What impact will the DWP’s White Paper have on DB pension schemes?
At 76 pages, there is plenty in the Government’s White Paper Protecting Defined Benefit Pension Schemes. But what does this mean for sponsors and trustees of DB pension schemes and is the landscape really going to change? We outline below the key areas that have created the most talking points with clients and industry friends.
The Pensions Regulator gets tougher
The Pensions Regulator (TPR) has had a busy time of late – BHS, British Steel and Carillion spring to mind – and the regulator is likely have plenty to do also in the future. Following the release of the DB White Paper, and the subsequent Select Committee hearing in the aftermath of the collapse of Carillion, the clear direction of travel is that TPR will be encouraged to use its teeth. Furthermore, it is anticipated that TPR will be given increased powers to gather information. New notification and reporting requirements are also expected to be placed on trustees and employers.
We can now expect to see a more proactive TPR that engages with trustees and employers earlier than before. Lesley Titcomb, chief executive at TPR, said of the changes within her organisation:
“We are clearer about what we expect, quicker to intervene and tougher on those who do not act in the interest of members. We have reinforced our regulatory teams on the frontline and are embedding a new regulatory culture...”
Schemes that do not toe the line can expect to feel TPR’s bite. New legislation will be put in place so that TPR can levy punitive fines on those who put their pension scheme deliberately at risk. There is also the prospect of prison sentences being handed down for the most serious offences.
But whilst this remains the intended direction of travel, we do not expect to see wholesale changes immediately; indeed a lot of the changes may take years to come into force. When they do, the costs of running a pension scheme may well increase, as the schemes respond to increased reporting requirements.
As the punitive fines will start to increase the costs associated with poor conduct, the importance of good governance and risk management should climb up the agendas of both trustees and sponsors.
Scheme Funding: How can it be improved?
A new funding Code of Practice will shift the emphasis from making short-term decisions to making long-term plans. With pension schemes being long-term savings vehicles it is logical that the scheme funding regime should consider precisely that: the long term. A framework that takes this into account sounds sensible. All of this will need to be formalised by the trustees in a new Chair’s Statement.
So far so good. But there are questions though. Can TPR write down the new requirements in such a way that covers all scenarios? And if possible, can it avoid creating MFR Mark II?
Consolidation of schemes
The argument goes that consolidation of small schemes into Superfunds or master trusts means members and employers alike will benefit from improved governance, stronger investment performance and economies of scale; thus producing better outcomes.
It sounds like a Win / Win. But how would this look in practice?
There are other consolidation routes available now e.g. scheme mergers, common investment funds, shared service models, and industry wide schemes. Whilst master trusts have taken off in the world of DC following auto-enrolment, the same cannot be said of DB master trusts. They have so far failed to make significant inroads on the market to date and there is nothing in the White Paper to change the status quo.
Superfunds will require changes to the legislative framework, with stricter funding standards for consolidators than for standalone schemes. In addition, there may well be restrictions around their investment strategies and possibly capital requirements. Bodies would need to be set up to monitor consolidators – and these would need to be funded.
There will be sound reasons why many trustees and sponsors may want to join a consolidator, but advice from actuaries, covenant specialists and lawyers will be of crucial importance. With little precedence to draw upon, many will be venturing into unchartered waters.
Make no mistake, the sponsors of consolidators will be in it to make money too. This is quite reasonable, but a balance will need to be struck to make running a consolidator commercially worthwhile without permitting excessive profiteering at the expense of member outcomes.
And what will other Pension Protection Fund (PPF) levy payers make of the consolidators? If one fails, would other PPF levy payers be happy to support them?
Taken as a whole, the White Paper tips the scales in the direction of regulation, in spite of the further consultation on for-profit market alternatives. The proposals signal an increase in regulatory engagement, oversight and scrutiny of DB schemes.
The proposals presented in the White Paper are certainly not going to solve every problem. For example, the opportunity to reduce the cost (and potentially value) of members’ benefits with over-riding changes to RPI/CPI was not taken. This could be taken to suggest that the Government believes that the funding and protection regimes are broadly doing their job.
One thing is clear: the new requirements will be expected to drive up standards of governance and security for members and schemes will want to review current practices to ensure they are addressing this challenge. However, these changes are likely to come at a cost to schemes. Will it be worth it? Every trustee, sponsor and member will, no doubt, have a different take on the White Paper proposals. Understanding what the outcomes of the proposals are is the first step of successfully preparing for the future.
Are you interested to learn more about the implications of the White Paper for your pension scheme?
Join us at our event on 29 May 2018 to be held jointly with the law firm Pinsent Masons in London. A link to register is below: