Phil Wadsworth, Chief Actuary, JLT Employee Benefits, said: “Greater protection for pension scheme members is to be applauded. However, strengthening powers for the Regulator will not prevent companies with large pension deficits from collapse. Rather, many well-run and well-funded schemes are being punished for the high profile failures of several large businesses. More rules and regulation means higher running costs for schemes, including some who can ill afford to pay.
“The Government has missed a precious opportunity to improve security and choice for members. Fundamentally, the white paper lacks innovation; we had hoped to see more ideas on how schemes are funded, with greater emphasis on cash flows rather than current gilt yields, as well as steps that make it easier for members to access the flexibilities introduced under Freedom and Choice. We are also disappointed that the Government did not take the decision to move the measure of inflation for pension increases from RPI to CPI, a move which would have improved the security of pensions for many and would have represented another key step towards simplification.
“It makes eminent sense to examine how to make Guaranteed Minimum Pension (GMP) conversion easier. Simplifying the historically complex benefit structures will significantly enhance members’ understanding of their defined benefit pensions as well as reduce the long-term running costs. Sponsors should be striving towards creating a simplified benefit structure and improving options for members around how they take their retirement income.”
Martin Hunter, Principal of Punter Southall Transaction Services, Xafinity Punter Southall comments: “While the proposals to introduce punitive fines and new criminal offences for reckless pensions behaviour will grab the headlines, the White Paper appears to maintain the DWP’s underlying view that there is no urgent need to overhaul the world of DB pensions.
“Any material changes will not happen quickly. Most of the changes will require new primary legislation, but the White Paper states that this is “unlikely to be before the 2019-20 parliamentary session at the earliest”, meaning it’s likely to be at least 2021 before any of these changes take effect. Further, there is a lot of detail still required on how most of the changes would be achieved.
“One notable exception to these slow timescales is on the introduction of punitive fines. The White Paper states that the DWP “will examine the feasibility of the penalty regime applying in respect of acts or omissions prior to enactment, in particular, after the date this document is published”. This could be a major cause of concern and potentially paralysis for employers of defined benefit pension schemes, given the lack of detail around the scenarios in which these punitive fines will be issued.
“In light of all the additional powers likely to be provided to the Pensions Regulator, it is essential that we have a Pensions Regulator that is commercial, objective and responsive to ensure that the new powers are used appropriately.
“There is also some confirmation that the DWP will not make some of the big changes which some in the pensions industry had been pushing for. The DWP will maintain the current 15 month timeframe for completing a valuation (despite some calls to reduce this to 12 months) and they have rejected calls to introduce a statutory override which would allow all schemes to move from RPI to CPI for increasing pensions. There will also be no major overhaul of the current funding regime, particularly resisting calls for there to be a maximum allowed length for deficit recovery plans.
“However, there is increased focus on the long term strategy for a pension scheme. This may cause concern for employers with mature, closed DB schemes, as there is a suggestion that it would not be appropriate for these employers to aim to run off their liabilities over the long term, rather than transferring them to an insurance company or other run-off consolidator.
“Despite the calls from Frank Field’s Work and Pensions Select Committee, there are also no plans to provide greater flexibility to rescue struggling pension schemes with distressed DB schemes, which will come as a disappointment to some employers and pension scheme members.”
Janet Brown, Partner at Sackers, commented: “Like the trailer of a Hollywood blockbuster, the paper trails key ideas under consideration and the phased approach to the various consultations it promises will follow with the necessary detail.
“The main message is that TPR is up front and centre in being given more powers to strengthen the existing pensions system for the first time since its creation in 2005.
“While a new Pensions Act is not foreseen until 2019/2020, the main proposals in the White Paper include some pretty meaty changes to TPR’s powers to get information, insist on interviews, and inspections and it will have the ability to issue civil fines. Alongside this is the political manifesto commitment of the Government to introduce criminal sanctions for those limited, serious cases where directors are said to have shown wilful or grossly reckless behaviour in relation to a DB scheme. Time will tell how easy “recklessness” will be to draft and implement.
“Despite all the rumours about fundamental changes to the system, the proposals map out, with a liberal use of the word “proportionate”, improvements to the current system including:
• Clarification to the DB Code of Practice on funding standards with a new revised Code to be consulted on later in 2018;
• A requirement (perhaps not a surprise) that DB Chairs follow their DC colleagues in needing to have a DB Chair’s statement which will be submitted to TPR with the triennial valuation;
• TPR is to focus its efforts on financially vulnerable schemes where there has been a hit on key metrics;
• RAAs will be extended and will have their own consultation;
• Consolidation of schemes will be enabled – the DWP states this consultation will materialise towards the end of 2018.
Brown continued: “While you might think there is something for everyone, those waiting for an RPI/CPI statutory override power will be disappointed, with the DWP not wishing to commit at this time to introducing that power. No change either to the current debt on the employer legislation nor the introduction of a shortened valuation cycle.
“Overall, whilst these changes represent the most significant overhaul since TPR came into being, the likely impact of the new powers will be highly dependent on the clarity with which they are drafted, TPR’s resources and its appetite to use them.
“The roll-out of the follow on consultation papers over the coming year will keep the industry busy, working out the detail of how these ideas will come to fruition.”
Protecting Defined Benefit Pension Schemes’.
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