UK: One In Six Occupational Pension Schemes Could Fail

Last Updated: 13 January 2016
Article by Mark Howard and Laura Cooke

The rather stark message from the Pensions Institute Discussion Paper The Greatest Good for the Greatest Number published in December 2015 is that up to 1,000 private sector defined benefit ("DB") occupational pension schemes are "stressed" and unlikely to pay members pensions in full.

The paper sets out proposals for further discussion and legislative and regulatory change to address the challenges that this presents.

The paper defines a DB scheme as "stressed" where it is significantly underfunded relative to the value of the employer's business, with a weak employer covenant. Of the 1,000 DB schemes that the paper concludes are stressed (being around 17% of all private sector DB schemes) it estimates that 400 DB schemes have sponsoring employers with viable businesses, but will not survive if the pension deficit remains on the corporate balance sheet. The remaining 600 will never ever pay full benefits and the question becomes one of when, not if, the DB scheme will enter the Pension Protection Fund ("PPF").

The paper suggests that earlier intervention with stressed schemes might lead to a more positive outcome either by:

  • the DB scheme providing better benefits than PPF compensation (which in particular benefits younger members as the compensation from the PPF is less for members under normal pension age)
  • the DB scheme might still enter the PPF, but with greater assets than would otherwise be the case

Unlike previous Pensions Institute papers, it sets out proposals, not recommendations, due to the lack of detailed data of weak sponsoring employers and the conflicting views amongst the expert opinions sought during the research. These proposals are aimed at sparking debate as to how best deal with stressed DB schemes:

  1. Change the Pension Regulator's ("tPR") remit for trustees of stressed DB schemes from 'protection of member benefits' to 'protection of member interests';
  2. Make non-statutory pension increases contingent on the DB scheme's funding level;
  3. Introduce a PPF 'pre-assessment' period to facilitate early intervention;
  4. Change the PPF's cliff edge compensation rules for pre- and post-NRA to a phased approach, based on age and/or length of service;
  5. Provide specific guidance for trustees of stressed DB schemes on the appointment criteria for specialist advice, and provide a rapid fee-check calculator to reassure trustees that they will not contravene tPR's guidance on proportionality;
  6. Introduce a requirement for tPR to alert trustees and sponsors when it identifies that a sponsor's covenant is 'weak' (its lowest ranking), or is on a rapid downward trajectory towards this ranking; and
  7. As part of each funding review, employers should be required to provide an annual statement to the trustees about the prognosis for the business over the next three to five years, including any plans for corporate actions. This would align the regulation and governance of sponsoring employers with the concerns of trustees.
The Supplementary Materials to the Paper also contained a summary of the UK private sector DB universe: there are around 6,000 DB schemes, covering around 11 million members. As at September 2015, it is estimated that the trustees of these schemes are, in aggregate, responsible for assets valued at about GBP 1.2 trillion, which compares with combined liabilities estimated at about GBP 2 trillion.


This is an important paper highlighting a difficult area for trustees and one where they face the prospect of criticism if the DB scheme ends up in the PPF when an opportunity to secure better benefits as been missed. Amongst the paper's findings is that lay trustees are unlikely to have the necessary experience of the issues that arise with a stressed employer and find themselves in a position of "informed bewilderment". Coming on the back of the Pensions Regulator's updated guidance on assessing and monitoring the employer covenant it emphasises the need to obtain expert advice.

This is also not just an issue for smaller DB schemes and employers. The paper concludes 25 of the largest DB schemes, each with liabilities in excess of GBP 1 billion, are stressed.

Nor is this a debate which can be ignored by stronger schemes and sponsoring employers. If the aim is to ensure that more DB schemes can either avoid the PPF or enter the PPF with greater assets, then there should be a benefit for all schemes in the future levies to the PPF being smaller than might otherwise have been the case.

We await the developing debate with interest.

The Greatest Good for the Greatest Number

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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