On 21 December 2016, the Work and Pensions Committee published its report on defined benefit (DB) pension schemes. It has done so having conducted interviews with and received submissions from key industry stakeholders over the past few months.
The Committee was tasked with recommending changes to the DB pensions sector which would reduce the likelihood of cases such as BHS happening again. In its report, the Committee analysed four key areas of DB pensions and made recommendations for the government, the Pension Protection Fund (PPF) and the Pensions Regulator (TPR) to consider. The four areas are:
- promoting well-run schemes;
- identifying and intervening in potential problem schemes;
- stressed schemes; and
It is anticipated that the government will now consider the recommendations in the Committee’s report, with a view to publishing its own Green Paper on DB pensions in early 2017.
In this update, we have summarised the Committee’s key findings and recommendations.
- Promoting well-run schemes
- Communication with sponsors. The Committee was concerned that uncooperative sponsors could keep trustees in the dark about information that would be crucial to them in carrying out their duties effectively. As such, it recommended that the government consider giving powers to trustees to demand timely information from sponsors.
- Consolidation of small schemes. The Committee considered that consolidating small schemes could offer benefits to members in terms of efficiency and sustainability. As such, it recommended that the government consider removing existing barriers to scheme consolidation.
- Statutory aggregator fund. The Committee concluded that there was a strong case for the creation of a statutory aggregator fund to facilitate the consolidation of the assets and liabilities of small schemes. It suggested that this could be run by the PPF, although there would not be a requirement for the sponsoring employer to be insolvent for the scheme to be included.
- Small lump sums. The Committee noted that a number of DB pensions are small and can be disproportionately costly for schemes to hold. It concluded that, in certain circumstances, it may be mutually beneficial for an employer, the scheme and its members to commute small pensions into lump sums. It therefore recommended that the government consider relaxing the rules for taking small DB pension entitlements as lump sums.
- Incentivising good governance. The Committee noted that well-governed schemes were at less risk of falling into the PPF. As such, it suggested that the PPF should re-examine how the levy framework could incentivise schemes to improve their governance, by providing discounts on the PPF levy.
- Identifying and intervening in potential problem schemes
- Timescale for submitting valuations. The Committee considered that the current timeframe for trustees and sponsors to agree a valuation (15 months) was too long. It suggested that this could be reduced to 9 months.
- Risk-based approach to valuations. The Committee recommended that TPR should adopt a risk-based approach to valuations, with riskier schemes having to provide valuations more frequently and lower-risk schemes providing valuations less frequently.
- Tougher on deficit recovery plans. The Committee heard evidence that TPR has never used its power to impose a schedule of contributions in the event that trustees and sponsors cannot agree a valuation. The Committee suggested that TPR should be tougher on deficit recovery plans and should not be shy to impose a schedule of contributions when a sponsor is not taking its responsibilities seriously.
- PPF levy framework. The Committee considered that the PPF levy may increase insolvency risk on some employers by imposing disproportionate costs on schemes. It recommended that the PPF examine the effect of the levy framework on employers that may be disadvantaged by the current model – such as SMEs and mutual societies.
- Stressed schemes
- Streamlining RAA process. The Committee considered that Regulated Apportionment Arrangements (RAA) can produce results which are better for pensioners, employers and the PPF than insolvency. However, it noted that RAAs are rarely used and the process includes potentially harmful delays. RAAs were described by the Committee as an ’emergency measure’ which does not operate at an ’emergency pace’. In order to streamline the RAA process, the Committee recommended that the government consider: (a) reducing the 28 day period between TPR issuing a warning notice and a final approval notice, and (b) relaxing the requirement for insolvency to be inevitable within 12 months for an RAA to be approved.
- Changes to indexation. The Committee noted that some schemes have generous indexation rules more by accident than design. It concluded that, in certain circumstances, a reduction to rates of indexation could be in the interests of members as a whole (for example, if the alternative was corporate insolvency and the scheme falling into the PPF). As such, the Committee recommended that the government consider permitting trustees to propose changes to scheme indexation rules, where this would be in the interests of members.
- Broaden TPR’s power to wind-up schemes. The Committee noted that TPR has rarely (if ever) used its power to wind-up a scheme under the current legal framework – i.e. where doing so is ‘necessary in order to protect the interests of the generality of the members of the scheme‘. The Committee recommended that TPR’s power to wind-up a scheme should be extended to include circumstances where the PPF was being placed at a greater risk by allowing a ‘zombie scheme’, with no prospect of an improvement in its funding position, to drift.
- Advance TPR clearance. The Committee noted that clearance applications have fallen drastically since the process was introduced – from 263 in 2005/6 to 9 in 2015/16. It concluded that the incentives to seek clearance were currently too weak. It recommended that the government consult on proposals to require parties to seek advance clearance from TPR for certain corporate transactions that could be materially detrimental to the funding position of a DB scheme.
- Punitive fines. The Committee heard evidence that TPR’s current powers to impose contribution notices (CNs) and financial support directions (FSDs) are not punitive, as they can only require parties to make contributions to a scheme that they ought to have contributed in the first place. The Committee recommended that the government consider giving TPR powers to add punitive fines to CNs and FSDs, set at such a high level to ensure sponsors were incentivised to properly fund schemes and seek clearance for potentially detrimental transactions. It suggested that the fines could treble the original demand in the CN/FSD.
The Committee has made some fundamental and wide-reaching recommendations in its report which, if implemented, have the potential to radically alter the future of DB pension regulation. It will be interesting to see which of the proposals the government chooses to enact into law. To that extent, we now await the government’s Green Paper with interest.