The White Paper will draw heavily on the report of the Goode Committee, set up by Peter Lilley, social security secretary, in 1992. The report, published last year, contained 218 recommendations.
While few will object to measures that prevent looting of pensioners' assets, one key Goode proposal - a minimum solvency margin for pension funds - has provoked alarm in the industry.
In fact, the solvency debate has focused attention on whether recent styles in pension fund management are appropriate.
A solvency test along the lines proposed by Goode could cost British industry billions of pounds to top up insolvent pension funds. There is also concern that pressure to meet Goode-style solvency tests could lead to a huge shift of investments away from volatile shares towards less risky, fixed-interest bonds.
Apart from the problems this shift may cause in financial markets, a less risky approach would mean more expensive pension schemes. This is because equities have shown better rates of return than bonds, so higher investment in bonds means higher contributions would be required from employers to give the same benefit.
Employers and trustees might also balk at the risks they are taking on in providing guaranteed benefits under final salary schemes - the most common arrangement - and instead switch to defined contribution schemes.
This method, common in the US and in UK personal schemes, means potential pensioners take on all the risk attached to the contributions invested on their behalf. This would make the value of future benefits less certain.
Such wide-reaching ramifications stem from a proposal by the Goode Committee on solvency tests that appear reasonable, even innocuous, to anyone other than an actuary.
Goode suggested that pension fund assets should by law equal their liabilities - a minimum solvency standard of 100 per cent.
If solvency fell below a base level of 90 per cent, the company sponsoring the scheme should make an injection of funds in the time a regulator deemed appropriate.
There is scarcely any legislation on the funding of pension schemes. Deficits that arise from the winding-up of a company sponsor are a debt owed by the company, and the Inland Revenue has rules to force schemes to pass any surplus above a minimum amount back to the company and/or scheme members.
The Goode recommendations provoked a sharp reaction from the pensions industry. The reasons for this are practical and arcane.
Goode said assets should be valued on a 'discontinuance' basis or at market prices, on the assumption that the fund is to be wound up on the spot.
Pensions managers with memories of the ultra-bear market slumps of 1974, 1987 and 1990 complained that company sponsors might be forced to put crippling sums of money into funds at short notice to meet solvency problems that proved to be only short-lived.
Actuaries use an 'on-going' solvency approach that values investment assets on the basis of long- run assumptions about dividend growth on shares and the rate of interest.
The Goode recommendations also caused consternation on the other side of the pension fund balance sheet. Actuaries, for ongoing solvency or funding purposes, also look at the liability to provide a specified pension benefit on a long-term basis using assumptions about long-term interest rates.
Goode threatened to throw a spanner into the actuarial works by recommending that a pension fund's liabilities should be translated into their immediate cash equivalents.
The use of transfer values implied using market rates of interest to evaluate pension liabilities. Schemes with many active members in employment, usually funded by equity investment, would be badly exposed by this approach.
The Department of Social Security took this on board in a test run to find out how many schemes would be insolvent on a modified Goode test. A similar exercise by Bacon & Woodrow, the actuarial consultants, found that over 90 per cent of its sample schemes were more than 100 per cent solvent. Most of those that fell below were restricted executive schemes.
While these tests are no cause for complacency, they suggest that concern over the impact of minimum solvency standards may have been overblown.
The Goode Committee also raised the question of a statutory investment standard. Behind this is the issue of whether the increasing commitment to shares by pension funds - from 47 per cent of assets in 1962 to 79 per cent in 1993 - is appropriate to the needs of a gradually maturing pensions industry.
Net inflows from contributions fell behind net outflows to pensioners several years ago. Investment income has made up the gap but whereas total income was 156 per cent of outgoings in 1990 this fell to 120 per cent in 1993.
The pensions industry is entering middle age after a sprightly adolescence and prosperous young adulthood. Solvency test or not, the cost of funding schemes is likely to rise in a less buoyant investment climate and on a more prudent approach to suit its greying members.
(Photograph omitted)Reuse content