'Surprisingly tentative' proposals to stabilise defined benefit pension schemes published

Out-Law News | 21 Feb 2017 | 2:25 pm | 3 min. read

Plans published by the UK government to improve the "security and sustainability" of the country's £1.5 trillion defined benefit (DB) pension schemes are "surprisingly tentative", an expert has said.

Alastair Meeks of Pinsent Masons, the law firm behind Out-Law.com, said that the government "could have come to more definite conclusions considering that the travails of DB schemes have been well-flagged for over a decade". In particular, its proposals around allowing employers to change the measure of inflation used to uprate scheme benefits from the retail price index (RPI) to the consumer price index (CPI) should be strengthened, he said.

"Logically, if the government thinks that CPI is a better measure of inflation than RPI, it should have the courage of its convictions and enable employers to make this switch," he said.

The paper, on which the government is consulting until 14 May 2017, contains proposals on member protection, funding and investment, scheme affordability and consolidation. In particular, it looks at ways to strengthen the powers of the Pensions Regulator in a way which strikes the right balance between the interests of sponsoring employers, scheme members, the Pension Protection Fund (PPF) and the wider economy.

DB schemes, which include ‘final salary’ schemes, promise a set level of pension once an employee reaches retirement age, no matter what happens to the stock market or the value of the pension investment. The percentage of these schemes open to new members has fallen dramatically over the last 10 to 15 years, while increased life expectancy, changes to working patterns and the economy mean that those which remain are operating in a very different environment from the one that they were designed for.

Although there is no evidence of a "systemic" issue affecting DB schemes, recent high profile cases have raised concerns regarding the way in which these schemes are funded, according to the government. These cases include the high-profile collapse of retailer BHS at a point when its pension scheme was £571 million in deficit. The paper also follows a report into pension scheme funding by the House of Commons Work and Pensions Committee, which addressed many of the same issues.

The paper proposes the introduction of a statutory "over-ride", which could be used to allow "stressed" schemes to change the way in which they uprate member benefits from the retail price index (RPI) to the consumer price index (CPI) measure of inflation. This would mean that members would continue to be protected against inflation, albeit at a traditionally lower rate. The government has also asked whether schemes should even be permitted to suspend indexation where it is in the best interests of the scheme members to give the employer time to strengthen its financial position.

The government is also seeking views on whether to increase the Pensions Regulator's powers, in particular in relation to corporate transactions that could affect a company's ability to meet its pension promises. It does not, however, appear willing to introduce compulsory 'clearance' of corporate transactions, as this "has the potential to make turnarounds more difficult and lead to more businesses being placed into insolvency". The regulator could instead be given the power to levy "significant fines" against companies that do not take appropriate steps to mitigate the impact of corporate transactions on their pension schemes, according to the paper.

The paper also sets out potential options for consolidating schemes into 'superfunds', ranging from shared back office functions to full consolidation of assets and liabilities. Any consolidation should, however, be a voluntary initiative rather than run directly by the government, according to the paper.

"The government correctly recognises that the Pensions Regulator has adequate powers in the main, but inadequate resources," said pensions expert Alastair Meeks. "It ponders dealing with the latter by either increasing the levy or letting the regulator charge for some services, such as clearance. While the idea of the regulator charging for some services has some appeal as a funding mechanism, the Pensions Regulator would need to get used to being measured against service standards."

"The government is also attracted by the idea of consolidating DB pension schemes. It correctly sees the opportunity to improve governance and scheme returns. Unlike in the defined contribution (DC) pension scheme market, there are few providers yet offering this: one or two master trusts are starting to appear in this area and our own product, Hedgehog, allows pension schemes to group under a single trusteeship. Such vehicles look set to get a major impetus if the government goes down this route," he said.