Nearly half of pensions professionals and scheme representatives believe that retrospective changes to pensions promises should be allowed, according to a recent survey, suggesting growing concern over the level of defined benefit liabilities.
Attendees at professional trustee company Law Debenture’s 2017 debate were asked if they would support the repeal of section 67 of the Pensions Act 1995, which prohibits protected or detrimental modifications to a member’s “subsisting rights”.
Forty-five per cent of respondents said they would overturn the act, with experts in favour arguing that doing so would enable the creation of a sustainable “defined ambition” pensions environment.
If the trustees concluded that the employer is likely to be insolvent in two or three years then they would be able to make changes they wouldn’t otherwise have made
Faith Dickson, Sackers
Changes to accrued benefits have been a topic of intense debate in recent months, as schemes such as the British Steel Pension Scheme have argued they could become self-sufficient and avoid the Pension Protection Fund if they are allowed to modify past promises.
They are currently prevented from doing so by section 67, except where the Pensions Regulator and the PPF agree to measures such as a regulated apportionment arrangement.
An industry divided
Mark Ashworth, chair of Law Debenture Pensions Trustees, said that the strictures of these existing exemptions often prove frustrating for those trying to effect change to pensions in the best interest of all parties.
“A regulated apportionment arrangement does only apply in really quite extreme circumstances where insolvency is essentially inevitable in the fairly short term,” he said.
He expected that the respondents looking to repeal section 67 would also like to see it replaced with something that gives more flexibility but prevents employers neglecting their current and former employees.
He said the division between pensions insiders revolved around the question of whether section 67 prevents “changes being made that could either keep schemes open or keep schemes solvent”, or whether it was “necessary to protect members, against a background of trustees possibly coming under considerable pressure to agree changes”.
Help employers
Faith Dickson, partner at law firm Sackers, said that modifying section 67 to allow changes to stressed schemes made sense, as it would ultimately ensure better outcomes for members.
“You could have a sort of gateway, that if the trustees concluded that the employer is likely to be insolvent in two or three years then they would be able to make changes they wouldn’t otherwise have made,” she said.
Some have previously argued that section 67 does not automatically invalidate modifications to benefits, but merely gives the Pensions Regulator the ability to block them.
However, Dickson said in practice, no schemes or employers would make substantial changes “in the hope that nobody can say it’s void in the future”.
Proceed with caution
David Brooks, technical director at consultancy Broadstone, said making sure the new rule was not abused would require a similar level of stricture, and might even promote disputes between employers who are allowed to lessen their liabilities and competitors who are not.
He said that any wider changes to indexation of benefits looked politically unrealistic.
“At the end of the day there’s millions of people in these pension schemes that rely on them,” he said “The government would dearly love to give UK plc something... but they just can’t do that.”
