The Department for Work and Pensions will consider giving further “proactive” powers to the Pensions Regulator and examine the case for consolidation, in a long-awaited white paper on defined benefit to be published in the winter.
Plans for the document were announced on Thursday, and aim to restore consumer confidence in final salary schemes while driving increased efficiency in the sector.
Regulation of DB schemes has been in the spotlight since the emergence of several high-profile insolvencies in 2016, and has caused headaches for policymakers looking to protect the public without harming UK plc.
There’s a possibility that, by further clarifying specifically where the regulator should be, then that flexibility is removed
Simon Kew, Deloitte
The proposals will build upon the findings of the DWP’s February green paper and consultation.
Protecting consumers
In a statement, secretary of state for work and pensions David Gauke said: “The vast majority of defined benefit pension schemes are helping to provide a secure retirement for millions of people."
“However it is clear that experiences differ from scheme to scheme. With more than £1.5tn invested in them, people need to have confidence that they are resilient and robustly regulated.”
Gauke added that any reform would seek to support the sector. Pension Protection Fund analysis has shown that while DB promises are not systemically unaffordable, a sizeable tranche of schemes will end up in the lifeboat.
“We will ensure that the system continues to balance the needs of consumers, the schemes themselves and business for the future,” Gauke added.
The announcement confirms that, despite the turmoil and personnel change brought about by the June election, the policy process stemming from the green paper is continuing.
The mention of consolidation will also serve as a nod to the Financial Conduct Authority’s recent recommendation that the DWP should remove barriers to pooling and merging.
What will be in it?
Responses to the green paper may hold the clues to the white paper’s eventual content, said Wendy Hunter, head of the London pensions practice group at law firm Squire Patton Boggs.
“If we had a crystal ball then I think we should be expecting a number of the points suggested by the regulator to come through in the white paper,” she said.
A “comply or explain” regime, a strengthened winding-up power, and the power to set binding standards were all suggested in what, according to the regulator’s website, is its only public response to a government consultation.
The response made little mention of regulatory oversight on corporate transactions, which was a prominent feature of Theresa May’s Conservative manifesto and was deemed unrealistic by many industry figures.
“I don’t see how that could work, they just don’t have sufficient resources,” said Hunter.
Lesley Titcomb, chief executive of the regulator, announced in a blog that the watchdog would try to improve its oversight using data analysis, alongside a pledge to be more proactive in the use of its powers.
Flexibility should be a priority
For Simon Kew, assistant director of restructuring services at consultancy Deloitte, the key to any further powers would be giving the regulator flexibility, to drive improved standards across the industry while protecting those employers who are genuinely struggling.
"There’s a possibility that, by further clarifying specifically where the regulator should be, then that flexibility is removed to a certain degree,” he said.
Kew said the specificity of the legislation required to alter pension increase promises would diminish the flexibility currently enjoyed by the regulator, and that it was therefore unlikely that the white paper would put an end to the rules lottery.
'Greenest of green papers' explores DB sustainability options but lacks urgency
A wide-ranging government green paper explored a number of possible changes to improve the sustainability of defined benefit schemes, but although experts welcomed the variety of issues discussed, some noted a lack of urgency.
However, softening the rules around regulated apportionment arrangements by allowing the regulator and PPF to open talks earlier than 12 months from insolvency could prove useful, he added.
Is consolidation the answer?
The guiding principle of the paper should be not to overreact, according to Malcolm McLean, senior consultant at Barnett Waddingham.
“Most people are suggesting that there isn’t actually an affordability problem, but there are a lot of very small DB schemes, and it’s possible that they could benefit from consolidation,” he said.
The theory behind scheme consolidation is well documented, but a full merger into multi-employer schemes could prove technically difficult; even at the asset pooling level there are difficulties, said McLean.
“Trustees seem to have a pride in running their own scheme and don’t really relish the idea of joining with somebody else,” he said. “It would therefore have to be a nudge if you like, rather than anything else.”
