Defined BenefitDec 21 2016

Retirees face benefit cuts in major DB shake-up

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Retirees face benefit cuts in major DB shake-up

Struggling defined benefit schemes should be allowed to reduce the benefits they pay their members to prevent more BHS-style collapses, MPs on the Work and Pension select committee have said.  

The recommendation, which could see many pensioners receiving lower incomes in retirement than they were promised, was part of a suite of major reforms recommended in a report published today (21 December).

The report also called for extensions to the The Pensions Regulator's powers, which would provide what it described as a "nuclear deterrent" against another BHS-style scandal.

It also called for trustees of small DB schemes to be allowed to consolidate their schemes in an "aggregator fund" to be run by the Pension Protection Fund.

These three major reform recommendations come after several months of hearings that saw former and current pensions ministers, think tanks, employer groups, businesses and unions give evidence before the select committee.

Committee chair Frank Field, who had stated from the beginning of the inquiry that the committee would target member benefits, said:

"To prevent another BHS we need to have the means to nip inevitable disasters like this one in the bud.

"We hope the government will consult on the package of measures we propose, which would go a long way, without resorting to any new reams of red tape, towards doing just that."

While stressing that pension promises were "just that", and that any changes to benefits should "not be taken lightly", the committee nevertheless urged the government to find a way to allow struggling pension schemes to reduce the benefits they pay members.

This would most likely involve switching indexation of annual pension increases from the retail price index (RPI) to the usually-lower consumer price index (CPI).

"We recommend that in its forthcoming green paper the government consult on means of permitting trustees to propose changes to scheme indexation rules in the interests of members," the paper stated.

"These proposals should be subject to regulatory approval but the presumption should be in favour of change. This measure should not only facilitate permanent changes to indexation rules; in many cases a conditional arrangement, whereby the scheme and employer have some breathing space to overcome difficulties, but then revert to more generous uprating when good times return, may be most appropriate."

The committee claimed the BHS pension scheme may have avoided falling into the PPF, and taking the associated 10 per cent cut in benefits, if it had been allowed to reduce the indexation of benefits.

The committee's second headline proposal was to give TPR the power to impose punitive fines three times the size of current fines.

In the case of BHS, it would give TPR the power to call for payments of £1bn rather than the £350m reportedly demanded from the failed company's former owners.

It claimed the regulator would never have to use these powers, because they would act as a total deterrent similar to that supposedly provided by nuclear weapons.

"Regulatory intervention is often clunky and concentrated at stages when a scheme is in severe distress or has already collapsed," the committee stated.

"The Committee recommends TPR be reformed to a nimbler, more proactive regulator that could intervene sooner when difficulties in a company pension fund become apparent, and before problems begin to compound."

The committee argued that an aggregator fund run by the PPF, meanwhile, would be an "attractive alternative" to the insurance company buy-out market, which it said smaller employers often find "prohibitively expensive or unavailable".

It claimed such a fund would "bring greater stability and certainty to scheme members" and increase the chances that small employers could "continue to thrive, invest and employ".

Among the other proposals was a recommendation that rules over "small lump sum transfers" out of DB schemes be relaxed.

TPR chief executive Lesley Titcomb said the regulator would consider the recommendations "carefully".

“We continue to discuss options with [the Department for Work and Pensions] for the legislative and regulatory framework for workplace pensions, and how this might be improved, ahead of the green paper, which will consider the future of pension funding, the regulatory framework and TPR’s powers," she said.

A DWP spokesperson said the majority of employers were managing their pension schemes "responsibly", but said recent incidents had "raised some important questions". 

"In the coming months we’ll be publishing a green paper on pension funding and as part of this we’ll be looking at powers of The Pensions Regulator,” the spokesperson said.

Christopher Daems, director of Cervello Financial Planning, welcomed the proposal to increase TPR's powers.

"The power to impose more punitive measures to prevent pension failure makes sense and the level proposed should act as a suitable deterrent to ensure that future failures don't occur."

However, Henry Tapper, business development director of First Actuarial and founder of Pensions Playpen, said the report was an "overreaction to an overstated problem".

"The proposed remedies to the 'calamity' of BHS could be more calamitous, allowing indexation to be conditional (retrospectively) and allowing small schemes to fold into a living PPF risks undermining the good work of trustees over the past few years and could lead to a needless dumbing down of benefits," he said.

Tom McPhail, head of retirement policy at Hargreaves Lansdown said the key question for any proposed changes is whether they will be in the best interests of the scheme members.

He said: "Judging by this report, the interests of employers and the pensions industry seem to be winning out over those of their employees and scheme members.

"Pensions are pay, so retrospectively reducing the value of pension benefits is tantamount to refusing to pay an employee after they have done the work for you: the pensions minister should stand firm in defence of employees’ pensions.”

He added final salary schemes give gold-standard pensions to their members and enjoy very substantial taxpayer support.

"The tax relief granted to final salary schemes far outweighs the sums paid into defined contribution pensions. It is only right therefore that the government should be able to call them to account and to ensure that they deliver value for money to all stakeholders, including employers, the scheme members and the taxpayer.”

james.fernyhough@ft.com