The Department for Work and Pensions (DWP) has published the White Paper - Protecting Defined Benefit Pension Schemes which follows on from the green paper issued last spring. Generally, the Government believes the legislative and regulatory regime is working well for the majority of defined benefit pension schemes and there is no systemic problem which would indicate widespread changes are required. However, there is an acceptance that some modifications are necessary to enable a tougher approach for employers who do not protect their pension schemes. To achieve this, the White Paper sets out a number of proposals to:

  • strengthen the regulatory framework
  • optimise scheme funding
  • encourage efficiencies and facilitate consolidation of schemes

Chapter one – a stronger Pensions Regulator (tPR)

The Government does not believe that there is wide-scale deliberate activity by employers to avoid pension scheme liabilities. However, in its view, ‘the system must guard against the risk that a small number of people may take action detrimental to a scheme’s prospects of paying full benefits’.

The Government is concentrating on proactive prevention of harm to pension schemes and punishing reckless behaviour. It is proposing to strengthen tPR by:

  • Giving it powers to penalise those who deliberately put their pension scheme at risk by introducing punitive fines.
  • Legislating to introduce a criminal offence to punish those found to have committed wilful or grossly reckless behaviour in relation to a pension scheme, which will build on the existing process to support the disqualification of company directors.
  • Working with tPR to strengthen the existing notifiable events framework and voluntary clearance regime so that employers have appropriate regard to pension considerations in any relevant corporate transactions. This includes improving the effectiveness and efficiency of tPR’s existing anti-avoidance powers.
  • Legislating to give tPR enhanced information-gathering powers across all its functions, including the power to compel any person to submit to an interview, the power to issue civil sanctions for non-compliance and an inspection power

Chapter two – improving the way the system works – scheme funding

Several areas of the defined benefit (DB) system are being rearranged, including the funding code of practice to provide clearer guidance on key areas of funding.

The Government has the aim to ‘improve decision-making and governance across the sector’, by implementing a new package of measures which are intended to ‘optimise’ scheme funding and enable tPR with the right tools to respond to poor decisions and enhance public confidence in the pensions systems. It proposes the following:

  • strengthen tPR’s ability to enforce DB scheme funding standards, through a revised funding code of practice, focussing on:
    • how prudence is demonstrated when assessing scheme liabilities
    • what factors are appropriate when considering recovery plans
    • ensuring a long-term view is considered when setting the statutory funding objective
  • requiring trustees of DB pension schemes to appoint a chair and for that chair to report to the regulator in the form of a chair’s statement, submitted with the scheme’s triennial valuation
  • retaining the 15 month valuation period

There will be a battery of further research, testing and extensive formal consultation to revise the DB funding code of practice and guidance, as well as the contents of the chair’s statement.

Chapter three – improving the way the system works – consolidation of schemes

The Government recognises that ‘consolidation can help schemes benefit from reduced scheme running costs per member, more effective and efficient investment strategies and improved governance’.

Taking inspiration from the Pension and Lifetime Savings Association’s proposed superfund model which illustrates some of the methods available, the Government will:

  • consult this year on proposals for a legislative framework and authorisation regime within which new forms of consolidation vehicles could operate
  • consult this year on a new accreditation regime which could help build confidence and encourage existing forms of consolidation
  • work with tPR to raise awareness of the benefits of consolidation with trustees and sponsoring employers, though, for example, tPR’s trustees’ toolkit and updating guidance
  • consider some minor changes to guaranteed minimum pensions conversion legislation to support benefit simplification, which will help reduce complexities in existing benefit structures

The aim is to ‘encourage efficiencies and facilitate consolidation for the improvement of outcomes for members and employers, while ensuring sufficient safeguards are in place’.

Chapter four – other live areas

The Government consulted on a number of other live areas affecting the pensions industry, including options for the British Steel Pension Scheme, but stepped back from any changes in the following areas:

  • Retail prices index (RPI) to consumer prices index (CPI) – the Government will not implement a statutory override to allow employers or trustees to change the measure of inflation from RPI to CPI used to calculate annual increases to pensions. However, it will continue to monitor developments in the use of inflation indices
  • Existing employer debt provisions for multi-employer schemes – noting the recent introduction of the deferred debt arrangement, the Government considers that the existing arrangements allow enough range for dealing with an employer debt

Chapter five – delivering the White Paper reforms

Some measures can be implemented immediately where new legislation is not required, such as tPR using its existing powers to become a clearer, quicker and tougher regulator. Work on other measures will commence shortly including tPR starting a review of its funding code of practice, which again does not require any new legislation. Most of the proposals are however complex and require further consultation along with legislative changes. For these areas, the Government, DWP and tPR will continue consulting throughout 2018 and 2019 before eventually moving to legislation in due course. Where primary legislation is required, the changes are unlikely to be put before parliament until the 2019-20 parliamentary session at the earliest.

The White Paper confirms the direction of travel for defined benefit scheme policy although it will some time before the majority of the proposals take effect.