On 20 February the Government published its Green Paper "Security and Sustainability in Defined Benefit Pension Schemes".  The paper explores numerous issues, sets out the data available and invites comments and evidence.  The overall tenor of the paper is that the Government has little appetite for sweeping changes, and is not convinced that the evidence supports radical changes, for example to the Pensions Regulator's powers, of the type proposed by Parliament's Work and Pensions Select Committee.  The paper does indicate that the Government may be open to introducing a statutory override to allow schemes to switch to CPI-based indexation/revaluation in cases where RPI is "hard wired" into their rules.  The consultation runs until 14 May 2017.

The paper groups issues under the following four main headings:

  • funding and investment;
  • employer contributions and affordability;
  • member protection; and
  • consolidation of schemes.

Funding and investment

The paper notes concerns expressed by some commentators that current valuation measures result in short-termism and in some cases an overly conservative investment strategy.  However, it notes that any move to a completely different statutory funding objective would be "extremely disruptive".  The paper indicates that there is a lack of evidence as to whether discount rates used by schemes are generally overly pessimistic, and that the Government has not seen compelling evidence that the triennial cycle of valuations is itself a significant problem for schemes, nor that it is impacting on funding and investment strategies.  Whilst there is evidence of a shift away from return-seeking assets over time, the Government finds no evidence that this is driven by inappropriate measures of scheme liabilities.

The paper concludes that more evidence is needed on the quality of trustee decision making in this area, and the factors that influence investment strategies and choices of asset classes. It seeks views on various specific questions regarding whether the current scheme valuation rules are fit for purpose and being used appropriately and whether there is any evidence that current investment choices may be "sub-optimal".

Employer contributions and affordability

The paper considers whether the current regime is sustainable for employers or whether the current balance between protection of members and demands on sponsoring employers requires alteration.  It explains that the Government is not persuaded that there is a case for across the board changes to reduce defined benefit liabilities.  However, in the specific areas of revaluation and indexation, the paper indicates that the Government is willing to consider a statutory override to allow schemes to move to revaluation and indexation on the current statutory basis (based on CPI inflation) where scheme rules contain an express requirement for revaluation/indexation based on RPI.  The paper seeks views on this issue.

The paper also seeks views on whether the funding regime should be tightened up where a scheme has a substantial deficit and the sponsoring employer could afford to repair the deficit more quickly.

The paper indicates that the Government may be willing to look at measures aimed at stressed schemes/employers, in particular where the employer is likely to become insolvent while the scheme is still in deficit.  However, the Government is not minded to introduce measures which would allow benefits to be reduced in circumstances where the scheme continues with its existing sponsoring employer.

Member protection

The paper seeks views on whether the Pensions Regulator should be more prescriptive in terms of setting scheme funding standards, though the Government is mindful of the criticisms made of the old statutory Minimum Funding Requirement (MFR) and is wary of being overly prescriptive.

The paper refers to the parliamentary Work and Pensions Select Committee's suggestion that the Pensions Regulator should have powers to prevent certain corporate transactions via a requirement for mandatory Regulator clearance.  The Government appears very wary of extending the Regulator's powers in this way, stating that any such approach "would need to be very narrowly limited to avoid potentially significant disadvantages to business".  The paper also indicates that the Government is not attracted to the Select Committee's suggestion that the Regulator be given the power to impose punitive fines in addition to its existing moral hazard powers, expressing concerns that fear of regulatory action could result in the Regulator being overwhelmed with clearance applications, or corporate activity being affected to the detriment of employers with defined benefit schemes.

The Government appears more open to extending the Regulator's information-gathering powers, perhaps by creating an overall duty on parties to cooperate with the Regulator.  The paper also seeks views on whether trustees should be given greater powers to require information from the scheme's employer, and whether there should be a requirement for a scheme's employer to consult with trustees before making dividend payments if its scheme is severely underfunded.

Consolidation of schemes

The paper considers in some detail the advantages which could be gained by smaller schemes being consolidated to increase their bargaining power and obtain improved investment performance.  However, the Government indicates that it is not minded either to impose compulsory consolidation or to introduce any kind of central "aggregator" vehicle to enable consolidation.  The paper seeks views on encouraging consolidation.

Multi-employer schemes and the statutory debt on employer regime

The paper says that the Government intends to consult on a new option for employers to manage employer debts triggered under section 75 of the Pensions Act 1995 in relation to non-associated multi-employer schemes.  The paper asks questions about "orphan" liabilities and the calculation of section 75 debts, although the brevity of the consultation in this area and the terms in which the consultation questions are framed indicate that the Government is not looking to make major changes.


The Green Paper raises a wide range of issues, but the tenor of the paper generally gives the impression that the Government has little appetite for sweeping reforms.  The area where change seems most likely to be considered is in relation to a possible statutory override to enable more schemes to adopt CPI-based indexation/revaluation, although at this stage the Government is seeking views on the issue rather than putting forward a formal policy proposal.  Corporate Britain is likely to be relieved that the Government appears very wary of significantly increasing the Regulator's powers in relation to corporate transactions.