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Defined Benefit Chair’s Statement: effective member protection – or unintended consequences?

Defined Benefit Chair’s Statement

Sophie Ash, Director at KPMG, discusses the recent White Paper on “Protecting Defined Benefit Pension Schemes”.

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Defined Benefit Chair’s Statement: effective member protection – or unintended consequences?, Illustration of yellow piggy bank with lock inside

There may be fewer envelopes dropping on your door mat – but anyone with a defined benefit (DB) pension, no matter from when, may still be getting pensions information by post. Do you have that sense of excitement when you open your ‘summary funding statement’ from your trustees? Is it reading you relish, to interpret what the change in the deficit might mean for your own pension? And those all-too frequent requests for a new member-nominated trustee? Did you take time to nominate anyone or look at the candidates and vote?

To put it another way, how engaged are we as members? Do we need even more ‘stuff’ to help us understand the world of ‘pensions’? If you are reading this, it might indicate that you have responsibilities for a pension scheme – whether in a ‘sponsor’ capacity, and therefore paying for it, or as a trustee looking after it. Either way, you’ll no doubt be trying to cope with all the legislation that keeps changing around you – with yet more to come.

If you only have a defined contribution (DC) scheme to think about, what follows won’t affect you. The White Paper “Protecting Defined Benefit Pension Schemes” published in March won’t change things in terms of your scheme. That said, the latest requirements for the DC Chair Statement and web-access for DC member information gives us some idea of what the next package of measures might mean for DB schemes. This includes the plans for a DB Chair’s statement.

 

If you are a DB sponsor, it’s important to consider the potential repercussions of this new statement.

Appointing a Chair

The main upshot is that the Pensions Regulator (TPR) will be collecting more information as part of the valuation three yearly cycle. The trustees need to appoint a Chair who will issue a statement, so that TPR can assess the quality of the plans underpinning the funding of the scheme.

It’s highly likely that disclosure of these plans will extend to members. Alongside the regular funding updates, it is reasonable to expect this information will also be available to members, explaining what the trustees plan to do with the scheme in the medium to long term.  Are they funding to buy out, for example? Are they looking to consolidate in some other vehicle?  And how much will the assets be de-risked? 

 

Potential costs and impacts

How much more will it cost the employer to achieve these plans? And judging by the DC requirements, will this information be available in a more public way on a website? 

It’s also worth thinking about how long it will be before shareholders and analysts of a listed company start seeking out this information to expand on the company accounting disclosures. Will this help identify a more realistic cost of DB pensions to the business? If this is a buyout, where is that cash coming from? And what price sensitive information might these disclosures reveal? Listed companies have extremely onerous responsibilities when it comes to the handling and disclosure of price sensitive information.  

Company directors with these responsibilities are remunerated accordingly. Should the trustee board members also be paid for these extra responsibilities? According to the White Paper, where trustee chairs are paid currently, they might receive annual fees ranging from £25,000 to £60,000 (depending on fund size). This in itself might be quite an eye-opener for those giving up their time to support the pension scheme as a trustee.

 

Impact on the members

A solid sponsor providing ongoing funding until the last member’s benefits are paid could be rocked by inappropriate disclosures. In other words, if handled badly, the new requirements could actually reduce the protection of members’ benefits. The unforeseen consequences of this legislation should therefore be on the agenda for both employers and trustees immediately. Addressing this actively within any valuation negotiation is essential, as well as ensuring any documentation reflects any agreed strategy, as these requirements may take effect before all the other proposed changes in the White Paper. Some trustee boards might also decide to be early adopters – as TPR intends – although this could end up adding more disruption. 

 

For more information, please contact Sophie Ash

 

Invitation: Rethink Pensions breakfast seminars

Put yourselves in a member’s shoes - have pensions ever been more confusing?

We would like to invite you to our Rethink Pensions breakfast seminar series taking place across the UK throughout June and July 2018.

We will be presenting the topics ‘from the member’s perspective’ to help inform your strategy. Pensions is in the news more than ever  - with MPs publicly questioning pension trustees in select committees, a white paper, pensions strikes, transfer value mis-selling, collective DC and much more.

Never before has it been so critical for members to understand their pensions, but at the same time it has never been more complicated.  How do members make decisions about Freedom & Choice?  What do employees feel about the investment options in their DC scheme? Will building integrated risk management into your strategy really help protect members? And will disclosing it in a Chair’s statement add more confusion for members?

Whether your role is in finance, as a trustee or in HR, this session will provide insights and a fresh perspective on the complexities that the ‘pensions world’ is facing.

For the full schedule and more information on our breakfast seminars please click here

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