Source · Select Committees · Work and Pensions Committee
Recommendation 8
8
Rejected
Consider funding regime changes to increase trustee confidence in taking appropriate investment risk.
Conclusion
We remain to be convinced that the PPF underpin would be an effective incentive to trustees to consider increasing their investment risk. DWP and TPR should consider whether there are changes to the funding regime that could give trustees confidence to take appropriate investment risk. (Paragraph 74) 56 Defined benefit pension schemes
Government Response Summary
The government states that trustees already have significant flexibility for investment risk within the current regime and is not persuaded that merely allowing more risk would be sufficient. It highlights the 'Options for Defined Benefit schemes' consultation, exploring changing incentives, and commits to respond later this year.
Government Response
Rejected
HM Government
Rejected
The amount of risk that is taken in a scheme’s investment allocation is based on many factors. Sponsors and trustees must agree the scheme’s technical provisions, which involves making assumptions about investment returns. This therefore sets a planned risk budget for scheme investment. Actual investments are controlled by trustees. This means trustees have significant flexibility to adopt scheme-specific investment strategies and invest in a wide range of assets, including growth assets and private markets, where that risk is supportable by the employer covenant. TPR’s ‘fast track’ approach9 to assessing valuations allows for assets to be up to 60% in growth for immature schemes, and higher 8 https://www.gov.uk/government/consultations/options-for-defined-benefit-schemes/ options-for-defined-benefit-schemes 9 https://www.thepensionsregulator.gov.uk/en/document-library/consultations/draft- defined-benefit-funding-code-of-practice-and-regulatory-approach-consultation/ response-to-our-draft-db-funding-code-of-practice-consultation allocations may also be possible under its ‘bespoke’ approach, which many schemes will choose to follow. Even at low dependency for significantly mature schemes, TPR has suggested that up to 30% allocation to growth assets could still be appropriate in some circumstances. There is further flexibility on how schemes invest the surplus generated. Based on the evidence, we are not persuaded that merely allowing more risk to be taken in the regulatory regime will be sufficient to persuade trustees to adopt a higher risk asset allocation. Trustees are aware that ultimately the employer is responsible for funding DB benefits. The main effect of better returns is to make paying those benefits less expensive for the sponsor. The sponsor will also be acutely aware that if higher risk investments do not perform, and a deficit emerges, not only will the sponsor then have to pay more, but this deficit must be shown on their balance sheet. It is against this wider context that the Options for Defined Benefit schemes consultation explored changing the mix of incentives for trustees and sponsors. The Government will respond to this consultation later this year.