Budget changes to pension regulation: if a job’s worth doing, it’s worth doing well
Budget 2013 confirmed the coalition government’s decision to revise the Pensions Regulator’s (TPR’s) statutory objectives. According to the Chancellor’s speech, TPR will have
A new requirement to have a regard for the growth prospects of employers.
This is something that was broadly supported by the TUC. But the move would be far more effective if TPR’s objectives were more comprehensively reformed.
On balance, putting this objective on an equal footing with TPR’s other statutory objectives would be of benefit to members insofar as it encourages schemes to stay open. Where the deficit recovery contributions that employers are asked to make are unaffordable, or at odds with the long-term health of their business, it can mean that schemes are closed unnecessarily, whether to new entrants or new accruals altogether.
The employer’s interests should not be put ahead of scheme members, but TPR already has a statutory objective to protect the benefits of occupational pension scheme members. As part of this review, we believe the government should also consider giving TPR an objective of protecting future accruals – currently it is only required to consider past accruals.
The elephant in the room is TPR’s statutory objective to protect the Pension Protection Fund (PPF). The PPF is the government-sponsored/industry-funded insurance mechanism that pays pensioner benefits, albeit at a reduced rate, in the event of scheme insolvency.
The PPF is funded by a levy on solvent schemes (like an insurance premium). But it also takes in the residual assets of insolvent schemes, that is, defined benefit pension schemes deemed unable to meet their future liabilities. It has long been suspected that this is one of the reasons TPR has such strict requirements on the level of deficit recovery contributions that employers must make. TPR judges the appropriate contribution level not in terms of the best interest of employers, or even members, but to ensure that – if they think entry into the PPF is more likely than not –schemes are wound up before assets are depleted too much.
This is understandable – the financial viability of the PPF is vital to the defined benefits pension system as a whole. But is it really fair on members of schemes in trouble that decisions about their pensions are taken in the light of the funding position of other schemes, that is, the entire PPF constituency?
We have a chance now to re-appraise all of TPR’s objectives, including the duty to protect the PPF. The government is presumably being more cautious about this wider review because it would raise the thorny issue of the government’s obligations should the solvency of the PPF itself come under scrutiny. But if the new statutory objective on employer growth prospects is to work effectively, it might be a necessary task.