Independent Governance Group (IGG) has called on the government to use its Mansion House Reforms to help resolve intergenerational unfairness between DB and DC scheme members.
IGG cites the lack of incentive to take the necessary level of investment risk and inadequate risk mitigation as key barriers to the government’s goal of leveraging pension scheme assets to boost the UK economy in its response to the ‘Options for DB schemes’ consultation.
It says that in order to encourage corporate DB pension schemes to create a surplus, sponsors should be given the option of deploying some, or all, of that excess to raise DC contributions prior winding-up the scheme.
According to IGG, enhancing DC funds in this manner would not just encourage investments in productive assets but also contribute to narrowing the disparity in outcomes between DB and DC scheme participants. This disparity is a significant factor in the increasing financial gap between generations.
IGG also highlights seven obstacles that the government must tackle across both DC and DB schemes to ensure the success of its initiatives in its response to the call for evidence on ‘Pension trustee skills, capability and culture’.
According to IGG, growing pension regulations and complex events like the LDI crisis pose challenges for lay trustees, leading to over-reliance on advisers.
IGG doubts the efficacy of accrediting lay trustees for achieving economic growth and productive asset investment, favouring the introduction of professional trustees to enhance governance. Moreover, they support mandating professional trustees for all schemes over time.
In addition to trustee knowledge, key considerations for DC schemes include administration costs, liquidity management, scheme and employer longevity, and asset suitability.
Meanwhile, key challenges for DB schemes include the need for quick readiness for annuity transactions, which may not fit with productive financing investments in terms of risk, return, and liquidity. This strategy also carries the danger of “regret” if investment risk increases and the sponsor’s financial strength deteriorates, leaving them unable to fund deficits caused by underperforming productive finance assets. Furthermore, the applicability of accessible assets in the UK is an important issue.
Additionally, IGG cautions against the potential risk of discouraging individuals from taking on roles as lay trustees.
IGG chief executive officer Andrew Bradshaw says: “We believe fresh thinking and new ideas are required in order to realise the Chancellor’s ambition. We have proposed ideas regarding surplus reforms within an appropriate framework and with clear and proportionate regulatory supervision.
“We believe this approach will enable trustees to demonstrate to sponsors how schemes can invest in productive assets with acceptable levels of risk and with members’ interests at the forefront. This is a win-win for employers, the Government and the UK economy.
“At the same time, the recent increase in pensions-related regulation and legislation, coupled with major events such as the LDI crisis, means the need for a higher level of knowledge and understanding on trustee boards has never been greater.
“We support a move to mandate the appointment of a professional trustee for all schemes over a workable timeframe, but caution against the potential unintended consequences of implementing an accreditation regime for lay trustees that deters people from coming forward.
“The broad range of skills, qualifications, and experience of lay trustees, together with their first-hand knowledge of the businesses that sponsor pension schemes, is a vast resource that has helped to underpin good governance.”
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