The UK Government has issued its Green Paper on the future and sustainability of DB pensions, with consultation closing on 14 May 2017. Despite its 99 pages, the main conclusion is that the system isn’t broken:
“Whilst recognising that the system may not be operating optimally in all areas, our main conclusion is that there is not a significant structural problem with the regulatory and legislative framework.”
And, despite the starting point of the Work and Pensions Committee, it was refreshing to see the comment that:
“The overarching view of virtually all stakeholders is that the regulatory regime for DB pensions is satisfactory, and that the funding regime sets a fair balance between the interests of the members and those of the sponsoring employers (though it was recognised that many employers are paying more for their DB pensions than expected when the schemes started).”
Also noteworthy was the comment that the DWP considers that there is insufficient evidence to say that DB plans generally are unaffordable.
The DWP is at pains to highlight that the aim of the Green Paper is to inform a debate, rather than suggest that any particular options are viable or desirable. That said, the DWP does go on to offer views on the viability or desirability of various options put forward.
The paper focusses on the following four areas:
- Funding and investment,
- Employer contributions and affordability,
- Member protection,
- Consolidation of DB pension plans.
Much of the paper responds to the proposals made by the Work and Pensions Committee following its call for evidence in December 2016. It also contains a wealth of background information and, if you ever need any statistical analysis about pretty much anything to do with defined benefit pension provision, the Green Paper would be the place to start.
Proposals made by the Work and Pensions Committee, which the Government favours, include:
- Suspending indexation where the employer is stressed and the plan is underfunded: however this might involve a “moral hazard” risk where some employers see an opportunity to allow the funding level of their plan to deteriorate in the hope of reducing their liability to inflation-linked benefits,
- Granting greater investigative powers to the Pensions Regulator, such as the power to require parties responsible for pension plans to attend for interview,
- Giving the trustees powers to request information from the employer that is reasonably required for the operation of the plan,
- Small plan consolidation on a voluntary basis (but not through an arrangement run or financed by a government body, as suggested by the Work and Pensions Committee)
Proposals from the Work and Pensions Committee that found less favour in the Green Paper (but on which the Government seeks views) include:
- Shortening the valuation period to 9 months,
- The provision of a general statutory override to allow plans to switch from RPI to CPI,
- Increasing the Regulator’s power to wind up a plan,
- Making clearance compulsory in very limited circumstances – this has the potential to make turnarounds more difficult and UK business less competitive generally,
- The “nuclear deterrent” of punitive fines – any such proposal, if implemented, would need to be clearly defined and time limited.
As part of its discussion in relation to small plan consolidation, the DWP floats the idea of requiring all DB plans to produce a Chair’s statement similar to that produced by a DC plan, which reports on administration and investment costs but which also states whether or not the trustees have considered the possibility of consolidation. On the funding and investment side, the Government said that it would be interested to hear views on whether some employers and trustees were taking a cautious investment approach after careful reasoned decision making, or whether sub-optimal decisions were being taken as a result of existing legislation being too restrictive.
Whilst there has been some criticism that the Green Paper doesn’t go far enough (Steve Webb comments that “This must be one of the ‘greenest’ Green Papers in living memory”) we are pleased to see that the Government recognises that for the most part the legislation that is in place does strike the right balance between all stakeholders but that, as is always the case, there may be some room for further fine tuning.
We are responding to the consultation and if you would like us to include your views or would like any more information on how the proposals could affect your pension arrangements, please contact me or one of our other pension team members.
