DB white paper must refocus system on providing benefits

The secretary of state for work and pensions, David Gauke, says the paper will set out next steps on what reform is needed to support the sector. The goal is to build on the aims of its green paper predecessor to ensure consumer confidence and secure the future of DB pension scheme members.

In an uncertain political and regulatory climate, providing clarity and continuity is key for enabling schemes to make important decisions with confidence.

For those members in underfunded schemes with stressed employers, a better framework for resolving these cases is needed

In an equally uncertain business climate, and with increasing focus on covenant risk, it is right to give the regulator increased powers and explore more comprehensive resolution arrangements.

A reframing of the objectives of the system towards providing member benefits is also warranted.

Member outcomes should be a priority

There needs to be a focus on balancing the "sustainable growth of the employer" language currently featured in the Pensions Regulator’s remit.

This needs to be counterbalanced with an equivalent statement on achieving the best possible outcomes for millions of DB members and their dependents – many of whom are relying on their DB pension for financial security in retirement.

Reassure the industry

Pension schemes are long-term entities, with the results of decisions made manifesting themselves over years, if not decades.

These decisions are important. Choices around risk management and strategic asset allocation can materially influence the security of members’ benefits.

It is imperative that schemes know what framework they are, and will be, operating in. This can ensure decisions are not unnecessarily delayed, and that uncertainty is not introduced into decision-making processes. Without this clarity, members face worse outcomes.

In the past 10 years we have seen a huge amount of change across the pensions industry.

The paper also needs to give reassurance on the continuity and stability of pensions beyond the five-year political cycle.

Schemes that have taken, or are contemplating, steps to reduce risk and increase security for their members need to be confident that the regulatory regime will not work against them if they do so.

More power for the regulator

The DWP has said that as part of the paper it will be considering providing the regulator with more proactive, rather than reactive, powers. This is essential.

It might include the authority to impose criminal and civil penalties on individuals for not cooperating, or giving false information.

Additionally, it would be helpful to see more powers to compel individuals to cooperate, as well as greater resources to allow the regulator to engage with some schemes more frequently than the three-year valuation.

Ease the path to RAAs

For those members in underfunded schemes with stressed employers, a better framework for resolving these cases is needed.

The current regulatory instruments have worked in some cases but are possibly too restrictive or limited to help the majority of struggling schemes.

The requirements for a regulated apportionment arrangement are highly stringent and it is rare for these to be approved; the regulator has granted fewer than 30.

Of course, there is a balance to be struck to avoid systems being taken advantage of. But constructing a regime that aims to achieve the best possible outcomes for members would be a step forward.

Of course, risks must be carefully considered, including unintended consequences such as moral hazard.

These are just a handful of things we would like to see emerge from the DB white paper.

Clearer guidelines and support around transferring out, a recognised differentiated approach for those schemes who are still open and a consultation on guidelines for improved DB member communication would also be steps in the right direction.

Dan Mikulskis is head of DB pensions at consultancy Redington