Nick considers whether some of the criticisms levelled at smaller schemes are deserved and voices concerns about the application of the new funding regime to these schemes as mapped out in the consultation document.
Some selected statistics from the 2019 Purple Book;
- Schemes with between 1 and 999 members make up 80% of all DB schemes
- Schemes with fewer than 100 members are significantly better funded on an estimated buyout basis (and PPF s179 basis) compared to any other category
- The modelling assesses that the smallest schemes have the highest insolvency probabilities (with schemes with fewer than 100 members being predicted as being more than twice as likely to go insolvent as those with more than 10,000 members)
- However, around 41% of schemes in PPF assessment are in respect of schemes with fewer than 100 members which is only a little higher than their share of all DB schemes at 36%. If they were twice as likely to go insolvent, we might expect smaller schemes to make a much higher percentage of the total number of schemes in PPF assessment. Suggesting that, at least anecdotally, the insolvency modelling perhaps might be being a bit harsh on these smaller schemes
Of course statistics are dangerous beasts at the best of times and can be selectively used to prove almost anything. My only point would be that smaller schemes, which make up the majority of DB schemes, perhaps get a harder time than they should. On some measures at least, they appear to be better funded than the largest schemes and are supported by covenants that are not significantly weaker.
In their latest consultation, TPR also note that they tend to have similar headline asset allocations to larger schemes but perhaps with less hedging and their deficit contributions as a percentage of profits are significantly higher. Typically these smaller schemes will be;
- run on tighter budgets as costs will tend to be larger relative to the size of the scheme;
- there will be closer working relationships between the senior management team of the sponsoring employer and the Trustees;
- there will be more focus on individual liabilities as each member will represent a larger proportion of the whole;
- often they will engage a specialist smallscheme provider who will provide them with bespoke advice taking into account their particular circumstances and cost base
This focus on costs can mean that these Schemes do not have the sophisticated modelling, governance or investment strategies that might be available for larger schemes. The TPR has rightly flagged issues in this regard. However, is there a danger in losing what these schemes do well by punishing them for things that are, perhaps, in the end, less important to that bottom line which is their ability to deliver benefits to the members.
Whilst there are many sensible suggestions being made in TPRs funding consultation I believe its application to smaller schemes (particularly those with fewer than 100 members) needs to be thought through carefully. There is a danger that these smaller schemes will be forced to adopt the TPRs preferred approach by making the costs of following the alternative, bespoke, approach prohibitive. This feels like a step backwards when a lot of progress had already been made through the existing approach of encouragement, TPR sharing their findings and allowing more flexibility in how the end goal is achieved.
One option might be to initially roll out the new approach for larger schemes which will allow time to iron out any kinks and think more carefully about precisely how it might apply to these smaller schemes.
Nick Atkin
The views expressed in this blog are my own and do not represent those of Atkin & Co.
