DWP issues defined benefit whitepaper

DWP issues defined benefit whitepaper

The Department for Work and Pensions (DWP) issued its whitepaper on defined benefit pension schemes yesterday.

Recommendations centered on protecting pension pots from the kind of situations that struck Carillion in January. Its pension scheme was left with a $1 billion deficit.


Graham Vidler, director of external affairs at the Pensions and Lifetime Savings Association (PLSA), welcomed the release of the whitepaper, commenting: “While the regulatory framework will ensure most members of defined benefit schemes see their benefits paid in full, we share the government’s view that there is a need for a range of different measures to strengthen that framework and further improve benefit security. More than 11 million people rely on defined benefit pensions for their retirement income and need to be able to do so with confidence.”

“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.”

“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 (TPR) ability to regulate the system effectively depends on effective governance of both pension schemes and the companies which stand behind them.”

Among the proposals in the whitepaper are changes to TPR’s powers. Vidler explained: “The UK pensions industry looks to TPR to set standards while acting as a preventative lever and a defence against malpractice. Today’s proposals would give TPR additional powers as it works to avoid situations like those experienced by BHS, British Steel and Carillion pension schemes. The ability to impose significant fines, undertake enhanced information gathering exercises and introduce an increased oversight regime can all play a role in safeguarding people’s pensions.

“However, while there is support for ensuring that TPR has the power to undertake its role, our members are keen that they are proportional and practical. We also need to ensure that we guard against unintended consequences as we build a more sustainable system. Further consultation is needed to identify how these new powers can work with and complement TPR’s existing approach and its commitment to be “clearer, quicker and tougher.”

The proposal for each scheme to have a chair of trustees was also welcomed by the PLSA. Vidler said: “While defined benefit pensions continue to be the backbone for many savers’ retirement aspirations, it is clear that there is room for improvement and changes in order to help more schemes deliver on their promises. A clear understanding of a scheme’s funding position is vital and we welcome the requirement for scheme funding objectives to include a clear view of long-term aims—be they to run-on with the employer, reaching self-sufficiency or buy-out.

“Trustees play a significant role in ensuring that a scheme delivers on its promises. We welcome the requirement for each scheme to have a chair of trustees—a key tenet of good governance. In addition, we are particularly pleased that the White Paper introduces the requirement on defined benefit schemes to provide TPR with a chair’s statement in line with those currently produced by defined contribution schemes. This is an issue that we believe is key to help build high standards of governance and operational effectiveness across the sector.”

Finally, the PLSA drew attention to the whitepaper’s analysis of consolidation. Vidler commented: “We are pleased to see that the whitepaper takes forward the work on consolidation developed by the PLSA’s defined benefit taskforce over the past two years. There is a growing body of evidence that consolidation in its many guises could provide the benefits of scale for those schemes that choose to consolidate. We look forward to working with DWP on this issue going forward as we work to strengthen defined benefit pensions and give more members a better chance of receiving full benefits.”

JLT Employee Benefits

Phil Wadsworth, chief actuary at JLT Employee Benefits, said that while greater protection for pension scheme members is to be applauded, “strengthening powers for the regulator will not prevent companies with large pension deficits from collapse”.

“Rather, many well-run and well-funded schemes are being punished for the high profile failures of several large businesses. More rules and regulation means higher running costs for schemes, including some who can ill afford to pay.”

Wadsworth said: “The government has missed a precious opportunity to improve security and choice for members. Fundamentally, the whitepaper lacks innovation; we had hoped to see more ideas on how schemes are funded, with greater emphasis on cash flows rather than current gilt yields, as well as steps that make it easier for members to access the flexibilities introduced under Freedom and Choice.”

“We are also disappointed that the government did not take the decision to move the measure of inflation for pension increases from RPI to CPI, a move which would have improved the security of pensions for many and would have represented another key step towards simplification.”

“It makes eminent sense to examine how to make guaranteed minimum pension (GMP) conversion easier. Simplifying the historically complex benefit structures will significantly enhance members’ understanding of their defined benefit pensions as well as reduce the long-term running costs. Sponsors should be striving towards creating a simplified benefit structure and improving options for members around how they take their retirement income.”


Commenting on the paper, Simon Harrington, senior policy adviser at the Personal Investment Management & Financial Advice Association (PIMFA), said: “We welcome the commitments in the whitepaper which we believe are both proportionate and conductive to good consumer outcomes. We are particularly pleased to see a requirement for defined benefit schemes to provide a chair’s statement which will contribute towards improved standards of accountability and governance for such schemes. The clear indication of a move towards consolidation and the benefits that accompany it are also welcome.”

“However, we note the context set by the DWP comment, which we support, that the majority of defined benefit schemes in the UK are well run and that recent events should not be allowed to colour judgements of them.”

Lincoln Pensions

Darren Redmayne, CEO of Lincoln Pensions, said: “Increased input from the regulator should help create a more efficient relationship between sponsor and scheme. Arming the regulator with a bigger stick, however, will increase pressure on both advisers and the regulator to determine clear rules for when and how this stick is used.”

“Both the strength and weakness of the current regime lies in its flexibility and, as we know from experience with the minimum funding requirement, a ‘one size fits all’ approach is not appropriate which makes setting concrete boundaries difficult.”

“Consolidation gets a briefer mention than expected which perhaps suggests a lack of legislative time rather than anything else.”


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