ABI warns UK govt to use 'extreme caution' on pension changes

Finance Minister Jeremy Hunt has called for views on potential changes to the pension market could encourage further investment in the UK businesses, with an emphasis on startups.

DB pensions promise pension savers a certain level of income when they retire, based on their salary, but have largely been replaced by defined contribution (DC) pensions, where the pension saver bears all the financial risk as the size of their final pot will depend on investment performance by the fund's manager.

The ABI said it had stressed that the central purpose of DB pension schemes – to pay the benefits promised to members – should not be undermined. For years many companies had been paying in extra cash to bridge fund deficits, but the ABI said the conversation around had now shifted to dealing with surpluses.

However, fluctuations in asset values could reverse this, so caution must be taken, it added.

"Any move to allow employers to use the surplus of a DB pension scheme should only be considered if member benefits have already been secured," the ABI said.

"Otherwise, this risks creating commercial benefits for employers, while generating further risks for scheme members. This is precisely what the regulatory system over the last twenty years has been created to prevent."

The ABI also said that proposals for the Pension Protection Fund (PPF) – the lifeboat scheme which protects people with a DB pension when a firm becomes insolvent – to act as a public consolidator of private DB pension schemes would be a major intervention.

Expanding the role of the PPF, or introducing a new public consolidator, could also risk introducing “moral hazard” into DB scheme decision-making, the ABI said as employers could feel inclined to put less money into their scheme to get cheaper protection from a public consolidator.

Any expansion of the PPF’s role must retain the employer’s legal obligation to support the scheme and schemes would still need to continue to work towards being fully funded, the ABI said.

Yvonne Braun, director of policy, long-term savings, at the ABI said: “We welcome the focus on addressing some of the ongoing challenges in pension policy and are keen to work with government to tackle these.

“However, it should exercise extreme caution when exploring options for DB schemes, including the ability to extract surplus, and introducing a public consolidator. Introducing these market-shifting proposals may bring significant risks for highly uncertain rewards.”

Reporting by Frank Prenesti at Sharecast.com