Estimated reading time: 3 minutes
Following last year’s green paper, the Department for Work and Pensions (DWP) published its long-anticipated white paper, ‘Protecting Defined Benefit Pension Schemes’, shortly before Easter, giving us a taste of how the pensions industry might be re-shaped in the coming years.
The news for trustees is that, unlike some of its ground-breaking predecessors, this white paper is more a case of the Government smoothing the rough edges of the Defined Benefit (DB) pension system. An evolution, not revolution, one might say.
The lack of fundamental reform stems from the DWP’s view that “the system is working well for the majority”. However, it does accept it needs a tougher approach to parties whose “irresponsible decisions” have a detrimental impact on their pension scheme. It therefore proposes giving greater powers to The Pensions Regulator (TPR) over funding and corporate activity - and extending the ‘notifiable events’ framework so it can act as an early-warning system for the regulator.
In the white paper, the Government sows the seeds for development in three main areas:
TPR will be given additional powers, for example to impose punitive fines on those who “deliberately put their pension scheme at risk”. The DWP is considering whether the regulator’s new powers could be applied retrospectively, and will consult further on establishing a criminal offence of committing “wilful or grossly reckless behaviour” in relation to a DB pension scheme.
Trustees and employers may need to let TPR know of any planned corporate transactions or restructuring before they actually happen, using a 'statement of intent'. This would set out that the employer has considered any impact on the DB scheme, and how they will mitigate this.
TPR’s powers will expand to allow them to compel someone to “attend an interview and explain any facts, events or circumstances” relevant to investigations – although the DWP will not go so far as to legislate a “duty to co-operate”.
A review of whistleblowing activity and reporting processes should lead to earlier warnings for the regulator, so they can take action in appropriate cases. In certain instances, boardroom decisions will need to better reflect pensions considerations. Though it's pleasing to note that the Government recognises any further proposals in this regard must avoid damaging “legitimate business interests”.
You can find further discussion on TPR’s possible new powers in Adam Poulson’s blog.
The DWP will introduce a new package of measures to optimise scheme funding. This includes an updated code of practice setting out how we might define (and demonstrate) “prudence and appropriateness”. Because although trustees always had to be “prudent” in setting technical provisions, the lack of a formal definition led to inconsistency between schemes, and conflict between trustees and employers. This had been an issue for some time.
DB schemes will need to appoint a Chair of Trustees, who must submit a statement of compliance to TPR alongside scheme funding documentation. This statement won't have to be issued directly to all members.
TPR will now have to establish clearly the factors trustees should focus on when developing a funding plan. In particular, how they, and employers, should set their Statutory Funding Objective in the context of a long-term overall objective. (This, the DWP notes, may be to continue with employer support, reach self-sufficiency, to ultimately buy-out benefits, or to transfer to a consolidation vehicle).
Time will tell whether formalising a longer-term objective will focus the minds of trustees and employers. However, along with clearly defined expectations of ‘prudence’ and ‘appropriateness’, the proposals may at least lead to a smoother funding process for many.
In his blog post, Danny Wilding looks at the links between long-term funding objectives, employer covenant and consolidator schemes.
The DWP has promised to consult later this year on a legislative framework, and on an associated ‘accreditation regime’, allowing DB schemes to consolidate if they wish. At the same time, TPR will promote the potential benefits of consolidation by offering guidance, and through its trustee 'Toolkit'.
The DWP has said it will consult on the funding requirements for commercial consolidation vehicles. These schemes are unlikely to appeal to sponsors unless the funding requirements are significantly less prudent than the equivalent cost of 'buying out' benefits with an insurance company. However, without this capital threshold, consolidator schemes may not provide the security trustees demand. In particular, they may not offer the protection of the Financial Services Compensation Scheme or the Pension Protection Fund (PPF), especially if the link to the sponsoring employer is severed.
"The DWP has said it will work closely with TPR, the PPF and others, to improve the RAA process, without increasing risk to scheme members."
Regulated Apportionment Arrangement (RAA) improvements, but further changes ruled out
The DWP has said it will work closely with TPR, the PPF and others, to improve the RAA process, without increasing risk to scheme members. This follows legislative easements already put in place for sponsor debt being triggered in multi-employer schemes.
However, the Government is ruling out measures to override pension increase provisions in schemes’ trust deed and rules, which might otherwise allow schemes with RPI-linked increases fixed in their rules to use CPI as the preferred measure of inflation. The DWP will nevertheless “continue to monitor developments in the use of inflation indices”.
The Government has also said it has no plans to change the current method for calculating employer debts on exiting or winding up the scheme.