In its recently published white paper, titled “Protecting Defined Benefit Pension Schemes”, the Department for Work and Pensions (DWP) stated it would work to improve “the effectiveness and efficiency” of the Pensions Regulator’s (tPR’s) existing anti-avoidance powers while tPR’s code on Defined Benefit (DB) funding standards would also be revised, with more focus on prudence when assessing liabilities, the appropriate factors for recovery plans, and ensuring a long-term view is considered when setting the funding objective.
Over the past eighteen months or so, in the run up to the publication, we have seen tPR launch a campaign to improve the governance standards of pension schemes. The initial focus of this campaign sought to highlight the fundamental importance of good governance. According to tPR, “Good governance is the bedrock of a well-run pension scheme”.
Most trustees welcomed this drive to improve governance, and well-run trustee boards often comprise individuals with a wide range of skills and experience who have a good relationship with their advisers. This allowed open and frank discussions with the overall goal being the provision of promised defined benefits to members whilst being as affordable as possible to the sponsoring employer.
Even so, tPR has been under a great deal of scrutiny over the past couple of years with high profile cases hitting the headlines. This has led to tPR having to hit back and in its corporate plan for the period 2018 to 2021, it has stated that it is committed to becoming a “clearer, quicker and tougher” regulator. The plan identifies eight priorities for tPR in the coming year, including:
• ensuring that DB schemes are effectively regulated;
• improving standards of trusteeship and scheme governance;
• authorising master trusts under the new statutory regime; and
• promoting the good administration of work-based pension schemes.
tPR will seek a more interventionist approach, however some commentators have warned that the DB landscape could be worn down by over excessive prescription as tPR is forced to incorporate new objectives laid down by central government.
The new Code will make it an explicit requirement for schemes to comply with specific areas of the guidance (unlike the current principles-based approach) and will also clearly highlight that it is the trustees’ responsibility to demonstrate compliance.
The proposals also introduce the requirement for DB schemes to appoint a Chair who will report to tPR as part of each actuarial valuation through a DB Chair’s Statement, mirroring the current requirement for DC schemes.
It is expected that tPR will be given the power to impose punitive fines on those who “deliberately put their scheme at risk”. In the most extreme circumstances, tPR will even be able to criminally prosecute those who commit “wilful or grossly reckless behaviour in relation to a pension scheme” and will have the power to propose the disqualification of company directors.
tPR’s information gathering powers will also be widened, along with a review of the notifiable events framework to ensure all relevant events are covered and that tPR is informed of potential transactions earlier in the process. We hope that the replacement for Lesley Titcomb, tPR’s Chief Executive, who will step down in February 2019 at the end of her four-year contract will push the proposed changes through which will go some way towards allaying the fears of some commentators who have been unduly critical of the watchdog.
There is a risk that the ever-increasing amount of regulation and guidance issued by the various regulatory bodies (including DWP, tPR, Treasury, FCA, PPF, etc.) could lead to behaviour that lowers the standards that trustee boards work to as they seek to meet the prescriptive requirements laid down but go no further which feels like an uncomfortable direction to be heading.
Quantum prides itself on provide clear and relevant advice focused on areas that have the most impact for schemes. This includes helping trustees to comply with legal and regulatory requirements and to aid trustees to run their schemes effectively, offering feedback and challenge whilst co-operating with other advisers.
Lawrence Davies, Consultant at Quantum
lawrence.davies@quantumadvisory.co.uk