DWP publishes Green Paper consultation on DB pension schemes

Following on from the Work and Pension Select Committee’s December 2016 report on defined benefit (DB) pension schemes, the Department for Work and Pensions (DWP) published its Green Paper consultation document entitled “Security and Sustainability in Defined Benefit Pension Schemes” on 20 February 2017.

The aim of Green Paper is to prompt an informed discussion from those involved in the operation of DB schemes – such as trustees, employers and other pension professionals.

The main conclusion in the Green Paper is that there is not a significant structural problem with the current regulatory and legislative DB framework. However, the DWP acknowledges that the system is not operating optimally in all areas, and so has drawn together in the Green Paper a number of suggestions from commentators on how the system could be changed to deliver better outcomes.

The Green Paper examines the possible changes suggested in the four broad areas below. The DWP has invited responses to six main questions across these four areas:

1.     Funding and Investment

Are the current valuation measures the right ones for the purposes for which they are used?

The DWP asks specifically whether the flexibilities in setting the Statutory Funding Objective discount rate are being used appropriately. However, it is not itself convinced that there is strong evidence for a systemic issue with a lack of flexibility in the setting of the discount rate.

Another area of discussion is the possibility of shorter periods to finalise valuations. The Work and Pensions Select Committee previously recommended a period of 9 months as an alternative to the 15 months that is currently allowed to finalise valuation arrangements.

Do members need to understand the funding position of their scheme, and if so what information would be helpful?

The DWP has considered what might be done by both Government and industry to help people better understand valuation and deficit data. However, it does accept the potential cost implications for smaller schemes and queries what practical use further information would actually be.

Is there any evidence to support the view that current investment choices may be sub-optimal? If yes, what are the main drivers of these behaviours and how could they be changed?

The DWP has drawn together views on whether investment strategies may be overly conservative, and whether trustees are choosing to take less risk than they reasonably could, given the strength of the sponsor covenant standing behind the scheme. The DWP would also like to explore whether there is scope to mitigate barriers to greater use of alternative asset classes. The DWP would like further information and insights on these issues before reaching a conclusion.

2.     Employer Contributions and Affordability

Is there a case for making special arrangements for schemes and sponsors in certain circumstances such as a different regime for employers who can afford to pay more, and/or new or enhanced flexibilities for stressed sponsors and schemes?

One of the suggestions that has caused controversy is the idea that ‘stressed’ schemes with weak employers may be permitted to either suspend indexation and/or revaluation for a period, or be allowed to move from RPI to a more modern form of index even if their scheme rules do not allow this. Whilst we can see the potential rationale for this, such as where the only alternative was employer insolvency and PPF compensation for members, it would need to be very tightly defined and carefully policed to prevent ‘moral hazard’ issues arising.

3.     Member Protection

Do members need further protection, and should this be delivered by a stronger and more proactive Regulator, and/or trustees with enhanced powers?

The DWP has outlined a number of potential new or enhanced powers for the Regulator. Amongst other things, this includes making clearance compulsory on certain corporate transactions and an overarching duty for parties to co-operate with the Regulator when it comes to information gathering.

The DWP acknowledges, however, that any new/enhanced powers in this area would need to be proportionate and workable, and not be detrimental to the effective functioning of the economy. The DWP also acknowledges that the Regulator has limited resources, and that giving it more powers would require additional resource if those powers are to be used effectively.

4.     Consolidation of Schemes

Should Government act to encourage, incentivise, or in some circumstances mandate the consolidation of smaller schemes into vehicles with greater scale and better governance in order to reduce the risk to members in future from the running down of closed, especially smaller, DB schemes?

Various stakeholders have suggested that some form of consolidation may help to make the delivery of DB pensions more efficient. Whilst the DWP acknowledges that consolidation may have its merits, it is careful to note that the scale of the challenges to successful consolidation should not be underestimated.

Next steps

The deadline for responding to the consultation is 14 May 2017. We await the results of the consultation with interest.