DWP Consultation on the "Security and Sustainability in Defined Benefit Pension Schemes" February 2017

Posted by Rupert Graham-Evans on
The DWP has issued a key "green paper" for consultation in February 2017 called "Security and Sustainability in Defined Benefit Pension Schemes". This DWP "green paper" sets out evidence about the key challenges facing DB pension schemes and focuses on a number of options to improve confidence in the system – watch this space.

This "green paper" has three important themes in relation to DB pensions - those of "member protection", "sustainability" and "affordability". The DWP is seeking views from the pensions community to see how these three aims can be met in order to secure the retirement incomes of current and future pensioners.

The DWP findings maintain that £1.5 trillion of monies are held under management by DB schemes across the UK.  DB schemes help to fuel the UK economy through scheme investments and DB pensions provide a vital source of income for 11 million people nationally.

Since the financial crash of 2008 many DB schemes have struggled with funding due to low interest and gilt rates which have made scheme investments more challenging. The green paper explores concerns raised by many that there is a problem with scheme funding and the regulatory framework.

The DWP suggests that scheme deficits may shrink for the majority of schemes provided employer contributions are maintained at current levels. The evidence does not support the view that DB pensions are unaffordable and there is little evidence to suggest DB pensions are driving employers into insolvency.

The DWP is not of the view that funding DB pensions is generally unaffordable for employers. The DWP does recognise that for some employers the amount of deficit repair contributions to their DB schemes is not sustainable and that the biggest risk to members is the financial collapse of their employer.

Commentators have put forward options to assist employers including allowing businesses to more easily separate from their DB scheme, renegotiating benefits and to provide more assistance from the Pension Regulator.

The DWP is keen to receive feedback on these options for stressed employers, and member protection is at the heart of the policy.

The DWP is keen to hear from commentators with views on how to achieve member protection where there is corporate restructuring:-:

  • Should the Pensions Regulator be more pro-active to prevent corporate collapses like BHS?
  • Should there be a blanket requirement for employers to apply to the TPR for clearance against the use of TPR's "moral hazard" powers? The DWP believes this approach would be disproportionate;
  • Should TPR have wider information gathering powers which it could use to require trustees and employers to provide key information necessary to protect members.

The DWP also explores the option for smaller DB schemes to be merged into larger consolidation vehicles (which have been termed superfunds) These options include compulsory consolidation or voluntary consolidation.

The results of the consultation will be interesting. There appears to be a tension between the aims of protecting members' benefits and supporting employers with seemingly unsustainable DB costs.

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Rupert is a Legal Director in our Pensions team based in our Southampton office.

Rupert Graham-Evans
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