March 2018 saw the publication of the Government White Paper “Protecting Defined Benefit Pension Schemes”. The proposals set out focus on security of the arrangements and make clear the need for employer support and effective administration of all schemes.
The Regulator will revise its code of practice on DB funding arrangements. In addition, a new regime will be introduced that will focus on funding plans, reflecting a long term view of the overall scheme funding objective. Elements of the new requirement will be mandatory as, currently, the Code of Practice is only principles-based although The Pensions Regulator (tPR) use it to inform their judgement where funding difficulties arise. The new regime will give tPR increased powers to enforce a prudent and appropriate funding approach.
DB Chair’s Statement
It also introduces the idea of a triennial DB Chair’s statement; much like the current annual DC arrangement. The proposal is that the regular declaration will be supplied to tPR with the full actuarial valuation.
Current suggestions for the content of the statement are:
- the scheme’s long term “financial destination” and its strategic plan for reaching this;
- the key risks in trying to achieve this objective and how these are mitigated and managed by the trustees; and
- how the trustees are meeting key performance indicators over governance of the scheme e.g. value for money.
It is proposed that this statement will be mandatory and will be enforced by use of fixed penalty notices, as is the case for DC schemes. It will also be within tPR’s powers to demand an “out-of-sequence” statement where it has concerns about any scheme.
The focus on protecting DB schemes will bring in the ability to impose punitive fines on those tPR consider “deliberately put their scheme at risk”. In the worst cases, there will be a criminal offence that can be used against those who have “committed wilful or grossly reckless behaviour in relation to a pension scheme”. Alongside this, will be a strengthened notifiable events framework and voluntary clearance regime.
The White Paper explains that consolidation is seen by Government as a potential solution to the currently costly buyout option for schemes (particularly smaller schemes). It sets out its plans to consult on proposals for a legislative framework and authorisation regime within which new consolidation vehicles forms could operate, with an accreditation arrangement to build longer-term confidence.
Note that, alongside all of the above, it is the intention to give tPR additional information-gathering powers similar to those it has for auto-enrolment and master trusts, including:
- rights to demand an interview;
- power to issue civil sanctions for non-compliance; and
- a power of inspection.
TPR will also have the right to disqualify specific company directors.
Consideration was given in the Green Paper that preceded the White Paper to allowing employers to make changes to scheme rules moving the indexation of pensions from RPI to CPI. The White Paper firmly removes that possibility but does make clear that the Government or the tPR will have a watching brief on this issue and may change their views in the future.
The timeline for moving from proposal to legislation is set out but, as most of the changes need primary legislation, the White Paper suggests that changes are unlikely to happen before the 2019-20 parliamentary session, at the earliest.
As ever with pensions, only time will tell when the legislation will come into force, and what the final requirements will be, and public high profile cases may change both the proposed actions and the timelines.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.