WPC recommends changes to governance, surplus rules

A report from the committee, published today, said the Pensions Regulator (TPR) had focused too much on protecting the Pension Protection Fund (PPF) and accrued benefits more generally.

This, the report said, had encouraged a “de-risking approach which has increased the cost of DB schemes for employers”.

Improved funding levels and the PPF’s significant reserves of approximately £12bn meant this low-risk objective was “no longer needed”, the committee said.

“Open and continuing schemes now need confidence that the additional flexibilities that have been promised will be reflected in the actual approach regulators take in future,” the committee said.

“To signal the change in approach needed for this, TPR’s objective to protect the PPF should be replaced with a new objective to protect future, as well as past, service benefits.”

Power to trustees

On governance, the Work and Pensions Committee called on the regulator to require all trustees to be accredited through a professional body and signed up to a trustee register.

For lay trustees, this meant more support was needed to give them the necessary time and resources to gain accreditation.

The committee also called for all professional trustees to require accreditation, and for the regulator to set a timeline for all schemes to have at least one accredited trustee.

The Association of Member Nominated Trustees (AMNT) participated in the enquiry and was positive about the committee’s report.

Janice Turner, co-chair of the AMNT, highlighted that the report reflected many of the associations concerns and priorities, primarily around strengthening the role of member-nominated trustees that otherwise risked being “sidelined”.

“The committee could not have been clearer in its support of member-nominated trustees and I thank them for taking on board our concerns,” she added. “Member protection is now firmly back at the heart of DB pension fund governance – where it must always be.”

Harus Rai, chair of the Association of Professional Pension Trustees (APPT), said: “The report is thoughtful on how DB governance can be enhanced and we are supportive of their recommendations that a date should be set to make accreditation mandatory for professional trustees and that plans should be set out on a timetable for every trustee board to have at least one accredited member.”

Surplus extraction

Pension scheme members who gave evidence to the committee flagged concerns that they would be overlooked in discussions about what to do with scheme surpluses.

This was particularly an issue for members with benefits accrued prior to 1997, as these are not automatically uprated with inflation.

The committee recommended that the Department for Work and Pensions and TPR “explore ways to ensure that scheme members’ reasonable expectations for benefit enhancement are met, particularly where there has been a history of discretionary increases”.

The BP Pensioner Group, which gave evidence to the enquiry, backed the committee’s findings in this area. Mike Slingsby, a spokesperson for the group, said the report had “reset the debate” about the DB system “by reminding employers and trustees that the interests of the pension scheme member remain paramount”.

BP’s scheme became a focal point of the enquiry earlier this year when Alistair Carmichael, MP for Orkney and Shetland, highlighted that many of the scheme’s members had been negatively affected by inflation as their benefits were not indexed, despite the scheme having a healthy surplus.

Steve Webb, partner at LCP and a former pensions minister, said the committee’s report was right to recommend updates to DB regulation to reflect fact that many schemes are now in surplus.

“The government needs to decide urgently how it can make sure member benefits are secure and at the same time help companies, members and the wider economy benefit from the assets of over £1trn which are still sitting in these schemes,” Webb said. “In our view the offer a full Pension Protection Fund underpin in exchange for payment of a new super-levy remains the best way to achieve this.”

A spokesperson for the Pensions Regulator said it would consider the report’s recommendations and respond “in due course”.

The spokesperson said: “It’s our job to make sure pension savers get their promised benefits, and although funding levels are at their best levels in recent memory with around 80% of pensions schemes fully funded, we are not complacent.

“Schemes can rapidly be affected by market conditions, corporate activity and insolvency events, which is why we make sure that effective long-term risk management is at the heart of our approach and the forthcoming DB Funding Code and Regulations.

“The code also allows for open schemes with a strong sponsoring employer to invest a significant portion of their portfolio in growth assets.”