UK Pension Regulations Weigh on DB Plans

July 2, 2003 ( - United Kingdom plan sponsors continue to be wary of increased regulation in the defined benefit space, as nearly one third have closed their plans to new members.

The number represents a marked increase from the 14% that reported similar restrictions on their plans in 2001.   Further, the findings show that further closures can be expected; some  14% overall say it is likely or very likely that the plan will be closed to new members in the next year , according to 2003’s Survey of Occupation Pension Scheme conducted by the Pension Fund Partnership.

However, new participants will not be completely shut out of the British defined benefit arena.   Only 2% of those who have not closed their defined benefit plan say they are likely or very likely to wind up the scheme totally over the next one to two years.  

Plan Contributions

Additionally, companies continue to contribute to participant retirement accounts at a healthy clip.   Overall, company contribution levels are over two and a half times those of member contribution rates. The average company contribution level is 12.79% of gross salary in 2003, up from 11.75% in 2001 and 10.16% in 2001, rising to 13.87% if the 5% overall of companies making no contribution are excluded.   In fact, while 14% of the largest plans currently do not make contributions, this percentage has fallen significantly over the last four years; from 33% in 2000, to 23% in 2002.

By comparison, employee contribution rates have increased as well, albeit only slightly.     The average member contribution level for defined benefit plans is 4.52% of gross salary in 2003, up from 4.24% in 2002 and 4.02% in 2001. If the 7% of plans with no contribution rate are excluded, the rate increases to 5.23% of gross salary.

Despite continued funding, the average  Minimum Funding Requirement (MFR), which aims to ensure pension funds can meet their obligations by requiring them to discount assets at the same interest rate as those of benchmark gilts , is 105.3%, down on the figures of 108.7% in 2002 and 111.2% in 2001. Whereas in the 2001 research a quarter of plans had a funding level in excess of 120%, last year the equivalent figure was 16% and this year it is down further to 14%. Overall, 25% have a funding position of less than 100%, with 10% having a funding position below 90%.

Myners Effect

Well over half (55%)   of respondents have followed investment practices in line with those outlined by the Myners Report in 2001, with the remaining plans saying they have made no changes as a direct result of the report.

Among the changes noted by plans:

  • 13% – formalized planning and policy objectives
  • 13% – formalized or enhanced trustee training
  • 9% – reviewed or revised their Statement of Investment Principles or their actual investments
  • 8% – identified and addressed weaknesses in their compliance with Myners.

When asked to look ahead over the next year, 60% of respondents say they have no plans to make any changes as a consequence of Myners. Of those likely to make a change, it is again the areas of trustee training and planning/policy objectives that are mentioned by most plans (although less than one in ten do so), followed by enhanced monitoring, reporting and disclosure.

UK government officials asked Myners in 2000 to investigate the way in which investment decisions are made within the UK institutional investment industry. He was also asked to identify factors that might be distorting the decisionmaking process to the detriment of both pension funds and their beneficiaries.     Myners’ principles as outlined in his report are:

  • clear objectives
  • focus on asset allocation
  • expert advice
  • explicit mandates
  • activism
  • appropriate benchmarks
  • performance measurement
  • transparency
  • regular reporting.

Problems and Solutions

Despite the relative health of the existing plans, UK plan sponsors are still concerned about the future.   Overall, 37% feel the main challenge facing occupational pension plans today is poor investment performance. This has overtaken the subject, which has been placed first in all previous surveys, of complexity of legislation, mentioned this year by 28% of plans , as is MFR/funding/contribution issues.

Perhaps a little surprising, is the four out of 10 segregated plans that say they have made no changes to their asset allocation over the last year; compared with a very similar 43% that made moves from equities towards bonds.   Additionally over one in ten plans (11%) have moved from UK equities to overseas equities, while a smaller number have moved from equities towards property and alternative investments.

Further, respondents appear content to go it alone.   When asked whether investment consultant firms should also provide asset management as part of their corporate structure, 71% of respondents say they should offer consultancy only and should not be associated with the provision of any asset management services, with 20% having no problem with this and the remainder declining to answer.

Additionally, the survey noted other issues on the minds of British plan sponsors:

  • rising costs (15%)
  • poor public/member perception (14%)
  • confidence and understanding (14%)
  • FRS17 (12%)
  • investment uncertainty (12%)
  • increased longevity (10%)
  • corporate sponsorship/commitment (7%)
  • closure of defined benefit schemes (6%).

When asked what one thing in the pensions or investment industries the respondents would change, if they were able:

  • 40% say simplify/reduce legislation and regulation
  • 10% say simplify/reducing taxation
  • 8% say make pensions easier to understand/get rid of the jargon
  • 5% say reduce/cease government interference and intrusiveness
  • 4% say reintroduce ACT relief

The Fifth Annual Survey of Occupational Pension Schemes Report is based on the findings from questionnaire responses by 242 plans, representing a combined asset value of over £111 billion and more than 3.1 million members.