DB Pensions Green Paper seeks to get the balance right

The Government has issued its eagerly awaited Green Paper, “Security and Sustainability in Defined Benefit Pension Schemes”. This follows informal consultation with stakeholders in 2016 as well as a report on DB regulation produced by the influential Work & Pensions Select Committee in December.

Background

A Green Paper is the traditional way in which Governments set out options for change. The new Green Paper is prompted in part by ongoing concerns from employers and trustees about affordability and scheme funding issues. However, it also seeks to respond to the risk of poor outcomes for DB scheme members, witnessed in high-profile pensions cases over the last year.

The Government does not accept that there is a crisis in DB pensions, nor that the overall regulatory regime is unsatisfactory. Nonetheless, there is a case for change in a number of areas. Whilst it suggests that some of the options set out in the Green Paper are not necessarily “viable or desirable”, it says it is keen to engage on a wide range of potential options for addressing existing concerns.

Areas for consideration

Funding and investment: The Government acknowledges that a one-size fits all approach to funding may not be the best use of the Pensions Regulator’s resources. It seeks to explore whether there is scope to encourage some schemes to make more optimal investment decisions, and mitigate barriers to the greater use of alternative asset classes.

Employer contributions and affordability: The Government is not persuaded that there is a general affordability issue for employers, but recognises that change may be needed to help some “stressed” schemes and employers. This could take the form of intensive Regulator support for challenged schemes and sponsors, and more use of existing flexibilities such as longer recovery plans.

The Green Paper also considers allowing schemes to move from RPI to other measures of inflation. More controversially, another option that remains on the table is allowing indexation to be suspended for underfunded schemes with stressed employers. The paper also considers making it easier to renegotiate pension benefits or transfer members to new schemes with lower benefits.

At the same time, the Government says there is evidence that many employers could afford to eliminate deficits more quickly than they are currently doing and seeks views on ways in which this might be encouraged.

Member protection: Overall funding and protection are “working broadly as intended” but there is a case for giving the Regulator proportionate additional scheme funding powers, as well as for imposing a formal duty on parties to co-operate and engage with the Regulator. The Government may also consider compulsory Regulator clearance of corporate activity in “very narrowly limited” circumstances and requiring consultation with trustees before dividends are paid when a scheme is severely underfunded.

Consolidation of schemes: The paper considers the pros and cons of different consolidation models and whether it should be voluntary or compulsory, although its clear preference is for the former. The considerations include increasing scope to reshape benefits to simplify administration and make consolidation easier. The Government does, though, state that it will not take forward any consolidation “superfund” through a government body.

Note that concerns about employer debts in non-associated multi-employer schemes are to be taken forward shortly, in a separate consultation.

Summary

The Green Paper is a thorough review of DB regulation, designed to help the Government strike the right balance between the interests of employers, trustees and members. It represents a good opportunity to participate in what is certain to be a lively, and important, debate. The consultation closes on 14 May.

The paper can be found here.