The future of the defined benefit system

The funding deficits of defined benefit (DB) pension schemes have made news headlines in recent times, following the difficulties encountered by the British Steel Pension Scheme and some high profile business failures. The Government’s response was to issue a Green paper suggesting ways in which the funding and security of members’ pensions could be improved. It has now published its long-awaited White Paper, Protecting Defined Benefit Pension Schemes.

The proposals to strengthen the Pensions Regulator’s powers have received most commentary due to their potential impact on corporate transactions. Those proposals include giving the Regulator new powers to be able to fine companies or individual company directors for “irresponsible activities” that may cause material detriment to a pension scheme and compromise the scheme’s funding position. The Government is considering whether this new penalty regime can apply from the date of the White Paper, 19 March 2018.

The Government also intends to make the wilful or grossly reckless behaviour of directors (and any connected persons) in relation to a DB scheme a criminal offence. It will consult over the next few months to make sure that the power is proportionate.

Although the Government has decided against making the Regulator’s existing voluntary clearance framework mandatory for certain transactions, it will introduce a requirement for a “statement of intent” to be produced by the sponsoring employer(s), in consultation with the scheme trustees, before relevant transactions take place. ‘Relevant’ transactions will be those posing the highest potential risk to a DB scheme, such as the sale or takeover of a sponsoring employer. The statement will have to confirm that the sponsoring employer has appropriately considered the impact on any affected DB scheme and will have to set out how it proposes to mitigate any detrimental impact on the scheme caused by the proposed transaction.

However, other proposals in the White Paper, particularly in respect of scheme funding, could have significant implications for DB schemes and take effect more quickly. For more information, please see our article The future of the defined benefit system: evolution not revolution?