Xafinity : Can we close the £700 billon pension hole?

• It will cost over £700 billion to immediately insure pensions and prevent another Carillion - this is not feasible

• Meaningful action is needed now to limit the impact of company failure on members' pensions

• Actions need to focus on security of benefits

• Allowing distressed employers to move to CPI; encouraging the provision of contingent assets; and allowing earlier intervention to save schemes can make a big difference

• The above would strengthen trustees and companies' Integrated Risk Management armoury

Xafinity Punter Southall, the largest pure pensions consultancy in the UK specialising in pensions actuarial, investment consulting and administration services, has made three recommendations based on the comments made by Prime Minister May regarding the need to strengthen the position of pensions in the wake of the collapse of Carillion.

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 £700 bn. 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 made 3 key recommendations to improve pension scheme member security.

1. Moving inflation protection to CPI for struggling employers

The Office for National Statistics has distanced itself from RPI saying in 2017 'the RPI is a flawed measure of inflation with serious shortcomings and we do not recommend its use.' Indexation was introduced to protect members' pensions from being eroded by inflation. Allowing distressed employers to link benefits to CPI still allows for inflation protection and arguably uses an index that may better reflect the inflation pensioners will experience. The change may allow relief which supports capital investment in a business.

2. Tax relief for meaningful security

It has been shown time and again in cases of business failure that pension schemes suffer less when they have similar protections to lenders (e.g. security). The suggestion is that the Government look at providing tax relief for the value of any meaningful contingent asset as if it were a contribution to the pension scheme. Xafinity Punter Southall's Risk of Ruin model has clearly shown in past cases that contingent assets can be most efficient and effective in protecting members' benefits.

3. A rescue process for pensions

This could be similar to Creditor Voluntary Arrangements (CVA). Debate has recognised that the current system to manage pension liabilities using Regulated Apportionment Arrangements (or RAAs) often comes too late and does little to save members' pensions. If action is taken sooner on unaffordable pension schemes then more resources and funding may be available. The process around a CVA is a possible model here where all parties (company, trustees, Regulator and PPF) can put forward their view. Independent court oversight may be needed.

Wayne continued: 'The Regulator has provided a clear steer that trustees should manage funding, investment and employer risks together, i.e. Integrated Risk Management. The 3 recommendations above would significantly strengthen the tools available to trustees and companies to do so.

'A more radical approach for the current Government would be to look at the level of protection provided by the Pension Protection Fund. 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.'

For more information please contact:

Rebecca Noonan, Senior Consultant, Camarco

Tel: [phone]

Louise Dolan, Partner, Camarco

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