How to protect defined benefit schemes

A defined benefit (DB) pension is an employer’s promise to pay an employee member a predetermined retirement benefit, with the resultant pension being linked to the member’s earnings and length of employment.

DB pensions are expensive but most employers manage their schemes responsibly, fulfilling their scheme funding and governance obligations.

Since 2012, with the introduction of auto-enrolment and the growth of defined contribution schemes, the DB sector has changed, with most schemes now closed to new members and some closed to future benefit accrual.

The pensions landscape has undergone enormous change in recent years, with the introduction of auto-enrolment, pension flexibilities and master trusts.

Nevertheless, the DB sector continues to manage assets of around £1.5trn and its regulation affects around 10.5m scheme members. 

Despite a few recent high-profile company insolvencies, the government believes that DB regulation is basically sound and that it provides employers and trustees with a wide range of options on how pensions liabilities are managed.

The Department for Work and Pensions’ (DWP’s) White Paper, Protecting Defined Benefit Pension Schemes, was published on 19 March 2018 and sets out the government’s proposals to clarify the relevant rules and to strengthen the powers of the Pensions Regulator (TPR).

What the White Paper sets out

The White Paper sets out the DWP’s proposed principal changes, including:

• Protecting private DB pensions by strengthening TPR's powers.
• Improving the way scheme funding works.
• Providing new opportunities for DB schemes to benefit from consolidation options.

These proposals are examined in turn below.

More effective powers for the pensions regulator

TPR already has wide-ranging authority to intervene in the management of DB schemes, including its so-called "anti-avoidance" or "moral hazard" powers.

The anti-avoidance powers were considered necessary to limit claims on the government’s Pension Protection Fund (PPF), which provides statutory compensation for DB scheme members whose sponsoring employers become insolvent.

The existence of the PPF means that, unless there are suitable safeguards, it is possible for unscrupulous employers to manipulate their affairs to transfer scheme liabilities to the PPF.

The pensions regulator's legal objectives include limiting calls on the PPF and protecting members' benefits.

Although the government does not believe there is wide-scale deliberate employer avoidance activity, it is recognised that the system must be tough enough to protect scheme members by ensuring TPR has sufficient power to take any necessary action.

Proposals to enhance the Regulator’s effectiveness include: