Over a year since the Government’s exploratory Green Paper on defined benefit pension schemes, a White Paper has finally arrived, with a number of proposals for reform. There is plenty for trustees and employers to digest.
Protecting pensions: new powers for the Pensions Regulator
The Government is to introduce new, punitive fines for company directors who deliberately put their pension scheme at risk, as had been recommended by the Parliamentary Select Committee. It will also make it a criminal offence for directors and connected persons to commit “wilful or grossly reckless behaviour in relation to a pension scheme”, although there is little detail as yet on the scope of this provision.
The Government also has plans for corporate transactions which might affect DB schemes. There will be a requirement, prior to certain business transactions taking place, for sponsoring employers or parent companies to make a “statement of intent” saying that they have appropriately considered the impact on any affected DB scheme, and setting out how they propose to mitigate any detriment. The Government will consider further which business transactions would be in scope, saying only that it aims to catch “those which pose the highest potential risk” to a scheme. In addition, the Regulator will revisit its existing clearance guidance.
The Government has decided not to impose a statutory duty on parties to co-operate with the Regulator. However, it will review the existing notifiable events framework, give the Regulator extra information-gathering powers and permit the Regulator to impose fixed and escalating civil penalties where these are not complied with.
Controversially, the Green Paper had floated the possibility – for ‘stressed’ employers with underfunded schemes – that trustees might be able to suspend or reduce benefits in some circumstances, or benefit from an override allowing RPI indexation to be replaced by CPI. The Government has decided that it will not be taking these ideas forward.
Reviewing the approach to scheme funding
The Regulator’s Code of Practice on DB scheme funding will be revised, with a key focus being on ensuring that trustees take a long-term view when setting a scheme’s statutory funding objective (SFO). The trustees and employer will be expected to set the SFO in the context of a long-term objective (such as achieving self-sufficiency, or buy-out within a set timescale), with the trustees explaining how they have used the long-term objective to inform their scheme’s technical provisions and recovery plan. Clearer funding standards and guidance will also be introduced, supported by legislation allowing the Regulator to take steps if they are not met.
As had been widely anticipated, trustees of DB schemes will have to submit a Chair’s Statement to the Regulator. However, this will only be required alongside each triennial valuation, and not annually. The Government has also confirmed that it does not propose to change the current triennial valuation cycle, nor to reduce the current 15-month long stop period in which statutory funding documents must be agreed.
A new model for scheme consolidation
The Government remains keen to support consolidation of DB schemes, and innovative models for doing so. It will therefore consult on proposals for a legislative framework and authorisation regime for new forms of consolidation vehicles. Like the new master trusts regime, this would be overseen by the Regulator.
The White Paper sets out various considerations for commercial consolidators in the marketplace, such as the funding level required, the potential need for a capital buffer and possible restrictions on scheme funding strategy. There would also be a new accreditation regime, to encourage existing forms of consolidation (although DWP has ruled out any legislative changes that would allow trustees - as part of the consolidation - to simplify members’ benefits without their consent).
Timing of the changes
The Government proposes a phased approach to implementation. Describing the White Paper as setting a “direction of travel”, it acknowledges that many of the proposals require further work before any legislation can be tabled. There will be a number of consultations during 2018 and 2019, with legislation not expected until the 2019/20 Parliamentary session.
The White Paper can be found here.