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UK pensions speedbrief - DB white paper: a greenish tinge?

  • United Kingdom
  • Pensions - Defined benefit


The DWP this week published its highly anticipated and wide-ranging white paper, “Protecting Defined Benefit Pension Schemes”, the follow up to its green paper of February 2017.  The emphasis in the white paper is on measures to strengthen the Pensions Regulator and protect DB member benefits (rather than on easements to assist scheme sponsors or trustees).  These include a strengthening of the scheme funding and governance rules and introducing new sanctions against those who “put pension schemes at risk”.  Few of the measures will be implemented imminently – most will require consultation and new primary and/or secondary legislation. 

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, nor is mention made of any explicit restrictions on dividend payments.

The Pensions Regulator: some enhanced powers

The government  acknowledges that most employers wish to operate their schemes properly, but says it feels it needs to “guard against the small minority of employers who may be content to put their scheme at risk”. 

New punitive fines - The government plans to give the Pensions Regulator powers to punish those (including individual directors) “who deliberately put their pensions scheme at risk” by introducing punitive fines.  It is expected that these will be linked to the issue of a contribution notice, although the details are still to be confirmed. A key point to flag here is that the DWP are considering the feasibility of the new penalty regime applying retrospectively from the date of the white paper (19 March 2018).

New criminal sanctions - The most widely publicised aspect of the white paper is the government’s decision to introduce a new criminal offence “to punish those found to have committed wilful or grossly reckless behaviour in relation to a DB scheme” (including directors and any connected persons).  It plans to carry out a consultation about this over the coming months.  We would expect such sanctions to be difficult to impose and infrequently used, though they may succeed in focusing minds in board rooms on pension matters.

Review of notifiable events - The Pensions Regulator’s early warning system, the notifiable events framework, will be reviewed. This includes a review of whether it covers all relevant transactions and clarification on timing requirements (currently the duty is to notify the Pensions Regulator as soon as reasonably practicable). 

Declaration on business transactions – Companies will be required 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.  What “relevant business transaction” means is not yet clear but it is said to include only those with the “highest potential risk” to DB schemes, such as the sale or takeover of a sponsoring employer. The stated aim is to ensure that pension considerations are better reflected in company decisions.

Stronger information gathering powers - There are plans to strengthen the Pensions Regulator’s information gathering powers, including introducing the ability to inspect records, documents and electronic devices at parties’ premises and to compel people to attend interviews.  Interestingly, the DWP notes that the new interview power may be used in relation to professional advisers who are unable to co-operate (due to client confidentiality issues) unless compelled to do so by statute. There will also be a new ability for the Pensions Regulator to impose fines as an alternative to criminal sanctions for non-compliance with a request for information.  The government has decided against introducing a legislative “duty to co-operate” at this stage but will give the matter further thought.

No mandatory clearance - The green paper canvassed views on whether the Pensions Regulator’s voluntary clearance regime should become mandatory for certain types of transactions involving DB schemes.  It was always going to be difficult to strike a balance between protecting member benefits and not hindering legitimate corporate activity. The proposal received what is described in the white paper as a “mixed response”.  Companies with DB schemes may be relieved to hear that the idea will not be pursued. 

Other Pensions Regulator-related matters - Other potential measures mentioned briefly in the white paper include a possible review and strengthening of the Pensions Regulator’s existing anti-avoidance powers and clearance guidance together with a strengthening of the current director disqualification system. 

Scheme funding: prudent and appropriate

The DWP feels that most DB schemes are well managed and shortfalls are being addressed – it does not perceive that there is a general affordability problem.  It considers, however, that schemes and employers will benefit from clearer scheme funding standards – in particular it has seen evidence of technical provisions which have not been set prudently, recovery plans that are inappropriate and discount rates that are either too high or too low.

Revised DB funding code and meaning of prudence - The Pensions Regulator will consult on introducing clarified funding standards via a revised DB funding code of practice.  This will focus on how prudence is demonstrated when assessing scheme liabilities and what factors are appropriate when considering recovery plans. With most private sector DB schemes now closed to future accrual (and research showing that nearly a third of those have no journey plan or long term target) the new guidance will put an increased emphasis on how trustees can set their statutory funding objective in line with their long term objective, be that self sufficiency, buy-out or some other aim.  

Status of code and sanctions for failure to comply - Although the DB funding code of practice is generally influential in scheme funding discussions, it does not have the same status as legislation and there is currently no direct penalty for failure to comply with it (or with any other Pensions Regulator code of practice). The DWP now plans to legislate “to require trustees and sponsoring employers to comply with some or all” of the new funding standards.  It will also amend primary legislation to enable the Pensions Regulator to take action (for example thorough sanctions or fines) in the event of non-compliance with the new DB funding code.  This is a potentially significant new departure in the regulation of scheme funding and it will be interesting to see how it develops in consultation.

Mandatory DB Chair and Chair’s statement - The green paper identified that DB schemes are not currently required by law to have a Chair of trustees (though in our experience most do). The DWP plans to legislate to require the board of trustees of DB schemes to appoint a Chair. The Chair must then report on key scheme funding decisions in a statement. The consultation on the revised DB funding code of practice will inform the content of this new Chair’s statement – it is expected to include a description of the strategic plan for reaching the statutory funding objective and describe the scheme’s long term financial destination.  The DB Chair’s statement will need to be submitted every three years together with the full scheme valuation (rather than annually, like the DC Chair’s statement), though the Pensions Regulator will have the power to request an “out of cycle” statement. As with the DC Chair’s statement, penalties will apply for non-compliance.

No change to valuation reporting timing - Triennial valuations must be submitted to the Pensions Regulator within 15 months of the valuation's effective date. The green paper sought views on whether a shorter valuation reporting cycle (such as 9 or twelve months) might be appropriate but the decision has been taken to retain the current 15 month deadline.

Cost and charges - Although costs and charges are not borne by members directly in a DB context, the DWP plans to work with the Pensions Regulator and others to consider what more could be done to promote greater transparency of costs and charges in DB schemes. 

Consolidation: bigger is better

Research by the Pensions Regulator suggests that small and medium sized schemes fail to meet its standards more frequently than larger schemes, and that trustee decision making in smaller schemes could often be improved. The government therefore wishes to offer the pensions industry “the opportunity to innovate” by creating a new style of DB consolidator vehicle, to enable DB schemes to be brought within larger bodies (other than via a traditional buy-out with an insurance company) and benefit from shared functions and improved governance.  It seems to be envisaging an arrangement whereby the scheme sponsor pays to pass its liabilities to its scheme on to a commercial body which has been set up expressly for that purpose.   If it comes to fruition, it seems this regime will be a “third way” sitting between employer and insurer backed schemes.

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

More to come on consolidators - There is minimal information in the white paper about the proposed new commercial consolidator regime and the DWP plans to consult in detail later this year. The consultation will address important issues such as whether commercial consolidators will be eligible for the PPF, the circumstances in which a surplus could be returned and the required standards of governance – the DWP will take its governance cue from the new DC master trust regime.  

Benefit simplification: no easy solutions

Possible improvements to regulated apportionment arrangements (RAAs) - An RAA is a statutory process that allows an employer which is likely to become insolvent in the next twelve months to separate from its DB pension scheme. The scheme then enters the PPF or a new successor scheme is created.  An RAA is an expensive and complex process and the idea of making changes to the requirements was discussed in the green paper.  The DWP says it will look at whether it is possible, without increasing risk to scheme members, to make improvements to the RAA process (though we get the impression that wholesale change to the RAA requirements is off the table).

GMPs - The DWP is currently considering what it describes as “some minor changes” to GMP conversion legislation “for the near future”.  It is also working with HMRC to investigate whether changes to tax legislation are needed to address potential annual and lifetime allowance implications of GMP conversion. The DWP reiterates the view that schemes must equalise benefits to take account of inequalities caused by GMPs and says it will consider its position in light of the forthcoming Lloyds Banking Group High Court case, due to be heard this summer.

No RPI/CPI override - Another topic discussed in the green paper, and very close to many employers’ hearts, is the possibility of a legislative override enabling schemes that have RPI hardwired in their rules as a measure of inflation to move instead to CPI.  According to the DWP’s calculations, allowing schemes to move to CPI could reduce schemes’ liabilities by as much as £90 billion. While it acknowledges that DB schemes are more expensive to maintain than was anticipated when they were set up, the government says it is ruling out such measures at present and will not “countenance a reduction in employer liabilities which might simply facilitate a transfer to shareholders of cash members are relying on to support them in retirement”.  The door, it seems, has been firmly shut on this option for the time being but the DWP says it will continue to monitor future developments in the use of inflation indices.

No employer debt changes - The government has no plans to change the current method for calculating employer debts (the buy-out basis). In addition, it says it considered carefully proposals to exclude orphan liabilities (scheme liabilities that are not attributable to a current employer) from the calculation of an employer debt but concluded that there is insufficient justification to warrant such a change.

British Steel Pension Scheme (BSPS)/bulk transfers without consent - The Work and Pensions Select Committee in its report on the BSPS recommended that the government brought forward proposals for a system of deemed consent which would enable the bulk transfer of DB benefits to an alternative scheme providing “unequivocally better” benefits than the PPF (to be used in future cases similar to British Steel).  The government, whilst acknowledging that there are lessons to be learned from the British Steel pensions restructuring, has decided that providing such a power is undesirable, largely because outcomes in any new scheme will depend on members’ personal circumstances.  The white paper also included a response to the May 2016 consultation on the BSPS, now a matter of largely historic interest only given the well publicised outcome.

Timing of any changes: the clock is ticking (slowly)

Many of the proposals in this white paper are not as thoroughly developed as those we have seen in previous pensions white papers – some have suggested that the white paper has a distinct greenish tinge. According to the DWP, the proposals will take “a number of years” to implement and will require a phased delivery approach.  During 2018 and 2019, the DWP and the Pensions Regulator will carry out a number of consultations.  Primary legislation will then be required for many of the changes and this is likely to be put before Parliament during the 2019/20 session, at the earliest. 

For more information, please contact your usual Eversheds Sutherland adviser or:

Sarah Swift
+44 20 7919 0848 

Anthea Whitton
+44 113 200 4663