Blog : BOARD TALK
|Posted on December 30, 2016 at 2:30 PM|
There is no shortage of corporate governance issues for UK businesses to consider going into 2017, with levels of executive pay high on the nation's agenda.
But spare a thought for pensions - as recently considered on Forbes.
As we crashed into Christmas you may have missed the annual survey by the Pensions and Lifetime Savings Association.(PLSA). It revealed that the costs for operating defined benefit (DB) schemes have increased by 37% in one year.
"Since 2015, the mean running cost of DB schemes has increased by 37% from £400 to £546 per member. This is largely driven by increases in fund management and custody costs, up 32%. Smaller schemes, those with 5,000 or fewer members, have seen the greatest rise in running costs with an average increase of 63%, to £787 per member" said the PLSA.
Importantly, in 2016, only 10% of DB schemes were open to new members compared to 21% in 2015. That figure is only 4% in the private sector. "Rising costs, as well as economic volatility and low interest rates, are proving key factors in the decision to close to new members" it said.
“Our analysis highlights a continuing problem for DB schemes. Higher operating costs, especially for smaller schemes, combined with widening deficit levels mean DB schemes are under pressure as never before. We can’t ignore the resulting risk to members’ benefits for all but the most strongly funded schemes and for these members the risk is they will lose 15-20% of their benefits" said Joanne Segars, Chief Executive, Pensions and Lifetime Savings Association.
But there seems a strange reluctance by business to make these facts more widely known.
In early December it was reported that Tata Steel and the unions had agreed a £1bn rescue deal to save 4,000 jobs at Port Talbot. The Telegraph called it a "landmark deal for Britain's steel industry."
It also said: "However, the agreement could come at a cost for steelworkers. As part of the agreement Tata is beginning a consultation on changes to the £15bn pension scheme attached to the business, with far less generous terms."
In order for Tata to sever its pension fund, it turns out the the Pension Protection Fund is considering a significant change to its rules, as the FT then reported.
"The PPF, which protects the pensions of workers whose employers become insolvent, said it may consult further on a rule to allow it to charge its levy on pension schemes that are not backed by an employer" according to the FT.
It seems to me that change in the air is not always acknowledged, when it is in nobody's interest to do so.
The PLSA has a DB Taskforce currently collaborating across the pensions sector to develop recommendations on how to change the industry to improve outcomes for members and schemes, it said.
Going back to executive pay, according to a PLSA report early this month which was covered here, 87% of pension funds responding to a survey said executive pay is too high.
Of that 87%, almost two-thirds (63%) believe executive pay is generally too high, while 37% say it’s too high in cases of poor performance. Pension funds also have serious concerns about the pay gap between executives and their workforce with 85% of respondents highlighting it as a problem.
Perhaps we also need to look more closely at the reasons for those "increases in fund management and custody costs, up 32%."
Thank you for reading - and Happy New Year from Board Talk.