Gold-plated pension warning as pots at risk of ‘being finished off’ by new restrictions | Personal Finance | Finance

The dwindling number of gold-plated pension schemes that are still open to new members risk being inadvertently finished off, MPs have warned.

Changes to proposed regulations and improvements in governance standards are urgently needed to ensure private sector defined benefit (DB) pension schemes remain an active and thriving part of the pensions landscape, the Work and Pensions Committee said.

Despite a steady decline in number in recent years, DB pension schemes are still of critical importance to both savers and the UK economy, the committee added.

DB schemes promise savers a certain level of payout when they retire, based on their salary. Many have been replaced by defined contribution (DC) schemes, where the saver bears the risk of what income level they will end up with in retirement.

Two decades of regulatory and policy caution have led to a low-risk approach to investment “that threatens to inadvertently finish off the few remaining DB schemes still open to new members”, the MPs said.

Their report called for a fresh approach to funding regulation.

The report said: “The funding levels of the majority of defined benefit schemes have improved.

“Although there are questions about the extent to which the value of assets fell over 2022 which we think need to be resolved, the change compared to the mid-2010s when the majority were in substantial deficit, is clear.

“This raises new questions and gives rise to new opportunities and challenges – for example, relating to how DB scheme funding is regulated, how to treat any surplus in pension and compensation schemes and how to ensure scheme members feel their interests are represented in these decisions.”

One area of focus during the committee’s inquiry was the development of a new DB funding regime, proposed for scheme valuations from September 2024.

The report said: “The intention is to require schemes to aim for a position of low dependency on the sponsoring employer by the time they are significantly mature, with investments that are highly resilient to risk.”

Regarding the new proposed funding regime, the committee’s inquiry heard concerns that open schemes could be forced to de-risk unnecessarily, potentially leading to premature closure.

The committee is calling for the Government to address the concerns in the final version of the funding code.

Sir Stephen Timms, chair of the Work and Pensions Committee, said: “Defined benefit pension schemes are hugely important to savers planning for a comfortable retirement and for the UK economy.

“The improvement in scheme funding levels presents opportunities for both to benefit, but a new approach to regulation and governance is needed to protect the best interest of scheme members and allow still open schemes to thrive.

“The flexibility afforded by the much-improved financial position of the PPF (Pension Protection Fund), which we applaud, gives the Government an opportunity to ensure open schemes are not hindered by overly-cautious restrictions imposed by regulations.

“While many trustee boards operate to high standards, new standards for trustees can foster confidence that this is the case across DB schemes.”

Sir Steve Webb, a former pensions minister who is now a partner at consultants LCP (Lane Clark & Peacock) said: “So many of today’s rules and regulations around pensions were born of a world of pension deficits and worries about member pensions being paid.

“Today the world is very different, with the majority of schemes running a surplus and debating how best to use it.

“But the rules have not caught up with the new world and may mean that schemes and members do not get the most benefit from their improved financial position.

“The Government needs to decide urgently how it can make sure member benefits are secure and at the same time help companies, members and the wider economy benefit from the assets of over £1 rillion which are still sitting in these schemes.”

A Department for Work and Pensions spokesperson said: “We are in a strong position with defined benefit pension schemes enjoying high levels of funding. Our new regulations promote better – and clearer – funding standards, while retaining the benefits of a flexible, scheme-specific approach.

“Our defined benefit options consultation is ongoing to seek views on how schemes can provide better outcomes for savers. We remain committed to progressing legislation for the permanent superfund regime as soon as parliamentary time allows.”