DB schemes move towards risk-sharing approach

At least one large company with a defined benefit scheme is considering reopening the pension but on a risk-sharing basis, claims the Pensions Regulator.

Speaking at the launch of its governance discussion paper, June Mulroy, executive director of delivery at the Pensions Regulator, suggested there are some interesting products coming through the market aimed at large final salary FTSE 100 companies, but the problem to address is how to offer less expensive ‘scaled down’ versions.

She says it is ‘heartening’ many employers want to keep their DB schemes open, although not necessarily on the same terms, so has been keeping a watching brief at solutions emerging from the City.

Mulroy adds: “We know of one company considering reopening its DB scheme as a risk-sharing proposition, as they feel they have a product which can manage these risks, and although at the early stage we were initially sceptical, it seems to have legs, and we can see other companies beginning to look at this approach.”

However, while some employers do approach the Regulator about proposed schemes, Mulroy says it doesn’t ‘approve’ or ‘kite mark’ schemes, although it does highlight which aspects it really doesn’t like.

She says: “There are some ideas we have seen which are simply abandonment – hence our guidance last year – however we are beginning to see less of these although the solutions currently available are focused on the large FTSE 100 companies, but they are more regulated.”

Mulroy says she doesn’t believe any solutions will really emerge until the end of 2007, as she says they would require “fundamental changes” which cannot “happen overnight” as firms have to find the funds to make any new solutions viable.

She also warns the Regulator does not want to become a ‘tick-box’ regulator as the aim is to get away from the compliance-based regime and move towards a more risk-based approach.

She points out the problems with a ‘tick-based’ approach is it could lead to a ‘one-size fits all’ approach of pension fund regulation, whereas the Pensions Regulator wants to ‘educate and enable’ rather than resort to enforcement.

She says, for example, in clearance procedures for mergers and acquisitions, firms do not actually need to apply for clearance or can ignore and recommendation TPR make, businesses might be risking the prospect of its powers being used at a later date.

She admits the Regulator does occasionally grant retrospective clearance on M&A issues, and although she says it “doesn’t like doing it” and believes it “isn’t the ideal”, she admits they will consider it to help provide a clearer picture for trustees.

Mulroy adds: “Enforcement is used as a last resort, we’re not afraid to use them, as we recently used one of our strongest powers [to ban a trustee for life], but it is an awfully large weapon to hit people with, particularly when it will only send a message to the people you hit.”

As a result, she says: “Education is our main issue as we don’t want to add to the burden of schemes. The Trustee Toolkit is the first step but we want to push it much more as there is a strong correlation between education and trustees understanding trickier issues such as employer covenants.”

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