Legacy issues for DB schemes will persist for decades longer than has been predicted says the Pensions Management Institute.
The PMI says that industry predictions around DB legacy issues, particularly those involving buy-out, being completed within 25-30 years are wildly over optimistic, with the reality much closer to 50 years. The body argues that the buyout market will struggle to cope with demand for years.
PMI technical consultant Tim Middleton says: “The very nature of DB liabilities is long-term and we have some concerns that the industry does not fully appreciate how long it will take to reconcile through wind-ups and buy-outs. It is becoming increasingly clear that the buy-out market will struggle to provide the capacity to cope with current demand for these exercises, let alone keep up with any growth in the volume of requests.
“There is a perception that DB is dead in the water – we couldn’t be further from the truth. The fact of the matter is there are people who have not even been born yet who will spend their careers working on DB. The industry seems more and more focused on automatic enrolment and defined contribution preparations and these DB legacy issues are not being accurately addressed.
“Another important factor is the impact of DB liabilities on the sponsor, many of whom are struggling to make any impact in reducing their deficits. Scheme deficits often dictate a company’s strategy, so the long-term and wide ranging impact of DB legacy should not be underestimated. We would urge the industry not to be entirely distracted by new DC ideas just yet, as the reality is that the remnants of DB will continue for decades to come.”