White Paper – Protecting Defined Benefit Pension Schemes

The biggest news this month was the publication of the DWP’s highly anticipated and wide-ranging white paper, the follow up to its February 2017 green paper. Many of the proposals are not as thoroughly developed as those in previous pensions white papers, and some have suggested that the white paper has a distinct greenish tinge.

The DWP says the proposals will take “a number of years” to implement and will require a phased delivery approach. During 2018/19, the DWP and the Pensions Regulator will carry out a number of consultations, with primary legislation not likely to be put before Parliament until the 2019/20 session, at the earliest.

Some of the more controversial measures discussed in the green paper, such as mandatory Pensions Regulator clearance for transactions involving DB schemes, and a proposed CPI override for schemes with RPI hardwired into their rules, will not be pursued. Neither is there any mention made of any explicit restrictions on dividend payment.

The Pensions Regulator: some enhanced powers

New punitive fines to punish those “who deliberately put their pensions scheme at risk”, which may apply retrospectively from the date of the white paper.

New criminal sanctions “to punish those found to have committed wilful or grossly reckless behaviour in relation to a DB scheme”.

A review of the notifiable events regime, the Regulator’s early warning system, will be undertaken to determine if it covers all relevant transactions and to clarify timing requirements (currently “as soon as reasonably practicable”).

Declarations on business transactions will be introduced to require companies to make a “statement of intent”, in consultation with trustees, before a “relevant business transaction” takes place. This would state that the company has appropriately considered the effect on any DB scheme and how it proposes to mitigate any detrimental effect.

Stronger information gathering powers will be given to the Regulator, including introducing the ability to inspect records, documents and electronic devices at parties’ premises, and to compel people to attend interviews.

Scheme funding: prudent and appropriate

Revised DB funding code and meaning of prudence to focus on how prudence is demonstrated when assessing scheme liabilities, and what factors are appropriate when considering recovery plans.

Status of code and sanctions for failure to comply. The DWP plans to legislate “to require trustees and sponsoring employers to comply with some or all” of the new funding standards, and amend primary legislation, to enable the Regulator to take action in the event of non-compliance with the new DB funding code.

Mandatory DB Chair and triennial Chair’s statement will be introduced to include a report on key scheme funding decisions, expected to include a description of the strategic plan for reaching the statutory funding objective and describe the scheme’s long term financial destination.

Cost and charges, although not borne by members directly in a DB context, will be considered to see what more could be done to promote greater transparency in DB schemes.

Consolidation: bigger is better

The government wishes to offer the pensions industry “the opportunity to innovate” by creating a new style of DB commercial consolidator vehicle, set up for the purpose of enabling DB schemes to be brought within larger bodies (other than via a traditional insurance company buy-out) and benefit from shared functions and improved governance.

The DWP says that commercial DB consolidators would not be required to fund buy-out level but that funding requirements would likely have to be higher than is typical of schemes with a continued link to their employer and likely with a capital buffer requirement.

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