DB green paper: What is the government offering?
AT A GLANCE:
- Indexation change is on the cards for distressed employers
- Early access to DB pensions is 'odd' suggestion
- Critics say green paper is 'passive' and 'hands-off'
The industry finally has some understanding of the government's position on the future of DB regulation. James Phillips explores if it goes far enough
The Department for Work and Pensions' (DWP) much anticipated green paper on defined benefit (DB) regulation finally arrived on 20 February, providing significant insight into the government's thinking on the sector.
Yet, the consultation is scarce of firm proposals and does not seek to make many changes to the sector, despite widespread calls for reform.
Most notably, there is a suggestion that "stressed employers" could be allowed to suspend indexation or move to a lower inflation measure to curtail their growing liabilities.
Yet, on consolidation, the government argues it sees the benefits but is unwilling to mandate any change.
The green paper is simply a consultation exercise on the department's current thinking, but it does offer an indication of how far it will be willing to go. The question is whether this is enough.
Indexation
Switching indexation from the Retail Prices Index (RPI) to the generally lower Consumer Prices Index (CPI) has proved controversial, with questions raised on the correct balance of pension promises and benefit security. Yet, many schemes that want to make the switch are barred from doing so, simply based on how their scheme rules were set out decades ago.
The green paper steps back from suggesting an industry-wide statutory override, despite the government moving all public sector schemes to CPI in 2011. Instead it proposes allowing schemes in distress to either halt indexation for a limited period or to move from RPI to CPI.
LCP partner Alex Waite says the government has dragged its feet on this issue for too long and the consultation is delaying it even further.
"It would have been more constructive to have an immediate proposal to resolve the issue," he says. "It is clearly going to take time for a preferred way to come through, during which time schemes continue to pay out increases based on what the green paper calls 'anachronistic' increase rules.
"The government created this legal lottery in 2010 and it shouldn't have taken seven years before they begin the process of considering options."
Baroness Ros Altmann who was pensions minister from 2015 to 2016 agrees with the proposals, arguing it should strictly be on a scheme-specific basis.
"There is no problem with a statutory override being permitted for CPI, especially given that public sector schemes have all done it," she states.
"It's not something that should be done willy-nilly but if an employer needs to do so, and the scheme is safer having done so, the fact that they've got particular wording in their trust deeds seems not to be a sufficient reason to prevent rationalisation of the indexation measures."
Lump sums
The green paper has also floated the idea of allowing DB members to access small amounts of their savings under the age of 55.
Current rules allow DB members over the age of 55 to take a lump sum of less than £10,000, or higher where total pension benefits will not be more than £30,000 after the lump sum is taken.
The DWP said the use of these trivial commutations would be "beneficial in certain limited circumstances" for under-55s but these have yet to be outlined.
"I don't agree with this proposal at all," says Altmann. "It would be unwise to just let people cash out their DB entitlement; that should go into DC.
"I would welcome a different emphasis that recognises that for many members, especially those with small deferred entitlements who've got other pensions elsewhere, there are hugely positive reasons to transfer to DC after Freedom and Choice."
Sir Steve Webb, who was pensions minister between 2010 and 2015 and is now Royal London's director of policy, believes the proposal is odd and somewhat random.
"This seems really weird to me," he says. "There's a perfectly reasonable discussion to be had about early access to pensions in general. You ought to do that as part of a proper review.
"Just to say, 'there's a lot of people with a bit of legacy DB, maybe we should let them take their cash at 45', is very odd."
Consolidation
The green paper also dismisses any suggestion of the government involving itself in driving greater consolidation in the DB sphere, arguing instead schemes should do it on a purely voluntary basis, as is the current situation.
Although the industry is somewhat united on the benefits of consolidation, the role of government and the methods of achieving it are less unanimous.
TPT Retirement Solutions head of strategy and business development Paul Murphy concurs with the government's view that it should be voluntary.
"TPT welcomes the green paper and the conclusion that there is a strong case for voluntary consolidation of schemes," he says. "DB master trusts are ideally placed to provide this solution, with the attendant benefits such as improved efficiency leading to lower costs, access to more sophisticated investment strategies and better governance."
However, some believe that government needs to be involved, or make some changes, in order to push schemes towards consolidation. Sir Steve believes the government is being too detached on this point.
"Clearly, a certain amount of consolidation can happen already, but not much has happened," he says. "The government is being a bit too hands-off on this. Even if they don't compel consolidation, or regulate schemes into consolidating, at the very least they should be more proactive as a bringer-together.
"It feels very passive to me. The government can't just say 'there's nothing much stopping it, so do it with our blessing guys'."
Scant
Yet, the green paper follows a raft of industry and political work exploring the sustainability of DB schemes. The Pensions and Lifetime Savings Association (PLSA) has a DB taskforce, which last October said the system was too fragmented and needs consolidation.
Meanwhile, the Work and Pensions Committee (WPC) towards the end of 2016 conducted its own inquiry into DB regulation.
It all follows high-profile cases involving British Home Stores and Tata Steel, as well as soaring deficits in the wake of last June's vote to leave the European Union (EU), which caused a drop in gilt yields and devaluation of sterling.
Despite all of this evidence-gathering, the DWP is still seeking more views to understand if it needs to take any steps in the future.
Speaking at the Association of Member-Nominated Trustees (AMNT) conference last week, pensions minister Richard Harrington said the green paper was not "kicking the can down the road".
Nevertheless, there has been some disappointment expressed at the lack of firm proposals.
Baroness Altmann believes the government could be acting faster and has failed to address issues with section 75 debt affecting small employers in the Plumbers' Pension Scheme.
"The green paper is just raising a lot of questions, but these questions are the same questions as have been asked for a long time," she says. "We need to get on with actually making some decisions.
"Some areas are a little newer than others, but the paper is long on discussion and short on proposals and solutions. For example, giving the regulator more powers and measures for the Plumbers' Pension Scheme could be put into the Pension Schemes Bill now.
"It's lacking in really radical new thinking that we need for the longer term; it's more about 'let's plod along similar to the things we've been thinking about and talking about for ages anyway'."
Sir Steve agrees, arguing that any changes to come out of the green paper and its consultation responses are going to be a long way down the road.
"You'd never know there had been nine months of public debate, select committee evidence and PLSA working groups," he says. "Then, suddenly you get this green paper which is back to the beginning again.
"If the green paper had been just a bit firmer, you could have seen the route map from that. If they say, actually we are going to regulate to require schemes to be of sufficient size, you probably need a whole further consultation, legislation and leading time. All of this suggests that action on the ground is a long way away."
The 103-page document considers a wide range of issues, yet seemingly offers very few proposals or solutions at this point, leaving some industry figures scratching their heads at the inaction.
Nevertheless, the green paper is one step towards some change, which could result in a stronger and more sustainable DB sector.
- Underfunded schemes with distressed employers could suspend or lower indexation
- DB consolidation should be voluntary
- Clearing mergers and acquisitions with TPR should not be mandatory
- TPR needs greater information gathering powers
- Government unsure if discount rates are overly pessimistic
- Trustees may be able to make more optimal investment decisions
- Government does not believe there is an affordability crisis
More on Defined Benefit
Trustees have 'false confidence' in their scheme strategies
Nearly every trustee is confident of the next stage in their scheme’s strategy, despite almost an equal number being forced to consider replacing plans within the prior 12 months, according to research by Barnett Waddingham.
Companies overstate liabilities by £60bn amid Covid deaths
Companies could be overstating their pension liabilities by up to £60bn due to their life expectancy assumptions, according to XPS Pensions Group.
Updated: Landmark GMP ruling 'significant challenge' for schemes
Defined benefit (DB) schemes that provide GMPs must revisit and, where necessary, top-up historic cash equivalent transfer values (CETVs) that have been calculated on an unequal basis, a landmark court judgment said last week.
FCA must stop DB transfer history repeating
Regulators must act now to impose some "proper regulation" to stop another defined benefit (DB) transfer advice disaster, saysTim Sargisson.
DB funds as an economic lever could derail schemes from responsibilities
Opportunities for defined benefit (DB) schemes to pursue investment approaches that help repair the UK’s economy cannot stand in the way of improving member outcomes, Aegon says.
