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Govt DB pension governance proposals need to get the balance right

22 March 2018

The government has published its highly anticipated Defined Benefit Pension Schemes paper, designed to strengthen and better protect DB pension schemes and explore options to improve confidence in the system. 

There are currently around 11 million people in DB schemes in the UK, with £1.5 trillion held under management. In Protecting Defined Benefit Pension Schemes, the Department for Work and Pensions set out its plan to protect scheme members.

Following the crisis that engulfed the BHS scheme last year, the proposals set forward hope to avoid similar situations in the future by handing The Pensions Regulator (TPR) additional powers. The government will give TPR the ability to impose significant fines, undertake enhanced information gathering exercises and introduce an increased oversight regime.

Kate Smith, head of pensions at Aegon described the paper as a “giant step in the right direction”, sending out a “loud and clear” message that reckless behaviour from employers which puts DB schemes at risk will no longer be tolerated.

She said: “It’s timely that the government is also looking to strengthen the Pension Regulator’s powers around corporate transactions which could negatively impact their DB Scheme.

“It’s also positive that the Pensions Regulator will be setting out a Code on clearer funding standards for ongoing schemes. Taken together these new powers will strengthen DB schemes and give greater protection to members’ pensions and in turn should reduce the numbers of DB schemes falling into the Pension Protection Fund. There’s more work to be done, but this is a giant step in the right direction.”

The Pensions and Lifetime Savings Association (PLSA) said it welcomed the white paper and shared the government’s view that “there is a need for a range of different measures to strengthen that framework and further improve benefit security.”

PLSA director of external affairs Graham Vidler, said: “A clear understanding of a scheme’s funding position is vital and we welcome the requirement for scheme funding objectives to include a clear view of long-term aims – be they to run-on with the employer, reaching self-sufficiency or buy-out.”

However, while Vidler said there is support for ensuring that TPR has the power to undertake its role, its members are keen that they are “proportional and practical.”

He added: “We also need to ensure that we guard against unintended consequences as we build a more sustainable system. Further consultation is needed to identify how these new powers can work with and complement TPR’s existing approach and its commitment to be “clearer, quicker and tougher”.

But while the paper sought to make recommendation to safeguard DB schemes, it stopped short of clamping down on companies.

Tom Selby, senior analyst at AJ Bell, said: “This is the greenest of green papers. The document is filled with suggestions of actions that could be taken to protect savers and prevent another BHS or Carillion-type disaster, but anyone hoping the Government would come down on firms like a tonne of bricks will likely be disappointed.

“There are reasons for the Government’s reticence in taking the hammer to firms sponsoring DB schemes. These companies are central to the UK economy, employing hundreds of thousands of people across all manner of sectors. Policymakers will therefore be keen to ensure any measures to protect pension scheme members do not disproportionately affect the ability of these businesses to spend and invest in the short-term – particularly with Brexit now just 12 months away.”

Selby said that while some may view the findings as a “damp squib”, the onus was on policymakers to get any reforms right.

“After all, it is not just the futures of 11 million DB members at stake here – millions more work for these companies and could, indirectly, be impacted by any measure which raises short-term costs for their employer,” he added.

 

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