More changes ahead for Occupational Pension Schemes

The Defined Benefit scheme landscape has undergone radical upsets and changes over the past year, and the changes seem set to continue for the foreseeable future.

The Defined Benefit scheme landscape has undergone radical upsets and changes over the past year, and the changes seem set to continue for the foreseeable future.

Defined Benefit (“DB”) schemes are often a problem for employers and a concern for regulators, employees and pensioners. For employers they are often viewed as an albatross round the neck of a business – an expensive and unaffordable relic of a bygone age, no longer fit-for-purpose in a radically altered economic and demographic world. Unsurprisingly, very few are still open to new members: most are currently in deficit.

For regulators, the concern is that a minority of employers and trustees are tempted to evade their obligations. If that happens, employees and pensioners are worse off, and regulators must to pick up the tab. The problems with the BHS and British Steel pension schemes highlight some of the issues that arise when a company runs into financial trouble.

In the light of that the Department for Work & Pensions (“DWP”) has been consulting on potential changes to provide DB scheme members with more protection. This article considers their recent White Paper, “Protecting Defined Benefit Pension Schemes”, which suggests possible changes.

The White Paper is of interest to a potentially wide field, which highlights just how crucial a role DB schemes play in the UK economy and as the provider of pension benefits to a substantial number of people. Those who may be paying close attention to the forthcoming changes include insurers who write or administer DB schemes, sponsoring employers, trustees of DB schemes, and even DB scheme members themselves. Those who currently run DB schemes will be interested to learn of the potential for more onerous duties in future, especially given the increasing powers which the Pensions Regulator will be able to wield.

So what does the paper propose? The White Paper considers three key areas of reform. These are set out below.

A stronger Pensions Regulator

The concern has been that the regulators lack the teeth to genuinely discourage rogue employers from wrongdoing. If adopted the proposals will:

  • Give the Pensions Regulator (“TPR”) powers to impose fines from those who put their pensions schemes at risk. The penalty regime will be proportionate and robust and aim to strengthen TPR’s existing anti-avoidance framework. This power will extend to company directors.
  • Introduce a criminal offence to punish wilful or grossly reckless behaviour on the part of company directors and any connected persons. This will include strengthening the existing process of company director disqualification.
  • Improve and strengthen the voluntary clearance and notifiable events framework, which should lead to employers having due regard to pension considerations when making decisions on corporate transactions.
  • Improve TPR’s information gathering powers, including requiring attendance at interviews, inspection powers and civil sanctions for non-compliance with section 72 Pensions Act 2004 notices (by which TPR can require the production of documents or information). 

Consolidation of pension schemes

An issue for smaller schemes is that running costs are proportionately higher, as they do not benefit from economies of scale. Consolidation is therefore to be encouraged as one way of making DB schemes more affordable. The proposals will:

  • See further consultations on a new legislative framework and authorisation regime under which new consolidation vehicles could work.
  • A consultation on an accreditation regime which will aim to increase confidence and encourage consolidation.

Modifications to Guaranteed Minimum Pension conversion legislation is also under consideration, with the aim of simplifying benefit provision. However, the outcome of a current High Court case involving Lloyds Banking Group pension trustees, is awaited before any further decisions are made in this area.

How and when will this change things?

The White Paper makes clear that the Government has a substantial amount of research and consultation to do before many of the proposed measures are introduced and formalised.

The changes, however, are all positive, and take on board feedback provided through the DWP’s earlier Green Paper (Security and Sustainability in Defined Benefit Pension Schemes, published in February 2017), and the context of the current pensions landscape. The focus on strengthening TPR’s powers in particular should bring a level of comfort to DB members and act as a deterrent to any employer who makes risky decisions involving their firm’s pension scheme.

The White Paper does highlight, though, the need to balance the protection of DB members with legitimate business decisions made by employers. This is not, perhaps, an easy balance to achieve and it remains to be seen how such a balance will be both achieved and maintained.

Looking into the future

The White Paper highlights the importance of DB pension schemes to the UK economy: with approximately £1.5 trillion in assets held within schemes, and with roughly 10.5 million members who will rely on defined benefit pensions to form their retirement income, their importance cannot be overlooked.

With a phased implementation, it may be some time before the full effect of the reforms are realised. The further consultations are scheduled to occur over the coming year, and further changes may be proposed. However, on the horizon looms Brexit. It is wholly unclear how this will alter the regulatory, political, economic and social landscapes. It is therefore possible that any changes introduced will need further reassessment. 

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Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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