The DWP has this morning published its consultation on possible reforms to Defined Benefits pension schemes. The paper focuses on four broad areas of possible reform; Funding and Investment; Employer Contributions and Affordability; Member Protection; and Consolidation of Schemes. From Tom McPhail, Head of retirement policy at Hargreaves Lansdowne.
This is a wide-ranging consultation, seeking to strike a balance between the competing and sometimes irreconcilable demands of employees’ pension rights, their continued employment, shareholders’ interests and the wider economy. The overall tone is cautious, with the government clearly reluctant to give employers and their schemes carte-blanche to water-down member benefits and protections. In the end, it is all about achieving value for money and security of retirement incomes. Of particular interest will be the possibility of allowing struggling employers latitude to reduce the burden on the company of continuing to support their pension scheme. Defining a set of rules to achieve this whilst also minimising the risk of employers gaming the system will be challenging. Similarly the questions around Regulatory clearance of corporate actions will need to strike a delicate balance between member protection on the one hand, and on the other allowing UK industry to conduct its business. It looks likely whatever else happens, we’re going to see a beefed up pensions regulator emerging the other side of this consultation.
If you would like any additional information or commentary, do get in touch. Proposed areas of review: Funding and investment; Mandate or encourage schemes to publish a range of valuation measures; Better Government and industry communications about the meaning and context of valuations; Regulator to allow for more regular valuations for high risk schemes, and a longer valuation cycle for lower risk schemes; Reduce the timescale for valuations from 15 months to 9 months; Introduce risk based reporting and monitoring requirements for schemes; Improve trustee decision making skills through training or better guidance; Mandate the use of professional trustees; More proactive role for the Regulator in scheme funding and risk management; Commission further research into trustee decision making, the factors affecting investment strategies and choices of asset classes.
Employer contributions and Affordability
Interim funding targets, or a tougher funding regime for employers with severely underfunded pension schemes and capacity to pay more, or limits on the length of recovery plans in some circumstances. Making it easier to separate schemes from struggling employers. More intensive support from the Regulator for challenged schemes and sponsors. Power for the Regulator to wind-up schemes. Make it easier for schemes to “run on” without a sponsor where they have sufficient funding, or make it easier to transfer members in bulk to a scheme with lower benefits. More use of existing flexibilities such as longer recovery plans. New flexibilities like deferred or back loaded recovery plans. Allow renegotiations of pension promise in some circumstances. Allow schemes to suspend indexation in some circumstances. Allow schemes to move from RPI to a more modern index of inflation. Make trivial commutation rules easier to operate. Measures to ensure transparency and members are aware of the risks to their benefits.
Additional scheme funding powers for the Regulator – perhaps with explicit standards and a “comply or explain” regime; Proactive compulsory clearance of certain corporate activities in limited circumstances; Levy substantial fines on companies for corporate transactions which have a detrimental impact on schemes; Impose a duty to co-operate and engage with the Regulator, backed by civil penalties; Require sponsors to engage with and provide information to trustees in a timely manner; Require consultation with trustees before paying dividends if scheme is severely underfunded; Better communications with members.
Consolidation of schemes
Make it easier to simplify and to re-shape benefits. Set standards for consolidation vehicles such as DB master trusts, and a standard simplified benefit model. Require schemes to publish their administration costs and the charges paid for investment and other advice and services. Provide a legislative framework for new consolidating superfunds targeted at delivering an alternative to buy-out, or at consolidating stressed schemes – and allow the industry to innovate to create new vehicles. Changes to the employer debt regime in multi-employer schemes.