May's promise to protect pensions lacks concrete solutions

Regulatory oversight of corporate transactions was mentioned both in the Department for Work and Pensions’ green paper and the Conservative manifesto in the last general election.

It seems clear that something needs to change, but exactly what and exactly how far they’re going to go down this road remains to be seen

Malcolm McLean, Barnett Waddingham

The latter promised a beefed-up Pensions Regulator with the ability to issue punitive fines where a scheme was left “wilfully” under-resourced. The manifesto also said the party would consider building on the clearance regime to give schemes and the regulator the right to scrutinise, or even stop, takeovers and mergers.  

While certain scandals, such as the collapse of BHS, have shown that something needs to change, the industry has voiced concerns about the feasibility of these ideas.

Government to target companies risking workers’ pensions

Earlier this month, pensions and financial inclusion minister Guy Opperman, said the government’s highly anticipated white paper on defined benefit pensions, which was planned to be published in winter, has been delayed until spring.

Theresa May said on Saturday that the government will work to stop companies putting pensions at risk.

“In the spring, we will set out new tough new rules for executives who try to line their own pockets by putting their workers’ pensions at risk – an unacceptable abuse that we will end,” wrote the prime minister in the Observer.

While the statement is encouraging for some, it does not give much indication of what the new rules might be.

Her promise comes following the recent collapse of outsourcing and construction giant Carillion, adding further to concerns over sponsor covenant and schemes being at risk of not paying full benefits.

“It’s an attractive political soundbite, but [it’s] quite hard to know what it will mean until we see the detail, presumably in the white paper,” said Martin Hunter, principal at consultancy Xafinity Punter Southall.

The regulator already has some very strong powers, such as the moral hazard provisions, which can require a third party other than the Pension Protection Fund to provide funding for a DB scheme.

“Generally speaking, pension professionals feel that there’s not a huge amount wrong with the current regime – that’s certainly my view,” said Hunter.

While there have been a number of high profile cases, “it’s hard to see what changes could easily be made to the current framework to address that”, he added.

Regulatory resources

If the government were to introduce a requirement for companies to get clearance on a large transaction, takeover or merger, there would be a number of challenges, said Hunter.

One is whether it would be “feasible and viable” for employers to carry out that extra step, and the other is resource. “What kind of resource would the regulator need to be able to do it? Would you do it for all companies… that had a pension scheme, no matter how small?” Hunter added.

Echoing these concerns, Malcolm McLean, senior consultant at Barnett Waddingham, noted that if the regulator gets more involved in transactions and closely monitors employers, “there’s going to be… possibly massive resource implications”.

He said that the real question is, “how much it’s all going to cost and… who’s going to pay for it all?”.

The regulator has previously drawn attention to the disparity between deficit contributions and dividends paid.

In June 2017, analysis published by the regulator revealed that the ratio of deficit repair contributions to dividends at 210 FTSE 350 companies declined to about 7 per cent by the end of the 2016 financial year, from from around 10 per cent in 2011.

Faye Jarvis, partner at law firm Hogan Lovells, said: “We may see something more on that.”

However, she highlighted that it will be difficult to find a balance between ensuring businesses can generate sufficient financing while also funding the scheme properly.

“A strong employer that can invest and grow its business is also important for… the security of the pension scheme,” she said.

Jarvis said that another possibility is tougher standards or guidance from the regulator in terms of what it expects on funding pension schemes in valuations.

She said this “might be something that can be introduced more quickly without needing primary legislation”.

Fines require new laws

Frank Field, chair of the work and pensions committee, has previously called for punitive fines to avoid disasters similar to that of BHS.

But attributing responsibility to individuals can be difficult. Jarvis said: “If you’re fining individuals, the ability to demonstrate, or have the evidence to demonstrate, that they personally deserve to be fined could be quite tricky in practice.”

She added that the ability for the regulator to issue fines against individual executives might need primary legislation.

For McLean, the two main areas that need to be tackled are how to ensure employers fund their schemes properly, and the question of corporate transactions.

“It seems clear that something needs to change, but exactly what and exactly how far they’re going to go down this road remains to be seen.”