Commentary

The Work and Pensions Select Committee’s Call for Evidence on the Future of DB

calendar icon 26 April 2023

Commenting as the Work and Pensions Select Committee’s Call for Evidence on the Future of DB closes, Patrick Bloomfield, Senior Actuary, Hymans Robertson says:

“We are greatly heartened that the Committee is asking these questions about a potential renaissance in UK Defined Benefit (DB) now, before the new DB funding regulations are finalised. The current draft regulations will exacerbate DB’s focus on insurance and run-off.

“A DB renaissance is possible and the societal benefits could be enormous. Rekindling DB, to tap into the UK’s £1.4 trillion of DB assets and restore DB accrual as a mainstream benefit, would require large-scale policy incentives to counterweight the inherent risks.

“The reasons why 90% of DB schemes closed to new entrants are manifold. Legislative reactions to high-profile corporate failures have led to prioritising more secure accrued benefits. Parliament’s greatest challenge may be garnering business confidence that DB legislation won’t become hostile in future, long after commitments are made based on a short-term policy incentive.

“Policies which could stimulate DB include:

  • Resetting legislative and regulatory objectives to balance past and future DB provision, as a minimum by carving-out open schemes from the proposed new DB funding regulations.

  • Enabling sponsors to use DB surpluses to fund benefits for current workers.

  • Encouraging trustee to allow early sponsor access to DB surpluses and removing penal taxes on refunds. Tax incentives could potentially be offered for refunds deployed into UK productive finance and/or climate initiatives and for saving via DB.

“The outcomes of this call for a potential UK DB renaissance mustn’t just be left to resurface in future but looked at seriously now, because the current generation of workers can’t afford to retire as a result having inadequate DC savings. Stronger tax incentives for saving via DB (compared to DC or CDC) could help to restore DB accrual as a mainstream benefit in the UK private sector.”