Defined pension schemes: regulatory changes coming

Trustees of defined benefit pension schemes and company directors will need to get to grips with proposed changes to the regulatory framework – including potential punitive fines and new reporting requirements.
 
The proposed changes are set out in a white paper, Protecting Defined Benefit Pension Schemes, issued by the Department for Work & Pensions (DWP). The paper’s principal aim is to maintain confidence in defined benefit pensions by increasing the protection of members’ benefits.

Enhanced powers
The Pensions Regulator already has a range of anti-avoidance powers, but the DWP wants to strengthen these. It intends to give the Regulator powers to punish those who deliberately put their pension fund at risk by issuing punitive fines. It will also introduce a new criminal offence for company directors who put pension schemes at risk through wilful or grossly reckless behaviour, and build on the existing process to support the disqualification of directors. The DWP also wants to strengthen the Regulator’s information-gathering powers by, for example, giving it the power to compel any person to attend an interview.

The DWP plans to work with the Regulator to strengthen the existing notifiable events framework and the voluntary clearance regime. This will include clarifying the timing of the notifiable events framework so that the Regulator has earlier warning of transactions that could have a detrimental effect on a pension scheme and so increase the likelihood of a call being made on the Pension Protection Fund. The DWP will also ask the Regulator to review the current clearance guidance to make sure it is clear and captures all appropriate transactions.

Scheme funding
The DWP wants to strengthen the regulator’s ability to enforce defined benefit scheme funding standards through a revised Defined Benefit Funding Code. This will clarify how prudence is demonstrated when assessing scheme liabilities, and what factors are appropriate when considering recovery plans. It will also set a clear long-term funding objective, ensuring that a long-term view is considered when setting the statutory funding objective.

In addition, the DWP will require all defined benefit schemes to appoint a chair and for that chair to report to the Regulator in the form of Chair’s Statement, submitted with the triennial valuation. Trustee decision making and risk management will also be expected to follow a principles-based approach set out by the Regulator.

Consolidation
The paper also addresses consolidation, which already occurs in various forms in the pensions market. The DWP will consult on proposals for developing a legislative framework and authorisation regime within which new forms of commercial consolidation vehicles could operate.

Be prepared
Once these proposals are firmed up and ultimately introduced, it will be important for pension scheme trustees to understand the implications fully. Training on the revised Funding Code requirements and on effective and integrated risk management could be beneficial. Pension scheme trustees and chairs may also value some external reassurance that the new Chair’s Statement to the Regulator meets regulatory expectations.

If you’d like to discuss any of the changes proposed by the paper, please contact Eva Halelka or Lila Clarke on 0207 334 9191 or email using the links.

 

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