DB white paper generates as many questions as answers

First there is the headline-grabbing new proposed power of criminal sanctions for wrongdoing by directors of sponsoring employers, penalising wilful or grossly reckless behaviour in relation to a defined benefit pension scheme.

Time will tell how easy “recklessness” will be to draft and implement against the minority of unscrupulous employers.

One person’s calculated risk to manage a company may be another’s unjustified and wanton indifference to the risk they are running and the impact on the DB scheme.

This white paper still begs the question: will the regulator have the right resource at the right time, to do the right thing?

With a burden of criminal proof, the regulator might struggle in using this power any more often than it has been able to use its moral hazard powers with the reasonableness test. It looks like political manifesto promises will make bad pensions law, providing only the illusion of safety.

Next on the list of reinforcements is the range of information-gathering powers, already in place for mastertrusts and auto-enrolment, including powers to require attendance at interviews with the regulator, civil sanctions and inspection powers.

These powers, readily in use by the regulator elsewhere, will help them. A review of notifiable events and voluntary clearance is promised, but little can be expected there.

Trustee powers still insufficient 

Sadly though, and notably lacking, there has been no thought given to granting trustees stronger powers to seek information from their sponsors. Beefing these up would help open up dialogue between trustees and employers earlier, rather than having to rely on the regulator stepping in after the event.

The main message from this white paper is that the regulator is being listened to on what tools it needs to strengthen the existing pensions system, for the first time since its creation in 2005.

But there’s silence on whether it will also be given sufficient resources to use these strengthened powers; the risk is in their application in practice.

Proportionate, proportionate, proportionate

Although the white paper talks tough, it is perhaps trying to manage expectations through its discussion of proportionate use of powers, potential actions, and the use of the new sanctions being proportionate with the breach.

While a new Pensions Act is not expected until 2019/2020, the white paper also maps out, with a liberal use of the word proportionate, several improvements to the DB system.

They include clarification to the DB code of practice on funding standards. It will be interesting to see how legally binding this is to become, as a code.

The requirement to have a DB chair’s statement that will be submitted to the regulator with the triennial valuation is also new, as is a statement on how the watchdog will focus its efforts on financially vulnerable schemes where there has been a hit on key metrics.

There will be some consideration of regulated apportionment arrangements to see if their application needs extending, and the Department for Work and Pensions states its consultation on consolidation will materialise towards the end of 2018.

Questions still need answering

While you might think there is something for everyone, those waiting for a statutory override power, allowing benefit indexation to move to the consumer price index, will be disappointed. No change either to the current legislation on debt on the employer, nor the introduction of a shortened valuation cycle.

There is a lot to take in, but a lot to hear more about in consultations as the year develops.

For all the sensible stuff in among the background noise of strengthened powers, this white paper still begs the question: will the regulator have the right resource at the right time, to do the right thing?

Janet Brown is a partner at pensions law firm Sackers