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Protecting Defined Benefit Pension Schemes - Gov.uk

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Protecting Defined Benefit Pension Schemes
Cm 9591

Protecting Defined Benefit Pension Schemes
Presented to Parliament by the Secretary of State for Work and Pensions by Command of Her Majesty March 2018 Cm 9591

© Crown copyright 2018 This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/opengovernment-licence/version/3 Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.
This publication is available at https://www.gov.uk/government/publications/protecting-definedbenefit-pension-schemes
Any enquiries regarding this publication should be sent to us at [email protected]

ISBN 978-1-5286-0250-1

CCS0318188160

03/18

Printed on paper containing 75% recycled fibre content minimum
Printed in the UK by the APS Group on behalf of the Controller of Her Majesty’s Stationery Office.

Protecting Defined Benefit Pension Schemes 1

Contents

Ministerial foreword

3

Executive summary

4

Introduction

4

The Defined Benefit system

4

Protecting the system and improving the way it works

5

Proposed changes

6

Next steps

8

The wider pensions context

9

Chapter one: protecting private pensions – a stronger Pensions Regulator 10

Chapter two: improving the way the system works – scheme funding

19

Chapter three: improving the way the system works – consolidation

29

Chapter four: British Steel Pension Scheme and other live areas

39

Chapter five: delivering the White Paper reforms

46

Annex A: background information and additional evidence

49

Annex B: glossary of terms

69

2 Protecting Defined Benefit Pension Schemes

Protecting Defined Benefit Pension Schemes 3
Ministerial foreword
People today are living longer and working more flexibly. Millions of people look forward to a more secure retirement because of their workplace pension as a result of diligent saving through their working lives.
We have already taken a number of important steps to strengthen the private pensions landscape: over nine million people are now automatically enrolled into an occupational pension scheme, we’ve given those aged over 55 greater choice in how to access their private pension pots and have taken forward a legislative framework for a new single financial guidance body, which will provide savers with more information and guidance on their retirement options.
And to achieve greater security, choice and dignity we have also introduced the new State Pension and we continue to provide benefits such as the Winter Fuel Payment.
Although most private sector Defined Benefit pension schemes are closed to new members and/or new accruals, the sector remains an integral part of the UK pensions system with around 10.5 million members relying on them. In addition, with roughly 14,000 employers currently supporting Defined Benefit pension schemes and around £1.5 trillion in assets held by these schemes, the Defined Benefit sector is of crucial importance to the UK economy. The Government is committed to ensuring that we do everything we can to protect pensions for those who have saved for their retirement, and to help employers to meet their promises to pension scheme members.
The UK already has a robust system in place to protect Defined Benefit pensions. We expect most people will get their pension paid in full. The Pensions Regulator offers support and guidance to trustees and can take action against employers who are not delivering on their legal obligations. In the event of an employer becoming insolvent, the Pension Protection Fund provides people with compensation so they do not see a substantial fall in their retirement income.
However, the pensions’ landscape is evolving, as Defined Benefit schemes continue to close and be replaced by other forms of provision. This alters the relationship between the sponsoring employer and the scheme, bringing new challenges for trustees and employers. We are managing this change so that the Defined Benefit system continues to work in the best interests of those involved – for members and pensioners, for today’s workforce and for employers.
This White Paper sets out our approach for the future of the Defined Benefit system, and supports the Regulator’s ambition to be clearer, quicker and tougher. For all schemes and businesses we are clarifying the rules and expectations, for example through a clearer, enforceable Defined Benefit Funding Code, but otherwise not making fundamental changes to the existing system. For the small number of employers evading their obligations, we will put in place tougher, more proactive powers so that the Pensions Regulator can intervene more effectively to protect individuals. Finally, we will be consulting over the coming months on a framework for consolidation, offering industry the opportunity to innovate but ensuring there are robust safeguards in place so members’ benefits are well protected.

4 Protecting Defined Benefit Pension Schemes
Executive summary
Introduction
The government believes the system is working well for the majority of Defined Benefit schemes, trustees and sponsoring employers but accepts that we need a tougher approach for those few whose irresponsible decisions impact on their pension scheme. The vast majority of UK employers run their business responsibly, displaying high standards in corporate governance and fulfilling their responsibilities to their employees and their pension funds. But the Government is determined to ensure we have a corporate governance framework that works for both employers and employees and wants to reduce further the risk of major company failures occurring through shortcomings of governance or stewardship.
The Defined Benefit system
A Defined Benefit pension is a promise made by the sponsoring employer to a scheme member that they will pay a predetermined level of pension, regardless of socio-economic factors. There have been significant changes in the structure of the overall pension landscape recently, with the introduction of automatic enrolment and the growth of Defined Contribution schemes. This has meant that the Defined Benefit pension sector has changed over recent years. The majority of Defined Benefit schemes are now closed to new members;1 however, with around £1.5 trillion assets held under management by Defined Benefit schemes and around 10.5 million scheme members2 relying on Defined Benefit pensions for a substantial portion of their expected retirement income, they remain of critical importance. Furthermore, Defined Benefit pension schemes are also an important part of the UK economy as they can provide the investment needed to fund new businesses and finance public debt.
Despite a few recent high-profile cases, our findings, and most consultation responses,3 suggest that there is no systemic problem in the regulatory and legislative framework that governs them. This framework is designed to respond flexibly to ever-changing conditions, and to provide employers and trustees with a wide range of options in how they manage their pension liability. However, there are examples of sponsoring employers misusing this flexibility and sometimes benefitting at the expense of
1 According to the Pension Protection Fund’s Purple Book 2017, only 12% of private sector Defined Benefit schemes were still open to new members.
2 The number of memberships does not represent a precise number of people. In some cases, one person may be a member of two (or more) pension schemes.
3 In February 2017, we published a consultation: Security and Sustainability in Defined Benefit Pension Schemes. Our summary of responses has been published separately to this White Paper.

Protecting Defined Benefit Pension Schemes 5
pension scheme members. When wrongdoing against the pension scheme takes place, the impact on individual members can be significant.
The system is designed to withstand the various economic and social events that may play out over the typical 80 year life of the average pension scheme. Some of these factors, including increasing longevity, a prolonged period of low interest rates, and expected low future investment returns mean that currently schemes are more expensive to maintain than was anticipated when they were set up. Defined Benefit schemes are now maturing, with pension payment obligations increasing and predicted to peak around 2020–2030.4 It is important that we continue to improve and safeguard the system to ensure it is fit for the future for members, sponsoring employers and schemes.
Protecting the system and improving the way it works
Regulating the Defined Benefit sector is a challenging job but the Pensions Regulator works with companies and trustees to get the right balance of interests as set out in the Pensions Act 2004. The Pensions Regulator is independent from government. Its role is to regulate the legislative framework which requires all Defined Benefit schemes to provide a valuation of their funding position at least every three years and, if a scheme is underfunded, to put in place an appropriate plan to rectify the deficit over an agreed length of time. In most cases, this flexibility within the framework works well to balance the needs of sponsoring employers with essential protections for members. Where abuse of the pension scheme has taken place, the Regulator can use its current powers to help protect members’ benefits.5 But we want to go further and ensure that, where necessary, the Regulator has the ability to get tougher.
In the natural course of business some employers will become insolvent. While we are putting in place measures to increase the protection of members’ benefits, the proposals in this White Paper cannot prevent insolvency. Nor is it always in the interest of members of a pension scheme for the Regulator to force a company which is already struggling, to pay substantial pension contributions that risk worsening the situation. In the long-term, the best protection for a Defined Benefit pension scheme is a strong and solvent employer which works with trustees to put the needs of the pension scheme on an equal footing to other business considerations.
In the event of employer insolvency, there is a proven system in place to reduce potential losses to members. The Pension Protection Fund was established in 2005 to pay compensation to members of eligible Defined Benefit pension schemes where the sponsoring employer becomes insolvent. In such circumstances, when schemes do not have sufficient assets to secure pension benefits at the compensation level or above, the Pension Protection Fund, which is funded by a levy on all Defined Benefit pension schemes, steps in.
The level of protection afforded to members is high, regardless of the level of underfunding in the scheme. Compensation is broadly paid at 100% of accrued benefits to those over the scheme’s normal pension age and 90%, subject to a cap, to everyone else. As at March 2017, around 130,000 members were in receipt of compensation. Another 110,000 deferred members6 were in the Pension Protection Fund but with compensation not yet in payment. This is equivalent to only just over 2% of all Defined Benefit scheme members. The Government notes with concern that even those attempting to highlight the impact of business failure on pension scheme members do not always recognise the high level of protection the Pension Protection Fund provides.
4 The Pensions Regulator (TPR), ‘Corporate Plan 2014-2017’ 2014: page 19, figure 2. Available at: http://webarchive.nationalarchives.gov.uk/20160105125821/http:/www.thepensionsregulator.gov.uk/docs/corporateplan-2014-2017.pdf
5 TPR, ‘Regulatory Intervention Reports’. Available at: http://www.thepensionsregulator.gov.uk/doc-library/regulatory-intervention-reports.aspx 6 The Pension Protection Fund (PPF), ‘The Purple Book’, 2017.

6 Pr ot e cti n g D efi n e d B e n efit P e n si o n S c h e m e s
W hil st t h e s af et y n et pr o vi d e d b y t h e Pe n si o n P r ot e cti o n F u n d i s a k e y f e at ur e of t h e s y st e m, t hi s G o v er n m e nt will n ot st a n d f or e m pl o y er s e v a di n g t h eir r e s p o n si biliti e s a n d r el yi n g o n t h i s pr ot e cti o n, w hi c h c o ul d l e a d t o ot h er s p o n s ori n g e m pl o y er s , pl a yi n g b y t h e r ul e s, t o f o ot t h e bill.
Pr o p o s e d c h a n g e s
O ur a m biti o n i s t o m ai nt ai n c o nfi d e n c e i n D efi n e d B e n efit p e n si o n s b y i n cr e a si n g t h e pr ot e cti o n of m e m b er s’ b e n efit s. W e k n o w t h at t h e m aj orit y of s c h e m e s ar e m a n a g e d w ell a n d will b e a bl e t o m e et t h eir p e n si o n s c h e m e li a biliti e s. T h e G o v er n m e nt’ s p o siti o n o n t hi s i s cl e ar. Wh er e e m pl o y er s c a n aff or d t o p a y , t h e y s h o ul d m e et t h eir li a biliti e s wit h o ut u n d u e d el a y or e v a si o n a n d p ut s af e g u ar d s i n pl a c e t o pr ot e ct m e m b er s’ b e n efit s wit h o ut r el yi n g o n t h e P e n si o n Pr ot e cti o n Fu n d . F or a n e m pl o y er w h o s e b e h a vi o ur p ut s t h eir p e n si o n s c h e m e at ri s k a n d t hr e at e n s t h e li k eli h o o d of m e m b er s r e c ei vi n g t h eir p e n si o n b e n efit s i n f ull, w e ar e i m pr o vi n g e xi sti n g p o w er s a s w ell a s i ntr o d u ci n g n e w p o w er s f or t h e R e g ul at or t o g et t o u g h er. B e y o n d t hi s s m all gr o u p , w e ar e i m pr o vi n g t h e s y st e m f or all e m pl o y er s a n d s c h e m e s b y cl arif yi n g s c h e m e f u n di n g pri n ci pl e s s o tr u st e e s c a n m a k e m or e i nf or m e d d e ci si o n s, m a ki n g it e a si er f or t h e R e g ul at or t o i nt er v e n e e arli er, a n d cr e ati n g t h e ri g ht c o n diti o n s f or s c h e m e s t o c o n s oli d at e s o b e n efit s of s c al e c a n b e r e ali s e d s e c ur el y. W e r e c o g ni s e t h at D efi n e d B e n efit li a biliti e s c a n b e e x p e n si v e f or s o m e e m pl o y e r s – our pr o p o s al s b al a n c e t h e pr ot e cti o n of m e m b er s’ b e n efit s wit h t h e s u st ai n a bilit y of t h e s p o n s ori n g e m pl o y er’ s b u si n e s s .
Pr ot e cti n g pri v at e p e n si o n s – a str o n g er P e n si o n s R e g ul at or
Alt h o u g h m o st e m pl o y er s w a nt t o d o t h e ri g ht t hi n g b y t h eir p e n si o n s c h e m e , we n e e d t o g u ar d a g ai n st t h e s m all mi n orit y of e m pl o y er s w h o m a y b e c o nt e nt t o p ut it at ri s k. R e c kl e s s b e h a vi o ur c a n n ot o nl y aff e c t t h e v al u e of m e m b er s’ b e n efit s b ut a s t h e P e n si o n Pr ot e cti o n F u n d i s f u n d e d b y a l e v y, t h o s e b u si n e s s e s w hi c h a bi d e b y t h e r ul e s b e ar t h e c o st of t h o s e w hi c h a v oi d t h eir p e n si o n li a biliti e s. T o pr e v e nt e m pl o y er s s e e ki n g t o a v oi d, r e d u c e or li mit t h eir p e n si o n s li a biliti e s, t h e R e g ul at or w a s gi v e n a r a n g e of ‘ a nti -a v oi d a n c e p o w er s’ w h e n t h e fr a m e w or k w a s s et u p. I n g e n er al, t h e s e w or k w ell. H o w e v er, t h er e h a v e b e e n r e c e nt c all s f or G o v er n m e nt t o str e n gt h e n t h e s e p o w er s s o t h e y c a n pr o a cti v e l y pr e v e nt h ar m t o p e n si o n s c h e m e s a n d p u ni s h r e c kl e s s b e h a v io ur . T h e G o v er n m e nt’ s m a nif e st o m a d e a c o m mit m e nt t o t a k e a cti o n t o pr e v e nt a n d p u ni s h t h o s e w h o s e d eli b er at e a cti o n s p ut p e n si o n s c h e m e s at ri s k . We will: (i) Str e n gt h e n t h e r e g ul at or y fr a m e w or k a n d t h e R e g ul at or’ s p o w er s, a s s et o ut i n t h e G o v er n m e nt’ s
2 0 1 7 m a nif e st o, t o: • gi v e t h e R e g ul at or p o w er s t o p u ni s h t h o s e w h o d eli b er at el y p ut t h eir p e n si o n s c h e m e at ri s k b y
i ntr o d u ci n g p u niti v e fi n e s; • le gi sl at e t o i ntr o d u c e a cri mi n al off e n c e t o p u ni s h t h o s e f o u n d t o h a v e c o m mitt e d wilf ul or
gr o s sl y r e c kl e s s b e h a vi o ur i n r el ati o n t o a p e n si o n s c h e m e a n d buil d o n t h e e xi sti n g pr o c e s s t o s u p p ort t h e di s q u alifi c ati o n of c o m p a n y dir e ct or s ; a n d • wor k wit h t h e R e g ul at or t o s tr e n gt h e n t h e e xi sti n g n otifi a bl e e v e nt s fr a m e w or k a n d v ol u nt ar y cl e ar a n c e r e gi m e s o t h at e m pl o y er s h a v e a p pr o pri at e r e g ar d t o p e n si o n c o n si d er ati o n s i n a n y r el e v a nt c or p or at e tr a n s a c ti o n s. T hi s i n cl u d e s i m pr o vi n g t h e eff e cti v e n e s s a n d effi ci e n c y of t h e R e g ul at or’ s e xi sti n g a nti -a v oi d a n c e p o w er s. W e will w or k wit h t h e r el e v a nt p arti e s t o e n s ur e t h at th e s e m e a s ur e s d o n ot h a v e a n a d v er s e eff e ct o n l e giti m at e b u si n e s s a cti vit y a n d t h e wi d er e c o n o m y.

Pr ot e cti n g D efi n e d B e n efit P e n si o n S c h e m e s 7
(ii) Pr o vi d e t h e R e g ul at or wit h t h e ri g ht t o ol s t o d o t h eir j o b, b y : • en s ur i n g t h at t h e y r e c ei v e t h e i nf or m ati o n r e q uir e d t o c o n d u ct i n v e sti g ati o n s eff e cti v el y a n d effi ci e ntl y. T h e s e p o w er s will b e s u p p ort e d b y p e n alti e s t o dri v e c o -o p er ati o n .
T a k e n t o g et h er, t h e s e n e w p o w er s will str e n gt h e n t h e d et err e nt a g ai n st a n d p u ni s h m e nt f or r e c kl e s s b e h a vi o ur a n d gi v e t h e Re g ul at or t h e a bilit y t o r e s p o n d m or e q ui c kl y a n d d e ci si v el y w h er e t h e y b el i e v e wr o n g d oi n g h a s t a k e n pl a c e . Gi v e n t h e c o m pl e xit y of s o m e of t h e s e m e a s ur e s, w e will u n d ert a k e f urt h er w or k wit h t h e R e g ul at or a n d k e y p arti e s a n d c o n d u ct f urt h er c o n s ult ati o n w h er e n e c e s s ar y t o e n s ur e t h at t h e s e m e as ur e s ar e eff e cti v e, w or k a bl e a n d pr o p orti o n at e a n d t h at a n y ri s k s of u ni nt e n d e d c o n s e q u e n c e s ar e a p pr o pri at el y miti g at e d.
I m pr o vi n g t h e w a y t h e s y st e m w or k s – s c h e m e f u n di n g
O ur Gr e e n P a p er c o n cl u d e d t h at m o st m e m b er s ar e li k el y t o g et t h eir p e n si o n b e n efit s p ai d i n f ull, a n d t h at, d e s pit e m a n y s c h e m e s h a vi n g f u n di n g d efi cit s t h e y ar e br o a dl y aff or d a bl e f or s p o n s ori n g e m pl o y er s. W e t hi n k t h e fl e xi bl e n at ur e of t h e c urr e nt s t at ut or y fu n di n g o bj e cti v e w or k s w ell t o b al a n c e t h e s e c urit y of m e m b er s’ b e n efit s a n d t h e n e e d s of t h e s p o n s ori n g e m pl o y er, t a ki n g i n di vi d u al s c h e m e cir c u m st a n c e s i nt o a c c o u nt. T hi s w or k s b e st w h e n tr u st e e s a n d t h eir s p o n s ori n g e m pl o y er s c oll a b or at e t o f oll o w t h e pri n ci pl e s s et o ut b y th e R e g ul at or i n it s F u n di n g C o d e of Pr a cti c e, b ut n ot all d o s o . To g et h er wit h a n u m b er of ot h er f a ct or s, t hi s c a n l e a d t o i n cr e a s e d ri s k t o m e m b er s’ b e n efit s w h er e t h er e ar e i n s uffi ci e nt c o ntri b uti o n s fr o m s p o n s ori n g e m pl o y er s or ri s k t o e m pl o y er s’ su st ai n a bilit y w h er e c o ntri b uti o n s ar e hi g h er t h a n n e c e s s ar y . S o m e s c h e m e s ar e alr e a d y e x e m pl ar s i n m a n a gi n g t h eir f u n di n g p o siti o n . For m o st s c h e m e s t h e pr o p o s al s b el o w will ali g n t o e xi sti n g pr a cti c e s. B ut, t o i m pr o v e d e ci si o n -m a ki n g a n d g o v er n a n c e a cr o s s t h e s e ct or, w e will i m pl e m e nt a n e w p a c k a g e of m e a s ur e s t o o pti mi s e s c h e m e f u n di n g. A s p art of t h at, w e will e n s ur e t h at tr u st e e s a n d e m pl o y er s h a v e t h e ri g ht s u p p ort a v ail a bl e t o t h e m, i n or d er t o d eli v er b ett er o ut c o m e s f or s c h e m e m e m b er s. O ur m e a s ur e s will al s o e n s ur e t h e R e g ul at or h a s t h e ri g ht t o ol s t o r e s p o n d t o p o or d e ci si o n s a n d e n h a n c e p u bli c c o nfi d e n c e i n t h e p e n si o n s s y st e m. W e will: (i) Str e n gt h e n t h e R e g ul at or’ s a bilit y t o e nf or c e D efi n e d B e n efit s c h e m e f u n di n g st a n d ar d s, t hr o u g h a
r e vi s e d C o d e, f o c u s si n g o n: • h o w p r u d e n c e i s d e m o n str at e d w h e n a s s e s si n g s c h e m e li a biliti e s; • w h at f a ct or s ar e a p pr o pri at e w h e n c o n si d eri n g r e c o v er y pl a ns ; a n d • e n s uri n g a l o n g-t er m vi e w i s c o n si d er e d w h e n s etti n g t h e st at ut or y f u n di n g o bj e cti v e . (ii) R e q uir e t h e tr u st e e s of Defi n e d B e n efit p e n si o n s c h e m e s t o a p p oi nt a C h air a n d f or t h at C h air t o r e p ort t o t h e R e g ul at or i n t h e f or m of a C h air’ s St at e m e nt, s u b mitt e d wit h t h e s c h e m e’ s tri e n ni al v al u ati o n. T h e s e m e a s ur e s will s u p p ort tr u st e e s a n d t h eir s p o n s ori n g e m p l o y ers t o m a k e t h e b e st p o s si bl e l o n g-t er m d e ci si o n s f or s c h e m e s, b y pr o vi di n g gr e at er cl arit y o n w h at c o n stit ut e s g o o d pr a cti c e a n d e n c o u r a gi n g gr e at er a c c o u nt a bilit y. T h e pr o p o s al s will al s o e n s ur e t h e R e g ul at or c a n t a k e eff e cti v e a n d m or e effi ci e nt a cti o n w h er e tr u st e e or e m pl o y er d e ci si o n s d o n ot l e a d t o a p pr o pri at e s c h e m e f u n di n g o ut c o m e s .
I m pr o vi n g t h e w a y t h e s y st e m w or k s – c o n s oli d ati o n
C o n s oli d ati o n alr e a d y t a k e s pl a c e i n v ari o u s f or m s a cr o s s t h e p e n si o n s m ar k et. I n t h e D efi n e d B e n efit s e ct or, c o n s oli d ati o n c a n h el p s c h e m e s b e n efit fr o m r e d u c e d s c h e m e r u n ni n g c o st s p er m e m b er, m or e eff e cti v e a n d effi ci e nt i n v e st m e nt str at e gi e s a n d i m pr o v e d g o v er n a n c e. E vi d e n c e s u g g e st s t h at, o n a v er a g e, s m all a n d m e di u m -si z e d s c h e m e s ar e m or e li k el y t o f ail t o m e et t h e g o v er n a n c e st a n d ar d s e x p e ct e d b y t h e P e n si o n s R e g ul at or a n d h a v e hi g h er a d mi ni str ati v e c o st s t h a n
EmployersBenefit Pension SchemesBenefit SchemesPension SchemeAti