On 16 June 2017 the Pensions Regulator published its response to the Department for Work and Pensions’ (DWP) Green Paper on “Security and sustainability in defined benefit pension schemes”.
A summary of the original Green Paper published 20 February 2017 can be found here.
Although not addressing every issue, the Regulator sets out its views in relation to the four main areas the DWP outlined as potentially being in need of re-structuring.
Funding and investment
In line with the Green Paper’s view that many members do not understand their DB scheme’s funding position, the Regulator calls for the clarification of the meaning of “prudence” and “appropriateness” in relation to scheme funding strategies and recovery plans. Although the Regulator recognises the importance of flexibility, it believes that a better understanding of what is expected of schemes in regards to funding would benefit the regime.
Ideally, the Regulator wishes to be given the power to set binding standards which would apply on a “comply or explain” basis, thus giving trustees an “opt-out” which maintains the flexibility of the system. The Regulator also supports the promotion of good governance which, in its view, will better enable trustees to take advantage of investment opportunities.
Employer contributions and affordability
The Regulator’s response supports the view expressed by the DWP that across the board change is not needed in this area. However, it does note that sponsors who are able to pay higher contributions should be encouraged to do so in order to reduce pension deficits. This, in turn, protects the Pension Protection Fund (PPF). In the Regulator’s view, clarification of its funding powers would allow it to encourage employers to repair deficits more quickly.
Nevertheless, it is emphasised that fair treatment of schemes with strong employers is necessary in order to avoid inappropriate transfer of wealth from members to the sponsor’s shareholders and other creditors.
Finally, the Regulator wishes to expand its ‘winding up’ power to allow it to consider all of its objectives in relation to DB schemes. This would allow the Regulator to protect the PPF from the few schemes with trustees who are unwilling to act despite “persistent difficult financial circumstances”.
In view of higher standards of member protection, the Regulator would like its relationship with the regulated community to be strengthened. Suggested new powers for the Regulator would allow it to request information on an ad hoc basis and compel parties to submit to an interview. The Regulator also requests the power to impose civil sanctions, in addition to criminal penalties, for non-compliance with information requests.
Regarding the Green Paper’s proposed requirement on parties to obtain clearance for any planned corporate actions, the Regulator believes this would be disproportionate but does recognise that clearance in defined circumstances could prevent activity that leads to a negative impact on schemes. Alternatively, it is recognised that a fining system deterring such behaviour may also be effective.
Consolidation of schemes
The Regulator notes that consolidating DB schemes is “one of the key areas of the Green Paper worth exploring further”. Amongst other things, it is believed that consolidating DB schemes could lead to better governance and a wider range of investment opportunities. Similarly to the Government’s position, the Regulator would encourage voluntary, as opposed to compulsory, consolidation.
The Pensions Regulator’s full response can be found here.