Conclusions and recommendations
Promoting well-run schemes
1.Communication is fundamental to the trustee-sponsor relationship which is at the heart of a well-run pension scheme. Uncooperative sponsors can keep trustees in the dark about information crucial to them carrying out their duties effectively. We recommend the Government consult in its forthcoming Green Paper on proposals to give trustees powers to demand timely information from sponsors. We recommend the Government consult in its forthcoming Green Paper on proposals to give trustees powers to demand timely information from sponsors. (Paragraph 13)
2.A well governed pension scheme is at less risk of falling into the PPF. Accounting for governance in the PPF levy could incentivise the reduction of governance risk. We recommend that, as part of its forthcoming review of its levy rules for the three years from 2018–19, the PPF re-examine how the levy framework could incentivise schemes to improve governance. Any such good governance discount would need to be based on objective and transparent criteria that are demonstrably associated with positive outcomes for members and that complement the levy model’s calculation of insolvency risk. (Paragraph 24)
3.The consolidation of small schemes offers clear and substantial benefits to members in terms of efficiency and sustainability. These potential rewards are longstanding, so the paucity of practical suggestions of how to achieve it was very disappointing. Successive governments, and the pensions industry, should have acted sooner. We recommend the Government comes forward in its forthcoming Green Paper with proposals for removing regulatory and other barriers to scheme consolidation. (Paragraph 37)
4.There is a very strong case for the creation of a statutory aggregator fund to facilitate the consolidation of the assets and liabilities of small schemes. This could be managed by the Pension Protection Fund (PPF), but there would not be a requirement for the sponsoring employer to be insolvent for the scheme to be included. This would be an attractive alternative to the insurance company buy-out market, especially for smaller employers which often find this option prohibitively expensive or unavailable. An aggregator fund would bring greater stability and certainty to scheme members. It would also increase the chances that small employers could continue to thrive, invest and employ. We envisage a proposal whereby the sponsoring employer would agree a conditional programme of contributions at the point of transfer to the aggregator form but would then cease to be otherwise connected to the scheme. (Paragraph 41)
5.We recommend the Government consult in its forthcoming Green Paper on proposals to create a statutory aggregator fund for defined benefit (DB) schemes to be managed by the PPF. This consultation should consider points including: how continued funding for the aggregated schemes should be secured;
- the nature of clearance required for sponsor contribution plans and to ensure consolidation was in the interests of members;
- which schemes would be eligible, including whether it should be restricted to closed schemes or schemes under a certain size limit; and
- whether a uniform benefit structure would be required and, if so, how this could be achieved. (Paragraph 42)
6.Many DB pensions are small. They can be disproportionately costly for schemes to administer and hold assets for, and a very small regular pension payment may be less valuable to a member than its cash value or an alternative investment. It is clear that in certain circumstances it is mutually beneficial for a pension scheme and its members with small pensions to commute these into lump sum payments. It is essential, however, that a person contemplating taking this step has access to advice and guidance on whether it is the right decision for them. (Paragraph 47)
7.We recommend the Government consult in its forthcoming Green Paper on relaxing the rules for taking small DB pension entitlements as lump sums. We further recommend the Government sets out in response to this report how it proposes to ensure that DB pension members have adequate access to advice and guidance in order to assess the merits of taking lump sums. (Paragraph 48)
Identifying and intervening in potential problem schemes
8.The Pensions Regulator (TPR) has a substantial suite of powers. It is, however, reluctant to use some of them. This is particularly true of interventions before a scheme is in severe stress which could nip potential problems in the bud. Furthermore, we get the impression that it can be somewhat aloof in dealing with trustees when it is well placed to provide timely, informal guidance. We welcome TPR’s announcement of a review of its regulatory approach and will follow its progress with interest. (Paragraph 57)
9.TPR has a scheme-specific approach to regulation, but this does not extend to the frequency of scheme valuations. We recommend that the Pensions Regulator should adopt a risk-based approach to scheme valuations. Riskier schemes should provide them more frequently, while low risk schemes should not be required to report as regularly. (Paragraph 62)
10.Fifteen months is a long period for any negotiation. It is certainly far too long for a regulator to be kept in the dark. If a scheme valuation and recovery plan takes more than nine months to agree then TPR’s intervention in the scheme may well be warranted anyway. We recommend that the statutory timescale for the submission of valuations and recovery plans be reduced to nine months. In instances where TPR has concerns about the sustainability of a scheme or the progress of recovery plan, it may be appropriate for it to intervene sooner to request information—for example, the valuation on which basis negotiations are ongoing. Similarly, TPR should encourage trustees to keep it updated on the progress of discussions and offer support where necessary. (Paragraph 67)
11.TPR needs to be tougher on deficit recovery plans. It should not be shy or slow in imposing a contribution schedule when a sponsor is not taking its responsibilities seriously. Recovery plans of more than ten years should be exceptional. Particular attention should also be paid to any plan which concentrates employer contributions in the distant future. As a general rule, the onus should be on sponsors to demonstrate that a recovery plan is reasonable in their specific circumstances. (Paragraph 74)
12.We support the risk-based PPF levy. It is important, however, that it does not increase insolvency risk by imposing disproportionate costs on schemes. We are particularly concerned that some groups of employers without access to expensive professional advice, or with atypical business models, may be disadvantaged by the current levy calculations. A risk-based levy is only fair if it accurately reflects risk. We recommend that, as part of its forthcoming review of its levy rules for the three years from 2018–19, the PPF examine the effect of the levy framework on particular types of employer, including mutual societies and SMEs. It should rectify or otherwise adjust for any anomalies which adversely affect such groups. (Paragraph 80)
Stressed schemes
13.The Regulated Apportionment Arrangement (RAA) is a means of negotiating an outcome for scheme members that is better than the PPF in instances where a sponsoring employer is in mortal danger. When agreed, it can produce results that are better for pensioners, better for employers and better for the PPF than insolvency. It is, however, very rarely used, and the process includes potentially harmful delays. It is an emergency measure, but it does not operate at an emergency pace. (Paragraph 92)
14.We recommend that in its forthcoming Green Paper the Government consult on:
- reducing the interval, currently 28 days, betweeen TPR issuing a warning notice of an impending RAA and issuing a final notice; and
- relaxing the requirement for insolvency to be inevitable within 12 months for an RAA to be approved.
We further recommend that TPR guidance be amended to encourage its involvement at an earlier stage in the formulation of RAA proposals in order to facilitate a more iterative approach. (Paragraph 93)
15.Pension promises are just that. Any change to the terms of them should not be taken lightly. In circumstances where an adjustment to the scheme rules would make the scheme substantially more sustainable, however, a reduction in benefits could well be in the interests of members. Some schemes have more generous indexation rules than others more by accident than design, and indexation by CPI rather than RPI is certainly preferable to corporate insolvency and a pension scheme in the PPF. Trustees should be empowered to take decisions in the long term interests of scheme members. (Paragraph 110)
16.We recommend that in its forthcoming Green Paper the Government consult on means of permitting trustees to propose changes to scheme indexation rules in the interests of members. These proposals should be subject to regulatory approval but the presumption should be in favour of change. This measure should not only facilitate permanent changes to indexation rules; in many cases a conditional arrangement, whereby the scheme and employer have some breathing space to overcome difficulties, but then revert to more generous uprating when good times return, may be most appropriate. (Paragraph 111)
17.We recommend the Government broaden TPR’s power under section 11 of the Pensions Act 1995 to order the wind-up of a pension scheme. TPR should be permitted to wind-up a scheme when it is satisfied that this would be in the best interests of the PPF and its levy payers, and that no alternative option is realistically available to deliver a better outcome for members. (Paragraph 117)
Anti-avoidance
18.Clearance has the clear benefit of enabling TPR to tackle potential moral hazard implications of corporate transactions head-on rather than after the event, while providing comfort and certainty to the scheme members and sponsoring firm. Clearance is far preferable to the drawn-out—and resource-intensive—legal process of enforcement action. It is, however, voluntary and employers are increasingly skipping it: there were 263 applications in 2005–06 but just nine in 2015–16. The incentives to seek clearance are currently weak. Some unscrupulous sponsors may well be calculating that they are better off risking a protracted anti-avoidance battle than coming to an immediate pension settlement. (Paragraph 140)
19.We recommend that in its forthcoming Green Paper the Government consult on proposals to require advance clearance from TPR for certain corporate transactions that could be materially detrimental to the funding position of a DB scheme. The circumstances in which clearance was compulsory would have to be narrow to prevent a disproportionate effect on normal economic activity. They might include the sale or merger of a scheme sponsor where the pension deficit is higher than a fixed proportion of the value of the company. It is also reasonable to expect any prospective purchaser to have a credible plan for tackling a substantial pension deficit. (Paragraph 141)
20.Under TPR’s existing anti-avoidance powers, an employer seeking to avoid its responsibilities to a pension scheme may well take a punt on risking enforcement action. TPR has a mixed record, resolution may take several years, and the most TPR might hope to recover is the amount of support the employer should have provided to the scheme in the first place. In the meantime, the pension scheme members are left in limbo. (Paragraph 145)
21.We recommend that in its forthcoming Green Paper the Government consult on giving TPR powers to add punitive fines to Contribution Notices and Financial Support Directions. These fines would have to be set at a high level to ensure they incentivised sponsors to properly fund pension schemes and seek clearance for corporate transactions which may be to a scheme’s detriment. We recommend that fines that could treble the original demand be considered. The intention would be that such fines would not need to be imposed: they would act as a nuclear deterrent to avoidance. (Paragraph 146)
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20 December 2016