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01st March 2017

DWP publishes Green Paper about defined benefit pension schemes

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Following the Work and Pensions Committee’s report on its inquiry into BHS (discussed here), the Department for Work Pensions (“DWP”) has published its green paper on ‘Security and Sustainability in Defined Benefit Pension Schemes’.
It is available here. Views are being sought on changes suggested in four areas: funding and investment, employer contributions and affordability, member protection and consolidation of schemes. More details on these are set out below.

1. Funding and investment

The DWP wants to explore whether there is scope to encourage or facilitate some schemes to make more optimal investment decisions, and to mitigate any barriers to the greater use of alternative asset classes. They intend to commission further research on this and to further investigate the factors that influence investment strategies and the choice of asset classes.

The DWP has not identified a segment of schemes or employers that would warrant targeted policy intervention but think that more might be done by both Government and industry to help people better understand valuation and deficit data and provide an improved overall sense of the degree of certainty and risk in the regime as a whole.

2. Employer contributions and affordability

The DWP is not persuaded that there is a general ‘affordability’ problem for the majority of employers running a defined benefit scheme or that there is a case for across the board changes that would reduce or abandon indexation.

The DWP thinks that there could be a case to:

  • suspend indexation in cases where the employer is stressed and the scheme is underfunded;
  • rationalise indexation arrangements, as the current arrangement where some schemes are prevented from moving to CPI by scheme rules is something of a lottery.
A number of possible approaches to encourage sponsors who have significant resources available to make faster progress in repairing deficits are also set out. These include limiting extensions to recovery plans or setting hard limits on the lengths of recovery plans in certain circumstances; setting interim funding targets for severely underfunded schemes and, until they are met, requiring the employer to stay closely in touch with the Pensions Regulator (the “Regulator”)

The DWP considers that options to allow a struggling business to more easily separate from a pension scheme, to renegotiate benefits or to enhance the powers of the Regulator so that it could separate schemes from employers or wind up schemes in specific circumstances have significant drawbacks and could raise ‘moral hazard issues’.

3. Member protection

The DWP’s view is that a blanket requirement on parties to obtain clearance from the Regulator ahead of any planned corporate actions would be disproportionate. If clearance was required in certain specified circumstances, a very high threshold would need to be set for the circumstances triggering the requirement.

Changing the information gathering powers of the Regulator is more likely to be taken forward, with the creation of a duty, applicable to all parties responsible for a scheme, to co-operate with the Regulator, and providing the Regulator with a power to interview relevant parties supported by a sanction for non-compliance.

4. Consolidation of schemes

The DWP’s view is that there is a strong case supporting greater voluntary consolidation of schemes. It is not convinced that compelling schemes to consolidate would be proportionate.

The DWP has concluded that the government should not design a ‘Superfund’ consolidation vehicle run through arms length body. However, they have asked whether it would be appropriate for government to provide some structures or incentives to encourage the pensions industry to innovate and to provide new consolidation vehicles.

The consultation closes on 14 May 2017. For more information on defined benefit pension schemes, please contact Christopher Nuttall on 01604 463134 or click here to email.