On 19 March 2018, the Government published the much awaited White Paper ‘Protecting Defined Benefit Pension Schemes‘ setting out proposals for a wide range of reforms to support defined benefit (“DB”) pension schemes (the ‘Paper’). This follows on from the Green Paper ‘Security and Sustainability in Defined Benefit‘ launched in February 2017 to assess the nature of the challenges facing DB pensions in the private sector.
The Paper concludes that despite recent high-profile cases, the DB system is broadly working as intended; pension liabilities are, in the main, affordable for sponsoring employers and the vast majority of scheme members are likely to receive their benefits in full. It sets out a range of measures designed to protect scheme members and prevent and punish those whose deliberate actions put pension schemes at risk.
Improving scheme funding
The Pensions Regulator (TPR) will consult on clearer funding standards through a revised DB code, focusing on how ‘prudence’ and ‘appropriateness’ can be defined to better balance employer commitments with risks to members and the Pension Protection Fund.
Trustees of DB schemes will also be required to appoint a chair of trustees, and for that chair to report on their key scheme funding decisions in a Chair’s statement, submitted to TPR alongside the scheme’s triennial valuation.
Consolidation of DB Schemes
The Government will consult on proposals for a legislative framework and a new accreditation regime to encourage consolidation of small pension schemes which it believes will result in better governance, lower cost and better outcomes for members.
Strengthening the regulatory framework
The Government intends to strengthen the regulatory framework by providing the TPR with enhanced information-gathering powers supported by a punitive regime to deter those who seek to avoid co-operating with TPR. The Government will also work with TPR to improve both the notifiable events framework and the voluntary clearance regime.
On 26 June 2018 the Government issued a consultation document entitled ‘Protecting defined benefit pension schemes – a stronger Pensions Regulator‘ which builds on the measures proposed in the Paper in relation to strengthening the regulatory framework. The consultation (which ran until 21 August 2018) outlines three main areas of change:
Improving the Regulator’s and trustees’ role in scrutinising corporate transactions.
The proposals include changes to the existing notifiable events framework to extend the range of employer-related events and bringing forward the timing of the notification requirement for certain transactions to no later than when negotiations have led to agreement in principle. In certain transactions the employer must issue a Declaration of Intent before signing, which sets out the implications of the transaction for the pension scheme and how any risks will be mitigated.
A new system of sanctions to deter wrongdoing and punish it when necessary.
The Government is intending to give TPR power to impose new penalties for non-compliance. The new system will build on the existing civil and criminal sanctions available to TPR and give flexibility to vary the level of penalty, depending on the seriousness of the breach.
Improving TPR’s existing powers to issue Contribution Notices and Financial Support Directions.
The consultation outlines a number of proposed changes to the way in which the Regulator exercises its anti-avoidance powers through the current Contribution Notice and Financial Support Direction regimes.
Further consultation on Consolidation of DB Schemes and Improving scheme funding are expected later this year and in 2019 respectively.