Last week the Government published its White Paper "Protecting Defined Benefit Pension Schemes". Key areas covered are:
- strengthening the powers of the Pensions Regulator;
- new scheme funding requirements; and
- consolidation of DB schemes.
Most of the proposed changes will require legislation, and in many areas the detail is yet to be worked out. However, the Government is considering introducing a penalty regime that is retrospective to the date of publication of the White Paper. Employers and trustees should make sure they understand the proposals.
Strengthening powers of Pensions Regulator
Key measures proposed to strengthen the Regulator's powers are:
- strengthened "moral hazard" powers, for example giving the Regulator an express power to penalise the targets of a contribution notice, including individual directors. The Government will consider whether it is possible to introduce this measure with retrospective effect to the date of publication of the White Paper. Whether or not the Regulator can use its contribution notice powers to penalise can make a significant difference to the amount it is able to claim. There has been a case which the Regulator settled for a much lower amount than originally sought after a judge expressed the view that a contribution notice should not be used to penalise, only to compensate for detriment attributable to the target's act or omission;
- a new criminal offence to punish "wilful or grossly reckless behaviour of directors" (and any connected persons);
- changes to the "notifiable events" framework which could broaden the types of transaction that have to be notified to the Regulator or bring forward the point at which they have to be notified;
- for certain transactions (detail to be confirmed) which pose the highest potential risk to a DB scheme, a requirement for sponsoring employers or parent companies to make a statement of intent, in consultation with trustees, prior to the transaction taking place, confirming that they have "appropriately considered" the impact on affected DB schemes, and setting out how the employer proposes to mitigate detriment to the scheme;
- improved information gathering powers including a new power for the Regulator to compel attendance at interview and broader powers to inspect documents and records;
- power for the Regulator to bring civil, as well as criminal, sanctions, where a person fails to comply with a notice requiring information.
Key measures proposed in relation to scheme funding are:
- a new DB funding code of practice from the Regulator giving greater clarity as to what the Regulator expects regarding the requirement to set a scheme's technical provisions "prudently" and to set a recovery plan "appropriately" to reduce a scheme's deficit;
- giving legal force to some of the funding standards in the code and giving the Regulator increased powers to enable it to enforce the standards;
- a requirement in the new DB code for trustees to set their statutory funding objective in the context of a long-term objective. For an open scheme, the long-term objective might be to run on with employer support. For a closed scheme, examples of long-term objectives might be to buy out benefits within a specific timeframe or reach self-sufficiency (ie scheme can adopt a low risk investment strategy and run off with minimal call on the sponsoring employer);
- a requirement for trustees of DB schemes to appoint a chair who will be required to submit a chair's statement with the scheme's actuarial valuation. It is expected that the statement will need to set out the scheme's long-term financial destination, the scheme's strategic plan for reaching its statutory funding objective, the key risks to meeting that objective and how the trustees are mitigating and managing those risks.
The Government plans to consult this year on proposals for a new regime which would allow employers to divest themselves of pension liabilities by transferring the scheme's assets and liabilities to a "consolidator vehicle" or "Superfund". The White Paper suggests that such a consolidator vehicle could be operated commercially, via a private company that sets up a DB scheme and takes over the responsibility for meeting the liabilities of other schemes in exchange for a one off payment or structured payments by the previous sponsoring employer. It suggests that the covenant could be provided by additional capital supplied by external investors who expect a return for their investment.
The White Paper proposes that consolidator vehicles would not be required to meet the same funding standards as insurance companies offering buy-out arrangements, but would be required to meet higher funding standards than those required of a traditional DB scheme with a sponsoring employer.
Measures not included in the White Paper
The White Paper says that the Government is "presently" ruling out measures which would override scheme rules to allow employers to change the inflation measure used to calculate annual benefit increases (eg switch from RPI to CPI) where the rules don't currently allow this.
The White Paper also says that the Government has no plans to change the basis for calculating "section 75 debts" triggered when an employer ceases to employ active members in a multi-employer scheme.
On GMPs, the White Paper says that the Government remains of the opinion that schemes must equalise pension benefits to account for inequalities caused by GMPs being different for men and women, but says that the Government will review its position in the light of any decision in the court case being brought by the Lloyds Banking Group pension trustees in relation to this issue.
The measures proposed in the White Paper will almost all require further consultation and, in most cases, a new Act of Parliament. Where such new legislation is required, the White Paper says this is unlikely to be before the 2019-20 parliamentary session "at the earliest".
The new proposals relating to strengthened Regulator powers and scheme funding show a clear "direction of travel" towards a tougher more proactive Regulator. It will be some time before we know the detail of most of the proposed measures, but the Government has clearly put a marker down that it intends to make it easier for the Regulator to hold directors to account for the impact that their actions have on the company pension scheme, and to impose tougher sanctions on directors personally if they show a reckless disregard for the scheme. We are already seeing signs of the Regulator making increased use of its existing powers and expect this trend to continue.
If the Government achieves a regime which enables widespread consolidation of DB pension schemes into one or more "superfunds" that will be a game changer. However, achieving a consolidation regime which provides both commercial returns for investors and sufficiently robust safeguards to protect member benefits against the risk of scheme failure will involve a difficult balancing act. Until we have more detailed proposals, it is hard to predict how successful the proposed new consolidation regime will be.