The Government has finally published its long-awaited White Paper, Protecting Defined Benefit Pension Schemes.
The first half of the White Paper contains proposals intended to protect defined benefit (DB) pension schemes from " the small number of employers" prepared to abuse them and to improve the DB scheme funding framework. The proposals in these sections build on the existing system and aim to influence behaviour with the long-stop of new penalties for bad behaviour.
The White Paper then looks at existing ways of consolidating DB schemes and, in particular, whether it would be possible to introduce new commercial consolidation vehicles. It moves on to a miscellany of issues included in last year's Green Paper as possible solutions to the problems facing the British Steel Pension Scheme at that time.
Here we highlight some of the main proposals.
Protecting the system
To strengthen the Pensions Regulator's existing anti-avoidance framework, the Government intends to give the Regulator new powers to be able to fine companies or individual company directors for "irresponsible activities" that may cause material detriment to a pension scheme and compromise the scheme's funding position. The Government is considering whether this new penalty regime can apply from the date of the White Paper, 19 March 2018.
The Government also intends to make the wilful or grossly reckless behaviour of directors (and any connected persons) in relation to a DB scheme a criminal offence. It will consult over the next few months to make sure that the power is proportionate.
Although the Government has decided against making the Regulator's existing voluntary clearance framework mandatory for certain transactions, it will introduce a requirement for a "statement of intent" to be produced by the sponsoring employer(s), in consultation with the scheme trustees, before relevant transactions take place. ‘Relevant’ transactions will be those posing the highest potential risk to a DB scheme, such as the sale or takeover of a sponsoring employer. The statement will have to confirm that the sponsoring employer has appropriately considered the impact on any affected DB scheme and will have to set out how it proposes to mitigate any detrimental impact on the scheme caused by the proposed transaction.
The Government also intends to review the scope and timings of the notifiable events framework.
Finally, the Regulator's information–gathering powers are going to be strengthened. For example, it will be given the power to compel a person to attend an interview and to inspect records, documents and electronic devices of parties at premises. It will also be able to impose fixed and escalating fines for not providing information or documents when requested by notice to so.
Improving the way the system works: scheme funding
Whilst acknowledging that some schemes are already exemplary in managing their funding position, the Government intends to implement a package of measures to optimise scheme funding for all DB schemes. This will involve the Regulator revising its Funding Code of Practice, focussing on how "prudence" is demonstrated when assessing scheme liabilities, what factors are "appropriate" when considering recovery plans and ensuring a long-term view is considered when setting the statutory funding objective.
The Government will make it a legal requirement that trustees and sponsoring employers have to comply with the Code, or key principles within the Code, and will give the Regulator power to enforce the Code.
Trustees of DB schemes will have to appoint a Chair and the Chair will have to report on their key scheme funding decisions to the Regulator in the form of a Chair’s Statement, submitted with the scheme’s triennial valuation.
Consolidating DB schemes
The consolidation of DB schemes, where administrative functions and/or assets and liabilities are pooled in some form, already takes place in various forms (for example, shared administrative services, asset pooling and DB Master Trusts). The White Paper considers the idea of ‘commercial consolidation’ whereby a company would set up a new DB scheme and take over the responsibility for meeting the liabilities of other pension schemes in exchange for a one-off payment or structured payments by the previous sponsoring employer. The company then acts as the ‘sponsor’ with a new board of trustees responsible for scheme governance. The covenant is provided by additional capital supplied by external investors who expect a return for their investment.
The Government accepts that commercially run consolidation vehicles would be a "major shift" in DB pension provision sector and that there is "a delicate balance to be struck" in establishing a framework for them. The White Paper identifies eleven areas that will need to be covered in a legislative and regulatory framework for such a vehicle and the Government intends to consult later this year on detailed proposals for the framework.
Regarding existing forms of consolidation, the view is that more could be done to publicise the wider benefits of consolidation and to raise awareness around existing forms of consolidation such as DB master trusts. There is also a commitment to consult this year on a new accreditation regime for existing forms of consolidation.
One issue raised as a potential barrier to consolidation was the complexity of benefits and, in particular, GMPs. The White Paper states that the Government is considering some "minor changes" to GMP conversion legislation to support benefit simplification. It also appears that although the DWP still believes that equalisation of GMPs between the sexes is required, it will await the outcome of the Lloyds Banking Group case in the High Court.
Other live areas…
This section of the White Paper is notable for the things that the Government states that it will not do at the moment, including introducing an overriding power to allow schemes to switch from using RPI to CPI for increasing pensions in payment and introducing a system of deemed consent for bulk transfers between pension schemes.
However, it will look at whether it is possible to improve the process for making a regulated apportionment arrangement under the employer debt legislation.
This White Paper contains proposals representing an evolution of the existing system for regulating DB schemes - as the Government states, it "sets out the direction of travel for Defined Benefit policy".
Those who were expecting the rapid implementation of a set of firm proposals will be disappointed as the Government admits "most of the proposals are complex and some require further work before proceeding to legislation to ensure the exact parameters of the proposals are effective, proportionate and workable and do not lead to unintended consequences". The DWP and the Regulator will be carrying out consultations on particular policies before moving to legislation. Primary legislation will be needed in most cases and this is unlikely to be before the 2019–20 parliamentary session at the earliest.
However, following years of upheaval in pensions, a well-thought through, measured approach to further regulation is welcome. It will also allow employers and trustees the opportunity to consider the proposals and have their say if they will not be practicable. The Government will be hoping that setting out the direction of travel will be enough to start influencing the behaviour of all those involved in running DB pension schemes even before any legislation is drafted.