Just as the demise of Robert Maxwell led to a sea change (excuse the pun!) in the governance of pension plans via the Pensions Act 1995 it seems that the equally high-profile collapse of BHS may herald a major shift in the regulation of pension plans.
The Work and Pensions Committee report on defined benefit pension schemes published on 21 December 2016 – essential holiday reading – makes a raft of recommendations which, if implemented, would have an impact on the roles of both the Pensions Regulator and the Pension Protection Fund.
The aims of the recommendations are clear:
- avoiding another BHS
- avoiding a knee-jerk reaction, and
- avoiding box-ticking regulation.
The Regulator came in for a fair amount of criticism by the Committee regarding its involvement with BHS, not only in relation to the sale of the company but also in connection with the delay in intervening following the pension plan valuation process, in which a 23-year recovery plan had been agreed. The Committee wants the Regulator to be ‘nimbler’ so it can intervene earlier ‘to nip potential problems in the bud’. It also suggests changes to the valuation timetable and the acceptable length of recovery plans.
Perhaps the main headline-grabbing recommendation of the Committee is the proposal that the Regulator should have the power to impose fines in addition to a Contribution Notice or Financial Support Direction that would treble the amount demanded. The Committee sees this power as a ‘nuclear deterrent’ to incentivise sponsors to seek clearance for corporate transactions which may be detrimental to their pension plans. However, the Committee does not want clearance to be mandatory in all cases, but suggests it ought to be in certain circumstances.
In situations where a sponsor is facing insolvency, the Committee noted that Regulated Apportionment Arrangements are rarely used despite potentially providing an outcome that is better for pension plan members, sponsors and the PPF than the insolvency of the sponsor. It describes the RAA process as an emergency measure that does not operate at an emergency pace and recommends streamlining the process.
With regard to the sustainability of pension plans, the Committee recommends enabling trustees, with the approval of the Regulator, to:
- consolidate small pension plans into an ‘aggregator fund’, and
- change the indexation of pension benefits, which could be conditional on arrangements to revert to the original indexation ‘when good times return’.
It suggests that the PPF manages the aggregator fund.
The Committee also calls on the PPF to consult on changes to the calculation of the PPF levy to incentivise good pension plan governance and ensure certain types of sponsors such as SMEs and mutual societies are not unfairly disadvantaged.
The Committee, in what seems to be a departure from the aims set out above, also recommends a relaxation of the rules for taking small DB pensions as a lump sum and providing members who might wish to utilise the option with access to advice and guidance.
It’s fair to say that in its report the Committee presents a clear view as to the problems it believes face DB pensions and their regulation and the measures that are necessary to address these problems.
The Government is due to publish a Green Paper on DB pensions in the near future and it will be interesting to see how many of the Committee’s recommendations are included.