally understood,” Mr. Gupta said.
The pension funds deemed to have strong employers represent about 17% of the funds analyzed; those tending to be strong account for 38% of funds; 22% of funds are tending to weak; and the remaining funds are deemed as weak.
The task force report said the current DB system is too fragmented, and “work should be undertaken to investigate the potential for scheme consolidation, which could help secure more economically viable schemes able to deliver better value to scheme members and their sponsors.”
The task force will collaborate across the retirement and investment sector with government, regulators, social partners and the industry, to develop recommendations to support the sustainability of DB plans. “We encourage anyone who has a stake in defined benefit schemes to work with us,” the report said.
The report is available on the PLSA's website.