DWP urged to clamp down on unnecessary risk in DB schemes

Risk is the main issue facing UK DB schemes, and must be their key focus, according to pensions and benefits consultancy Hymans Robertson in response to the DWP’s DB Green Paper. Excellence in risk management, and using the funding flexibilities available, should be schemes’ main priority, putting a spotlight on improving benefit security, says the firm.

Calum Cooper, head of trustee DB at Hymans Robertson, said: “The DWP‘s view that DB schemes are generally affordable is absolutely right, so focusing on cost efficiency, whilst important, is not obviously the number one driver for the industry. Instead, it is vital we recognise the cost of running unnecessary risk. Each year there is still £423bn p.a. of risk in the system.

“It is blatantly clear that DB benefits no longer come with a cast iron guarantee. Indeed the Pension Protection Fund’s (PPF) modelling suggest that in the worst 10% of outcomes around 1,000 sponsors could be insolvent by 2030, so this needs to be tackled. Yet excellence in integrated risk management is not yet prevalent across the industry.”

Commenting on the industry’s ongoing focus on deficits, Cooper continued: “We are concerned that the industry response to the DB Green Paper will continue to focus on short term deficits when this is an opportunity to look at improving outcomes in the long term. It is important to manage risk through a long term lens, using all avenues and levers available, to improve the security of benefits.”

“The attention given to deficits has distracted from improving the security of pensions. As a strategy, simply pouring more money into schemes hasn’t worked for the last 15 years so it is fair to assume it won’t over the next 15. For too long schemes have viewed an increasingly complex web of investment, funding and strategy decisions through the narrow filter of deficits and discount rates. This can be improved by £250bn1 without increasing cash contributions if schemes are patient and take a truly integrated approach to risk management. This integrated approach to risk management is key to tackling the £423bn risks of DB in drawdown.”