The DWP Pensions White Paper tightens the rules for defined benefit pensions with stricter funding rules, punitive fines and criminal sanctions but also offers a new solution in commercial consolidators.
Reforms proposed in the White Paper on “Protecting Defined Benefit Pension Schemes”, published this week by the Department for Work & Pensions (DWP) are not a fundamental change in direction but a tightening of the rules and a number of measures to facilitate regulatory intervention:
- more reporting obligations, duties and sanctions for directors and trustees;
- more powers for The Pensions Regulator (Regulator);
- a revised Code of Practice on scheme funding;
- a long-term objective of no-less than self-sufficiency for closed schemes;
- stricter definition of “prudence” and “appropriate” recovery plans;
- a requirement for trustees and employers to demonstrate compliance; and
- a chairman’s statement on risk management and the approach to funding.
The tests are stricter, subjectivity is reduced and the burden of proof often reversed.
Various relaxations that had been considered in the pensions Green Paper in March 2017, such as benefit reductions for “stressed” schemes and an option to switch from RPI indexation to CPI indexation, have been dropped.
Mandatory clearance for certain transactions has also been dropped. Instead, employers will need to make a statement of intent, in consultation with the trustees, prior to “relevant business transactions” taking place.
The key innovation is the development of a legal framework for commercial consolidation of defined benefit schemes to achieve more efficient investment strategies and improved governance and to provide a more affordable solution than insured buy-out.
The Pensions Regulator’s powers
The DWP’s position remains that the existing regulatory framework is working well for the majority of defined benefit schemes. While the DWP does not consider that there are systemic issues with the current regulatory framework, the White Paper identifies a need to improve and add to the Regulator’s powers, in line with the Conservative Party’s election manifesto.
Punitive fines and criminal sanctions
A new penalty regime is to be introduced to tackle irresponsible activity that may cause material detriment to a pension scheme and may compromise its funding position, including:
- power for the Regulator to issue fines against the targets of a contribution notice including individual directors; and
- a criminal offence of “wilful or grossly reckless behaviour” for directors of sponsoring employers.
There is little detail but the penalty regime may be given retrospective effect from the date of the White Paper.
The clearance framework is to be reviewed to ensure that it captures all appropriate transactions but it appears there will be no mandatory clearance regime.
There will be a new requirement for sponsoring employers or their parent companies to make a statement of intent, in consultation with the trustees, prior to “relevant business transactions” taking place. This will need to set out how any detrimental impact on the scheme will be mitigated. While there is no clarity at this stage as to what transactions will be covered, the White Paper indicates that it will apply only to transactions that pose the highest potential risk such as the sale or takeover of a sponsoring employer.
Notifiable events regime
The notifiable events regime will be reviewed to add further events and time limits to ensure the Regulator is made aware of relevant transactions at an earlier stage so that it can engage in discussions.
Information gathering powers
The Regulator’s information gathering powers will include:
- a power to compel individuals to attend an interview and explain facts, events or circumstances relevant to its investigations or functions; and
- a power to inspect premises for purposes relevant to its functions i.e. not just in relation to its scheme funding powers as currently.
The Regulator will be given power to impose civil sanctions for non-compliance with a documentation request under section 72 of the Pensions Act 2004. Current legislation only provides for criminal sanctions.
The DWP expects to undertake further work with the Regulator and further consultations to ensure the measures are effective and avoid unintended consequences.
Revised Code of Practice
The Regulator will consult on a revision of its Code of Practice on scheme funding to clarify funding standards and, in particular, to specify the factors and the approach to assessing “prudence” and “appropriateness”, effectively adding more prescription to the principles-based approach of the current law and making it easier for the Regulator to intervene.
The revised Code of Practice will link valuations and recovery plans to a long-term objective such as achieving buy-out or self-sufficiency or transfer to a consolidator vehicle within an agreed timeframe.
This could be a material change as the current statutory funding objective is to cover technical provisions assuming on-going support from a sponsoring employer. The White Paper suggests running-on with employer support as a funding objective will only remain an option for open schemes, few of which remain. The long term objective will make funding assumptions a one-way street, with improvements to covenant no longer permitting a weakening of assumptions, even in principle.
The Regulator will be given powers to enforce the funding standards set in its Code of Practice and the onus will be on trustees and sponsors to demonstrate compliance, effectively reversing the burden of proof.
Trustees of defined benefit schemes will be required to submit a chairman’s statement to the Regulator with every triennial valuation. This will state the trustees’ approach to managing risks to the scheme, information on how the trustees are meeting funding standards and how the statutory funding objective is being set to reach the long-term funding objective as referred to above.
The DWP is broadly supportive of commercially run consolidation vehicles which, if designed appropriately, could reduce inefficiencies within the current system and offer better long-term outcomes.
The DWP will be consulting during 2018 on proposals for a legislative framework and authorisation regime within which new forms of consolidation vehicles can operate. Subject to the outcome of the consultation, the DWP does not propose that commercial consolidators should be required to fund.
A number of the proposed new measures will require consultation and primary legislation. It seems unlikely that any of the proposed measures will be in force prior to the 2019/20 parliamentary session. However, some elements may then be brought into force with retrospective effect from the date of the White Paper.