The Department for Work & Pensions (DWP) this week released a wide ranging green paper entitled “Security and Sustainability in Defined Benefit Pension Schemes” for formal consultation. Its release follows informal consultation with the pensions industry, a strongly worded Work and Pensions Committee Report and a spate of high profile pension cases involving failed or struggling employers, most notably Tata Steel and BHS, which have hit the headlines over recent months. Senior associate Suresh Bhatt explores the details.
Why is the Government looking at defined benefit (DB) schemes again now?
In addition to the much publicised cases mentioned above, the size of the DB sector means the Government cannot afford to take its eye off the ball. DB schemes continue to represent a significant proportion of the UK population’s retirement savings. According to Government figures, there are around 11 million current or future pensioner members in approximately 6,000 DB schemes which hold a combined total of £1.5 trillion in assets.
Many of these pension schemes have funding deficits, meaning that they do not have sufficient funds to pay all the benefits they have promised to all their members as those benefits fall due, over time. In fact over the period between December 2013 and January 2017 the gap between the value of these pension schemes’ assets and the value of the benefits they had promised to pay fluctuated significantly, between £28bn at its lowest to £459 billion at its highest. On the face of it, such figures could suggest that companies are struggling to contribute at a sufficiently high level and also that members are at risk of losing out on their promised benefits.
Other potential problems identified in the consultation include the cost to employers of running their DB schemes, particular the disproportionate costs for smaller schemes. Questions are also raised about whether the Pensions Regulator needs further powers to properly protect members.
The underlying narrative of the paper makes clear that the Government does not consider the DB pensions system to be in crisis. However, inviting industry comment, it suggests a more focused approach to address specific inadequacies, some of which have been highlighted by recent high profile cases.
What are the key areas covered by the consultation?
The paper covers 4 main topics. These are:
- Funding and investment;
- Employer contributions and affordability;
- Member protection; and
- Consolidation of pension schemes.
Within these topics, there are many options put forward for consideration (some of which have been trailed in the industry press). We have not listed them all, but some examples include:
- Allowing inflation proofing of pension benefits to be suspended in circumstances such as where the employer is struggling, and/or to use a different inflation index (for example, CPI instead of RPI) when increasing pensions or revaluing deferred benefits, regardless of the provisions of the scheme’s rules;
- Reducing the time to agree valuations from 15 months to 9 months;
- Facilitating the separation of schemes from employers which are in difficulty (subject to appropriate safeguards to ensure there are no moral hazard issues);
- Additional powers to give the Pensions Regulator the ability to levy significant fines where employer activity presents a threat to the pension scheme and appropriate mitigation has not been offered;
- Imposing limits on extending recovery plans for stronger employers; and
- Facilitating market innovation in the arena of pension scheme consolidation or establishing a “Superfund” administered by the PPF which compels smaller schemes to join to make significant savings in pension scheme running costs.
The paper puts forward a number of interesting and sometimes radical (in pensions terms) suggestions which need to be given careful consideration and it is hoped that the cut off date for responses of 14 May 2017 gives sufficient time to do so. In the meantime, to paraphrase the rather unlikely pairing of Horatio Nelson and Donald Trump, the Government expects that every pensions professional and DB scheme stakeholder will do his/her duty and respond to the consultation to make our DB pension system great again!
For further information, please contact:
Michael Collins, partner, Pensions
T: 0121 234 0236
Suresh Bhatt, senior associate, Pensions
T: 0161 836 7795