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‘Real action’ needed to strengthen pension schemes’ position

31 January 2018

In the aftermath of the Carillion collapse, pensions consultancy Xafinity Punter Southall has warned that a move to force companies to insure pension pots would cost over £700bn and instead, what is needed is ‘real action’ by government.

Following comments by Prime Minister Theresa May that the position of pensions must be strengthened, Xafinity Punter Southall said insuring pensions to avoid another Carillion was “simply not feasible.” Instead, the focus should be upon minimising the impact of failures on members’ pensions, the firm said.

Wayne Segers, head of Transaction Services at Xafinity Punter Southall, said: “It is encouraging to see the stance taken by the Prime Minister to look at strengthening the position of pensions. But forcing companies to fund pension pots to guarantee there is not another Carillion would cost over £700bn. That is the cost of insuring all pension schemes according to the Regulator’s latest figures. This is simply not feasible because the burden of this cost will be spread unevenly among stronger and weaker companies.

“Instead, the Government can take meaningful action to try to minimise the impact of failures such as Carillion. We are hoping to see a number of actions proposed as part of the pension White Paper expected in the spring. Our hope is that the Government will be bold and propose real action that will make a difference.”

Xafinity Punter Southall has called for the focus to be upon the security of benefits and has made three recommendations it believes could make a “big difference”.

• Moving inflation protection to CPI for struggling employers– allowing distressed employers to link benefits to CPI still allows for inflation protection and uses an index that may better reflect the inflation pensioners will experience. The change may allow relief which supports capital investment in a business.

• Tax relief for meaningful security– the government could look at providing tax relief for the value of any meaningful contingent asset as if it were a contribution to the pension scheme. According to Xafinity Punter Southall’s Risk of Ruin model, past cases have shown contingent assets can be most efficient and effective in protecting members’ benefits.

• Rescue process for pensions– a process similar to Creditor Voluntary Arrangements (CVA). If action is taken sooner on unaffordable pension schemes then more resources and funding may be available. The process around CVA is a possible model where all parties can put forward their view.

Seger continues: “The Regulator has provided a clear steer that trustees should manage funding, investment and employer risks together, i.e. Integrated Risk Management. The three recommendations would significantly strengthen the tools available to trustees and companies to do so.”

Segers said a more radical approach would be to look at the level of protection offered by the Pension Protection Fund.

He explains: “Currently, individual pension scheme members can see the value of their benefits cut by between 10% and 40% purely dependent on when they were employed. Total levies raised are at an all-time low. £550 million is expected for the levy year 2018/19 compared to target levies as high as £720 million in previous years. Now might be the time to ask whether, with a strengthened funding regime, the PPF should protect all benefits, with CPI inflation protection of course.”

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