Summary
The Government has published its long-awaited White Paper on defined benefit pension schemes, building on the Green Paper published last Spring. It concludes that there is no systemic problem in the regulatory and legislative framework that governs schemes but that some employers misuse the flexibility available, putting their employees’ pensions at greater risk. The proposed remedies include:
- giving new powers to the Pensions Regulator (tPR) to fine those who put their pension scheme at risk, as well as strengthening tPR’s existing powers,
- a revised tPR Code of Practice on scheme funding,
- a requirement for schemes to appoint a Chair and for the Chair to produce a regular report to tPR, to be submitted with the triennial funding valuation,
- encouraging scheme consolidation, to improve governance and economies of scale.
The paper notes that some changes can be implemented in the short term. Others will require further consultation and new primary legislation, so are unlikely to become law before the 2019/20 Parliamentary session.
A stronger Pensions Regulator
The Government proposes to:
- give tPR powers to fine those who deliberately put their pension scheme at risk,
- legislate to introduce a criminal offence of committing “wilful or grossly reckless” behaviour in relation to a pension scheme and build on the existing process to support the disqualification of company directors,
- work with tPR to strengthen the existing notifiable events framework and voluntary clearance régime and
- legislate to give tPR enhanced information-gathering powers.
It proposes further to introduce a requirement for sponsoring employers or parent companies to make a statement of intent, in consultation with trustees, prior to any merger, acquisition or sale that they have considered appropriately the impacts on any defined benefit pension scheme affected. This statement should explain how the sponsoring employer proposes to mitigate any detrimental impact on the scheme.
Scheme funding
The Government envisages that the revised Code of Practice on scheme funding will focus on:
- how prudence is demonstrated when valuing scheme liabilities,
- what factors are appropriate when considering recovery plans and
- ensuring that a long-term view is considered when setting the scheme’s funding objective.
The Government intends also to make compliance with (at least parts of) the revised Code mandatory.
The proposed Chair’s Statement is expected to set out:
- the scheme’s long-term financial destination and a description of its strategic plan for achieving the Statutory Funding Objective (“SFO”),
- the key risks to meeting the SFO (covenant, actuarial, investment and governance) and how trustees are mitigating and managing them and
- a narrative setting out how trustees will meet key governance standards.
In the light of these new requirements, the Government has decided not to reduce the statutory timescale for completing a funding valuation below the current 15 months.
Scheme consolidation
The Government intends to consult this year on proposals for:
- how new forms of consolidation vehicle could operate and
- a new accreditation régime for existing forms of consolidation.
The former envisages “Superfunds”, as proposed by the Defined Benefit Taskforce, which would enable a sponsoring employer to be discharged from its liabilities to a scheme at a cost below that charged by an insurer.
The Government is considering also minor changes to guaranteed minimum pension (“GMP”) conversion legislation to support benefit simplification. However, it is not proposing legislation to facilitate further simplification of benefits without member consent.
Easing the employer burden?
The Government plans to investigate further the possibility of making improvements to the Regulatory Apportionment Arrangement (“RAA”) policy, under which an employer in danger of imminent insolvency can be separated from its pension scheme with the approval of tPR and the Pension Protection Fund. It does not, however, propose to allow schemes to override their Rules in order to move from RPI to CPI as a basis for scheme pension increases and revaluation.