This season’s hot topic: Part 1

30 May 2017

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A number of regulatory papers focusing on DB pension schemes have been released over the last six months. Justin Corliss, Business Development Manager, summarises the main points.

Pension transfers are this season’s hot topic in financial services. Pension freedoms combined with record cash equivalent transfer values (CETV’s) have created a surge in the number of people asking about transferring their DB pension scheme to a defined contribution (DC) scheme, so they can access Pension Freedoms1. At the same time, some employers are struggling with the burden the scheme presents to their business, as increased longevity and low gilt yield put pressure on deficit levels.

And one constant I hear from both sides of this equation is a concern over the lack of guidance from the regulators - FCA regulate transfers while TPR regulate the schemes themselves. But this is beginning to change as evidenced by some of the publications which have emerged over the last six months.

In this article, I look at the guidance particular to the schemes themselves and in part 2, I’ll focus on guidance available to advisers. 

Guidance for schemes

House of Commons Work and Pension Committee report 

This report, created in the wake of the BHS scandal and published in December 2016, proposed increasing the TPR’s power and made mention of “Nuclear Deterrents to avoidance”2.

This involves allowing the TPR to levy punitive fines on scheme sponsors of possibly three times what they were due to pay if the sponsor fails to adequately fund the scheme, which results in protracted legal proceedings for the TPR to achieve resolution.

The report also discussed empowering trustees to demand timely information from the sponsoring employer and commented around funding the Pension Protection Fund to incentivise good scheme governance and ensure particular types of employers, including SME’s and mutuals, are not unfairly disadvantaged.

Next came the Green Paper, Security & sustainability in defined benefit pension schemes3, published in February 2017. This focused on four main areas:

  • Funding – to ensure scheme trustees are aware of all the flexibilities available to them in scheme funding.
  • Affordability – This was the part which created most of the controversy. It proposed that distressed schemes might be able to suspend or reduce inflationary protection offered within the scheme, perhaps to be made up later if the funding position improves. The issue is defined benefits schemes are deferred pay, and this measure is likely to reduce member’s ultimate benefits through no fault of their own.
  • Member protection – There was a call to increase regulatory powers and to have a nimbler regulator able to act quickly, although there were concerns raised over the mandatory clearance of mergers and acquisitions as this may stifle business activity in the UK.
  • Consolidation – with proposals to create industry “Super funds” with an aim of providing economies of scale for smaller employers for whom fixed costs of running and administering DB schemes is proportionally higher than for larger employers.

Read part 2 next month when Justin will be focussing on the guidance available to advisers.

For more on DB, please have a look at  royallondonconsulting.co.uk and Our views.

 

Sources

  1. Xafinity consulting 24th April 2017
  2. House of Commons Work & pensions committee. Defined benefit pension schemes. Sixth report of session 2016-17 21st December 2016
  3. Department for Work & Pensions. Security and sustainability in defined benefit pension schemes. February 2017
About the author

Justin Corliss

Business Development Manager

Last updated: 08 Jun 2017

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London EC3V 0RL.