A nuclear deterrent of some sort is needed for employers with defined benefit schemes.
Further to its investigation into the collapse of BHS and the impact on its pension scheme, the Work and Pensions Select Committee sets out its recommendation for defined benefits (DB) schemes going forward.
We take a look at the main findings:
- Not all employers are naughty.
- The report is primarily aimed at employers who try to avoid their DB liabilities using methods such as deliberate underfunding, corporate restructures and interminable deficit recovery plans.
As the report says: “Responsible employers, which are the overwhelming majority, have nothing to fear from what we propose”.
It is hoped that the recommendations made in this report will be taken forward into a Green Paper, promised by government in early 2017.
A nuclear deterrent to avoidance
In perhaps its most headline-grabbing recommendation, the report says that The Pensions Regulator (TPR) should be empowered to increase the fines it could impose on employers by up to three times the current amounts.
Bigger fines, the report argues, could act as a deterrent to employers shirking their DB responsibilities. It also recommends additional measures aimed at reducing the risk of scheme collapse, including:
- Empowering trustees and members so that they can force the employer to give them timely information that could affect the scheme.
- Allowing employers with small schemes to aggregate them into a scheme run by the Pension Protection Fund, to benefit from economies of scale.
- Employers and trustees should be able to negotiate the benefit indexation rules, perhaps reducing or postponing indexation for a limited period.
- Members should be able to benefit from certain aspects of the ‘pensions freedoms’.
A nimbler regulator
Regulatory intervention is cited in the report as “often clunky” and “concentrated at stages when a scheme is in severe distress”.
To tackle this, the report recommends that The Pensions Regulator (TPR) should be able to act more quickly in high-risk schemes and that scheme valuations and recovery plans should be submitted to TPR sooner.
Finally, citing the 23-year recovery plan put in place for the BHS scheme, the report recommends that recovery plans in excess of 10 years should only be agreed in exceptional circumstances.
Scheme reconstructions and corporate transactions
Where an employer is in immediate danger, The Regulated Apportionment Arrangement (RAA) can be used by TPR to negotiate potentially better-than-PPF benefits for scheme members. However this is rarely used as it is an emergency power that can only be used in specific circumstances.
The report recommends that the circumstances under which it can be used should be widened, and the process streamlined. Perhaps surprisingly, there is no statutory requirement to inform TPR of corporate transactions that could affect the viability of defined benefit schemes.
The report recommends that there should be a legal requirement to inform TPR in high-risk cases.
Jamie Clark is business development manager for Royal London