Pensions: Snow With Easter Eggs

 

Snow White Easter Eggs

With perfect timing for the late spring snow, the government has released its long awaited Protecting Defined Benefit Pension Schemes white paper, leaving everyone a couple of weeks over Easter to digest the headline proposals.

 

Government Acts as Easter Bunny for the Pensions Regulator

Headline points from the government include plans to criminalise wilful pension scheme neglect. This would be backed up by strengthening the existing notifiable events framework, and voluntary clearance regime, so employers would be forced to have proper regard for pension considerations in corporate transactions. However, the government has stopped short of making clearance mandatory. Information gathering powers, currently available to the Pensions Regulator for automatic enrolment enforcement, are to be extended to its defined benefit role, including the powers to compel individuals to submit to interviews, civil sanctions - including both fixed and escalating fines - and dawn raid powers. Separately, the Department for Business Energy and Industrial Strategy’s consultation on improving corporate governance places greater emphasis on good outcomes for pension scheme members with businesses and directors who face insolvency risk.

 

Other Easter Eggs

There are many government proposals - the majority of which will be enacted in subsequent legislation - which include:

  • Setting clear funding standards - this will involve Trustees & sponsoring employers working to understand the long term scheme funding objective; especially in relation to schemes where cash flow management becomes an issue as part of wider risk management controls. Trustees will be glad to know the Pensions Regulator has been asked to provide a description of how Trustees and sponsoring employers should set their scheme-funding objective in the context of the long term objective.
  • There will also be a requirement for a Chairman’s statement - similar to that required in the defined contribution pension schemes. This is to drive improved accountability and demonstrate collaborative decision making between Trustees and sponsoring employer. Trustees will be required to inform the Pensions Regulator about their approach to management of risk in the scheme, including how the ongoing funding, and the scheme funding objective is set in line with the longer term funding objective. It is also likely the statement will need to be supported by written policies on key functions. Helpfully, and unlike in a defined contribution context, the statement only needs to be submitted tri-annually with the scheme’s valuation, and not annually.

 

And a New Bonnet for Easter

In a major change to policy, the DWP has announced it will consult on the new legislative framework and authorisation regime to enable the establishment of commercial consolidation vehicles for defined benefit schemes. It is likely this will be very similar to the master trust financing and authorisation regime currently proposed for defined contribution pension schemes. Under the proposed model, a private company could set up a new defined benefit pension scheme and take on the liabilities of an existing pension scheme in exchange for one off, or structured payments, from the previous sponsoring employer. The covenant for the new scheme will be provided by additional capital from external investors and the company would act as a sponsor with a new Board of Trustees responsible for scheme governance. The hope is these types of vehicles will reduce the inefficiency, particularly around administration. There are already question marks as to whether or not greater flexibility and structure might be needed, i.e. with the consolidators taking equity stakes or structured debt repayments from former employers.

 

The Easter Parade

A stroll through the other issues in the white paper:

  1. The British Steel pension scheme (prior to its separation from TATA Steel UK Limited) decision was reviewed and it was decided no further action was to be taken.
  2. The Regulated Apportionments Agreement, whereby an employer can negotiate with the Pension Protection Fund, allowing the business to continue in existence while leaving its defined benefit liabilities with the Pension Protection Fund (provided insolvency is all but inevitable within the next 12 months), is deemed too complicated, too slow and too expensive. A review will take place to try and make the process more user friendly, without increasing risk to scheme members.
  3. There are no plans to change the current rules regarding indexation of pensions. Many industry parties wanted an override to change the current link to increases in RPI to be changed to CPI. This will not happen.
  4. There will also be no changes to the multi-employer Section 75 regime.
  5. The DWP estimates, where final legislation is required, it is unlikely this will be delivered before the 2019/2020 Parliamentary session at the earliest. However, a number of consultations and reviews will be underway during the latter half of 2018.

Happy Easter to all our clients and colleagues.

 

The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.