The Government proposes strengthened Regulator powers, improvements to scheme funding and scheme consolidation.
The Government has issued its pensions White Paper on protecting defined benefit pension schemes, somewhat sooner than expected. The paper takes the view that the current system works well for most schemes and employers but that a tougher approach is needed for those failing to act responsibly. It proposes changes in three main areas: strengthening the Pensions Regulator’s powers; improving the scheme funding regime; and consolidating schemes.
Whilst it may be years before some of the proposals – particularly those requiring primary legislation – have formal effect, we expect that the White Paper will nonetheless drive immediate behavioural changes amongst pension scheme sponsors and trustees.
Strengthening the Regulator’s powers
The Pensions Regulator already has a range of powers to tackle employers who seek to avoid their pension liabilities. However, these appear to have lacked sufficient clout. The White Paper proposes:
Improving scheme funding
The Defined Benefit Funding Code of Practice will be revised in order to overcome short-termism and foster greater accountability. In particular, the Code will focus on:
Whilst many schemes and employers already do a good job in these areas, the aim is to bring weaker schemes fully up to standard.
The paper develops the idea that consolidation of schemes would help to make the delivery of defined benefit pensions more efficient. Consolidation could operate across administrative functions and/or the pooling of assets and liabilities. Whilst some forms of consolidation are already available in the marketplace, the Government is looking to:
Many of the measures above (e.g. corporate clearance and scheme funding standards) can be achieved quickly, without the need for legislation. However, even in some of those areas, there will be further consultation later this year. Where primary legislation is needed (e.g. new legal powers and penalties), this is likely to happen only in the 2019-20 Parliamentary session at the earliest.
However, we expect that employer and trustee behaviour will change immediately on the basis of the aims spelled out in the White Paper. The threat of retrospective penalties will certainly give many employers pause for thought!
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