Many of the headlines about the Pensions Schemes Bill – and indeed the preceding White Paper that fan-fared the government’s intended direction of travel regarding pensions – focused on the new powers that The Pensions Regulator (TPR) will get and the eye-watering possibility of £1m fines.
Actually, that is not strictly true.
The headlines were - and still are – dominated by ‘the B-word’ which may yet have a significant impact on the life expectancy of this Bill despite its reported cross-party support.
We might assume that, even with the anticipated political disruption in the coming weeks (months? years?), the new regime should come to pass eventually.
So, what can companies who sponsor Defined Benefit (DB) pension schemes expect?
It is the schemes where the sponsor is deliberately trying to side-step responsibilities that the new legislation purposefully targets,The answer (perhaps unsurprisingly) is ‘it depends’, although perhaps an upsurge in employer-trustee collaboration should be universal.
In truth, the biggest impact for the majority of sponsors who take their DB obligations seriously will be a small, albeit fundamental, shift in funding viewpoint and one or two further hoops to jump through during M&A activity.
The Bill currently includes clauses obliging companies to notify TPR in advance of certain corporate events via a statement of intent.
The nature of these events is to be set out in further regulations so we will have to wait and see whether and how this will act to slow corporate activity.
It is more likely however that it will instead mean that pension schemes are not an afterthought in mergers and acquisitions as they so often have been in the past.
It is the small minority of schemes where the sponsor is deliberately trying to side-step responsibilities that the new legislation purposefully targets, and where TPR is expected to concentrate efforts.
Here we can expect to see those punitive fines thrown at corporate entities who “deliberately put their pension scheme at risk” with “wilful or grossly reckless behaviour” and “without a reasonable excuse”.
We will have to wait to see what kind of excuse the Regulator deems reasonable – and TPR could yet find it problematic proving negative actions were “wilful”.
Regardless, no employer is going to accidentally get bitten – only those who put their head directly into the lion’s mouth.
It therefore should not be a surprise to even the most blinkered of sponsors if, and when, TPR does come knocking.
The Regulator simply does not have the remit or the resources to lie in the bushes waiting to ambush unsuspecting employers and trustees, and I do not expect that will change anytime soon.
Indeed, although TPR’s information-gathering powers will be expanded – for example allowing them to compel a person to “attend an interview” or to “inspect records”- the result is likely to be an improvement in corporate behaviours.
TPR is again unlikely to have the resources to scrutinise every decision taken by, or affecting a pension scheme.
However, it is reassuring that those who seek to abuse the system will find it even harder now to hide.
The pensions industry is largely supportive of these expanded powers as an opportunity for TPR to adopt a tougher stance, but they absolutely must put the operational structures in place to ensure that enforcement actions are measured and proportionate.
If not, we have seen that the Parliamentary Work and Pensions Select Committee will not shy away from expressing public criticism.
Then there are the changes to the scheme funding regime – potentially the most significant since the Pensions Act 2004.
Here we may see an impact on company’s bottom line as TPR ultimately uses its expanded (and clarified) powers to issue Contribution Notices or force companies to financially support schemes.
For most defined benefit pension schemes however, the biggest news is that we can now expect to get some much-needed and long-awaited regulatory clarity in relation to funding.
In particular it will be mandatory for trustees and companies to establish long-term strategies and agree a “journey plan” that ensures the starting point (that is, their current funding approach) is joined up with their long-term objectives, whatever they may be.
I am sure that many schemes will benefit from having more engaged employers who feel able to sign up to seeing their DB plan through to the “end game”.
For the minority that don’t, however, the message is clear: TPR is coming for you.
Paul Houghton is head of actuarial consulting and a partner at Barnett Waddingham
