Company directors who neglect to fund their defined benefit (DB) pension schemes could face criminal charges under proposals put forward by the UK government today.

In its keenly anticipated white paper, Protecting Defined Benefit Pension Schemes, the Department for Work and Pensions (DWP) said it would legislate to introduce a new criminal offence “to punish wilful or grossly reckless behaviour of directors” in relation to a DB scheme.

In addition, the department pledged to grant The Pensions Regulator (TPR) more powers to fine directors and companies “to tackle irresponsible activities that may cause a material detriment to a pension scheme”.

The paper also included plans for a tightening of the “voluntary clearance” system, whereby companies can inform TPR when significant corporate activity might affect a DB scheme. The DWP said it would review the “whole framework” to ensure it covered all relevant activity and was sufficiently clear.

However, the white paper stopped short of granting TPR the power to veto mergers or acquisitions, an idea promised by prime minister Theresa May in the run-up to last summer’s UK election.

The DWP also decided against allowing schemes to change their measure of inflation or “simplify” their benefits, despite many industry commentators arguing that such measures could save schemes money.

The proposals follow the high-profile pension scandals involving high-street department store chain BHS and engineering and outsourcing firm Carillion.

Both went bankrupt with their DB schemes in deficit by hundreds of millions of pounds. Senior staff in both cases were subsequently criticised by politicians for neglecting their pension funds.

Consolidation

The DWP said it would consult on a “legislative framework and authorisation regime” to facilitate consolidation of DB schemes.

It specifically cited work by the Pensions and Lifetime Savings Association (PLSA) on the topic.

The UK pension funds’ industry body last year proposed the creation of so-called ‘superfunds’ to facilitate consolidation, particularly for small schemes.

The paper set out potential requirements for commercial consolidator vehicles – primarily regarding funding levels and a requirement for trustees to take legal, actuarial and covenant advice before agreeing to detach a scheme from the sponsoring employer.

Graham Vidler, director of external affairs at the PLSA, said: “We are pleased to see that the white paper takes forward the work on consolidation developed by the PLSA’s DB Taskforce over the past two years.

“The best support for a DB scheme is a strong employer and we believe the current flexible funding framework remains the right approach”

Lesley Titcomb, TPR

“There is a growing body of evidence that consolidation in its many guises could provide the benefits of scale for those schemes that choose to consolidate.

“We look forward to working with DWP on this issue going forward as we work to strengthen DB pensions and give more members a better chance of receiving full benefits.”

TPR would also be given additional powers to oversee consolidator funds, the DWP said.

Among other notable ideas put forward for legislation or consultation, the DWP proposed:

  • Reviewing the regulated apportionment arrangement process to “make improvements” to the system of separating schemes from employers;
  • Toughening TPR’s information gathering powers;
  • Revising the scheme funding code to support TPR’s enforcement;
  • Working with the regulator to promote awareness of consolidation options; and
  • Introducing a requirement for DB scheme chairs to report to the regulator after every three-year actuarial valuation.

Lesley Titcomb, chief executive of TPR, welcomed the proposed new powers for her organisation, saying they would “enable us to be clearer about what we expect from employers in relation to scheme funding and tougher where a scheme is not getting the funding it needs”.

“The best support for a DB scheme is a strong employer and we believe the current flexible funding framework, which allows employers to balance growth with meeting pension benefits, remains the right approach and we will aim to retain this flexibility in any new approach,” Titcomb added.

The full white paper is available here.

Industry views

Despite the government’s emphasis on criminal sanctions, the paper left many industry commentators underwhelmed…

“We applaud the extra powers to be given to TPR, including the ability to fine company bosses. However, these will need to be exercised with care and discretion. Hopefully the powers will strike home where necessary. It is not clear whether the regulator will need extra resources to carry out these additional duties, which are unlikely to receive legislative approval before 2019-20 at the earliest.”

Simon Taylor, actuary at Barnett Waddingham

“What we have is a bundle of small-scale measures that are probably modestly helpful changes, though we doubt whether they will make that much difference in practice. Under its breath, the government seems to be acknowledging that the current regime strikes a reasonable balance between protection of benefits and commercial enterprise. It’s just a shame that it couldn’t make much more of that in the white paper.”

Alastair Meeks, pensions partner at Pinsent Masons

“This is a missed opportunity to build a pensions system that’s fit for the future. It’s good that employers won’t be able to slash pension rises without members’ consent. But ministers are doing nothing to stop the closure of good-quality pension schemes. Millions of workers across the country will still worry about poverty in retirement.”

Frances O’Grady, general secretary of the Trades Union Congress

“We are glad to see that the government has been looking at the relationship between good corporate governance and good outcomes for pension scheme members. The Pension Regulator’s ability to regulate the system effectively depends on effective governance of both pension schemes and the companies which stand behind them.”

Graham Vidler, director of external affairs at the PLSA 

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