The Department for Work and Pensions (DWP) has proposed ways to improve the defined benefit (DB) system in its long-awaited consultation paper.
Here is a summary of the most important proposals and points raised in the green paper that was published today.
1) Indexation could be suspended for underfunded schemes
There could be an argument to suspend indexation for schemes which are underfunded and where sponsors are in stress.
2) Consolidation of schemes
In the paper the DWP argues it sees the benefits of scheme consolidation to reduce fragmentation. However it is against the government being responsible for the implementation and roll out of the system to do this, and rather prefers a voluntary model.
3) Mandatory TPR clearance
The government is against a blanket requirement on parties to obtain clearance from the regulator ahead of any planned corporate actions as this would be disproportionate. Any power would have to be narrowly defined and have a specific application.
4) Extra information gathering powers
However, on information gathering powers, the government says options for change include the creation of a duty, applicable to all parties responsible for a scheme, to co-operate with TPR. Also, to provide TPR with a power to interview relevant parties supported by a sanction for non-compliance.
5) Discount rates
The government is not certain the discount rates used for valuations are overly pessimistic. It is unsure what the evidence says and wants more input from the industry.
6) Trustees and investment
The government would like to explore whether there is scope to encourage or facilitate some schemes to make more optimal investment decisions, and to mitigate any barriers to the greater use of alternative asset classes. On the issue of the quality of trustees' investment decision-making, the government does not feel that there is sufficient evidence on which any firm conclusions can be reached. It intends to commission further research on this and to further investigate the factors that influence investment strategies and the choice of asset classes.
7) Scheme contributions
The government does not think there is an affordability crisis and that the majority of sponsors can meet their obligations.
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