Government's proposals will give regulator teeth

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”. 

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;

• Ensuring a long-term view is considered when setting the statutory funding objective; 

• Require the trustees of DB pension schemes to appoint a chair, and for that chair to report to the regulator in the form of a chair’s statement, submitted with the scheme’s triennial valuation.

Consolidation

In a partly unexpected move, the government will consult this year on proposals for a legislative framework and authorisation regime in which new forms of consolidation vehicles could operate. 

Of course, with consolidation comes requirements for accreditation and authorisation. The government will also seek industry views on the development of an appropriate regime to help build confidence and encourage existing forms of consolidation. 

A key focus for collaboration with the regulator will be to raise awareness of the benefits of consolidation with trustees and sponsoring employers, although, for example, the regulator’s trustees toolkit and updating guidance. 

More broadly, the government will also consider minor changes to guaranteed minimum pensions conversion legislation to support benefit simplification, which will help reduce complexities in existing benefit structures. We expected to see encouragement for existing forms of consolidation, which could have a positive impact for employers struggling with pension scheme deficits by reducing scheme running costs per member, enhancing efficiency of investment strategies, and improving governance.

However, the suggestion of legislation for new consolidator funds, in which a private company would establish a DB scheme and take responsibility for meeting the liabilities of other pension schemes in exchange for a one-off payment or structured payments by the previous sponsoring employer, comes as a bit of a surprise.

This structure could be very attractive to employers should these funds come to see the light of day, as they offer a cheaper alternative to buy-out. But industry commentators already expressed concerns over member security and multiple questions remain on how these funds would be structured and administered. 

The major disappointment in the White Paper is the lack of any statutory override that would permit the reduction of member pension increases and prevent further changes to the employer debt provisions under section 75 of the Pensions Act 1995.

Next steps

The government said “there are some proposals which can be implemented now. For other measures, more work is required to build a consensus about the best way to deliver the government’s aims and to design the detail of the proposals”.

Consultation will continue through 2018 and into 2019, before moving to legislation when parliamentary time allows. The government intends to legislate at the earliest opportunity but says this is unlikely to be before the 2019-20 parliamentary session at the very earliest. 

I welcome the tentative proposals on consolidation and simplification, and support the aim of making members’ benefits more secure. 

That said, in many respects, the White Paper is merely reactive to a few media headlines and lacks the innovation that many respondents to the Green Paper called for. More robust action that recognises the wider impact of the UK’s growing pensions black hole is needed now. 

The failure to introduce an override that allow schemes to change the measure of price inflation for pension increases, as happened with state and public sector pensions, is a missed opportunity, as is the absence of proposals to encourage de-risking through the removal of barriers to properly run member option exercises. 

If they are not already doing so, employers need to be discussing options for reducing risk and liabilities in their schemes with trustees and advisers, before an even tougher, more expensive and prescriptive DB regulatory framework is introduced.

Looking ahead, the industry needs to remain alert to the development of prospective options for scheme consolidation, which could well bring seismic change to UK pensions. 

John Wilson is head of technical at JLT Employee Benefits