The defined benefit funding regime needs to adopt a flexible approach that does not negatively impact less mature funds, according to the Pensions and Lifetime Savings Association (PLSA).
The body, in its submission to the Work and Pensions Committee inquiry into defined benefit pension schemes, said it was “broadly supportive” of the current regulatory framework for DB schemes.
But it said it was vital that the strong regulatory system in place remains fit for purpose, and as a result it was important the in-coming DB funding regime adopts a flexible approach that caters for the different needs of open and less mature DB funds.
The PLSA said DB schemes remain a critical part of the UK’s pension landscape. It pointed out that while the number of schemes in surplus is expected to rise in the the coming years — allowing schemes more opportunity for buy-outs and buy-ins — there may be problems ahead with a lack of insurer capacity in this market.
The PLSA pointed out that, buy-in and buy-out volumes are expected to reach a record high in 2023, potentially surpassing the £44 billion record set in 2019.
It added there are alternatives to buy-in/buy out, including schemes continuing to run on, or consolidating within a DB Master Trusts or Superfunds. The PLSA said that while there may be a number of advantages of DB scheme consolidation, ithe PLSA did not want the government to make this mandatory. The PLSA said in their view, there is a place for DB pension schemes of all sizes that are well funded and deliver excellent benefits and high-quality (often more personalised) services.
In order to achieve high standards the PLSA said it wanted the government to finalise Superfund legislation promptly, with consultation on this issue originally taking place in 2020. Final regulations should ensure that this regime offers at least the same level of protection to scheme members as the DB funding regime.
PLSA director of policy and advocacy Nigel Peaple says: “With many more DB funds expected to be in surplus over the coming years, the market for buy-in and buy-out may reach capacity, so it important that the system can accommodate alternative end games for schemes.
“The PLSA would like to see the Government proceed with finalising the Superfunds legislation to help with this.
“Consideration should also be given to reforming the current fraud compensation regime and having a discussion about how excess funds held by the PPF should be treated at the appropriate time.”
In its submission the PLSA also added that it believed the current fraud compensation regime is confusing for savers and industry alike and government should consider building a more robust fraud compensation regime. Potential considerations in building a more robust fraud compensation regime include:
- Merging the Financial Compensation Fund (FCF) and the Financial Services Compensation Scheme (FSCS) to create a single entity responsible for compensating all financial services firms against claims (including pension schemes that fall victim to scams).
- Reconsidering any future increases to the Fraud Compensation Levy (FCL) ceiling, which was increased from the 2022/23 levy year despite near universal opposition to it in DWP’s consultation in 2022, and for which the costs are ultimately passed onto scheme members.
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