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BRIEFING PAPER
Number CBP-8219, 6 July 2018
Defined Benefit Pension Schemes – 2018 White Paper
By Djuna Thurley; Federico Mor
Contents: 1. Background 2. Consultation 3. What should change?
2 Defined Benefit Pension Schemes
Contents Summary 3
1. Background 4 1.1 What is the private sector DB landscape? 4 1.2 DB scheme membership 6 1.3 Funding status 8 1.4 What is driving deficits? 11 1.5 Are DB schemes affordable? 14
2. Consultation 17 2.1 The Green Paper 17 2.2 The White Paper 18
3. What should change? 22 3.1 Should it be easier for employers to separate themselves from schemes? 22 3.2 Should the scheme funding regime change? 25 3.3 Allow changes to indexation? 30 3.4 Can more scheme consolidation be encouraged? 34 3.5 Should clearance be mandatory? 41 3.6 Does TPR need stronger powers? 44 3.7 What claims should the scheme have in insolvency? 50
Contributing Authors: Djuna Thurley and Federico MorMor
Cover page image copyright: Working women technology. Licensed under CC0 Licence – no copyright required. Image cropped.
3 Commons Library Briefing, 6 July 2018
Summary In December 2016, the Work and Pensions Select Committee published a report on , Defined Benefit pension schemes, making recommendations aimed at putting “incentive structures in place to make it more likely that [defined benefit] DB schemes would be sustainable and that employers will honour their responsibilities.” They included:
• Empowering the Pensions Regulator (TPR) to impose punitive fines, intended to deter employers from avoiding their responsibilities;
• Empowering trustees with the powers to represent the interests of scheme members – for example, by being able to demand timely information from employers or implement conditional indexation arrangements;
• Enabling the Pensions Regulator to intervene earlier – with a shorter timetable for valuations, particularly for riskier schemes and recovery plans of ten years except in exceptional cases;
• Facilitating scheme restructure in certain circumstances – for example, amending the barrier of imminent and inevitable insolvency for a Regulatory Apportionment Arrangement (RAA) to be allowed;
• Making it mandatory to apply for clearance in some cases (with the size of the deficit relative to value of the company and the viability of the ongoing plan for supporting the plan as relevant criteria.
In February 2017, DWP published a Green Paper Defined Benefit pension schemes: security and sustainability. This set out the evidence about the key challenges facing DB pension schemes and highlighted options to improve confidence in the system.
In July 2017, the Government said it would publish a White Paper that would address commitments in its manifesto in relation to the “regulation and rules governing defined benefit private pensions.” The paper would also “consider innovative delivery structures, such as consolidation and measures to drive efficiency within the sector.” The Government said that while the sector was “broadly working as intended”, the White Paper would consider the “need to evolve and adapt the regulatory regime to improve security for members.”(HC Deb 13 July 2017 c19-20WS)
On 19 March 2018, the White Paper Protecting Defined Benefit Pension Schemes (Cm 9591) setting out its approach for the funding of the Defined Benefit system and supporting 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 (Foreword).
Some of the issues are discussed in more detail in Library Briefing Paper SN-04368 The Pensions Regulator: powers to protect pension benefits (January 2018) and SN-04877 Defined benefit pension scheme funding (October 2017).
4 Defined Benefit Pension Schemes
1. Background
1.1 What is the private sector DB landscape? Over the last couple of decades, private sector defined benefit (DB) schemes have declined as a feature of the occupational pension landscape. As of 2016 only 1.3 million people were actively contributing to a private sector DB scheme, down from 3.7 million in 2005. Conversely, defined contribution (DC) scheme membership has massively increased among the private sector workforce in the last three years due to auto-enrolment.
The numbers actively enrolled in public service pension schemes (predominantly unfunded DB schemes underwritten by the Government) have remained relatively stable at over 5 million for the whole period.
0
2
4
6
8
10
12
14
16
Milli
ons
of a
ctiv
e m
embe
rshi
ps
Number of active members of occupational pension schemes by scheme type and sector
Private sector - allPrivate sector - defined benefit (DB)Private sector - defined contribution (DC)Public sector
Source: ONS Occupational Pension Schemes Survey 2016Note: quadrennial survey up to 1995; annual from 2004. Public sector not covered by 2005 survey. Changes to methodology for 2006 onwards mean that comparisons with earlier years should be treated with caution.
5 Commons Library Briefing, 6 July 2018
Millionsof which: Total
Defined Benefit (DB)
DefinedContrib (DC)
1953 3.1 .. .. 3.1 6.21956 4.3 .. .. 3.7 8.01963 7.2 .. .. 3.9 11.11967 8.1 .. .. 4.1 12.21971 6.8 .. .. 4.3 11.11975 6.0 .. .. 5.4 11.41979 6.1 .. .. 5.5 11.61983 5.8 .. .. 5.3 11.11987 5.8 .. .. 4.8 10.61991 6.5 .. .. 4.2 10.71995 6.2 .. .. 4.1 10.3
2000 5.7 .. .. 4.4 10.1
2004 4.8 3.6 1.2 5.0 9.82005 4.7 3.7 1.0 .. ..2006 4.0 3.0 1.0 5.1 9.22007 3.6 2.7 0.9 5.2 8.82008 3.6 2.6 1.0 5.4 9.02009 3.3 2.4 1.0 5.4 8.72010 3.0 2.1 1.0 5.3 8.32011 2.9 1.9 0.9 5.3 8.22012 2.7 1.7 1.0 5.1 7.82013 2.8 1.6 1.2 5.3 8.12014 4.9 1.6 3.2 5.4 10.22015 5.5 1.6 3.9 5.6 11.12016 7.7 1.3 6.4 5.7 13.5
3. Components may not sum to totals due to rounding... denotes data not available.
Source: ONS Occupational Pension Schemes Survey, 2016
Number of active members of occupational pension schemes, by sector, UK
1. Due to changes in the definition of the private and public sectors, estimates for 2000 onwards differ from earlier years. From 2000, organisations such as the Post Office and the BBC were reclassified from the public to the private sector.2. Changes to methodology for 2006 onwards mean that comparisons with earlier years should be treated with caution.
Private sector Publicsector
Note: This is not a continuous time series: quadrennial survey up to 1995; annual from 2004. Public sector not covered by 2005 survey.
6 Defined Benefit Pension Schemes
Expressed as a share of the total private sector workforce, the percentage of employees who have a DB pension arrangement with their current main job has fallen from 34% in 1997 to 9% in 2016.
1.2 DB scheme membership As active enrolment in private sector DB declines, schemes are increasingly concerned with the task of managing and sustaining their ongoing financial liabilities to deferred and retired scheme members.
The 1.3 million active members of private sector DB schemes only account for around 10% of the total 13.5 million private-sector DB memberships captured by the ONS survey in 2016. There were 5.5 million pensioner members (40%) and 6.7 million deferred memberships (50% - these are non-contributing members with preserved pension entitlements from past service).
7 Commons Library Briefing, 6 July 2018
Even among the 1.3 million active members, the majority (0.8 million) are contributing to schemes that have been closed to new members.1
According to the Pension Protection Fund’s annual Purple Book, the total number of private sector DB schemes has fallen from around 7,800 in 2005 to 5,886 in 2016, and down further to 5,671 in 2017. The shrinking ‘universe’ of extant schemes is the result of schemes winding up, merging or entering the PPF.
Since the PPF began collecting scheme returns for its data collection exercise in 2005-06, the proportion of schemes that remain fully open to new members has fallen from 43% in 2006 to 12% in 2017. Conversely, the proportion that are closed both to new members and to new accruals by existing members has risen from 12% in 2006 to 39% in 2017.
Of the 5,588 schemes for which the PPF holds full data, 197 (4%) are in the largest size category (over 10,000 members each) – these account for 6.6 million members between them (63% of all memberships).
At the other end of the scale, as many as 1,994 schemes (36%) have fewer than 100 members each, and 2,458 (44%) have between 100
1 ONS Occupational Pension Schemes Survey, table 4
8 Defined Benefit Pension Schemes
and 999. These two categories between them account for only 9% of all scheme memberships.
The fragmented nature of the DB landscape, featuring a large number of very small schemes, was one of the main concerns of the Pension and Lifetime Savings Association (PLSA)’s Defined Benefit Taskforce, which over the course of three reports published during 2016 and 2017 developed the idea of creating a ‘Superfund’ model which would facilitate the consolidation of subscale schemes.
1.3 Funding status The Government’s February 2017 Green Paper said that while most defined benefit pensions schemes were in deficit, they were not generally ‘unaffordable’ for employers:
Whilst almost all DB schemes currently have a funding deficit, our modelling suggests that these deficits are likely to shrink for the majority of schemes if employers continue to pay into schemes at current/ promised levels.
The available evidence does not appear to support the view that these pensions are generally ‘unaffordable’ for employers. While DB pensions are more expensive than they were when they were originally set up, many employers could clear their pension deficit if required. There is also little evidence that scheme funding deficits are driving companies to insolvency, and it seems clear that the majority of employers should be able to continue to fund their schemes and manage the risk their schemes are running. The single biggest risk to the members of these schemes is the collapse of the sponsoring employer.
9 Commons Library Briefing, 6 July 2018
However, there are some employers who are finding that their pension scheme deficit is having a significant impact and where the level of Deficit Repair Contributions may become unsustainable.2
The PPF and Pensions Regulator conduct regular risk-monitoring of the DB pension landscape. The PPF’s annual The Purple Book provides the most comprehensive overview of the aggregate balance sheet of the UK’s private-sector DB pension schemes.
Of the 5,671 schemes in the DB scheme universe, the Purple Book contains data on the membership, funding position and other characteristics of 5,588 schemes. As of March 2017, these schemes had total assets under management of £1.54 trillion. The liabilities of these schemes are presented on two bases:
• Section 179 basis: this is an estimate of the amount needed to pay PPF levels of compensation to scheme members rather than full benefits. This is the key risk measure for the PPF as this is the liability that the lifeboat fund takes on in the event of scheme failure.
• Full buy-out: this is the most expensive valuation and reflects the amount that would need to be paid to an insurance firm to take on the liability of paying full benefits to members in the form of annuity contracts. The buy-out deficit is usually much bigger than other estimates as it includes the extra amount needed to cover the insurer’s risk-related capital reserve requirements and profit margin.
On an s179 basis, total liabilities of DB schemes were £1.70 trillion (resulting in a deficit of £162 billion and an 91% funding ratio), whereas on a full buy-out basis the aggregate liability was £2.28 trillion (£742 billion deficit, 68% funding ratio).
2 DWP, Security and Sustainability in Defined Benefit Pension Schemes, Cm 9412,
February 2017, p5
10 Defined Benefit Pension Schemes
In addition to the annual Purple Book report, the PPF measures balance sheet risk on a monthly basis using the PPF 7800 index, which tracks the aggregate funding position of all DB schemes.
As of December 2017, the 5,588 schemes in the index had total assets of £1.59 trillion and total liabilities on an s179 basis of £1.69 trillion, resulting in an aggregate s179 deficit of £104 billion (and a funding ratio of 94%).
The liability figure, in particular, can exhibit a high degree of volatility. The biggest aggregate deficit was £413 billion (funding ratio: 78.3%) in August 2016, but this had more than halved to £195 billion (funding ratio: 88.1%) by November 2016. The index has not shown an aggregate surplus since March 2011.
66% of schemes are currently in deficit and 34% are in surplus. Since the index began in 2006 the series has shown a large majority of schemes in deficit.
-500
0
500
1,000
1,500
2,000
Assets and liabilites of defined benefit pension schemess179 basis, £ billions
Liabilities
Assets
Aggregate balance
Source: PPF 7800 index
11 Commons Library Briefing, 6 July 2018
1.4 What is driving deficits? In December 2005, the Pensions Commission chaired by Lord Turner of Ecchinswell, said a rapid decline in private sector DB had occurred in the last 10 years. It said the rise in DB was initially affordable. However, costs had increased, partly due to rising longevity but also because what had started as “highly unequal and to a degree discretionary, promises” were replaced over time with statutory requirements – for example, to provide equal access to pension rights for women, protect the rights of early leavers’ rights, provide certain benefits for survivors and index-link pensions in payment. Schemes had delayed in adjusting to this. In part this could be explained by the delayed appreciation of life expectancy increases. However, the bigger explanation was the “long equity bull market of the 1980s and 1990s.” The Commission concluded that:
The exceptional equity returns in the 1980s and 1990s allowed many private sector DB schemes to ignore the rapid rise in the underlying cost of their pension promises. When the fool’s paradise came to an end, companies adjusted rapidly, closing DB schemes to new members. A reduction in the generosity of the DB pension promises which existed by the mid-1990s was inevitable. That generosity had not resulted from a consciously planned employer approach to labour market competition, and would never have resulted from voluntary employer action well informed by foresight as to the eventual cost, or operating within rational expectations of equity market returns.
But the suddenness of the delayed adjustment, and its extremely unequal impact between existing and new members, have severely exacerbated the gaps that always existed in the UK’s pension system.3
It concluded that it was “difficult to see private sector DB provision, certainly final salary in form, playing more than a minimal role in the future UK pension system.”4
3 Pensions Commission, Second Report: A New Pension Settlement for the Twenty-First
Century, November 2005, p 122-3 4 Ibid, p48
5,870
5,361
6,443
3,991
3,953
5,412
5,173 3,701
4,936
4,521
4,339
3,710
1,881
2,182
968
2,662
2,607
1,020
1,143 2,449
1,121
1,424
1,455
1,878
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
DB private sector schemes, 2006 to 2017Number of schemes
Schemes in surplus
Schemes in deficit
Source: PPF 7800 Index
For more detail
On the increase in liabilities in the 2000s, see Library Briefing Paper SN-01759 Defined Benefit pension schemes (March 2009)
12 Defined Benefit Pension Schemes
More recent analysis, has emphasised the impact of accounting, tax and regulatory changes, changes in the economy, the shift from DB to DC with the introduction of auto-enrolment and financial markets (including the impact of quantitative easing).5
Tax and regulatory changes In a December 2016 Report, the Pensions Policy Institute lists a number of tax and regulatory changes as having contributed to the rising cost of DB schemes as including:
• Legislative changes which made benefits that were previously discretionary (such as indexation and survivors benefits), a statutory requirement;6
• The introduction of preserved pension rights for early leavers in 1975 and their extension in 1986;7
• Restrictions on the surplus levels schemes could hold in the Finance Act 1986;
• Employer debt provisions in the Pensions Act 1995, s75;
• The introduction of FRS17 in 2002, under which pension liabilities must be reported in company accounts; The introduction in the Pensions Act 2004 of new scheme funding requirements and the Pension Protection Fund, for which eligible schemes are required to pay a levy;8
• The abolition of dividend tax credits for pension schemes in 1997;9
• The abolition of contracting-out (and with it the contracted-out rebate for National Insurance) with the introduction of the new State Pension in April 2016).10
Changes in the financial markets Since the financial crisis in 2008, quantitative easing has also been cited as a factor driving deficits.11 The Pension and Lifetime Savings Association has explained that:
For DB schemes the consequences of QE are severe. Pension scheme liabilities for corporate accounting and regulatory purposes are typically measured of long-term interest rates, and as gilt prices and gilt yields correspondingly fall DB pension schemes see a small increase in their assets as the value of any gilts they already hold goes up, and a larger increase in their liabilities as the
5 Pensions Policy Institute, Defined Benefits: today and tomorrow, December 2016 6 See for example, Library Briefing Paper CBP-5656 Occupational pension increases (December 2017) and SN-06348 Survivors pensions for cohabitants and CBP-3535 Pensions: civil partnerships and same sex marriage (January 2018) 7 For background, see Library Briefing Paper SN-01151 Armed Forces Pension Scheme
and preserved pensions (March 2015) 8 CBP-4877 Defined benefit pension scheme funding (October 2017) and CBP-3917
Overview of the Pension Protection Fund (January 2018) 9 SN-581 Advance Corporation Tax (ACT) and pension funds (July 2017) 10 SN-6525 The new State Pension background (August 2016) 11 Debbie Harrison and David Blake, The Greatest Good for the Greatest Number,
December 2015, p7
Discount rates and pension deficits
A discount rate is figure used to convert future cash flows into a single figure in today’s terms. It is the equivalent of working out how much needs to be invested today in order to pay a promised level of benefits in, say, ten years’ time. A reduction in the discount rate has the effect of increasing the cost of future benefits and therefore increasing the total contribution required.
13 Commons Library Briefing, 6 July 2018
discount rate they apply goes down. Put at its simplest, and to isolate the gilts effect, for every £1 increase in assets due to falling gilt yields, there si a corresponding £5 increase in liabilities.12
The Government’s February 2017 DB Green Paper also pointed to low investment returns:
98. During this time [2006 to 2016] asset growth has been relatively steady, notwithstanding the significant dip following the financial crisis in 2008/2009. Estimated liabilities have shown a higher level of volatility, and have also increased at a faster rate. Much of this has resulted from schemes not hedging against the falls in gilt yields to historically low levels, and lower expectations for future investment returns which has had the effect of depressing discount rates and increasing estimated present value of scheme liabilities.13
Longevity increases The Green Paper also highlighted longevity increases, which had been rising faster than predicted when most schemes were set up. In 1983, it had been predicted that life expectancy at age 65 would be 15.2 years in 2014. In fact, it turned out to be 21 years, which is nearly 40% higher than predicted at the time.14
The table below shows the latest projections of remaining life expectancy for people at age 65. These are ‘cohort’ life projections, which assume continued improvements in age-specific mortality rates and will form the basis of future longevity-based reviews of the SPa. Over the half-century from 2014 to 2064, it is projected that remaining life expectancy at aged 65 in the UK will increase by around 5 years six months for men (from 21.2 years to 26.7 years) and 5 years 2 months for women (from 23.5 to 28.7 years). The rate of improvement is projected to be broadly uniform across the UK’s constituent countries, meaning that relative differences in life expectancy remain largely unchanged. In Scotland, life expectancy at age 65 remains around a year and a half lower for men than the UK average over the period, with only a very modest convergence of 0.3 years towards the UK average for both women and men between 2012 and 2062. Over the same period, life expectancy for women converges by 0.4 years.
12 PLSA, Exceptional times, exceptional measures? March 2012 13 DWP, Defined benefit pension schemes, Cm 9410, February 2017, p27-8 14 Ibid, para 101
14 Defined Benefit Pension Schemes
1.5 Are DB schemes affordable? The February 2017 DB Green Paper said that whether a particular level of pension contributions was affordable, was to an extent dependent on the “specific circumstances of individual schemes and their sponsoring employers”. A key question was the extent to which pension scheme liabilities were limiting employers’ ability to make the best use of the resources available.
Although there were signals that many sponsoring employers saw deficits as a problem, the evidence that DB schemes were unaffordable was far from conclusive:
106. However, even with these increased costs, the evidence that DB schemes are unaffordable is far from being conclusive, and should be considered with caution. Estimates of deficits and contributions relative to sponsor balance sheets and dividends vary and will depend on the methodology chosen, but some recent evidence highlights that:
• In 2015, FTSE 100 companies paid around five times as much in dividends as they did in contributions to their DB pension schemes.
• The 56 FTSE 100 companies with a DB pension scheme deficit paid 25% more in dividends (£53 billion) relative to their disclosed IAS19 deficit (£42 billion). Therefore, in theory, these companies have the ability to immediately repair their pension scheme deficits were they to feed their dividends into Deficit Repair Contributions (DRCs).
• In their most recent funding statement analysis, the Regulator indicated that for the current FTSE 350 companies which sponsor DB schemes, the trend in DRCs as proportion of dividends has generally declined over the period from 2010. This is further illustrated in Figure 9, where the median ratio declined from around 17% in 2010 to less than 10% in sponsors’ latest accounts. The
15 Commons Library Briefing, 6 July 2018
Regulator argues that this has been mainly driven by the significant increase in aggregate dividends over the period, without a similar increase in contributions. This is potentially an additional signal that affordability may not be an issue at the aggregate level.
• Similarly, the Regulator estimates that at the median, FTSE 350 companies paid around five times as much in dividends as they did in DRCs in 2010 but this ratio has moved to 11 times in their latest data available. 15
However, these statements related to the aggregate position. There were some outliers:
107. For example, according to Lane Clark and Peacock six companies paid contributions that were greater than the dividends they paid out. In addition, there were seven FTSE 100 companies with accounting liabilities greater than their market capitalisation as at year end 2015 according to the same source. Therefore on aggregate there does not appear to be clear evidence of affordability issues, however at the more individual scheme level further scrutiny could be beneficial.
Figure 9: Ratio of DRCs to dividends (where both DRCs and dividend are non zero). Current FTSE350 companies sponsoring DB/Hybrid pension schemes
The Green Paper said that while there was no single measure of affordability that gave definitive conclusions, the ratio of ‘deficit reduction contributions’ (DRCs) to ‘profits before tax’ (PBT) was probably the best single indicator. Analysis from tPR suggested that:
[…] around 50% of all employers with DB schemes are either paying no DRCs or paying DRCs which, taken as a ratio, are less than 20% of their reported PBT. On the other hand, again where PBT is available, 20% of employers are paying DRCs that are in excess of 100% of their PBT or are loss making employers. No PBT data is held for the remaining 16% of employers. So there is a significant minority for whom DRCs may become unsustainable in the near future, although the data may not be truly representative of their affordability position. This would depend on a number of factors, including the strength of the employer’s balance sheet, their ability to generate cash flow and their position in any wider group.16
TPR has segmented schemes based on their risk profile, which includes a combination of:
15 Ibid para 102-111 16 Ibid, para 109
16 Defined Benefit Pension Schemes
• The level of underfunding in the scheme taking into account the strength of the employer covenant and scheme maturity compared to the current cash contributions being paid
• The additional deficit that could arise from the investment strategy in the future, which may not be supportable by the covenant.17
Approximately 5% of schemes undergoing a valuation at that point had a sponsoring employer which was “weak, or weak and where it appears that they are at risk of becoming unable to or are already unable to adequately support the scheme.”18
17 TPR Annual Funding Statement, May 2017 18 Ibid
17 Commons Library Briefing, 6 July 2018
2. Consultation As the Pensions Policy Institute points out, identifying what needs to change depends what you want to achieve: manage the decline, minimise risk to members’ benefits, or try to reinvigorate DB.19
In December 2016, the Work and Pensions Select Committee published a report on Defined Benefit pension schemes, making recommendations aimed at putting “incentive structures in place to make it more likely that [defined benefit] DB schemes would be sustainable and that employers will honour their responsibilities.” They included:
• Empowering the Pensions Regulator (TPR) to impose punitive fines, intended to deter employers from avoiding their responsibilities;
• Empowering trustees with the powers to represent the interests of scheme members – for example, by being able to demand timely information from employers or implement conditional indexation arrangements;
• Enabling the Pensions Regulator to intervene earlier – with a shorter timetable for valuations, particularly for riskier schemes and recovery plans of ten years except in exceptional cases;
• Facilitating scheme restructure in certain circumstances – for example, amending the barrier of imminent and inevitable insolvency for a Regulatory Apportionment Arrangement (RAA) to be allowed;
• Making it mandatory to apply for clearance in some cases (with the size of the deficit relative to value of the company and the viability of the ongoing plan for supporting the plan as relevant criteria.
2.1 The Green Paper In February 2017, DWP published a Green Paper Defined Benefit pension schemes: security and sustainability. This set out the evidence about the key challenges facing DB pension schemes and highlighted options to improve confidence in the system.
Key questions addressed by the Green Paper are:
• What can be done to support stressed schemes?
• What can be done to ensure employers meet their liabilities?
19 PPI, Defined Benefits: today and tomorrow, December 2016, p7
18 Defined Benefit Pension Schemes
A basis for targeted interventions
The DWP Green Paper said that identifying a clearly defined segment of schemes or employers that would warrant targeted policy intervention is not straightforward. There were some schemes that were poorly funded and with weak sponsors and therefore a “high likelihood of PPF entry in the future.” However, there were no easily identifiable common characteristics across these schemes.20 TPR segments schemes based on their risk profile, which includes a combination of:
• The level of underfunding in the scheme taking into account the strength of the employer covenant and scheme maturity compared to the current cash contributions being paid; and
• The additional deficit that could arise from the investment strategy in future, which may not be supportable by the covenant.21
In more detail:
38. In the funding context, we segment the DB funding universe on the basis of the employer covenant. The covenant underwrites scheme risks and trustees’ investment and funding strategies. It should, therefore, be one of the key determinants in the behaviours of trustees and employers when agreeing funding outcomes.
39. We use four employer covenant segments: strong; tending to strong; tending to weak; and weak. In practice, we recognise that there are no ‘cliff edges’ or dramatic changes in covenant strength and the range of covenant strengths is a continuum along a spectrum of covenant strength. In our engagement with individual schemes we look at their particular circumstances in a much greater level of detail. Appendix A explains how we assess the strength of the covenant.
40. Segmenting by covenant allows us to develop an initial, high-level and consistent view of what an appropriate outcome for schemes with certain characteristics might look like. We use this to help us assess the overall risk and outcomes for the scheme. In our further engagement with schemes we focus on the behaviours and outcomes which we expect for each segment in line with an integrated approach to managing risk and how the flexibilities have been used.22
The PLSA says this definition was developed for a specific purpose (regulating scheme funding) and that if the definition is to be used more widely, the criteria used would “enable greater scrutiny and a wider understanding of the risks across the DB sector.”23
2.2 The White Paper In July 2017, the Government said it would publish a White Paper that would address commitments in its manifesto in relation to the “regulation and rules governing defined benefit private pensions.” The paper would also “consider innovative delivery structures, such as consolidation and measures to drive efficiency within the sector.” The Government said that while the sector was “broadly working as intended”, the White Paper would consider the “need to evolve and adapt the regulatory regime to improve security for members.”24
The White Paper published in March 2018 said the Government’s view was that there was already a robust system in place to protect DB
20 DWP, Security and sustainability in defined benefit pension schemes, Cm 9412,
February 2017, para 111 to 137 21 TPR Annual Funding Statement, May 2017, June 2014, p10-11 22 TPR, Defined benefit funding regulatory and enforcement policy, p10-11 23 PLSA, Response to Green Paper, May 2017 24 HC Deb 13 July 2017 c19-20WS
19 Commons Library Briefing, 6 July 2018
pensions but that that it supported Regulator’s ambition to be clearer, quicker and tougher:
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.25
Initial responses The Work and Pensions Committee welcomed the inclusion of new powers for TPR but said pensions were still at risk while the Government continued to consult:
Although the White Paper appears to leave room for the deterrent fines to be applied immediately – another very welcome move - the legislation needed to enact the new regime in full will not happen before 2019-20 at the earliest. In the meantime, with Government proposing to consult further, pension rights are still at risk from unscrupulous businesses seeking to avoid their pension obligations.26
The PLSA welcomed the White Paper saying it shared the Government’s view that there was a “need for a range of different measures to strengthen that framework and further improve benefit security”:
However, employer covenants are under pressure and failures like Carillion, BHS and most recently, Toys R Us clearly signal that this is a situation which cannot be ignored. We look forward to working closely with the DWP and the industry as we work together to build more secure defined benefit pensions.
25 DWP, Protecting Defined Benefit Pension Schemes, Cm 9591, March 2018,
Foreword 26 Work and Pensions Select Committee, Pensions still at risk while Government
continues to consult, 19 March 2018
20 Defined Benefit Pension Schemes
We are glad to see that the Government has been looking at the relationship between good corporate governance and good outcomes for pension scheme members. The Pension Regulator’s ability to regulate the system effectively depends on effective governance of both pension schemes and the companies which stand behind them.27
The Pensions Regulator welcomed new proposals designed to improve its ability to intervene to protect pension savers:
We called on government for more effective powers and so we welcome the proposals.
Planned improvements to our scheme funding, information-gathering and anti-avoidance powers will enable us to be clearer about what we expect from employers in relation to scheme funding and tougher where a scheme is not getting the funding it needs.
Furthermore, strengthening the notifiable events framework will improve our regulatory grip and will ensure we are sighted sooner on planned transactions that could pose a risk to scheme members.
We will now work closely with government to develop the White Paper’s proposals, including fines and criminal sanctions, to ensure they are proportionate, act as an effective deterrent and work in practice.
The best support for a DB scheme is a strong employer and we believe the current flexible funding framework, which allows employers to balance growth with meeting pension benefits, remains the right approach and we will aim to retain this flexibility in any new approach.28
In connection with the decision not to make clearance mandatory, Pensions Minister Steve Webb said that “it looked as though the government’s desire not to interfere in business transactions has taken priority over the desire to protect pensions.” Professional services firm Barnett Waddingham said TPR’s new powers would “need to be exercised with care and discretion.”29
The ACA said it was concerned at the absence of measures to help employers struggling with pension scheme liabilities:
We welcome the proposals that would aim to help the simplification of benefits as a precursor to consolidation of DB schemes.
“And we look forward to a new funding code: which we hope will incorporate lessons learned from recent high-profile failures.
“However, on a quick read, we are disappointed that no new relief to employers struggling with DB liabilities appears to be proposed. Our survey of employers conducted last year found this was needed if more employers are not to abandon DB provision. In that regard, whilst our survey found employers generally support tougher rules and fines for directors not taking sufficient
27 PLSA comments on DWP’s Defined Benefit Pensions White Paper, 19 March 2018 28 TPR welcomes proposed new powers to protect pension savers, the Pensions
Regulator, 19 March 2018 29 UK ditches plan to give pensions regulator powers on takeover, Financial Times, 20
March 2018 (£)
21 Commons Library Briefing, 6 July 2018
care in protecting scheme members’ interests, we wonder whether these tougher rules – without any help for struggling employers with DB liabilities – will again provide a further impetus for prudent directors to close schemes in favour of lower cost DC arrangements, with inferior pension outcomes.30
Committee Inquiry On 11 April 2018, The Work and Pensions Committee launched an inquiry into the White Paper, aiming to inform and influence it. The Committee invited evidence from interested parties on the following questions:
• To what extent is improving TPR's effectiveness a matter of greater powers, better use of resources or cultural change in the organisation?
• What can be done to strengthen the regime for clearing corporate transactions (like dividend payouts, selloffs, takeovers) that might weaken a pension scheme?
• Will a criminal offence provide a meaningful deterrent?
• What should "prudent" and "appropriate" scheme funding mean?
• How can consolidation of the fragmented DB landscape be best achieved?
• Given the difficulties facing DB schemes, is a faster legislative timetable warranted?31
30 ACA Chairman concerned at absence of measures to help employers strugging with
pension scheme liabilities, 19 March 2018 31 Work and Pensions Select Committee, Defined benefit pensions: the future, 11 April
2018
22 Defined Benefit Pension Schemes
3. What should change?
3.1 Should it be easier for employers to separate themselves from schemes?
A Regulated Apportionment Arrangement (RAA) is a mechanism which can allow an employer to restructure and continue trading whilst the Pension Protection Fund (PPF) takes on the takes on the pension scheme. It must be approved by TPR and the PPF must confirm that it does not object.32 TPR explains that RAAs are intended to be rare:
It is our belief that the best form of support for a pension scheme is that of an ongoing sponsoring employer. However, we recognise that in some situations this form of support may no longer be available where the sponsoring employer is at serious risk of insolvency. Where this is the case, it is important for employers, trustees and their respective advisers to engage in discussions at an early stage to explore the available options, including any which may offer an outcome other than insolvency. Engagement with the regulator should also begin at this early stage.
RAAs are only possible where a scheme is already in a PPF assessment period, or is expected to enter an assessment period. RAAs are extremely uncommon; the expectation when they were introduced into legislation was that they would be used rarely, which has proved to be the case.33
The PPF explains that its decision to agree to an RAA is based on three principles:
1. Insolvency has to be inevitable – this means that the pension scheme will be entering a PPF assessment period whatever happens.
2. The pension scheme will receive money or assets which are significantly better than it would have otherwise received through the insolvency of an employer. The proposal also needs to be considered by the PPF to be realistic compared to the pension buy-out deficit. This is the debt that would be due under section 75 of the Pensions Act 1995.
3. What is offered to the pension scheme in the restructuring is fair compared to what other creditors and shareholders will receive as part of the transaction. 34
The Work and Pensions Select Committee concluded that the RAA was an emergency measure, that did not operate at an emergency pace. It recommended that the Government consult on: • Reducing the interval, currently 28 days, between TPR issuing a
warning notice of an impending RAA and issuing a final notice; and
32 TPR, Regulated Apportionment Arrangements, August 2016; SI 2008/716 33 TPR, RAAs and employer insolvency, August 2010 34 The PPF approach to employer restructuring, August 2016
For more detail, see
Library Briefing Paper SN-04368 The Pensions Regulator: powers to protect pension benefits (January 2018) (section 2.5)
23 Commons Library Briefing, 6 July 2018
• Relaxing the requirement for insolvency to be inevitable within 12 months for an RAA to be approved.
It also recommended that TPR guidance be amended to “encourage its involvement at an earlier stage in the formulation of RAA proposals in order to facilitate a more iterative approach.”35
The Green Paper asked for views on proposals to allow struggling businesses to separate from scheme sponsors more easily, including by widening the criteria for RAAs:
227. Our analysis highlights that there appears to be a group of employers who are likely but not certain to become insolvent before the completion of the recovery plan or members benefits are paid in full. However, many of these employers may not be able to access an RAA as it is not clear that they will become insolvent in the next 12 months. For the schemes sponsored by these employers, the current system does not offer any alternative. Their only option is to aim for investment returns to enable them to reach full funding or for the business to improve and generate more cash. But the burden of the pension scheme may itself be compromising the ability of the business to invest and recover, or to restructure. This also creates a risk for PPF members and levy payers because there is a risk that the PPF deficit could grow very substantially in the run up to a likely future insolvency.36
It said there could be a considerable prize – giving struggling employers the chance to emerge as a sustainable business and generate more value for the pension scheme – but that it would also require a “different trade-off” between sponsors, members and the PPF levy payers and would raise moral hazard issues:
229. It is also important to recognise that the options that involve a ‘transfer of wealth’ from the members to the sponsor would raise moral hazard issues and there would need to be appropriate quid pro quo provisions in place. For example similar provisions to the condition for RAAs where the scheme would need to receive more than it would otherwise on insolvency, to ensure that the scheme is being treated fairly compared to other creditors to the employer.37
Green Paper responses The TUC said that in workplaces with recognised trade unions, those should be involved in consultation. There was a case for considering whether “a special measures process could be put in place at an earlier stage than available under the current regime as a means of securing a better deal than would be available at the point of insolvency.”38
The Pension Protection Fund was concerned that “the current requirement that insolvency must be inevitable in the next 12 months is overly restrictive and may limit the restructuring action that can take place whilst value remains in the employer.” However, any 35 Work and Pensions Select Committee, Defined benefit pension schemes, HC 55,
December 2016 36 Cm 9412, Feb 2017 37 Ibid 38 TUC, Response to Green Paper, May 2017
24 Defined Benefit Pension Schemes
amendments would need to retain strong safeguards to protect against “pension dumping”, including ensuring that the outcome was better for the scheme than the alternative and that the employer would otherwise be expected to become insolvent. 39
The PLSA said it “should be easier to separate schemes from struggling employers.”40
The Association of Consulting Actuaries (ACA) said:
We suggest that this [appropriate measures for stressed schemes] should be decided on a case by case basis with input from both the trustees and the Regulator. We suggest an intermediate solution should only be possible if: the trustees decide that it is in the members' best interests, and the Regulator gives its consent […] We think the test [for allowing an RAA] should be based on the members’ best interests rather than explicitly requiring insolvency in the near future.41
The White Paper In the White Paper, the Government said it would look further at whether changes could be made to the RAA process without increasing the risks to scheme members:
207. We discussed the idea of making changes to the RAA process in the Green Paper. Around half of the respondents suggested that the current process is too complex, and that this complexity can prevent employers from making use of an RAA even where it would be in both the employer and the scheme’s interest. They argued that making the process simpler could enable more businesses who would otherwise fail due to loss of investment or restructuring to benefit from RAAs, leading to better outcomes for current and future employees.
208. However, the other half of respondents were opposed the idea of any changes to the RAA process. Respondents argued that making it easier for employers to go through an RAA increased the risk that unscrupulous employers could seek to manipulate their circumstances in order to be able to separate themselves from their scheme.
209. We have given careful thought to whether, and how, we should make any changes to simplify the RAA process. We believe that an RAA can be helpful for both employers and schemes in some circumstances. We want to ensure that RAAs can be accessed by the right employers at the right time where an objective assessment suggests that they are at risk of insolvency and are not likely to be able to continue to support their Defined Benefit scheme.
210. However, we recognise that there is a risk in allowing more employers to go through an RAA process. It is important that we do not increase the risk to members by making changes.
211. We are therefore committing to working closely with the Regulator, PPF, stakeholders and the pensions industry to look at whether it is possible, without increasing risk to scheme members,
39 PPF Response to Green Paper, May 2017 40 PLSA, Response to Green Paper, May 2017 41 ACA, Response to Green Paper, May 2017
25 Commons Library Briefing, 6 July 2018
to make improvements to the RAA process, thereby increasing the potential for positive outcomes for businesses which might otherwise fail.42
3.2 Should the scheme funding regime change?
The scheme funding regime introduced under part 3 of the Pensions Act 2004 requires trustees to: • Draw up a statement of funding principles – which is a written
statement of the policy for meeting the statutory funding objective (which is that the scheme has sufficient and appropriate assets to meet its liabilities);
• Obtain a full actuarial valuation of their scheme at least every three years; and Where the scheme is in deficit, prepare a recovery plan setting out the steps that will be taken to meet the funding objective over what timeframe.
The aim is not to “eliminate all risk to members’ benefits” but rather to “strike a reasonable balance” between the demands on the employer and the security of member benefits, recognising that “a strong, sustainable employer is the best protection for a DB scheme.”43
The Work and Pensions Committee said a major concern had been the length of the recovery plan for the BHS scheme (23 years) and the time it had taken for TPR to intervene.44 It recommended more frequent valuations for risker schemes, a shorter period for reporting the outcomes of valuations and recovery periods longer than ten years only in exceptional cases:
9. TPR has a scheme-specific approach to regulation, but this does not extend to the frequency of scheme valuations. We recommend that the Pensions Regulator should adopt a risk-based approach to scheme valuations. Riskier schemes should provide them more frequently, while low risk schemes should not be required to report as regularly. (Paragraph 62)
10. Fifteen months is a long period for any negotiation. It is certainly far too long for a regulator to be kept in the dark. If a scheme valuation and recovery plan takes more than nine months to agree then TPR’s intervention in the scheme may well be warranted anyway. We recommend that the statutory timescale for the submission of valuations and recovery plans be reduced to nine months. In instances where TPR has concerns about the sustainability of a scheme or the progress of recovery plan, it may be appropriate for it to intervene sooner to request information—for example, the valuation on which basis negotiations are ongoing. Similarly, TPR should encourage trustees to keep it updated on the progress of discussions and offer support where necessary. (Paragraph 67)
42 DWP, Protecting Defined Benefit Pension Schemes, Cm 9591, March 2018 43 DWP, Security and sustainability in Defined Benefit Pension Schemes, Cm 9412,
February 2017, Executive Summary 44 Work and Pensions Committee, Defined Benefit Pension Schemes, December 2016,
para 148
For more information, see
SN-04877 Defined benefit pension scheme funding (October 2017)
26 Defined Benefit Pension Schemes
11. TPR needs to be tougher on deficit recovery plans. It should not be shy or slow in imposing a contribution schedule when a sponsor is not taking its responsibilities seriously. Recovery plans of more than ten years should be exceptional. Particular attention should also be paid to any plan which concentrates employer contributions in the distant future. As a general rule, the onus should be on sponsors to demonstrate that a recovery plan is reasonable in their specific circumstances. (Paragraph 74)45
The Green Paper said that although there might be a case for limited changes to help some employers manage liabilities more effectively, there was a broad consensus that there was “no need to change the fundamentals of the overall regime for DB pensions.” Requiring more frequent valuations for risky schemes might be counter-productive:
178. We should be clearer about what the problem is that we are trying to solve. If it is to ensure that schemes have the right ongoing monitoring processes in place rather than overly focussing on the triennial valuation, and the Regulator has access to the information they need to undertake their functions, then changes to the valuation cycle may not be the best solution to this problem. In fact requiring a struggling employer with an underfunded scheme to undertake more frequent valuations might be completely counter-productive if it racks up cost on a disproportionate basis. Another option might be to introduce risk based reporting and monitoring requirements which may offer some reduced burden to lower risk schemes, with a proportionate monitoring regime for higher risk schemes. 46
There might be a case for requiring employers with significant resources and severely underfunded schemes to make faster progress in repairing a scheme deficit:
212. One way to achieve this might be to tighten up the scheme funding regime for employers where there is significant affordability. One option, for example, would be to limit extensions to recovery plans, or to set hard limits on the lengths of recovery plans in certain circumstances. It could be argued that the employer should not be able to push back the date for dealing with the deficit or have a long recovery plan while they have significant resources available.
213. Another approach which has been suggested is to set interim funding targets for severely under-funded schemes, and, until they are met, require the employer to stay closely in touch with the Regulator and explain on a regular basis what action is being taken to repair the deficit. One way of focussing these requirements for consultation would be to only apply them to schemes which were not funded to PPF level, because if their employers were to go insolvent this would have negative repercussions for the DB universe as a whole, rather than just for the scheme’s members.47
Although there might be a case for allowing reduced contributions for stressed schemes and sponsors, there would be a risk of moral hazard:
223. If stressed employers are to be allowed additional flexibilities, the key questions then are how a struggling or stressed employer
45 Work and Pensions Committee, Defined Benefit Pension Schemes, December 2016 46 DWP, Sustainability and security in Defined Benefit Pension Schemes, Cm 9412,
February 2017, p37 47 Ibid
27 Commons Library Briefing, 6 July 2018
is to be defined and in what circumstances would it appropriate to target such easements. Wherever such lines are drawn there will be significant issues which would need to be resolved – for instance there is the possibility of moral hazard, where sponsors could seek to reduce their DB liabilities and take advantage of safety valves, by manipulating circumstances to ensure they meet the criteria.48
The DB Green Paper asked for views on options including: • Providing greater clarity over the requirements for scheme funding
– perhaps with a comply or explain regime, requiring trustees and sponsors to explain why they have not complied with the expectations set out in TPRs codes or guidance;
• The potential for tailored approach - with different measures targeted at underfunded schemes with stressed sponsors compared to those with better affordability.
Green Paper responses TPR said there would be benefits in greater clarity about expectations and a ‘comply or explain’ approach:
There would be benefits in greater clarify over what we expect schemes to do with regard to funding, through more defined standards and requirements…we could be given power to set binding standards […]in the form of detailed codes or guidance…supported by a legally enforceable “comply or explain” regime requiring trustees and sponsors to explain why they have not complied with our code and to demonstrate to us why they think their approach is prudent and appropriate.49
The Institute and Faculty of Actuaries (IFoA) thought the current approach contained the right degree of flexibility:
The advantage of the current valuation regime is that it provides flexibility, subject to certain constraints, including following a prudent approach…We have no evidence that the flexibility is mis-used…The current valuation cycle is appropriate and there is little benefit in changing the length of the cycle…For high-risk schemes, the challenges facing the scheme will not disappear by bringing forward valuations. Trustees need to maintain the focus on the management of the scheme rather than be distracted by a new valuation.50
The Association of Consulting Actuaries (ACA) broadly agreed but thought 15 months should be viewed as a deadline:
We do not think it would be practical to implement [shorter valuation cycles for high risk schemes] or that there would be benefits from doing so. In particular there is no evidence that the current, three-year, cycle imposes undue cost or burden on trustees or employers and it does not seem possible to identify reliably what is high or low risk, to the extent that valuation cycles could be changed, since there are so many different factors that are relevant to the decision. Our expectation has been that the Regulator uses risk criteria to “horizon scan” for relevant
48 Ibid 49 TPR, Response to Green Paper, May 2017 50 IFoA, Response to Green Paper, May 2017
28 Defined Benefit Pension Schemes
corporate and scheme-related information, as well as collecting comprehensive information annually using its scheme return process […] We suggest that the 15-month period should be viewed as a deadline after which the Regulator has full access to its powers to intervene in the valuation process. 51
The PLSA said:
PLSA believes that the current triennial valuation cycle, whilst not perfect, broadly works…For some schemes it could be possible to reduce the timescales to complete valuations from 15 months…However, often employer negotiations over the valuations can be complex and contracted many schemes feel it is important to take the necessary time to reach the right decision.52
The White Paper The White Paper said that to clarify scheme funding principles, the Government would:
• Strengthen the Regulator’s ability to enforce Defined Benefit scheme funding standards, through a revised Code, focussing on:
─ 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.
• Require the trustees of Defined Benefit pension schemes to appoint a Chair and for that Chair to report to the Regulator in the form of a Chair’s Statement, submitted with the scheme’s triennial valuation.53
Submissions to the Work & Pensions Committee The Pensions Regulator argued that the current funding regime had for the most part demonstrated its resilience but it had learnt from experience that it needed to be bolder in testing the scope of our scheme funding powers. It welcomed the White Paper proposals:
12. The funding regime for DB pensions is set out in the Pensions Act 2004, which introduced TPR and the PPF. In this legislation, Parliament scrapped the Minimum Funding Requirement, opting for a more flexible approach to scheme funding that requires risks to be managed but not eliminated. The Pensions Act 2014 provided TPR with a new statutory objective, “in relation to the exercise of its functions under Part 3 only, to minimise any adverse impact on the sustainable growth of an employer”. We have previously provided the committee with a note setting out the very different climate towards the start of the decade in respect of the public debate on DB pensions, which led to the introduction of this new objective for TPR. 13. The DB funding regime has been placed under significant pressure during the past decade because of the persistent low interest
51 ACA, Response to Green Paper, May 2017 52 PLSA, Response to Green Paper, May 2017 53 DWP, Protecting Defined Benefit Pension Schemes, Cm 9591, March 2018
29 Commons Library Briefing, 6 July 2018
rates and other factors. We believe that, for the most part, it has demonstrated its resilience and that most schemes will be able to meet their promises to members. However, regulating DB funding involves complex judgments. There have been times where the balance between schemes and employers was not always right over the past decade and, as a regulator, we have learned from this. A key lesson is that we need to be bolder in testing the scope of our scheme funding powers (section 231 of the Pensions Act 2004). We asked the Government for improvements to existing legislation to make s231 a more practical and effective regulatory tool, and we welcome the White Paper’s proposals for change.54
Royal London said the current framework warned against returning to an overly-prescriptive approach:
• “Prudent” and “appropriate” were intentionally left undefined in the original legislation since the prescribed definitions within the MFR legislation were found to be impractical as conditions changed, and adjustment of the legislation was very difficult. Regulators need to avoid repeating past mistakes.
• Instead of trying to define these terms, the Committee should consider if there are alternative ways in which trustees and sponsors can be provided with information that will enable them to successfully steer the future of their schemes for the benefit of their members. The use of a one-dimensional balance sheet liability value ignores the long-term nature of a pension scheme.55
The ACA warned against destabilising a system that was “by-and-large working well”:
Scheme funding - reducing the complexity and variety exhibited within the DB scheme universe to single metrics is a noble aim, but the unintended consequences will do more harm than good. The Government’s stance in the Green Paper was that DB funding was broadly functioning well, with some exceptions. Therefore, any measures should be focussed on these exceptions, without de-stabilising a system which is by-and-large working well. 56
The PPF argued that the revised Funding Code of Practice should consider how best to address the following issues:
• Lack of progress in closing deficits - Recovery plan lengths are broadly unchanged over the last 6 years (two triennial valuation cycles) and are still on average around 8 years in length. […] the lack of progress is striking especially in the context of findings set out in the White Paper that for FTSE350 companies paying DRCs and dividends, the ratio of DRCs to dividend payments has declined from around 10 per cent in 2011 to around 7 per cent in 2017 (primarily due to a significant increase in dividends without a similar increase in contributions).
• The prevalence of long recovery plans – Around one in five schemes (around 1,050) have a recovery plan length that is
54 Written evidence from the Pensions Regulator (BPW0025) May 2018 55 Written evidence from Royal London Consulting Actuaries (BPW0007) May 2018 56 Written evidence from ACA (BPW0020) May 2018
30 Defined Benefit Pension Schemes
longer than 10 years. We know from experience that even the strongest sponsors can deteriorate rapidly. The consequence of which can leave members and our levy payers exposed. Almost 400 schemes with employers in our strongest levy bands (levy bands 1 and 2) have a recovery plan of more than 10 years. We believe it is important the new Code introduces clear boundaries for recovery plan lengths, ensures strong sponsors close deficits within reasonable timeframes, and offers less leeway to take greater risk on account of employer strength or to “back-end load” recovery plans.
• The strength of Technical Provisions (TPs) relative to s.179 – Currently almost 3 in 5 schemes (around 3,100) are targeting a level of funding which wouldn’t allow them to buy out PPF levels of benefits in the event of employer insolvency. […] there may be merit in ensuring trustees understand and monitor their PPF funding position (as a key indicator of the position of their scheme in an insolvency scenario) and for this to inform their approach to scheme funding.57
On the other hand, trade unions and groups representing scheme members argued that more needed to be done to keep schemes open.
The TUC described the White Paper as a “missed opportunity” to devise a plan to keep DB pension schemes open. It called for an inquiry on whether current assumptions were appropriate and whether “alternatives could be more appropriate for managing pension provision for current members and future generations.”58
This concern was shared by UNISON who thought many valuation assumptions for unnecessarily over prudent. It had commissioned independent actuarial advice that showed “not only are changes often unnecessary but closing to new members and bringing in a DC scheme with an inadequate employer contribution represents bad value for money both for the employer and members.”
The AEA Technology Pensions Campaign also wanted a change in focus – onto how to reverse scheme closures.59
3.3 Allow changes to indexation? There are statutory requirements on DB schemes to:
• Index pensions in payment in line with inflation, capped at 5% for benefits accruing from service between April 1997 and April 2005, and at 2.5% for benefits accruing from April 2005 - known as Limited Price Indexation (LPI);60
• Revalue the deferred pensions of early leavers in line with inflation capped at 5%, and at 2.5% for rights accrued on or after 6 April 2009.
57 Written evidence from PPF (BPW009), May 2018 58 Written evidence from TUC (BPW0019) May 2018 59 Written evidence from AEAT Pensions Campaign (BPW0016) May 2018 60 Pensions Act 1995, s51; Pension Schemes Act 1993
For more information, see
Library Briefing Paper SN-05656 Occupational pension scheme increases (December 2017)
31 Commons Library Briefing, 6 July 2018
Before April 1997 there was no general obligation on Defined Benefit schemes to increase pensions in payment (although there was a requirement on schemes that were contracted-out of SERPS to provide indexation capped at 3% on rights accrued from 1988).61 Importantly, these are minimum requirements - there is nothing to prevent schemes from making more generous arrangements in their rules.62
On 26 May 2016, the Government launched a consultation on various options to help the British Steel Pension Scheme (BSPS). Its objective was to find a solution that achieved separation of the BSPS from Tata Steel UK, subject to it being strong enough to remain outside the Pension Protection Fund.63 Tata and the BSPS trustees had asked Government to allow them to reduce the levels of indexation and revaluation on future payment of accrued rights to the statutory minimum.64
The Government acknowledged that this would reduce members’ future pension payments in real terms and represented ‘a substantial loss to many members compared with the pension they would have expected.’ However, for most people, the proposal was the same or better than they would get in the PPF.65
To enable this, the Government would need to disapply “the section 67 subsisting rights provisions for the BSPS in order to allow the scheme to reduce indexation and revaluation.” This provides that scheme rules can only be changed to affect accrued rights if: the changes are ‘actuarially equivalent’ (i.e. there is no reduction in overall benefit entitlement); or individual members have consented). The Government said it would only consider this if regulations contained “clear safeguards to ensure member protection was not further compromised.” It would also look to impose a series of conditions that the sponsoring employer would need to meet as part of any agreement to facilitate a reduction in indexation and revaluation.66
Royal London Director of Policy, Steve Webb, called on the Government to ensure that those affected understood the implications – for example, older pensioners with most of their service before 1997, could see a “large part of their pension frozen with only a very small annual increase.”67
There were also concerns that making an exception for one case, would drive “a coach and horses through the fundamental principle that pension promises, once made, cannot be changed retrospectively.”68
61 SN-04956 Guaranteed Minimum Pension – annual increases (2015) 62 HC Deb, 19 July 2010, c4 63 DWP, British Steel Pension Scheme – a consultation, May 2016, p 13 64 Ibid, p24-5 65 Ibid p27; Library Briefing Paper SN-03917 An overview of the Pension Protection
Fund (January 2018). 66 Ibid p31 67 ‘Oldest pensioners "could lose over £10,000" from government plans to change
pension rules - Steve Webb, Royal London’, 4 June 2016 68 ‘Got a final salary pension? Time to steel yourself’, Financial Times, 2 June 2016;
Consultation to keep British Steel pension scheme outside PPF could benefit most
32 Defined Benefit Pension Schemes
The Work and Pensions Committee recommended that the Government consult on allowing schemes to make changes to indexation rules in the interests of members:
These proposals should be subject to regulatory approval but the presumption should be in favour of change. This measure should not only facilitate permanent changes to indexation rules; in many cases a conditional arrangement whereby the scheme and employer have some breathing space to overcome difficulties but then revert to more generous uprating when good times return, may be most appropriate.69
Green Paper responses TPR said a move to reduce member benefits across the board could not be justified:
One option discussed in the Green Paper is the potential for indexation to be cut in order to reduce the burden on employers. We do accept that some schemes have been prevented from adopting CPI as their inflation measure by a “scheme rules lottery,” committing them to RPI when their intention had simply been to protect against inflation in general terms…We also accept that there may be a case for suspension of indexation in specific situations where an employer is stressed and its scheme is underfunded…However, given the available evidence as discussed in the Green Paper and considering that some indexation promises may have been intentionally introduced as part of a deal incorporating a sponsor contribution holiday to manage historic surpluses, we do not believe that a move to reduce member pensions across the board could be justified on grounds of affordability nor on the grounds of rationalization or simplification of benefit structures.70
The TUC said there was no case for permitting cuts to member benefits without their consent:
There is no case for permitting cuts to members’ benefits without their consent. This includes changes to rates of indexation and revaluation. Giving schemes with retail prices index inflation uprating in their rules the ability to switch to the consumer prices index for uprating without member consent, would cost an average affected DB scheme member £20,000 over their retirement. A transfer of assets from pension scheme members to shareholders would do nothing to meet the challenges we face in ensuring people can live comfortably in retirement. However, there may be limited circumstances in which collective consent to changes is more appropriate than reliance on individual consent under the current system.71
The PLSA supported a statutory over-ride to allow scheme trustees to move to a different price index in the interest of members:
Where there is a high probability that schemes are going to be unable to provide 100% of accrued benefits, and cannot rely on employer support to address deficits, there may be a case for
members, The Actuary, 1 June 2016; British Steel pension rule change plans 'understandable but unfair', says expert, Outlaw.com 31 May 2016
69 Work and Pensions Committee, Defined benefit pension schemes, HC 55, December 2016, para 110-111
70 TPR, Response to the Green Paper, May 2017 71 TUC Response to Green Paper, May 2017
33 Commons Library Briefing, 6 July 2018
trustees to access lower, but above PPF levels of benefits, if in their judgement, it results in a better member outcome than would otherwise be the case. The merits of that case depend, however, on there being very carefully thought through safeguards. For example, benefits that have been amended could be increased again in the future should a change in circumstances allow it […] We would support a statutory override to allow scheme trustees to move to a different index, for both revaluation and indexation, where they think it is in the best interest of their members.72
The IFoA said:
It does not appear to us there is an affordability crisis, and there is no compelling evidence to make such a provision on grounds of affordability along. In that case, [allowing schemes to move to a different price index] would be largely a political decision […] suspending indexation would create administrative problems for schemes and is probably the worst of potential solutions.73
The ACA supported “moves towards conditional indexation, with appropriate safeguards.”74
The White Paper In the White Paper, the Government ruled out measures to override provisions in scheme rules to allow changes to the indexation measure used to calculate annual increases. This was because it had decided that it could not “accept any reduction in the value of member benefits”:
218. Any across-the-board change would allow sponsoring employers to reduce their liabilities at members’ expense even if the employer had no difficulties in meeting their existing liabilities. Some people have argued that reducing the liabilities in this way would save employers money they could then use to invest or to increase the pay and/or pensions of existing employees. However, it is not practicable to ensure the benefits of any reduction in liabilities are shared in this way and the Government is not prepared to countenance a reduction in employer liabilities which might simply facilitate a transfer to shareholders of cash members are relying on to support them in retirement.
219. We are therefore not persuaded by the view that employers or trustees should be able to override scheme rules on grounds of rationality and fairness, given the lack of consensus on what constitutes fairness in this circumstance. We are of course aware that RPI is no longer endorsed by the Office for National Statistics (ONS) and that ONS now counts CPI(H), which includes housing costs, as its preferred measure of inflation. We are also aware that moving from RPI to CPI can in some rare cases be the least worst option for scheme members – for example, if the alternative is scheme failure. Therefore, while we will not be providing an override of scheme rules at this time, we will continue to monitor developments in the use of inflation indices across Government, in pensions, and more widely.75
72 PLSA, Response to Green Paper, May 2017 73 IoFA, Response to Green Paper, May 2017 74 ACA, Response to Green Paper, May 2017 75 DWP, Protecting Defined Benefit Pension Schemes, Cm 9591, March 2018
34 Defined Benefit Pension Schemes
3.4 Can more scheme consolidation be encouraged?
The fragmented nature of the DB landscape, featuring a large number of very small schemes, was one of the main concerns of the PLSA’s DB Taskforce, which, over the course of three reports published during 2016 and 2017, developed the idea of creating a ‘Superfund’ model which would facilitate the consolidation of subscale schemes. It argues that while scale was not by itself a determinant of success, it can improve outcomes, through access to more sophisticated investment skills, the ability to negotiate lower fees and better standards of scheme governance.76
The Work and Pensions Committee said the Government should look at proposals for removing barriers to consolidation:
37. The consolidation of small schemes offers clear and substantial benefits to members in terms of efficiency and sustainability. These potential rewards are longstanding, so the paucity of practical suggestions of how to achieve it was very disappointing. Successive governments, and the pensions industry, should have acted sooner. We recommend the Government comes forward in its forthcoming Green Paper with proposals for removing regulatory and other barriers to scheme consolidation.77
The Committee thought there was a strong case for creating a statutory aggregator fund:
41. There is a very strong case for the creation of a statutory aggregator fund to facilitate the consolidation of the assets and liabilities of small schemes. This could be managed by the Pension Protection Fund (PPF), but there would not be a requirement for the sponsoring employer to be insolvent for the scheme to be included. This would be an attractive alternative to the insurance company buy-out market, especially for smaller employers which often find this option prohibitively expensive or unavailable. An aggregator fund would bring greater stability and certainty to scheme members. It would also increase the chances that small employers could continue to thrive, invest and employ. We envisage a proposal whereby the sponsoring employer would agree a conditional programme of contributions at the point of transfer to the aggregator form but would then cease to be otherwise connected to the scheme.
42. We recommend the Government consult in its forthcoming Green Paper on proposals to create a statutory aggregator fund for defined benefit (DB) schemes to be managed by the PPF. This consultation should consider points including:
• how continued funding for the aggregated schemes should be secured;
• the nature of clearance required for sponsor contribution plans and to ensure consolidation was in the interests of members;
76 PLSA, DB taskforce third report – opportunities for change, September 2017 77 Work and Pensions Committee, Defined benefit pension schemes, December 2016
35 Commons Library Briefing, 6 July 2018
• which schemes would be eligible, including whether it should be restricted to closed schemes or schemes under a certain size limit; and
• whether a uniform benefit structure would be required and, if so, how this could be achieved.78
In its February 2017 DB Green Paper, the Government agreed that consolidation was worth exploring but that “significant issues that would need to be overcome in order to achieve meaningful consolidation, and the scale of the challenges should not be underestimated.”79 The potential benefits fell into the following main areas:
• efficiency and lower costs ‘per member’, due to economies of scale;
• access to more investment opportunities, and a more sophisticated investment strategy;
• improved standards of governance and trusteeship;
• more cost effective approach to buy-out for smaller schemes; and
• providing a potential solution to stressed schemes/sponsors.80
However, challenges to successful implementation would include:
• to consolidate existing schemes would require considerable up-front costs for the sponsor as it would be necessary to improve the quality of scheme records before passing over the management of the scheme, and there are significant challenges in amalgamating different funds;
• trustees and advisors have vested interests – trustees may fear losing control over the day-today running of the scheme, including important decisions over funding and investment strategy and on sensitive matters such as discretionary benefits; and trustees and advisors may not be incentivised to consider consolidation, if that could put their own positions at risk;
• sponsors might not be willing to share sensitive information about their business and commercial strategy, which often must be shared with scheme trustees when they consider the strength of the employer covenant;
• where schemes pool investments, schemes with different characteristics such as maturity and funding level may have difficulty agreeing investments which meet their employer and member needs; and
• full consolidation of schemes is difficult if schemes have different benefit structures, and moving members to new benefits structures is not straightforward.81
The Green Paper discussed possible approaches:
78 Ibid 79 DWP, Security and Sustainability in Defined Benefit Pension Schemes, Cm 9412,
February 2017, para 344 80 Ibid para 352 81 Ibid
36 Defined Benefit Pension Schemes
• Ring-fenced consolidation – where schemes share back office functions but maintain the separation (or ring-fencing) of their assets and liabilities. However, economies might not necessarily be achieved where the scheme was still segregated.
• Full consolidation – which would involve all shared services and asset pooling but also involve the consolidation of liabilities. This approach raised significant questions around cross-subsidy and how liabilities would be shared. Schemes would need to find ways of sharing their risk (including investment, mortality and covenant risk). Such an approach would probably provide the most efficient, simple consolidation vehicle but could still suffer from significant upfront costs, in terms of managing scheme mergers, and be the most challenging to achieve;
• Winding-up lump sums – consolidation could trigger a scheme winding-up, meaning that winding-up lump sums (WULS) could be provided in respect of small DB pensions. This could generate savings but at the expense of members’ deferred pensions. Statutory changes might be needed to facilitate consolidation without triggering the section 75 employer debt and allowing WULS to be provided in the process.
• ‘Superfund consolidators’ – where the Government designs new consolidation vehicles and runs them through an arms-length body or to provide the framework and encourage the industry to innovate. The Government was not convinced that it should interfere in the market but did think the creation of consolidators or aggregators would be a helpful development. One option would be for a new consolidation vehicle – or superfund – to be targeted at small schemes that were fully funded on a ‘buy-out’ basis. A number of key questions would need to be addressed, including who would bear the risk (for example, relating to investment, mortality and covenant). The Government did not think there was a case for transferring risk to the taxpayer – so options would be for the risk to be borne by the employer, the scheme member or PPF levy payers.82
One option would be for the Government to remove any regulatory and other barriers to consolidation and to set out some standards for consolidating schemes to improve confidence in the process. Another could be to require schemes to report and potentially publish administration costs, including investment costs.83 A number of commentators suggested requiring schemes to consolidate in certain circumstances. The Government said that there would need to be compelling evidence that compulsion was a proportionate response.84
The final report of the PLSA’s DB taskforce published in September 2017, recommended:
[…] a template for a new Chair’s statement for DB scheme trustees, to create an impetus for good governance, cost transparency and a culture of considering consolidation.85
82 Ibid, paras 356-87 83 Ibid para 388 84 Ibid para 389 85 PLSA, DB taskforce third report – opportunities for change, September 2017
37 Commons Library Briefing, 6 July 2018
It argued that underfunded schemes with weak employers might particularly stand to benefit from the option of transferring to its proposed new consolidation vehicle - a ‘Superfund’:
Transferring to a Superfund could allow employers to concentrate on securing the future of their business, provide trustees with another way of securing member benefits, and ensure members gain from the greater likelihood of their benefits being paid in full. Our modelling and analysis provisionally indicates that Superfunds:
• Could pay members the full value of their benefits in more than 90% of scenarios, which has the potential to improve outcomes for more than 3 million members;
• Could cost employers significantly less than buyout, with 39% of employers surveyed already keen to consider Superfund entry; and
• Could free up employer resources for investment in their businesses. Of those who knew what they would invest in, 49% of employers said they would invest the money freed up directly in their employees, for instance through contributions to the DC pension scheme or wage growth; while 28% would invest in business growth, e.g. new equipment or company infrastructure.86
Its proposed model was that:
• A Superfund would be an occupational pension scheme;
• It would need to be authorised and supervised by TPR in a regime, not unlike that introduced for DC Master Trusts;
• Trustees and employers would need to jointly agree to transfer their scheme (including all assets
• and liabilities) into the Superfund, with employers paying a fee upon entry to substantially reduce scheme underfunding;
• Superfunds would aim to pay members the full value of their benefits in more than 90% of scenarios;
• Payments would be simplified to a common structure, as entering schemes would have a variety of different scheme designs which could be complex to administer otherwise; and
• Superfunds would be PPF-eligible, ensuring Superfund scheme members get the same level of protection as they did in their previous scheme.87
The White Paper In the White Paper, the Government said it would consult 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:”
Consolidation already takes place in various forms across the pensions market. In the Defined Benefit sector, consolidation can
86 Ibid, Executive Summary 87 Ibid, p23
38 Defined Benefit Pension Schemes
help schemes benefit from reduced scheme running costs per member, more effective and efficient investment strategies and improved governance.
Evidence suggests that, on average, small and medium-sized schemes are more likely to fail to meet the governance standards expected by the Pensions Regulator and have higher administrative costs than larger schemes. Partly, this is a result of being unable to benefit from economies of scale. Raising awareness of existing forms of consolidation, as well as facilitating new vehicles to enter the market by putting appropriate safeguards in place could provide new opportunities for employers and schemes to overcome those issues.
There will always be a risk of employer insolvency and even when schemes are well-funded, the cost of insurance provision means it is unlikely that many schemes are able to buy-out in full. New consolidation vehicles, such as the Pension and Lifetime Savings Association’s (PLSA) proposed Superfund model, could therefore offer a more affordable option than insured buy-out.
To encourage efficiencies and facilitate consolidation for the improvement of outcomes for members and employers, while ensuring sufficient safeguards are in place, we will:
(i) Consult this year on proposals for a legislative framework and authorisation regime within which new forms of consolidation vehicles could operate;
(ii) Consult this year on a new accreditation regime which could help build confidence and encourage existing forms of consolidation;
(iii) Work with the Regulator to raise awareness of the benefits of consolidation with trustees and sponsoring employers, though, for example, the Regulator’s Trustees Toolkit and updating guidance; and
(iv) Consider some minor changes to guaranteed minimum pensions (GMP) conversion legislation to support benefit simplification, which will help reduce complexities in existing benefit structures.88
The PLSA said it was pleased to see the White Paper take forward work on consolidation developed by the PLSA’s DB taskforce, saying there was a “growing body of evidence that consolidation in its many guises could provide the benefits of scale for those schemes that chose to consolidate.89
Submissions to the Work & Pensions Committee The PPF said it favoured the consolidation of small schemes to drive greater efficiency from scheme assets, reduce costs and improve governance. However, it also identified some potential risks and considerations to do with superfunds:
• Investment failure – In the absence of a substantive employer, the security of members (and the PPF) is entirely dependent on the investment performance of the fund and the associated buffer. This will be a lower level of security than that afforded by buy-out (backed by PRA regulation
88 DWP, Protecting Defined Benefit Pension Schemes, Cm 9591, March 2018 89 PLSA comments on defined benefit pensions white paper, March 2018
39 Commons Library Briefing, 6 July 2018
and Solvency II requirements), presenting a risk the investment strategy might fail, potentially leading to large claims on the PPF.
• The impact of profit withdrawal – The removal of funds in years of good investment returns could well increase the likelihood of scheme failure in the long term by preventing a greater level of reserve being built up. There is the unappealing prospect of investors making significant returns in early years with the vehicle failing in the long term.
• Systemic risk if consolidators become too large – In the current system risk is dispersed across individual schemes each with their own investment strategy and each underpinned by their own sponsoring employers (with diverse insolvency risks). Consolidators would bring schemes together with all risk focused on one investment strategy. Furthermore, different consolidators are likely to pursue the same investment strategy. There is therefore the prospect of risk becoming highly correlated (ie. all consolidators might fail at the same time).
• Fairness to PPF levy payers – Failure of a consolidator (assuming PPF eligibility) could impose costs that must be met by “conventional” schemes through the PPF levy.
• Inappropriate transfers – The judgement as to whether a transfer into a superfund improves security is likely to be a difficult one to make (especially with the challenges of accurately assessing the value of the employer covenant). There is therefore a risk that transfers will be made when it is not in the members’ best interests to do so […]. This is a particular concern given that some employers are likely to be highly incentivised to transfer scheme liabilities to a superfund if it offers the opportunity to “walk away on the cheap”.90
The PLSA said consolidation could help bring about economies of scale and improved governance but that the “the regulatory regime for Superfunds must be extremely robust, in line with – or possibly more stringent than – the recent authorisation regime introduced for DC master trusts”, and argued for a proactive role for TPR:
Superfunds would need to submit a business plan to the Regulator, covering areas such as strategy, investment policy, profit levels and other aspects of operation. TPR would need to approve the business plan which would provide the basis upon which the ongoing operation of the Superfund would be supervised. Although changes could be made to the business plan, these would need to be decided by agreement between the sponsor and trustees and would also be subject to approval by the Regulator.91
Royal London Consulting Actuaries expressed concerns in respect of the practical difficulties of scheme consolidation compared to pooling of services:
90 Written evidence from PPF BPW009, May 2018 91 Written evidence from PLSA (BPW0028) May 2018
40 Defined Benefit Pension Schemes
• The merger of schemes into consolidated superfunds will not address the problems that have arisen in cases like BHS or Carillion, however it would increase the risk that schemes become “too big to fail” as illustrated by Tata Steel.
• 80% of DB schemes have less than 1,000 members with the average membership being 214. To create a single superfund of 10,000 members would require approximately 50 sets of trustees and sponsors to agree. Operating a scheme with probably 100 different benefit structures and condition structures would not achieve the costs per member indicated by surveys for similar sized single employer schemes.
• The white paper makes it clear that consolidation is not just the merger of schemes, but also includes pooling of services between independent schemes. However, due to the use of the term “consolidation” government policy risks becoming focused on a sub-optimal idea, scheme merger. Pooling is likely be a more effective and practical form of consolidation.92
The ABI said it believed that existing buy-out and phased buy-in arrangements remained the best option:
[…] the buy-out market and phased buy-ins remain the best option for schemes looking to de-risk, with insurers providing the very highest level of certainty for member benefits, underwritten by high capital requirements, a robust system of governance and detailed reporting and disclosure. The bulk annuity market is highly active, with bulk transfers predicted to grow to £15bn per annum in 2018 and pension consultants have been regularly reporting that competitive pricing is being achieved by trustees. The only proven vehicle in existence in the DB market that can effectively separate the sponsoring employer from the scheme and achieve the benefits of consolidation and protection of member benefits is bulk annuity insurance.93
The Committee received evidence from a new Pension SuperFund, which it has been possible to set up under existing legislation because no change to scheme benefits is envisaged. It consolidates by accepting bulk transfers of assets and liabilities from existing DB schemes. The principal change was that the “sponsoring employer’s covenant was replaced by financial security.” It acknowledged the importance of having adequate safeguards in place – through governance and funding arrangements.94
Giving oral evidence to the Committee, its chief investment officer explained how their funding approach sought to protect benefits while incentivising investment:
We have a very prudent capital adequacy basis on which we would value the schemes’ liabilities. To the extent that the superfund can generate returns that take the funding level above 100% on that prudent basis, that upside would be shared between the scheme members and, ultimately, this asset-backed contribution vehicle. Capital will accumulate in there as required, and after another
92 Written evidence from Royal London Consulting Actuaries (BPW0007), May 2018 93 Written evidence from the ABI (BPW0030) May 2018 94 Written evidence from the Pensions Superfund BPW00025, May 2018
41 Commons Library Briefing, 6 July 2018
threshold—an even more prudent barrier, which is indicatively 115% on our prudent basis—any surplus in that buffer vehicle can be distributed to investors. There is a very clear waterfall. The first priority is keeping the scheme at full funding. Next, value goes directly to members and then, in the last stage of the waterfall, investors would potentially get a return.95
He also explained the arrangements to prevent the fund from being sold-off:
We have spent a lot of time, and are continuing to spend a great deal of time, very robust governance framework for the entire structure, of which the role of the trustees of the superfund itself will be central. It would be hardcoded into the design of the overall structure that assets cannot be removed, for instance, without trustee consent while the system is operating. We would protect ourselves by hard rules in the agreements between the superfund, investors and management to make sure that sort of thing cannot happen.96
Chief executive Alan Rubenstein explained why he thought the time had come for this approach:
What is different from, let’s say, 10 years ago is that we now all recognise that we are moving towards an endgame for defined benefit pensions. One of the problems we face is how to terminate that in a way that makes sure members get their benefits and does not place an excessive burden on industry.97
3.5 Should clearance be mandatory? The Work and Pensions Committee recommended that the Government consult in its forthcoming Green Paper on “proposals to give trustees timely powers to demand timely information from sponsors.”98 The February 2017 Green Paper acknowledged that there might be a case for “strengthening the trustee’s ability to require certain information or engagement” It asked whether trustees should be given extra powers such as powers to demand timely information from sponsors, to strengthen their position and whether they should be consulted when the employer plans to pay dividends if the scheme is underfunded.99
There is a notifiable events framework, which is designed to give TPR early warning of a possible call on the Pension Protection Fund. Schemes that are eligible for the PPF, and their employer, are required to notify TPR of certain types of event. Examples are an employer ceasing to carry on business in the United Kingdom, or a decision by a controlling company to relinquish control of the employer company.100
The Green Paper acknowledged some concern that this was not working as well as it should:
95 Q22, 2 May 2018 96 Q17, 2 May 2018 97 Q38, 2 May 2018 98 DWP, Protecting Defined Benefit Pension Schemes, Cm 9591, Mar 2018, para 12-13 99 DWP, Security and Sustainability in Defined Benefit Pension Schemes, Cm 9410,
December 2016, p73 100 TPR Code of Practice 02, Notifiable Events, April 2005; Pensions Act 2004, s69; SI
2005/900
42 Defined Benefit Pension Schemes
310. Duties to notify the Regulator of certain corporate transactions already exist within pension legislation. The duty falls on the trustees and employer through the notifiable events framework, with penalties for non-compliance. However, notification often occurs very close to the completion of the transaction, and trustees are sometimes not informed at all, which means that the Regulator is unable to act to prevent the transaction. There is some concern, shared by the Regulator, that the current regime is not working as well as it could.101
In addition, there is a system of voluntary clearance, which was introduced to enable companies undergoing restructuring to gain assurance that TPR’s anti-avoidance powers would not be used in relation to a corporate transaction.102 TPR seeks to balance different factors – protecting members’ benefits and reducing the risk of calls on the PPF, while at the same time recognising commercial activity and business needs.103 TPR cannot stop a corporate transaction from proceeding but can issue an assurance that its powers will not be used after the event. It strongly advises seeking clearance where “there is an event that may be materially detrimental to the ability of the scheme to meet pensions liabilities – such as a change of ownership.”104
The Work and Pensions Select Committee noted that clearance applications had declined substantially, falling from 263 in 2005-06 to nine in 2015-16. It recommended that the Government consult on new rules for situations where clearance was mandatory:
141. We recommend that in its forthcoming Green Paper the Government consult on proposals to require advance clearance from TPR for certain corporate transactions that could be materially detrimental to the funding position of a DB scheme. The circumstances in which clearance was compulsory would have to be narrow to prevent a disproportionate effect on normal economic activity. They might include the sale or merger of a scheme sponsor where the pension deficit is higher than a fixed proportion of the value of the company. It is also reasonable to expect any prospective purchaser to have a credible plan for tackling a substantial pension deficit.105
In the Green Paper, DWP said “very significant difficulties” would need to be overcome before clearance could be required in certain specified circumstances. It had the potential to “make turn arounds more difficult and lead to more businesses being placed into insolvency.” It would also be unlikely to catch some actions potentially more detrimental to the scheme– for example, “moving assets from the sponsor to another part of the corporate group cannot be effectively managed/controlled through a prospective clearance regime, and can only be addressed retrospectively.”106 Criteria would need to be very clear to prevent TPR
101 Cm 9412, Feb 2017, para 69 and 310 102 TPR, Clearance Guidance, June 2009 - introduction 103 Ibid 104 Article by Tony Hobman, Chief Executive of the Pensions Regulator in HR Director,
issue 38, June 2007, http://bit.ly/cnOiOc (UK Govt Web Archive) 105 Ibid 106 DWP, Security and Sustainability in Defined Benefit Pension Schemes, Cm 9412, Feb
2017, p 7
43 Commons Library Briefing, 6 July 2018
being overwhelmed with clearance applications and corporate activity being held up.107 It asked for views on whether it would be possible to “design a system of compulsory proactive clearance by the Regulator of certain corporate transactions without significant detriment to legitimate business activity.”108
Green Paper responses TPR said it did not think mandatory clearance would be a proportionate approach. Instead it advocated strengthening the position of trustees and incentivising employers to submit clearance applications:
We do not do not consider that mandatory clearance would be a proportionate approach. Instead we would advocate further consideration is given to: strengthening the position of trustees as the first line of defence… this could be through placing a duty on employers to consult with trustees; and then enabling the trustees to report concerns to the Regulator (and for the Regulator to then be able to require the submission of a clearance application); and incentivising employers to submit clearance applications in borderline cases – perhaps by enabling the imposition of substantive fines where employers are found to have avoided pension liabilities.109
The trade union, Prospect, agreed:
It is unlikely that such a system [requiring mandatory clearance in certain circumstances] could be specific enough in describing the types of transactions that are relevant to be manageable. Instead trustees and trade unions should have access to sufficient corporate information to enable an informed decision to be made on whether such any transaction should be approved or not.110
The White Paper The Government said the majority of respondents to the Green Paper consultation were concerned that:
[…] going even further with proposals for targeted mandatory clearance could stifle legitimate business activity such as corporate restructuring and could adversely impact on employment prospects
It would strengthen the clearance regime and consult on what more could be done without inhibiting legitimate business activity:
We will also strengthen the clearance regime so that sponsoring employers give sufficient regard to their pension scheme during corporate transactions, by building on existing processes and considering what new measures might be necessary. We will continue to work with the Regulator, industry and other relevant parties to understand how any new proposals might be introduced without inhibiting legitimate business activities.111
It said there were a number of improvements that could be made to the notifiable events framework, in particular:
107 Ibid, para 320 108 Ibid, p 73 109 TPR Green Paper response, May 2017 110 Prospect Green Paper response, May 2017) 111 DWP, Protecting Defined Benefit Pension Schemes, Cm 9591, December 2018
44 Defined Benefit Pension Schemes
• coverage of the notifiable events framework – we will review whether it covers all relevant transactions and widen these to include anything that is currently missing; and
• timing of the notifiable events framework – the framework currently requires businesses to inform the Regulator as soon as reasonably practical but without further definition. In practice, in some cases, this has meant not until (or after) the events actually occur. We think that this timing needs clarifying so that the Regulator is made aware at an earlier stage in consideration and can engage in discussions sooner.112
Work and Pensions Committee submissions However, the APL said that, while there were some cases in which it worked well, overall the way TPR had decided to operate the clearance process meant it was not fit for purpose and did not meet the objective of ensuring that the threat of TPR sanction did not become an impediment to corporate activity.113 TPR said it was essential that it could act swiftly to protect pensions in the event of major corporate activity. However, measures needed to be proportionate and the White Paper proposals struck the right balance:
We believe the right balance can be struck through the White Paper proposals for a stronger notifiable events framework and voluntary clearance regime, enabling us to step in to protect pensions without stymieing legitimate business activity. TPR will work closely with DWP and industry to develop efficient and effective measures for achieving this.114
The ACA agreed, welcoming the decision not to make clearance compulsory and the proposal for employers to have to consult trustees on a ‘Statement of Intent’ before certain transactions so that they could flag any concerns with TPR at an early stage.115 The PPF also welcomed the approach saying that there was an opportunity, through the review of the notifiable events and voluntary clearance regime, to ensure trustees were well informed of corporate transactions (sufficiently in advance to consider the implications for the scheme) and have the ability to quickly call in TPR when they are concerned. This was preferable to mandating TPR to sift through large volumes of corporate transactions.116
3.6 Does TPR need stronger powers? TPR already has powers to demand that additional financial support for pension schemes. Its anti-avoidance powers include power to issue:
• Contribution Notice – a demand for a sum of money where there has been a deliberate attempt to avoid a statutory debt;
112 DWP, Protecting Defined Benefit Pension Schemes, Cm 9591, March 2018, para 37 113 Written evidence from the APL (BPW0024) 114 Written evidence from TPR (BPW0025) 115 Written evidence from the ACA (BPW0020) 116 Written evidence from the PPF (BPW0029)
45 Commons Library Briefing, 6 July 2018
• Financial Support Direction – a requirement for financial support to be put in place for an underfunded scheme where the sponsoring employer was either a service company or was insufficiently resourced at the relevant time. An FSD can extend beyond the sponsoring employer into the wider corporate group.117
In its December 2016 report on DB schemes, the Work and Pensions Select Committee recommended that the Government consult on giving TPR powers to impose punitive fines. It thought these fines could “treble the original demand” in a Contribution Notice or Financial Support Direction from TPR. The intention would be that such fines would not need to be imposed: “they would act as a nuclear deterrent to avoidance.” Evidence from the Pension Protection Fund was that this would encourage employers to seek clearance where they might otherwise be subject to anti-avoidance powers.118
In its Green Paper, the Government asked whether TPR “should be able to impose punitive fines for corporate transactions that are detrimental to schemes?” and “if so, in what circumstances.”119 Green Paper responses In its response to the Green Paper, TPR said:
We think it is appropriate to consider mechanism to better enable the Regulator to proactively intervene in corporate transactions that could adversely affect the pension scheme…We would advocate that further consideration is given to “incentivising employers to submit clearance applications in borderline cases – perhaps by enabling the imposition of substantial fines where employers are found to have avoided pension liabilities.120
It in its manifesto for the 2017 general election, the Conservative Party said it would: “give the Pensions Regulator new powers to issue punitive fines for those found to have left a pension scheme under-resourced.”121
In the Observer on 21 January 2018, following the collapse of Carillion, Prime Minister, Theresa May said that in the spring, the Government would “set out new tough new rules for executives who try to line their own pockets by putting their workers’ pensions at risk – an unacceptable abuse tha we will end.”122 Chair of the Work and Pensions Committee Frank Field welcomed this but said the key was to match words with action.123
117 For more detail, see Library Briefing Paper SN-04368 118 Work and Pensions Committee, Defined Benefit Pension Schemes, HC 55, December
2016, para 143 119 DWP, Security and sustainability in Defined Benefit pension schemes, Cm 9412,
February 2017, p73 120 TPR Green Paper response, May 2017 121 Conservative Party, General Election Manifesto 2017 122 ‘Boardroom excesses can no longer be tolerated: the economy has to work for all’,
Theresa May, The Observer, 21 January 2018 123 Work and Pensions Committee tweet 21 January 2018
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The White Paper The Government said it would legislate to give TPR powers “to punish those who deliberately put their pension scheme at risk by introducing punitive fines.”
14. We will legislate to introduce a proportionate and robust penalty regime to tackle irresponsible activities that may cause a material detriment to a pension scheme and may compromise the scheme’s funding position.
15. This will strengthen the Regulator’s existing anti-avoidance framework, and will give the Regulator an express power to penalise the targets of a contribution notice. This power will extend to individual company Directors.
16. The parameters of this new approach will be enacted in primary legislation.
17. To ensure members of Defined Benefit schemes are protected as far as possible and to deter activity that puts the security of members’ benefits at risk, we will examine the feasibility of the penalty regime applying in respect of acts or omissions prior to enactment, in particular, after the date this document is published.
18. We will continue to work on the design of the new regime including the penalty levels, to ensure it remains proportionate and there are no unintended consequences. Although the details are still being developed, it is expected that the penalty will be linked to the contribution notice, effectively creating the possibility of a highly punitive fine being issued by the Regulator.
19. Through its operation of the regime over the last ten years, the Regulator has identified other ways in which its anti-avoidance powers could be enhanced. We will take this opportunity to review these powers more generally and, if needed, legislate to improve the Regulator’s contribution notice and financial support directions powers, further strengthening the regime.124
The Government would also legislate to introduce a criminal offence to “punish those found to have committed wilful or grossly reckless behaviour in relation to a pension scheme and build on the existing process to support the disqualification of company directors.”125
Work & Pensions Committee – need for new powers? The Work and Pensions Select Committee asked for views on whether TPR ’s effectiveness was a matter of greater powers, better use of resources or cultural change in the organisation.126 In response, TPR set out changes it had made in its approach:
4. TPR is changing. We are setting clearer expectations of those we regulate and we are intervening more quickly and decisively through regulatory activity and enforcement powers to put things right. There is a lot more to do but we know from feedback received from stakeholders and our regulated community that
124 DWP, Protecting Defined Benefit Pension Schemes, Cm 9591, March 2018 125 Ibid p6 126 Defined benefit pensions White Paper inquiry
47 Commons Library Briefing, 6 July 2018
they are aware of our TPR Future programme and that our clearer, quicker and tougher approach is already having an impact.
5. Through our TPR Future Programme we have completed a wholesale review of our approach to regulation. In April 2018, we started implementing a new regulatory model across TPR in order to drive up standards and tackle risks through proactive engagement with a larger proportion of the schemes and employers we regulate. We are being clearer and more directive about what schemes must do, making better use of data to enable us to target the right schemes, and using a wider range of communications, oversight and enforcement tools - ranging from high-volume targeted campaigns to supervision.127
The PPF argued that increased use of existing powers by the TPR and changing attitudes within the wider industry have already led to positive changes.128
The PLSA welcomed TPR’s shift in approach “towards a clearer, quicker and tougher approach to driving up standards in the pensions sector.” This had been a positive step and one which its members had indicated was already being felt on the ground. It warned against unintended consequences that placed extra requirements on all schemes, rather than those where enforcement action is genuinely needed.129
The Association of Pensions Lawyers (APL) Legislative Parliamentary Committee said what was needed was “largely a matter of cultural change and at least partly a question of sufficiently and prioritisation of resources.” It said TPR already had very wide-ranging powers which it believed could be put to greater effect:
1.8 We understand that TPR has, in the past, suggested that the powers are not workable because of some of the ambiguities in the powers (the key example being what is or is not reasonable). In our view, the concept of reasonableness is at the heart of these powers and is essential to the existence of such powers not causing significant difficulties for corporate groups with DB schemes (e.g. if there was no concept of reasonableness such that TPR simply had discretion to make connected parties liable it would exacerbate the issues mentioned above). If TPR were to “test” its powers more readily, this would enable precedents to be established to provide more certainty.130
The ACA did not think substantial new powers were needed, as TPR already had:
[…] significant powers, some of which it has used only sparingly; increased resources may allow it to intervene in more schemes, potentially at an earlier stage, but will lead to an increased levy payable by pension schemes; and whilst cultural change is clearly underway within the Pensions Regulator, it will take time to achieve. There is also the risk of powers (and fines) being exercised disproportionately in order to prove that the Pensions
127 Written evidence from TPR (BPW0025) May 2018 128 Written evidence from TPR (BPW009), May 2018 129 Written evidence from the PLSA (BPW00028) May 2018 130 Written evidence from the APL (BPW0024) May 2018
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Regulator is taking a tougher stance, when a more nuanced and supportive approach might achieve better outcomes.131
Unite thought there was a problem with TPR’s objectives and called for a focus on promoting continuing pension accrual in DB schemes.132 Response to White Paper proposals The PPF was supportive of the White Paper proposals intended to enhance TPR’s ability to act proactively to prevent detriment to pension schemes. In particular:
• New ‘fines’ – As we have previously proposed, we think the prospect of punitive fines should incentivise clearance applications from the right cases (those where there is a prospect of detriment to the scheme) and/or encourage employers to put greater levels of mitigation in place. In practice one option would be for these to be added to the Contribution Notices (CNs) where there is proven misconduct. Our expectation would be that they’d likely act as a powerful deterrent to potential avoidance and encourage proactive use of the voluntary clearance regime where appropriate.
• Strengthening information gathering powers – We think there is an opportunity through the review of the notifiable events and voluntary clearance regime to ensure trustees are well informed of corporate transactions (sufficiently in advance to consider the implications for the scheme) and have the ability to quickly call in TPR when they are concerned.133
The PLSA welcomed the proposed new powers, although effective implementation would be a challenge:
We believe that making “wilful or grossly reckless behaviour” a criminal offence would prove to be deterrent to company directors, and would fit alongside the suite of possible punishments, including superfines. We anticipate, however, that it may prove difficult to clearly define the range of what ‘good’ and ‘bad’ behaviour would look like and therefore it will be necessary to give careful thought to whether such a power would be implementable in practice. It would also be helpful to consider whether overlaps in the regulatory regime would lead to a position where different regulators had similar or duplicative duties to act against poor practice.134
The Institute and Faculty of Actuaries supported: “the White Paper for disclosure of pension scheme impacts on corporate transactions and for civil fines for misconduct of directors.” 135 Others were sceptical about how effective some of the proposed new powers would be. For example, the ACA did not think the proposed criminal offence would have the desired effect:
131 Written evidence from ACA (BPW0020) May 2018 132 Written evidence from Unite (BPW0013) May 2018 133 Written evidence from the PPF (BPW009),May 2018 134 Written evidence from the PLSA (BPW00028) May 2018 135 Written evidence from the IFoA (BPW0032) May 2018
49 Commons Library Briefing, 6 July 2018
We do not think that the proposed criminal offence for ‘wilful and grossly reckless behaviour’ in relation to a pension scheme is likely to have a significant impact on directors of companies sponsoring pension schemes. Company directors are already potentially liable to a large number of criminal sanctions under the Companies Act 2006 (for example for fraudulent trading) and yet there have still been gross failures of corporate governance. Adding a specific offence in relation to a pension scheme is unlikely to be a significant deterrent for a company director who is already ignoring his or her existing obligations under the Companies Act. Although we are not lawyers, we think that the ‘wilful and grossly reckless’ test is potentially a very high hurdle and one on which it may be difficult to achieve a conviction. We would therefore view this proposal as more of a political gesture to suggest that this is an issue that the Government takes seriously rather than a sanction that is likely to be much used, if at all.
If the measure acts as a deterrent at all, it is more likely that the message sent by the risk of criminal sanctions will provide a further impetus for prudent company directors to close their DB schemes in favour of lower cost DC arrangements, with inferior pension outcomes.136
The Association of Pensions Lawyers was also sceptical:
3.1 In our view, a criminal offence would not provide a meaningful additional deterrent. In our experience, the risk of a CN is already a meaningful deterrent for an individual.
3.2 The higher burden of proof associated with criminal offences would require significantly greater resource (both in terms of time and cost) on the part of TPR to achieve a successful criminal conviction, which requires a case to be proven beyond reasonable doubt. The industry is well-aware that TPR’s resources are limited.
3.3 There are also issues around the meaning of ‘wilful or grossly reckless’ behaviour in this context. These are difficult concepts to define and prove – and they are different to the usual definition of ‘reckless’ in criminal proceedings. They are also novel concepts for TPR, which has in the past been reluctant to use some of its more draconian powers particularly where the scope is unclear.
3.4 In practice therefore, it seems to us likely that such a power would be rarely used which would further reduce its effectiveness as a deterrent over time.137
The TUC saw some of the proposals as potentially positive but was sceptical of the proposals for a new criminal offence and punitive fines:
[…] the proposals in the White Paper to give TPR greater information gathering powers and to seek to strengthen the existing notifiable events framework and voluntary clearance regime are potentially positive steps. These are practical measures that could make it less likely that reckless scheme sponsors will put the provision of members’ pensions benefits at risk.
We are less convinced about plans to give the regulator powers to levy punitive fines on those who deliberately put a pension scheme at risk and to introduce a criminal offence to punish those who committed wilful or grossly reckless behaviour in relation to a pension scheme.
136 Written evidence from ACA (BPW0020) May 2018 137 Written evidence from the APL (BPW0024) May 2018
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While such measures give the impression of action, it is likely that their use would be extremely limited. It would be very difficult for regulators to demonstrate that someone has deliberately put a scheme at risk. This therefore risks being a distraction from more meaningful action. TPR has rarely brought prosecutions in the past.138
3.7 What claims should the scheme have in insolvency?
The question of whether debt due from an insolvent employer to an underfunded pension fund should be given priority over debts due to other creditors, was considered by the Pension Law Review Committee in 1993. It decided that it should not, partly because it would make the normal operation of the employers’ business more difficult:
The existence of a liability of indeterminate size ranking above, for example, the repayment of bank loans could be a major obstacle to the provision of credit.139
It decided that a better approach would be to introduce scheme funding requirements and a compensation scheme.140 This is the broad approach that is now in place. Defined benefit pension schemes are subject to the scheme specific funding requirements introduced under the Pensions Act 2004. Schemes that wind up underfunded on the insolvency of the employer will enter a Pension Protection Fund assessment period.141 Even where a scheme is in administration, tPR may be able to exercise its power to require a person it considers responsible for the scheme having insufficient assets to make a financial contribution to the scheme. One case in which it did so was that of Nortel – where it issued a Financial Support Direction to the parent company in Canada. In doing so, it took:
[…] into account the fact that the group was highly integrated, and operated on the basis of business lines rather than by reference to individual legal entities. The Panel also found that NNUK had played a key role running Nortel’s activities in EMEA. This benefited the whole Nortel Group thanks to NNUK providing much of the infrastructure and management functions necessary for EMEA’s operations. NNUK was also one of the group’s principle research and development centres, and had made significant intercompany loans to other group companies.142
The administrators of the companies in this and the Lehman Brothers group launched a joint court action in November 2010, seeking 138 Written evidence from TUC (BPW0019) 139 Pension Law Reform. The Report of the Pension Law Review Committee, Cm 2342-
1, 1993, para 4.11.2-12 140 Ibid, Summary, p32-5 141 Library Briefing Paper CBP-3917 Overview of the Pension Protection Fund (January
2018) 142 TPR, Regulatory Intervention report issued under s89 of the Pensions Act 2004 in
relation to Nortel Networks UK Pension Plan, September 2017; [2013] UKSC 52, 24 July 2013, para 39
51 Commons Library Briefing, 6 July 2018
confirmation of the legal status of an FSD when issued against an insolvent company. In July 2013, it ruled that an FSD is effective against insolvent companies, and that liabilities under it rank as provable debts (which rank lower in the priority order than the expenses of insolvency proceedings).143 TPR welcomed the judgement as having removed uncertainty:
The judgment therefore confirms that the FSD is effective in an insolvency, but overrules the findings of the High Court and the Court of Appeal that the costs of complying with an FSD issued against an insolvent target company following insolvency would rank as an expense of the administration or liquidation […]
in this case, the regulator was forced to defend against arguments that an FSD issued against an insolvent company would be ineffective and disappear down a ‘black hole’. Such an outcome would have had serious consequences for our efforts to protect members’ benefits and the Pension Protection Fund. We argued in response that FSD liabilities ranked either as an administration expense or, in the alternative, as a provable debt.
Since the challenge was first made, we have made clear that we have no intention of frustrating the proper workings of the administration process. Today’s judgement will provide clarify to the UK’s restructuring and rescue practitioners that FSD liabilities have to be recognised in insolvent situations but do not have priority over administration expenses or secured debts.144
An article in Insolvency Intelligence argued that had the Court of Appeal decision not been reversed, the need to take account of pension fund deficiencies elsewhere in the group might have deprived “otherwise-viable members of a corporate group…of any reasonable prospect of survival.”145
In debate on the collapse of Carillion on 11 January 2017, Work and Pensions Secretary, Esther McVey indicated that the position of the pension scheme in the list of creditors on insolvency was key:
Stephen Lloyd (Eastbourne) (LD): […] under the current rules, pension obligations are unsecured, meaning that insolvent companies fund their pension schemes only when they have compensated their other, supposedly more important, secured creditors? If so, has her Department considered carrying out a review of those rules so that employees with private pensions can be given a justifiably higher priority in future?
Esther MvVey: That is key—where do they fit in the line of creditors? Are people being given the correct protection for their pensions? That is why the Pension Protection Fund was brought in. Again, this is something that needs to be brought forward under the governance rules for pensions.146
This led to debate in the pensions press. A pensions lawyer commented that problems with this could include banks starting to insist on security
143 Ibid 144 Ibid 145 ‘Pensions again – ‘just when you thought it was safe to go into administration’, Professor Ian Fletcher and Gary Squires, AlixPartners, Insolvency intelligence, 2014 146 HC Deb 22 January 2018 c31
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to raise their position in the priority order. In addition, when you have an insolvent company there is insufficient money and it is often difficult to predict who the creditors would be the winners and losers.147 An alternative point of view, one set out in a 2016 report from the Pensions Institute, was that:
Legislation according a pension scheme’s deficit priority in insolvency would dramatically alleviate the problem of underfunded schemes. The pressure from other (thus demoted) creditors and stakeholders would quickly produce tangible amelioration.148
147 Esther McVey: Government to review priority of pensions in insolvency, Professional
Pensions, 23 January 2018 148 Keith Wallace, Milking and Dumping, The Pensions Institute, August 2016
BRIEFING PAPER Number CBP-8219 6 July 2018
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