The Department for Work and Pensions has published its highly anticipated Green Paper on the security and sustainability of Defined Benefit (DB) pension schemes. The Green Paper comes after a period during which the funding of DB schemes has come under increased political and public scrutiny. The aim of the Green Paper is to summarise the Government’s view on the current funding position of DB schemes generally and provoke a wider discussion within the industry around risk management.
Summary While the Green Paper accepts that the current system “may not be operating optimally in all areas”, it goes on to conclude that there is “not a significant structural problem with the regulatory and legislative framework”. Nevertheless, the Green Paper highlights four areas where potential change may be advantageous.
Funding and Investment The Government remains unconvinced that the discount rates in use are in general overly pessimistic or that there is a fundamental problem with the flexibility currently available. There is, however, some support for the concept that both the Government and the industry itself should do more to increase understanding around scheme valuations and deficits. The Green Paper also recommends further investigation to identify the issues that influence investment strategy and how optimal investment decision-making, including the use of alternative asset classes, can be facilitated more effectively.
Employer Affordability The Government is not persuaded that there is a widespread or general affordability problem for employers with DB schemes. Where there are ‘stressed’ schemes, the Green Paper refers to various options which have been proposed, including separation of the business and the scheme, renegotiation of benefits and a greater role for the Pensions Regulator. The Green Paper notes that each of these options has “significant drawbacks” and this is an area where the Government is keen to receive as much feedback from the industry as possible.
Member Protection As regards corporate activity, the Green Paper rejects the concept of a general requirement to obtain clearance from the Regulator ahead of planned corporate activity. A clearance regime may be appropriate for certain specified circumstances but further work will be required to ensure that this would not cause a substantial commercial disadvantage for employers. The Green Paper also considers whether there is a need for new information gathering powers for the Regulator in respect of both trustees and employers.
Consolidation The final section of the Green Paper is dedicated to the pros and cons of consolidating smaller schemes. The Government indicates its strong support for consolidation on a voluntary basis but considers any form of compulsory consolidation to be an inappropriate solution. While the Green Paper rules out the idea of a Government-run “Superfund”, it does request views from the industry on structures and incentives which could be introduced in order to promote consolidation.
The Green Paper forms the basis for a consultation which will run until 14 May 2017. All those who hold in interest in DB pension schemes are encouraged to respond, including members, trustees, employers and pension professionals.