The Work and Pensions Committee (WPC) have announced an enquiry into the viability of defined benefit (DB) pension schemes.
The current deficit on the UK's 6,000 schemes, which runs into the billions, has been described as one of the "greatest problems of this age" by MP and committee Chairman Frank Field and a solution to a predicted future crisis is desperately being sought.
The recent collapse of BHS, whose DB pension liabilities will most likely fall to the Pension Protection Fund (PPF), has brought the question of the sustainability of DB schemes to the fore. Following the BHS crisis (on which a separate enquiry is being held) combined with problems faced by British Steel (whose pension liabilities have made a sale virtually impossible) MP's have taken the view that a major enquiry must be launched into the long term future and viability of DB schemes. Thousands of businesses with DB schemes could face the same problems as BHS and British Steel, unless action to reform the system is taken now. The Department of Work and Pensions (DWP) have commented that they are aware of a number of employers, who offer DB schemes, who have concerns about the size of their liabilities and the impact of those liabilities on the future of their business.
Whilst the BHS enquiry is on-going, this fresh and wider enquiry will consider the status of DB pensions in their entirety. It is anticipated that the enquiry will consider radical solutions to the problems faced by the 6,000 DB schemes in the UK; 5,000 of which are currently in deficit, with the combined black-hole being more than £800 billion. The Chairman of WPC has commented that "Pensions law and regulation must urgently adapt to the issues of the future, rather than face the problems of the past." Employers who offer the traditional DB schemes pay employees their pension income as long as they live, and thereafter to their surviving spouse or civil partner. The costs of doing so has become unsustainable in recent times, due to increased life expectancy coupled with record low returns on capital.
The enquiry has been welcomed by the pensions industry as an opportunity to explore whether aspects of the scheme governance and Pensions Act 2004 should be revisited. Hargreaves Landsdown have commented that "it is no longer possible to turn a blind eye to the yawning reality gap that has opened up between the past promises made by employers through their pension schemes and the funds available today to make good on those promises."
The results of the enquiry remain to be seen but it is anticipated that it will lead to reform of both regulation and pension law, in order that a more sustainable model for pension schemes is put in place for the future.