The Pensions Management Institute's Lorraine Harper discusses the revised regime for scheme funding set out in the Department for Work and Pensions' white paper on defined benefit pension schemes, published earlier this year.
Action points
If trustees of a DB scheme have not formally appointed a chair they should do so now
Trustees should assess how liabilities are assessed and consider how the new regime might change this
Trustees of closed schemes should consider if they have a clearly defined long-term objective for their scheme
The overarching theme was the enhancement of the Pensions Regulator’s powers in order to provide greater safeguards for members’ accrued benefits.
Trustees may feel concerned that their scope for controlling funding has been reduced, but their ultimate responsibility for the consequences has not
It outlined its new expectations of employers, and controversially proposed a new criminal offence for anyone “found to have committed wilful or grossly reckless behaviour in relation to a pension scheme”.
Trustee boards will need to adapt
For trustees, the paper set out a revised regime for scheme funding. This has formed the basis of some debate.
Some argue that the new regime provides clearer guidance for trustees with regard to the regulator’s expectations, and that it formally identifies standards for trustees that might have reasonably been expected of them anyway.
Others have expressed concern at an approach condemned as overly prescriptive. Ultimately, however, it is fair to say trustee boards will be required to adapt in order to meet the new requirements of a clearer, quicker and tougher regulator.
One of the new requirements will be for trustees of DB schemes to appoint a chair. If such a requirement raises eyebrows, it will only be in the case of those who might have assumed that such a requirement existed already.
Having appointed a chair, DB trustees will be required to prepare a chair’s statement. The success of the chair’s statement in the context of defined contribution schemes has meant that such a development within the DB universe was all but inevitable. Again, such a change is unlikely to be seen as controversial or unreasonable.
However, the new code of practice will formally define how ‘prudence’ is to be demonstrated in the assessment of a scheme’s liabilities.
It is perhaps important to note that such a definition will be entirely arbitrary and will leave little scope for trustees and their advisers to allow for their own scheme’s specific circumstances. The new code will also give clear guidance on what is to be taken into account when formulating a recovery plan.
Demonstrate a long-term view
Trustees will also need to demonstrate that a long-term view has been adopted when deciding their statutory funding objective. It is likely this will prove rather less problematic. The regulator has in the past expressed concern that in the case of schemes closed to further accrual, trustee boards often appear to lack an ultimate path to run-off or buy-out.
Funding simply limps from one valuation to the next without ever appropriately identifying any clear commitment to wind-up. The new requirement will formally address this situation, and this can only best serve members’ interests.
However, concerns continue to be raised about a regulatory approach that introduces arbitrary and universal standards for a topic as complex as scheme funding.
The obvious concern is that the new regime will prove to be excessively prescriptive and will introduce an essentially inflexible approach. Trustees will no longer have as much scope for discretion when assessing factors affecting their own scheme but will instead have to conform to a universal model.
While this will lead to greater consistency in the approach to scheme funding, there will be those who are concerned at the adoption of a rigidly prescriptive approach to a topic as complex as funding. Many trustees may feel that effective control over scheme funding has in part been taken away from them.
Ultimately, trustees may feel concerned that their scope for controlling funding has been reduced, but their ultimate responsibility for the consequences has not.
Recent history demonstrates the potential dangers of an overly prescriptive regulatory culture. Many will remember the impact of the Pensions Act 1995 and the Minimum Funding Requirement. Such an approach proved too inflexible in the past, and it seems reasonable to raise similar concerns again.
We should perhaps remember the words of philosopher George Santayana: “Those who cannot remember the past are condemned to repeat it.”
Lorraine Harper is vice-president of the Pensions Management Institute
