Exclusive: Ministers plan ‘final salary’ pension reform as £1.7tn schemes face liquidity crunch
Ministers have announced plans to ramp up regulatory scrutiny of ‘final salary’ pension schemes today amid fears that rising interest rates and soaring inflation will leave some schemes facing a liquidity crunch this year.
Final salary – or ‘defined benefit’ (DB) – pension schemes, which cumulatively manage around £1.7tn in assets nationally and count almost 10m members nationally, are designed to pay a guaranteed income for savers in retirement.
But under proposals seen exclusively by City PM, the Department for Work and Pensions will ramp up scrutiny of the schemes’ funding and investment strategies and require schemes to submit plans to The Pensions Regulator, amid concerns over mismanagement in some schemes.
The plans follow a framework set out by the Pensions Schemes Act last year,and will look to ensure schemes are properly “delivering for savers” and safeguarding members’ cash, Pensions minister Guy Opperman told this newspaper.
“Most DB schemes are well managed. However, despite the safeguards in place, best practice is not universal.”
Pensions minister Guy Opperman
“Our intention is to have better – and clearer – funding standards, whilst retaining the strengths of a flexible, scheme-specific approach. It is neither ‘one size fits all’, nor about micro-managing schemes. Every scheme will be treated on its merits.”
The new measures, which are now under consultation, will look to embed “good practice already seen in the market”, as well as requiring trustees to report progress against scheme targets.
The plans come as experts warn of “unprecedented liquidity strains” facing some schemes this year due to sharp increases in interest rates which have forced some schemes to sell off their liquid assets.
“A significant proportion of [DB pension schemes] will need to act quickly to ensure they have the ‘dry powder’ available to meet further collateral calls if interest rates rise further,” Daniel Melley, Head of UK investments at Mercer told the Financial Times this month.
By subjecting investment and funding strategies to regulatory scrutiny, ministers are looking to ensure that schemes can withstand future volatility of the kind that has rocked markets this year and through the pandemic.
DB schemes also set to come under pressure this year as rampant inflation puts the squeeze on retirees’ spending power.
The schemes typically have some inflation protection baked in, but the vast majority impose a cap of around five per cent meaning that savers will be left out of pocket rampant inflation outpaces any rise in payouts.