Defined Benefit  

Government's proposals will give regulator teeth

Government's proposals will give regulator teeth

The recent publication of the government’s much-anticipated white paper on defined benefit (DB) pension schemes was met with a mixed response.

The government’s latest initiative seems to deliver many of the pre-requisites required to build protections across UK private sector pensions, such as arming The Pensions Regulator with extended powers, providing more clarity on scheme funding principles, and laying the groundwork for a move towards consolidation. 

Despite the string of high-profile scheme failures in recent months, the government concluded that “the system is working well for the majority of DB schemes, trustees and sponsoring employers”. 

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Fundamentally, the government believes “there is no systemic problem in the DB pensions regulatory and legislative framework”. 

Key points

  • The white paper on DB schemes provides clarity around scheme funding principles
  • The government proposes to strengthen the regulatory framework around workplace pensions
  • The government concludes that most members are likely to get their pension benefits paid in full

That said, the government acknowledges that “a tougher approach is needed for those few whose irresponsible decisions affect pension schemes” and remains determined to ensure that both employers and employees are supported and protected by an appropriate corporate governance framework.

Against this perceived backdrop, the government will strengthen the regulatory framework and the regulator’s powers to: 

• Give the regulator powers to punish those who deliberately put their pension scheme at risk by introducing punitive fines; 

• Legislate to introduce a criminal offence to punish those found to have committed wilful or grossly reckless behaviour in relation to a pension scheme, and build on the existing process to support the disqualification of company directors;

• Work with the regulator to strengthen the existing notifiable events framework and voluntary clearance regime so that employers have appropriate regard to pension considerations in any relevant corporate transactions (although work will be undertaken to ensure that these measures do not have an adverse effect on legitimate business activity and the wider economy);

• Provide the regulator with the right tools to do their job by ensuring they receive the information required to conduct investigations effectively and efficiently – these powers will be supported by penalties to drive co-operation.

The government believes that taken together, “these new powers will strengthen the deterrent against and punishment for reckless behaviour and give the regulator the ability to respond more quickly and decisively where they believe wrongdoing has taken place”.

Given the complexity of some of these measures, the government will undertake further work with the regulator and key parties to ensure that these measures are put into practice effectively.

Scheme funding

The government concluded that most members are likely to get their pension benefits paid in full, and that, despite many schemes having funding deficits, existing obligations are broadly affordable for sponsoring employers. 

However, to improve decision-making and governance, the government will implement a new package of measures to optimise scheme funding, which include:

• Strengthening the regulator’s ability to enforce DB scheme funding standards;

• A revised code focusing on how prudence is demonstrated when assessing scheme liabilities;

• A revision of which factors are appropriate when considering recovery plans;