Call for ‘nuclear deterrent’ to tackle pension scheme deficits

Ahead of the government’s expected green paper on defined benefit (DB) pension schemes, the work and pensions select committee is calling for the introduction of a ‘nuclear deterrent’ in the form of heavy fines to prevent companies from running up large pension deficits

The committee says The Pensions Regulator (TPR) should be given new enforcement powers, including the ability to impose punitive fines that could treble the amount payable if a company does not address a pension deficit. It is expected that such a fine would never need to be levied in practice, as it would act as such a strong deterrent to avoiding pension responsibilities.

The recommendation is one of a number considered by the committee which looked specifically at DB schemes in the wake of its inquiry into the collapse of BHS, following its sale by owner Sir Philip Green and its subsequent administration, which left some 20,000 workers facing reduced pension payments.

In its report the committee said it had found TPR ‘to be reactive and slow-moving’. It recommends TPR be reformed to a nimbler, more proactive regulator that could intervene sooner when difficulties in a company pension fund become apparent, and before problems begin to compound.

It suggests the timetable for valuations should be flexible—shorter or longer—to reflect the riskiness of schemes; the statutory timescale for the submission of valuations and recovery plans should be reduced to nine months, though TPR should intervene sooner where it has concerns; and recovery plans of more than ten years should be exceptional.

MPs also want the government to consult on new rules for situations where TPR clearance of major corporate transactions is mandatory rather than voluntary, allowing the TPR to decide if a particular proposed corporate change could damage a pension scheme.

In addition the report recommends new powers for pension fund trustees to take decisions in the interests of scheme members. These include being able to negotiate restructurings that result in better than Pension Protection Fund (PPF) outcomes for schemes facing crisis; being able to introduce flexibility to indexation to make schemes more sustainable; and being able to consolidate smaller schemes into a new statutory PPF-managed fund to take advantages of economies of scale.

Looking specifically at stressed schemes, the report points out that 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, but says this is a slow process and very rarely used.

The committee recommends the government consult on reducing the interval, currently 28 days, between TPR issuing a warning notice of an impending RAA and issuing a final notice; and on relaxing the requirement for insolvency to be inevitable within 12 months for an RAA to be approved.

The committee also says the risk-based levy charged by the PPF should be recalculated to incentivise good corporate behaviour, and avoid the ‘moral hazard’ of irresponsible companies ducking their pension liabilities at the expense of good corporate citizens.

The levy should be improved regularly to reflect risk accurately, and PPF should consult on a means of adjusting the calculation of the levy to incentivise good scheme governance and ensure particular types of employer, including SMEs and mutual societies, are not unfairly disadvantaged.

The committee argues that if its proposals had been in place at the time of the BHS collapse, then the BHS trustees would have been empowered to demand timely information from the uncooperative sponsor and may have been able, through a streamlined restructuring process or adjustments to indexation, to make the scheme more sustainable while securing better than PPF outcomes for members.

Frank Field, chair of the work and pensions committee, said: ‘It is difficult to imagine TPR would still be having to negotiate with Sir Philip Green if he had been facing a bill of £1bn, rather than £350m. He would have sorted the pension scheme long ago.

‘We hope and expect that we will never again see a company like BHS be able to come up with a 23 year recovery plan for its pension fund, and certainly not that it would take the regulator two years to really begin to do anything about it.

‘It is further inconceivable that Sir Philip Green's deal to dispose of BHS and its giant pension deficit for £1 to a dismally unqualified man, with no plan for the pension schemes and no means of financing one, would have evaded or passed any mandatory clearance scheme.

‘To prevent another BHS we need to have the means to nip inevitable disasters like this one in the bud. We hope the government will consult on the package of measures we propose.’

The work and pensions committee report on defined benefit pension schemes is here.

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