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How Will the Government Protect Defined Benefit Pension Schemes?

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This article has been submitted by Quantum Advisory

The main aim of the long-awaited White Paper by the Department for Work and Pensions – ‘Protecting Defined Benefit Pension Schemes’ (Published Monday 19th March 2018) – is to reduce the likelihood of similar scenarios to that of Carillion and Toys R Us happening again where the employers became insolvent and, as their defined benefit schemes were not adequately funded, members of these schemes received lower benefits courtesy of the Pension Protection Fund (PPF). Quantum Advisory’s Stuart Price comments on the government’s key findings from the report:

The White Paper focuses largely on security and reinforces the Pensions Regulator’s (tPR’s) drive to be clearer, quicker and tougher. There hasn’t been a substantial overhaul of the current system proposed, which reflects the Government’s view that most schemes are well run with the majority of employers keen to treat their schemes fairly. The paper does however recognise the existence of some poorly run schemes and employers who are not committed to providing the right level of support.

Defined benefit (DB) funding regime

Through revisions to tPR’s current Code of Practice, all DB pension schemes will be required to follow a new regime which focuses on prudence, the appropriateness of recovery plans and the need to take a long term view when determining the funding objective. The new Code will make it an explicit requirement for schemes to comply with specific areas of the guidance (unlike the current principles-based approach).

The Pensions Regulator powers

tPR will be given the power to impose fines on those who ‘deliberately put their scheme at risk’. In the most extreme circumstances, tPR will even be able to criminally prosecute those who commit ‘wilful or grossly reckless behaviour in relation to a pension scheme’ and will have the power to propose the disqualification of company directors.

tPR’s information gathering powers will also be widened, along with a review of the notifiable events framework to ensure all relevant events are covered and that tPR is informed of potential corporate transactions earlier in the process.

Consolidation

The White Paper explains that consolidation of DB pension schemes is viewed as a potential solution that could be more affordable than a traditional insured buyout for many schemes and there will be a further consultation on this.

Any legislative framework will need to strike a delicate balance between being commercially viable to potential private sector consolidators and providing members with adequate protection.

Retail Prices Index (RPI) and Consumer Prices Index (CPI)

The White Paper also touches on the much-publicised topic of whether the Government would introduce a legislative override allowing all schemes to switch increases from the higher RPI rate of inflation to the lower CPI rate.  At this stage the Government has resisted calls for change.

Overview

Whilst the White Paper sets out a clear plan for future DB policy and provides plenty of food for thought, some of the proposals are complex and will need substantial industry consultation before the required legislation can be passed. I doubt any legislation will actually come into effect until the 2019-20 parliamentary session at the earliest.

Stuart Price is Partner and Actuary at Cardiff-based pension experts. Established in 2000, Quantum Advisory provides pension and employee benefits services to employers, scheme trustees and members from offices in Cardiff, Bristol, Birmingham, Amersham and London.

For more information about Quantum Advisory, please visit: https://quantumadvisory.co.uk/about-us/