This note covers the main measures of pension scheme funding, the reviews leading up to the introduction of the scheme specific funding requirements; the key elements of the requirements; TPR’s approach to regulating scheme funding and current proposals for reform.Jump to full report >>
The current funding regime for defined benefit (DB) pension schemes was introduced under the Pensions Act 2004 (part 3). It requires trustees to:
The aim is not to “eliminate all risk to members’ benefits” but rather to “strike a reasonable balance” between the demands on the employer and the security of member benefits, recognising that “a strong, sustainable employer is the best protection for a DB scheme” (Cm 9412, Executive Summary).
In its December 2016 report on DB pensions, the Work and Pensions Committee made a series of recommendations aimed at “reducing the risk of another scheme collapsing in the manner of BHS”. A major concern for the Committee had been the length of the recovery plan to repair the funding deficit (23 years) and the time it had taken the Pensions Regulator (TPR) to intervene. The Committee recommended that recovery plans of longer than ten years should be exceptional and that TPR’s powers should be increased – allowing it, for example, to issue “punitive fines” in addition to its existing powers to require contributions and financial support see Library Briefing Paper CBP-04368 The Pensions Regulator: Powers to protect pension benefits (October 2017).
In its February 2017 Green Paper, Security and sustainability in Defined Benefit Pension Schemes, the Government said that while most schemes had a funding deficit, these were not generally ‘unaffordable’ for employers. However, there were some employers on whom the deficit was having a significant impact and for whom the level of contributions might become unsustainable. The Green Paper asked for views on options including:
It also asked for views relevant to TPR’s powers to protect scheme benefits – relating to its powers to issue contributions notices and financial support directions, to give clearance to corporate transactions and to allow stressed employers to separate from a scheme. These are discussed in Library Briefing Paper CBP-04368 (October 2017).
Another issue discussed the in Green Paper – whether there should be flexibility on schemes regarding indexation of pensions in payment is discussed in Library Briefing Paper CBP-05656 Occupational pension increases (September 2017).
The Government expects to produce a White Paper later in the winter (PQ 10024, September 2017).
Commons Briefing papers SN04877
Author: Djuna Thurley