Estimated reading time: 3 mins
The Government published its much anticipated white paper ‘Protecting Defined Benefit Pension Schemes’ on Monday 19 March. Here we outline for employers the three main issues it addressed:
Improving the funding of schemes.
Increasing the penalties for companies and directors who put their pension scheme at risk.
Making the consolidation of small schemes easier.
Improving the funding of schemes
There's a concern that the current code of practice encourages trustees to focus on short-term funding issues such as the size of the deficit, rather than long-term targets.
The Government's suggestion is to revise the code to switch this focus. Rather than worry unduly about short-term fluctuations in the funding position, trustees should concentrate on the long-term objectives of the plan.
Examples of these long-term objectives might include run-off, self-sufficiency, buy out by a set time, or joining a consolidation fund or ‘superfund’. This last option is where a newly created 'bulk' fund pools the assets and liabilities of smaller funds.
The focus on a long-term solution or ‘exit plan’ seems sensible. With most schemes now closed and maturing rapidly, company and trustee objectives become aligned in reducing risk and ensuring the scheme can meet the benefits in a reasonable time at a reasonable cost.
However, there will be challenges to overcome. For example, will a revised code of practice allow the company and trustees to agree to aim for a fund to buy out over 30 years, without worrying too much about short-term volatility? And what's the best way to hit these long-term targets while also ensuring costs for the employer don't escalate?
High-profile business failures that have caused pension benefits to fall to the Pension Protection Fund – BHS in particular – led the Conservatives to make a manifesto commitment to strengthen the regulations and the regulator’s powers, so as to protect pension schemes from unscrupulous bosses.
So we now have a promise of greater power to fine companies, and possibly to imprison directors whose reckless behaviour puts a pension scheme at risk.
The proposals include strengthening the 'notifiable events' framework, in particular to include a declaration of the impact on the pension scheme of any corporate transaction. As a minimum, this change will mean a lot more thought will be needed when companies are considering a corporate transaction where a DB pension scheme is involved.
The prevailing view of the Government is that small DB schemes are not as well run as large ones, as the cost of governance is too high. The proposed solution is some form of consolidation of small pension schemes, which would result in lower costs, better governance, and better outcomes for members.
The reality is that many companies would be keen to break the link with their pension scheme, but the cost is too high, even under a consolidation model – and likely to remain so. If the company remained on the hook for the liabilities costs are expected to be lower. But not many companies would want to give up control while retaining the risk.
The white paper discusses the legislative hurdles that need to be overcome to make consolidation commercially viable while also protecting member benefits. We're not convinced this will realistically be achievable without significant changes, such as making it easier to simplify a scheme benefit structure.