Protecting Defined Benefit Pension Schemes

Following its Green Paper on Security and Sustainability in Defined Benefit Pension Schemes in February last year, the DWP (Department for Work and Pensions) has now published its white paper under the above heading. There will be a lot of discussion in the coming weeks and months on some of the proposals but here is a summary of some of the key points:

DWP still take the view that there is no systemic problem with the regulatory and legislative framework governing DB pension schemes – despite some recent high profile cases – but they acknowledge that the flexibility within the current system has been misused in some cases.

• The powers of the Pensions Regulator (TPR) are to be enhanced so that there is a “stronger” Pensions Regulator. The key changes here will:
• Give TPR power to punish those “who deliberately put their pension scheme at risk” – what are termed “punitive” penalty fines will be introduced;
• A new criminal offence will be introduced to punish those found to have “committed wilful or reckless behaviour” in relation to a scheme;
• Strengthen the existing notifiable events voluntary clearance framework, so that employer takes account of pension considerations in corporate transactions (but DWP want to make sure that this does not adversely affect “legitimate” business activity).

• The funding regime is to be strengthened so that TPR can enforce funding standards (through a revised Code) that focus on:
• Demonstrating prudence when liabilities are assessed;
• Identifying what factors are appropriate to consider in the context of recovery plans; and
• Making sure that “a long term view is considered when setting the statutory funding objective”.

• All Defined Benefit Schemes will be required to have a Chair of Trustees who will have to produce a Chair’s statement alongside each actuarial valuation. This is likely to add to the burden on lay trustees.

• DWP will also consult on different options and opportunities for consolidation, and will look at some changes to the GMP laws to support benefit simplification. This will include proposals for a legislative framework and authorisation regime.

The objectives can clearly be supported but the devil will be in the detail. Some of the criticism levelled at TPR on recent high profile cases has focused on whether it intervened quickly enough, while some other comments questioned whether the existing powers were not being applied properly and robustly. In addition, any changes that impact on corporate activity will need to be carefully considered.

Trustees and sponsors will continue to face a difficult balancing act.

It also remains to be seen whether consolidation can be made to work. DWP states that the evidence is that smaller and medium sized schemes are more likely to fail governance standards and have higher administrative costs (partly because they cannot access economies of scale).  This is not universally true, of course – many small to medium sized schemes are well run, have high standards, and have found ways to minimise their running costs. In any event, any consolidation regime has to be able to deliver the same level of security as that available through insurance provision. Consultation on consolidation will commence “towards the end of 2018”.

DWP confirms that it will use a phased approach to making these changes, implementing them more quickly where there is consensus, but warning that some of the proposed changes (including some on scheme funding) will require primary legislation.

If fully enacted this would represent a very significant change to the governance regime for DB Schemes since Pensions Act 2004.