The Work and Pensions Committee (WPC) recently published a list of recommendations for consultation in the Government’s Green Paper due in early 2017 to address perceived flaws in the regulation of defined benefit (DB) schemes. In a series of blog posts, we will discuss the key challenges and benefits for each recommendation in detail. For now, let’s look at the highlights…
1. A ‘nuclear’ deterrent to avoidance
The most headline-grabbing recommendation by the WPC; the aim is to empower The Pensions Regulator (TPR) to impose punitive fines that could treble the amount payable by scheme sponsors and connected parties who are deemed to have avoided their pension obligations.
2. Empower trustees
Here, the recommendation is to enable trustees to demand timely information from scheme sponsors and agree changes to indexation of pension benefits, where such changes make the scheme sustainable. This may be a permanent change or it may be a conditional change so that there is the possibility to revert to original uprating when good times return.
3. A nimbler regulator
WPC have visions of a nimbler TPR, with which problems can be resolved earlier and ‘nipped in the bud’, before the need to ramp up regulatory action. This includes adjusting for the frequency of valuations, reflecting the riskiness of the scheme; reducing the statutory timescale for submission of valuations and recovery plans from 15 months to nine months; and suggesting that “recovery plans of more than ten years should be exceptional”.
4. Calculation of the Pension Protection Fund (PPF) Levy
A call on the PPF to adjust the calculation of the levy to incentivise good scheme governance via a reduction in the PPF levy payable and to ensure particular types of employer, including SMEs, are not unfairly disadvantaged.
"The WPC has recommended that TPR clearance for major corporate transactions be mandatory where the transaction could pose the risk of material detriment to the pension scheme."
5. Streamline the Regulated Apportionment Arrangement (RAA) process
“An emergency measure [that] does not operate at an emergency pace.” The WPC has recommended streamlining the RAA process and relaxing the requirement for insolvency to be inevitable within twelve months for an RAA to be approved.
6. Mandatory clearance
The WPC has recommended that TPR clearance for major corporate transactions be mandatory where the transaction could pose the risk of material detriment to the pension scheme.
7. Small scheme consolidation and the aggregator fund
The WPC asks the government for proposals for removing regulatory and other barriers to scheme consolidation, so that small schemes can benefit from the substantial benefits of efficiency, economies of scale and sustainability.
The WPC also asks the government to consult on proposals to create a statutory aggregator fund as an alternative to the insurance company buy-out, in order to facilitate the consolidation of the assets and liabilities of small schemes.
8. Small DB pension entitlements as lump sums
Where the DB pension entitlement is small, the associated costs to the scheme can be disproportionate. The WPC suggests the government consult on relaxing the rules for taking these small DB pension entitlements as lump sums and argues that it can be mutually beneficial to pension scheme and member to do so.
9. Compulsory wind-up of ‘zombie’ schemes
In cases where it becomes inevitable that a scheme will end up in the PPF, and yet the insolvency event needed to trigger this entry has not yet occurred, the WPC recommends that TPR’s powers are broadened in order to be able to wind-up the scheme. It argues that provided TPR is satisfied that there is no alternative option and the wind-up is in the best interests of the PPF and its levy payers, it should be able to impose such action.
Clare Lloyd-Williams contributed to the writing of this blog post.