The Department for Work and Pensions’ long-awaited White Paper – ‘Protecting Defined Benefit Pension Schemes’ – was published on Monday 19th March 2018, following on from the Green Paper issued in February last year entitled ‘Security and Sustainability in Defined Benefit Pension Schemes’. Our summary of the Green Paper can be found here.
The White Paper focuses largely on security and reinforces the Pensions Regulator’s (tPR’s) drive to be clearer, quicker and tougher. No substantial overhaul of the current regulatory regime is proposed, reflecting the Government’s view that most schemes are well run with the majority of employers keen to treat their schemes fairly. The paper does however recognise the existence of numerous poorly run schemes and employers who are not committed to providing the right level of support.
DB funding regime
Through revisions to tPR’s current Code of Practice, all DB pension schemes will be required to follow a new regime which focuses on prudence, the appropriateness of recovery plans and the need to take a long term view when determining the funding objective. 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.
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.
The White Paper explains that consolidation is viewed as a potential solution that could be more affordable than a traditional insured buyout for many schemes and there will be a further consultation specifically on the consolidation of DB schemes.
Any legislative framework will need to strike a delicate balance between being commercially viable to potential private sector consolidators and providing members with adequate protection.
RPI and CPI
The White Paper also touches on the much-publicised topic of whether the Government would introduce a legislative override allowing all schemes to switch increases from RPI to CPI. At this stage, the Government has resisted calls for change.
Delivering the reforms
Whilst the White Paper sets out a direction of travel for future DB policy and should provide plenty of food for thought at this stage, the proposals are complex and will need substantial industry consultation before the required legislation can be passed. It is unlikely that any legislation will come into effect until the 2019-20 parliamentary session at the earliest.
The White Paper can be found here.