22nd Mar 2018

A tougher regulator ahead

The Government has this week published their White Paper on DB funding with two main themes and goals. A tougher regulator and an environment to encourage consolidation and innovation.

It is clear the Government is not convinced that there are fundamental problems with the DB system but has clearly been concerned by various issues that have occurred, probably most likely around BHS and Carrillion.

Anyone hoping or expecting for less regulatory heavy space will be disappointed. The Regulator will be given more powers to investigate, intervene and fine those involved with pension schemes.

Some of this change will be some way away (2019 – 2020 for the bigger changes) but should come on to the radar of all DB schemes relatively quickly as consultation documents and future direction of travel becomes clearer.

Below is a summary of the main proposals:

Increased regulatory powers

  • The Regulator will be given powers to punish those who deliberately put their pension scheme at risk via punitive fines. This will require primary legislation. It should be noted that the Government will look for the penalty regime to apply from the date of this document.
  • It will be a criminal offence for sponsors to have acted in a reckless manner in relation to their pension scheme. This will build on the existing process where company directors are punished.
  • Exact punishment levels to be considered.
  • Strengthen the notifiable events framework and voluntary clearance (which remains voluntary) so pension obligations are properly considered during corporate activities
  • Greater data gathering powers akin to those in place around auto-enrolment. This will include the power to compel any person to submit to an interview with civil sanctions for non-compliance

Scheme funding

  • The Government will strengthen the Regulator’s ability to enforce DB scheme funding standards with a revised DB funding code. The key themes, which we expect to form part of the Integrated Risk Management framework, will be:
    • How prudence is demonstrated when assessing scheme liabilities;
    • What factors are appropriate when considering recovery plans; and
    • Ensuring a long-term view is considered when setting the Statutory Funding Objective (SFO).
  • There will also be a legal requirement to appoint a Chair and for a triennial Chair’s statement to be submitted to the Regulator with the valuation. This is not intended to be sent to members at the this stage.
  • The Pensions Regulator is to consult on “clarified funding standards through a revised Defined Benefit Funding Code of Practice, focusing on how “prudence and appropriateness can be defined to better balance employer commitments with risks to members and the PPF.

Scheme consolidation

  • The Government will consult on a legislative framework to allow for private-sector commercial DB scheme consolidators to be established. These would be vehicles for small DB schemes to transfer into for a one off fee from the employer. While the White Paper does go into quite some detail on this, this will require further consultation on (this list is not exhaustive):
    • Funding regime of these new schemes – likely to be lower than full buy out
    • The level of protection given by the PPF
    • Advice process for entering a scheme like this
    • Benefit harmonisation

Other changes for stressed schemes

  • There will be no statutory override on RPI (where it is hard-coded into the rules to allow CPI for indexation and revaluation. This looks like the last word on this.
  • A review of the Regulated Apportionment Arrangement to be improved.

Comment

Anyone watching recent headlines around the DB pensions space should not be surprised by much of what is included in the White Paper. The Government needs a strong and proactive Regulator and to achieve this objective have concluded that boosting their interventionist powers is the way forward. Over recent months we have seen a regulator more willing to engage with Trustees and their advisers and this is likely to continue in the knowledge that more powers are in the pipeline for them to scrutinise schemes and punish those that look to avoid their obligations to fund the scheme appropriately. It is notable that these powers could apply to any actions from the date of this White Paper. We are already in the new world order.

The new Code of Practice that we are expecting hints at a regime intent on highlighting the funding flexibilities which the Government worries are not being used enough. However, the discussions around setting of discount rates present in the Green Paper have disappeared to be replaced with an emphasis on good governance and clear accountable decision making. Although there is a suggestion that TPR will be asked to clearly define “prudence” and what is “reasonable” for recovery period. It is without doubt going to result in a doubling down on the Regulator’s current drive for schemes to actively discuss and document their processes around Integrated Risk Management, contingency planning and long-term strategy plans.

There will be a slew of consultative documents coming out during the remainder of 2018 which will need to be understood.