Aries Insight's Ian Neale gives us a primer on the defined benefit bill proposed by Frank Field MP, which promises to set a path for how the contentious issues will be tackled.
Key points
There are two proposed pensions bills:
One to deal with the liabilities faced by DB schemes
Another to prevent companies prioritising dividends over contributions
Striking a balance between meeting pension obligations and ensuring the viability of employers is fundamental
This followed his proposals, in the wake of the BHS scandal and the Tata Steel crisis, for two pensions bills: one to deal with the seemingly unsustainable liabilities faced by some DB schemes and the other aiming to prevent companies prioritising dividends over the contributions needed to keep their pension schemes afloat.
A potential vehicle to realise these objectives promptly arrived in the Queen’s Speech.
The government proposed a pensions bill that promised to tackle another bête noire of Field’s, namely mastertrusts and the limited protection for workers automatically enrolled.
The fundamental question is why, despite billions in deficit reduction contributions over the past decade, are DB schemes apparently no better off
We know the bill will also ‘liberate’ pension savers by removing barriers to flexible access, including capping early exit charges. Restructuring the delivery of public financial guidance is also planned. What we have so far is a mere sketch; interesting times lie ahead.
Common cause
Despite being a Labour MP, Field, in his powerful position, clearly has potential to make common cause with a government desperate to resolve the politically toxic problem of failing DB schemes. In August, his committee duly launched a wide-ranging inquiry into DB pensions regulation by the Pensions Regulator, including:
• the adequacy of regulatory powers and anti-avoidance provisions;
• the application of those powers, including in specific cases other than BHS;
• the level and prioritisation of resources;
• whether a greater emphasis on supervision and proactive regulation would be appropriate;
• whether specific additional measures for private companies or companies with complex and multi-national group structures are required;
• the pre-clearance system, including whether it is adequate for particular transactions including the disposal of companies with DB schemes;
• powers relating to scheme recovery plans; and
• the impact of the regulator's approach on commercial decision-making and the operation of employers.
All these issues might be covered in the bill. Additionally, the inquiry will examine the sustainability of the Pension Protection Fund, including the fairness of the PPF levy system and its impact on businesses and scheme members.
More widely, submissions are invited on the role and powers of trustees and relationships between them and sponsoring employers, the regulator and the PPF.
Balancing obligations
The really important issue is funding, however: the balance between meeting pension obligations and ensuring the ongoing viability of sponsoring employers.
One of the regulator’s statutory objectives is to “minimise any adverse impact on the sustainable growth of an employer”.
A crucial consideration is whether the current framework is generating intergenerationally fair outcomes, and if the current wider environment, including very low interest rates, warrants an exceptional approach.
Field is on record advocating legislation to permit reductions to benefits in order to save schemes that have no realistic prospect of meeting their liabilities.
Described bluntly in some quarters as ‘theft’, a proposal to take away accrued property rights is undoubtedly radical. The very mention of it in parliament might trigger more transfers out and thus further destabilise DB schemes.
Facing up to uncomfortable issues
Nevertheless, the committee inquiry and the promised pensions bill represent an opportunity to face up to uncomfortable issues.
The fundamental question is why, despite billions in deficit reduction contributions over the past decade, are DB schemes apparently no better off.
Is the basis for valuing liabilities fit for purpose? The regulator’s present idea of flexibility in future funding goes no further than extending recovery periods, which some might liken to kicking the can down the road.
Finally, discussion of DB deficits really should not exclude consideration of the £1.5tn for which the taxpayer is on the hook in respect of unfunded public sector DB scheme liabilities. Whether Field’s wishlist extends to tackling that particular elephant remains to be seen.
Ian Neale is director at intelligence provider Aries Insight
