19 April 2018

The proposals for change in the white paper are in three areas:

  • A stronger Pensions Regulator (TPR).
  • Scheme funding – clearer standards and a chair’s statement.
  • Consolidation of schemes – the main proposal in the paper.

Most of the proposals for new powers come with little definition and will be filled in after further consultation. In the meantime, many of the new powers are hard to evaluate.

The government continues to see ‘no systemic problem in the regulatory and legislative framework‘ behind DB schemes, but it does accept that some sponsors use the current system for their own benefit and to the cost of scheme members.

Stronger Pensions Regulator

New, extended and backdated powers

The government does not believe that there is wide-scale deliberate activity by employers to avoid pension liabilities, though it does say the system must guard against the risk that a few may act in a way that is detrimental to a scheme’s prospects of paying full benefits.

To deter irresponsible actions and to build confidence in DB schemes, the government proposes new, extended and backdated powers for TPR:

  • A proportionate penalty regime to deter irresponsible acts that may cause material detriment to a scheme and compromise its funding position.
  • The power to penalise the targets of a contribution notice (CN), including individual company directors.
  • A new penalty regime applying retrospectively to acts or omissions done before the regime is enacted, and in particular, to those done after the publication of the white paper (19 March 2018) giving notice of the regime. Scheme sponsors take careful note.
  • An examination into ways TPR has identified in which its anti-avoidance powers to issue CNs and financial support directions (FSDs) could be enhanced.
  • A comprehensive range of sanctions against wrongdoing e.g. not complying with a CN. There will be civil sanctions and, as a backstop, criminal ones too.
  • A new criminal offence to punish wilful or grossly reckless behaviour by directors (and connected persons) in relation to a DB scheme. There will be a consultation on the terms of this offence.

The government is looking closely at the framework for regulated apportionment arrangements. On certain conditions these offer a route into the Pension Protection Fund (PPF) that is agreed beforehand by TPR and the PPF.

Building on voluntary clearance

In its election manifesto the government said it would build on existing powers for TPR to scrutinise, to apply conditions and, in extreme cases, to stop mergers, takeovers and other large financial commitments that threaten the solvency of a scheme.

Voluntary clearance is about advance approval of corporate transactions. It stands in contrast to TPR’s strongest anti-avoidance measures (CNs and FSDs) that only operate retrospectively. Any material strengthening of the advance clearance regime would represent a significant extension of TPR’s powers. The government says it will give the idea of wider, stronger clearance powers further consideration.

Meanwhile there is one clear policy proposal which is to require sponsoring employers or parent companies to make a ‘Declaration of impacts on the pension scheme‘ in consultation with the trustees. This will explain how appropriate consideration has been given to the impact of a proposed corporate transaction on the pension scheme.

The declaration will need to set out how any detrimental impact on the scheme will be mitigated. The transactions targeted for a declaration are ‘those which pose the highest potential risk‘ to the scheme. The example given is the sale of a sponsoring employer.

Disqualification of directors

The government will consider how existing scrutiny processes could be made more effective by wider information sharing within government e.g. TPR will work with the Insolvency Service to develop existing procedures for sharing information. One of the powers the Insolvency Service has is to disqualify an individual from being a company director for two to 15 years.

Notifiable events

The government will review whether the notifiable events regime (designed as an early warning system for corporate and scheme events that could signal a detrimental impact on a scheme) covers all the transaction types that it ought to. It will also set a better defined time scale for notifying TPR than the current ‘as soon as reasonably practicable’.

Powers for TPR to gather information

There are a number of proposals to improve the effectiveness of TPR's powers to gather information (under s.72 of the Pensions Act 2004) from those involved in running a scheme. These include:

  • widening of the grounds on which information can be required and removing procedural hurdles
  • harmonising TPR’s information gathering powers across different types of pension scheme e.g. those used for auto-enrolment, DC and DB schemes and DC master trusts
  • a wider power to require a person to attend an interview to explain facts, events or circumstances relevant to any of TPR’s functions where they are unwilling to this voluntarily
  • power for TPR to impose fixed or escalating civil fines where someone fails to comply with a s.72 notice to provide information. These civil sanctions will be available alongside criminal prosecution, thereby creating a more flexible sanction
  • a widened power for TPR to inspect records, documents and computers at premises (normally after advance notice of inspection) for purposes connected with any of its functions.

The government believes its proposed changes to TPR’s information gathering powers and a more flexible sanctions regime will go some way to defuse the adversarial atmosphere that can develop over information gathering under existing legislation. It is therefore not currently proposing to put a positive duty on parties under investigation to co-operate with TPR, but will keep the idea under review.

Scheme funding

The two main proposals on scheme funding are:

  • clearer funding standards articulated in a revised Code of Practice (CoP) and guidance. In a material change, parts at least of the CoP will have statutory force for the trustees and/or the employer whereas the current CoP has only evidential weight
  • a new requirement for a chair’s statement to be submitted to TPR with the triennial valuation.

The government’s starting point on scheme funding is that where an employer can afford to fund its scheme, it should do so.

Clearer funding standards

TPR will carry out a consultation on a revised CoP and guidance. The focus of the revised standards will be on:

  • how ‘prudence’ is demonstrated when assessing scheme liabilities
  • what factors are ‘appropriate’ when drawing up a recovery plan
  • ensuring a long-term view is considered when setting the statutory funding objective.

The aim is that these measures will bring greater clarity to deliberations on funding.

The consultation will also consider:

  • what further help trustees may need to make sure they take a long-term view when setting the statutory funding objective (SFO)
  • how trustees can best assess the strength of their SFO against external risks
  • how trustees will show they met requirements for prudence and appropriateness in collaboration with the employer.

The government believes clearer funding standards will raise trustees’ awareness of funding issues, improve risk management and lead to better outcomes for members. It sees TPR’s revised CoP as describing how the trustees and the employer should set their SFO in the context of their scheme’s long-term objective.

The government’s proposals are short on detail but it looks likely that there will be at least a degree of change in the trustees' favour in the balance of power between trustees and employer over scheme funding.

Chair’s statement

With a view to improving the quality of decision making in schemes where it is below expectations, the government will legislate to require trustee boards of DB schemes to appoint a chair. The chair will be required to report to TPR with a statement on key scheme funding decisions. The statement is intended to drive accountability and to show evidence of joint decision making with the employer. It is also hoped that the new process will encourage long-term thinking and sound risk management.

Trustees will be required to tell TPR:

  • their approach to managing risks to the scheme
  • how the trustees are meeting the clearer funding standards
  • how the SFO is being set in line with the scheme’s long-term funding objective.

The chair will also be required to reflect on past decision making.

The content of the chair’s statement will be informed by the consultation. As sketched in the white paper, it could include:

  • a statement of the scheme’s long-term financial destination e.g. a buy-out
  • a description of the scheme’ s strategic plans for reaching its SFO
  • an explanation of how the clearer funding standards are being implemented
  • the key risks (e.g. covenant or governance) to the scheme and how it is proposed to manage them.

Unlike a DC scheme’s chair’s statement, this one is above all a management tool for the trustees that should be supported by written policies in key areas. It will also assist TPR in its regulatory work as a source of information and help it take a risk-based approach to DB schemes. There will be guidance on how to write a statement.

The chair’s statement must accompany the scheme’s triennial valuation when it is submitted to TPR.

As with the DC Chair’s statement, it is expected that there will be a fixed penalty fine for failing to submit a compliant statement on time.

Other points related to funding

DB costs: greater transparency

The government will work with TPR on what more could be done to make costs and charges more evident with a view to greater cost efficiency.

Helping individuals understand the funding position of their scheme

The government will work with TPR to see how trustees can be supported in providing clear and informative information should they wish to provide more than the current Summary Funding Statement.

Raising awareness of other funding measures

The white paper acknowledges a perception by some that many employers are finding it hard to sustain their contributions to schemes with substantial deficits, and that member benefits are at risk. TPR will respond by publishing a factsheet online, explaining the main different ways of valuing the assets and liabilities of schemes. It will be geared in part to journalists and commentators. TPAS will create a modified version for individuals.

Scheme consolidation

The government sees a good case for consolidation among the many small DB schemes for risk management, economies of scale, better investment performance, improved governance and potentially better member outcomes.

Main proposals

The government proposals, subject to consultation, are to:

  • create a legislative framework and authorisation regime for new, commercially run consolidation vehicles to operate within. The plan is that these vehicles will not need to be funded to the level of an insurance company
  • consider a new accreditation system to encourage existing forms of consolidation to continue.

The government will hold consultations this year on both proposals.

Schemes can and already do consolidate to different degrees. At the light end of the scale, schemes in the same corporate group can agree to appoint the same service providers. Towards the top of the scale, such schemes can be fully merged, all assets and benefit liabilities being transferred into one scheme. Scheme rules, funding levels and conflicts of interest can mean this is not possible, however.

If commercial consolidation took hold, it would be a mould breaking change in the handling of DB pension liabilities.

Scheme consolidation: other areas for consultation

Legislative framework

New consolidators could be set up as occupational pension schemes under the existing legislation, and TPR would be the regulatory body with enforcement powers. Authorisation and supervisory regimes would need to be added to the legislation. The government is not proposing consolidators should be capitalised to the same level as insurance companies.


Drawing on the Pensions and Lifetime Savings Association’s (PLSA) superfund model the government proposes the tie to a sponsoring employer could be broken in return for the price paid for joining the consolidator. One implication would be that the financial position of the consolidator would need to be demonstrably stronger than that of the sponsor. The PLSA’s work suggests the price of entry to the consolidator might be 80-85% of the full buy-out cost or 110-120% of technical provisions but, over time, the price of entry would be dictated partly by the terms of the legislation and partly by market forces (not unlike the buy-out market).

The trustees and the employer would each be expected to take independent actuarial, legal, covenant advice (and other appropriate advice) before deciding whether to proceed with consolidation.

Long term viability

The expectation is that the consolidator’s long term funding objective would ensure the viability of the consolidator and adequate security for member benefits (given that there would be no recourse to an employer covenant). Funding standards would need to be stricter than for occupational pension schemes generally and would need to recognise that the bodies behind the consolidator will be wanting returns on their investment. The consolidator would need a capital cushion that would provide funds should its funding drop below a specified level. It is expected the legislative framework would require a low risk or cash flow matching investment strategy.

The funders

Third party providers of capital could only withdraw profits from the consolidator in defined circumstances. Consideration will need to be given to restricting the level of charges to schemes that join the consolidator to prevent excessive profits.

A minimum funding level to which the consolidator can fall and still admit new schemes may need to be set.


Consolidators could grow to be strikingly large; standards of governance would need to be correspondingly robust. The legal definition of the duties of individuals involved in a consolidator will be key. Do they only owe duties to pension scheme members transferred into a consolidator? And/or to those who have funded the consolidator?

Consideration is being given to minor changes to the GMP conversion legislation with an eye to facilitating consolidation by allowing benefit structures to be simplified.

Eligible or not for PPF?

If a consolidator fails, should it be eligible for the PPF? If so, on what terms? Would occupational pension schemes generally be content to be supporting a commercial venture looking for returns out of pension scheme assets? Or will consolidators be set up such that they can always buy out member benefits above PPF level?

If you would like to discuss the information in this article in more detail, please contact Richard Knight.

Key contact

Richard Knight

Richard Knight Partner

  • Head of Pensions Practice
  • Pensions Services
  • Pensions Legal Advice

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