07 Apr 2017

Last year, the House of Commons Work and Pensions Committee issued, with the Business, Innovation and Skills Committee, a joint report on the collapse of BHS and the impact on its pension schemes.

While the report levelled much of its criticism at Sir Philip Green, the Committee also described the Pensions Regulator (TPR) as “reactive” and “slow-moving”. It was recognised that TPR is likely to face similar situations again and that "it is essential that it has the powers, resources, leadership and commercial acumen to act decisively". TPR itself commented on the limitations to its current powers saying "our experience of using these existing mechanisms is that on occasion and in specific circumstances they can be inflexible and pose some challenges to operate and enforce in practice”.

The Committee subsequently undertook a wider examination of the regulation of defined benefit schemes and its final recommendations were published at the end of last year.

Committee recommendations

The Committee’s key recommendations cover the following areas:

  • The Committee recommended that TPR be given power to issue punitive fines alongside its anti-avoidance powers. In other words, when issuing Contribution Notices and Financial Support Directions, TPR could include a fine which would potentially treble the original demand. It is envisioned that the threat of a fine would deter employers from failing to meet their responsibilities. At the moment, the Committee feels employers “may well take a punt on risking enforcement action” if the amount by which they could be penalised is no more than they would have been required to pay into the scheme in any event
  • The incentives on an employer to seek clearance were described as “weak” with some sponsors calculating that they would be better off risking an anti-avoidance battle in future. The Committee recommended that for certain corporate transactions which could cause material detriment to a scheme’s funding position, advance clearance from TPR should be mandatory. The circumstances in which clearance would be mandatory should be narrow in order to prevent an undue burden on economic activity
  • The Committee believes that communication is fundamental to the trustee-sponsor relationship which is at the heart of a well-run pension scheme. It recommended that the Government should consult on giving trustees the powers "to demand timely information from an employer ". It remains to be seen what this will involve beyond the information-sharing provisions which already exist in legislation
  • The Committee sees the consolidation of defined benefit schemes as offering clear and substantial benefits to members in terms of efficiency and sustainability. Smaller schemes have less bargaining power to negotiate fees and often pay more in running costs per member. Consolidation would offer the chance to address this if barriers to consolidation can be removed. The Committee also felt there is a very strong case for creating a statutory aggregator fund for DB schemes, managed by the Pension Protection Fund (PPF)
  • The Committee views the current 15 month window for completing scheme valuations as too long and recommended reducing it to 9 months. Further, the Committee recommended that TPR adopts a risk-based approach whereby riskier schemes provide valuations more frequently than low-risk schemes. It also noted that TPR should be tougher on deficit recovery plans, especially any plans which concentrate employer contributions in “the distant future”. Recovery plans of more than 10 years “should be exceptional”
  • The funding framework was criticised for being “almost entirely binary in its outcomes for stressed schemes”, so that either the scheme sponsor continues trading and tries to ensure fully funded benefits or fails and the scheme enters the PPF. In particular, the rules around regulated apportionment arrangements were deemed too inflexible and recommendations were put forward with a view to improving them. The Committee also noted that whether or not schemes have been able to change from using RPI to CPI (which is generally lower and less costly) when revaluing and indexing benefits is entirely dependent on the wording of their rules. It views the option of switching to CPI as being “preferable to corporate insolvency” and recommended that the Government consults on ways of allowing trustees to make proposals, subject to TPR approval, for changing indexation rules where this would be in the interests of members
  • The Committee recommended that TPR’s power to order the winding up of a pension scheme should be broadened when it is satisfied that this would be in the best interests of the PPF, and that no alternative option is realistically available to deliver a better outcome for members.

TPR has accepted the Committee's criticisms of its previous approach to scheme regulation and set out high level plans for reform in line with the Committee's recommendations.

Green Paper

Earlier this year, the Government published its awaited Green Paper, Security and Sustainability in Defined Benefit Pension Schemes, which seeks wider views on some of the Committee's recommendations. The Government’s stance is that the existing system of regulation and legislation is not broken but there may be room for targeted improvements in some areas, for example by:

  • reducing the timescale for valuations from 15 months to 9 months and adjusting the three year valuation cycle so that it is either longer or shorter depending on the riskiness of the scheme
  • giving TPR a greater role in determining the appropriate level of risk for individual schemes
  • introducing a statutory override to allow schemes to move from RPI to CPI for revaluation and indexation, regardless of their particular rules
  • requiring clearance to be obtained in certain specified circumstances
  • allowing 'stressed' employer to reduce benefits or even separate the business from the pension scheme in certain (very) limited circumstances
  • removing barriers to the voluntary consolidation of small schemes (although without the statutory aggregator fund suggested by the Committee).

The consultation closes on 14 May 2017 and it will be interesting to see which proposals, if any, are taken forward for further analysis. The Government is clearly mindful of the need to strike the right balance between the interests of scheme members and the detrimental impact which any change could have on the employer's business.

Other cases under review

Sir Philip Green’s £363m cash settlement with TPR in respect of the BHS pension schemes recently made headlines

TPR is continuing its enforcement action in respect of Dominic Chappell and Retail Acquisitions Limited.

There have also been developments in other cases where TPR was considering the use of its anti-avoidance powers. For example:

  • TPR won a legal victory in its attempt to use its powers in respect of the Silentnight pension scheme. TPR issued an initial warning notice in 2014 followed by a second notice in 2016 warning of its intention to seek a higher sum equivalent to the scheme’s entire deficit. The targets have failed in their application for judicial review of the second warning notice
  • Coats Group has agreed a £255m settlement with TPR to safeguard the benefits of members in two of its pension schemes following the issue by TPR of warning notices explaining the case for a Financial Support Direction. In addition, Coats Group will fully guarantee the liabilities of both schemes
  • there are reports that the PPF is looking into whether funds were extracted from the Bernard Matthews pension scheme. Bernard Matthews was previously sold under a pre-pack administration, which was described in a report prepared for the Work and Pensions Select Committee as being carefully crafted to benefit secured creditors and company controllers to the detriment of the pension scheme.

Keeping up its momentum, the Committee has started to scrutinise the BHS pension settlement, is continuing to look into what provisions have been made around the Bernard Matthews pension fund, and has begun scrutiny of the Trinity Mirror Group pension scheme deficit.

The question now appears to be not whether there will be change in the regulation of pension schemes but the extent of that change. Employers and trustees wishing to contribute to the debate should consider responding to the Green Paper.