Following the publication of a UK government green paper that moots several options for trying to help stressed employers and schemes – including by potentially allowing the reduction of members’ benefits and allowing an easier separation of a struggling business from its scheme – Sarah Swift, pensions partner at Eversheds Sutherland, comments:
“The long-awaited green paper on DB pensions sets out the Department of Work and Pensions’ evidence of the key challenges facing DB pension schemes and highlights a number of options that were suggested to the government to improve confidence in the system. Clearly, the definition of what amounts to a stressed employer and scheme will be paramount, with a risk of ‘moral hazard’ for employers if they try to come within a particular categorisation simply in order to abandon their scheme.
“However, of particular interest to many employers who are not in dire financial straits, will be the suggestion that there could be a case to rationalise the indexation arrangements in their scheme. The government suggests this could produce savings of £90 billion to sponsors. The question of whether a scheme’s pension benefits increase by reference to RPI or CPI is quite often a lottery and depends on whether the particular scheme’s rules were drafted to ‘hard wire’ in a reference to RPI or simply refer to the government’s indexation orders – which of course switched away from RPI to CPI some years ago.
“Many employers are unable to move away from RPI to CPI, either because their scheme rules appear to give this to members as a right or because of the need for trustee consent – which (for understandable reasons, such as wanting to protect members’ past benefits) can be difficult to obtain. The green paper may therefore be seized upon by those employers that feel stuck with a scheme that references RPI, but wish to move to CPI – because it invites views on introducing a statutory override to allow a move to a different index. However, we would caution employers against thinking this is likely to happen any time soon – there are clear political difficulties with moving ahead with such a change, including strong resistance from members and many trustees, as well as the general theme running through the green paper that the DWP sees no evidence of an imminent crisis affecting the sustainability of DB schemes, and doesn’t think a case has in fact been made for across-the-board reductions in benefits.”