Following on from last year's Green Paper ("Security and Sustainability in Defined Benefit Pension Schemes"), the Government has now published its White Paper entitled "Protecting Defined Benefit Pension Schemes" which sets out its proposals for the future of the UK's defined benefit (DB) pension system.

The White Paper recognises that the regulatory system does not need a radical redesign (a conclusion with which we agree) but it does seek to strengthen it in various ways. This was inevitable following high-profile cases where pensioners' interests were potentially at risk. As the White Paper acknowledges, however, most employers do try to do the right thing by their pension schemes. The aim of the Government's proposals is therefore to maintain confidence in the system by better protecting members' benefits and deterring that small number of employers who may be tempted to act in disregard of, or even recklessly in relation to, their DB pension scheme obligations.

So, what does the future hold for trustees and sponsoring employers of DB occupational pension schemes? In this article, we take a look at the Government's key proposals.

Key points

1. Much awaited White Paper

The Government published its White Paper: "Protecting Defined Benefit Pension Schemes" on 19th March 2018, following on from its 2017 Green Paper: "Security and Sustainability in Defined Benefit Pension Schemes".

2. DB regulatory system not broken

Whilst recognising that the existing UK regulatory system for DB pension schemes is "broadly working as intended", the Government intends to make a number of improvements to it in order to ensure confidence in the system is maintained.

3. Extended powers for the Pensions Regulator (TPR)

TPR is to be given more information-gathering powers to be backed up by additional powers to impose fines for non-compliance.

4. "Reckless" behaviour to be subject to criminal sanctions

There will be a new criminal offence for directors who demonstrate "wilful or grossly reckless behaviour" in relation to a company's DB scheme. TPR will also be given the power to impose punitive fines where companies or directors put DB schemes at risk.

5. Improved governance

DB schemes will be required to appoint a Chair of trustees and prepare a Chair's statement to be submitted to TPR with a scheme's triennial valuation.

6. Scheme funding

TPR's DB Funding Code is to be revised to clarify expectations around scheme funding.

7. Balance to be maintained

The White Paper accepts that most scheme sponsors are able and willing to meet their DB liabilities. It also acknowledges that there is a balance to be struck between protecting members' DB rights on the one hand and allowing companies to follow their legitimate business interests and grow their businesses on the other.

8. No legislation until 2019-2020 Parliamentary session

The Government is to consult with the pensions industry on a number of the White Paper proposals over the next year or so. Any new primary legislation that is required, though, is unlikely to be introduced until the 2019-2020 Parliamentary session at the earliest.

What's new?

Extension of TPR's powers

Much of the focus of the White Paper is on TPR. It is to be given additional information-gathering powers, including:

  • the power to compel someone to submit to an interview and explain any facts, events or circumstances that are relevant to TPR's investigations or to answer questions about information, records or documents held;
  • a power to impose fixed and escalating civil sanctions as an alternative to pursuing criminal sanctions for non-compliance with TPR requests for information without a reasonable excuse; and
  • a power to inspect records, documents and electronic devices of parties at premises for purposes relevant to TPR's functions.

In addition, TPR will have the power to impose punitive fines on companies and their directors who deliberately put their DB schemes at risk - the White Paper talks about causing "material detriment" which may compromise the scheme's funding position. This penalty regime could have retrospective effect to acts or omissions occurring after the publication of the White Paper (19 March 2018) but before the required legislation to implement this new regime is actually enacted (as happened with the original moral hazard powers).

The Government also intends to legislate to introduce a criminal offence in relation to company directors of "wilful or grossly reckless behaviour" in relation to a DB pension scheme. A consultation on this is to be carried out in the coming months.

There is also to be a review of the existing clearance framework and notifiable events framework to establish if these need to be strengthened. For example, consideration is being given to requiring sponsoring employers (or parent companies) to make a "statement of intent", in consultation with scheme trustees, prior to a "relevant business transaction" taking place (likely to be a sale or takeover of a sponsoring employer). It is envisaged that this statement would state that the company has appropriately considered the impact of the transaction on any affected DB pension schemes and would set out proposals to mitigate any detriment to the scheme.

Scheme funding

TPR's Code of Practice on Funding DB Benefits is to be revised, with more focus on:

  • how prudence is demonstrated when assessing scheme liabilities;
  • the appropriate factors when considering recovery plans; and
  • ensuring a long-term view is considered when setting the statutory funding objective.

TPR will consult on this. The aim is to "better balance employer commitments with risks to members and the PPF" and help trustees and employers to make better long term decisions for DB schemes.

Chair's statement

DB schemes will be required to appoint a Chair of trustees and to prepare a Chair's statement which must be submitted to TPR with the scheme's triennial valuation. This statement will require the Chair to report on (amongst other things) key scheme funding decisions and the trustee board's approach to risk management.

Scheme Consolidation

The Government is to consult this year on scheme consolidations and a framework for that and will also work with TPR to raise awareness of the benefits of consolidation.

In seeking to promote consolidation of defined benefit pension schemes, the Government recognises that smaller pension schemes struggle without the benefit of economies of scale, and find it more difficult to meet modern governance standards. The White Paper suggests, among other models, that in exchange for a one-off top-up to the funding of a pension scheme, an employer could be allowed to transfer it to a commercial consolidator vehicle, for less than the cost of buying it out with an insurance company. This will appeal in particular to employers with smaller pension schemes, but as the paper acknowledges, much work is still to be done if the barriers to consolidation (legislative and otherwise) are to be overcome.

What will stay the same?

Retail Prices Index (RPI)/Consumer Prices Index (CPI)

The White Paper rules out, for now at least, some ideas that were raised in last year's Green Paper. Employers may be disappointed that there is not going to be a statutory override to permit a change to CPI-based pension increases for pension schemes whose rules do not otherwise allow it (although the Government will continue to monitor developments in the use of inflation indices in the pensions sector and also more widely). Reasons cited for this include concerns that sponsors may use such a power to reduce their pension scheme liabilities at the expense of members even if they could meet their existing liabilities.

Valuation completion period

Also, the period for completing triennial actuarial valuations will remain at 15 months. The Green Paper considered shortening this to 12 months. However, the Government has decided to retain the 15 month completion period because that there are to be other changes to scheme funding requirements that trustees and employers will need to get to grips with and prepare for (see above).

What next?

TPR already has extensive powers, and whether it makes full or appropriate use of them is a controversial question. Whilst the new criminal sanctions and punitive fines will grab headlines, the Government's efforts to improve governance and to help employers and trustees make the right long-term funding decisions will be more relevant when it comes to delivering better outcomes for the average pension scheme member.

When it comes to what will change, much of the detail remains to be seen. Trustees may welcome clearer guidance in scheme funding negotiations, and the requirement to set a long-term funding objective although there will be concerns about how the Pensions Regulator balances greater clarity over concepts such as "prudence" without creating a mechanistic model when one size doesn't fit all. Measures such as a chairman's statement and promotion of higher governance standards are a continuation of existing regulatory trends, and few will disagree with the intentions behind all this. The priority now needs to be to ensure that whatever measures are implemented actually further these intentions and do not become a burdensome and costly box-ticking exercise for trustees and employers.

If directors are to be subject to a new offence of "wilful or grossly reckless behaviour" in relation to DB schemes and companies and their directors subject to punitive fines for putting DB schemes at risk, then pensions will receive more attention at board level on an ongoing basis and not just when corporate transactions are underway.

The Government now intends to consult with the pensions industry on many of these proposals over the coming year and into 2019. The White Paper talks about a "phased approach to delivery" for a "programme of work which will take a number of years to implement". To the extent that primary legislation is required to introduce these changes (and many of these changes would), this is unlikely to be before the 2019-20 parliamentary session.

So, a busy year ahead for the pensions industry as it starts to shape these proposals with the Department for Work and Pensions (DWP) and TPR - there is much to be done - but actual implementation of many of these proposals appears to be still some way off.