Business must not pay the price for Pension Regulator’s extra powers
Not wishing to pre-empt the result of the forthcoming General Election, but if the Conservative Party do win, their manifesto indicates that UK Government policy on defined benefit pensions has already been set.
The DWP’s Green Paper, Sustainability in defined benefit pension schemes, closed earlier this month but the Conservatives did not wait for responses to be analysed before deciding what needs to change.
ICAS submitted a response to the Green Paper, our position on some of the aspects are outlined below.
Lessons learned from BHS
Additional powers for The Pensions Regulator (TPR) in relation to corporate transactions are anticipated in wake of Work and Pensions Commons Select Committee recommendations, made in December 2016.
MPs’ concerns stemmed from several high-profile cases about the handling of DB schemes by BHS, British Steel, Halcrow and Bernard Mathews among others.
In its response to the Green Paper, the ICAS Pensions Panel has cautioned that any extension of TPR’s powers must be made without damaging the competitiveness of UK business.
However, ICAS is open to the idea of compulsory notification of corporate transactions and to clearance of corporate transactions being required from TPR in very limited circumstances.
Small scheme limitations need to be addressed
ICAS does not believe there is a systemic weakness in the DB sector but recognises that smaller schemes are less likely to have an independent professional trustee on the board or to be able afford the level of advice needed to follow an optimal investment strategy and may therefore seek to comply with regulatory requirements and no more.
With TPR setting out, in its latest corporate plan, its determination “to drive up standards of trusteeship across all schemes, with a particular focus on chairs and professional trustees”, ICAS is keen that smaller schemes with lay trustees should not be forgotten and should fall within any plans to drive up standards of stewardship, governance and decision-making.
Finance Directors de-risking
It is ICAS’ experience that finance directors are taking an even greater interest in managing pension liabilities with a view to de-risking: there are some benefits in this regard from DB to defined contribution transfers taking place under the freedom and choice reforms.
A desire to de-risk, and reduce balance sheet volatility, is understandable given the impact on liabilities of low interest rates and the visibility of pension deficits in financial statements.
DWP’s concept of ‘the stressed employer’ is flawed
The Green Paper seeks views on whether ‘stressed’ employers should be allowed to reduce member benefits.
Although it may be tempting for employers to think about reducing member benefits to make these more affordable, the potential for moral hazard is significant and ICAS does not see any scope for reforms built round the concept of the ‘stressed’ employer.