Changes to proposed regulation and improvements in governance standards are urgently needed to ensure private sector defined benefit (DB) pension schemes remain an active and thriving part of the pensions landscape and work in the best interest of scheme members, MPs say today.
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The Work and Pensions Committee report concludes that despite a steady decline in number in recent years, DB pension schemes are still of critical importance to both savers and the UK economy.
It warns however that two decades of regulatory and policy caution from DWP and The Pensions Regulator (TPR) have led to a low-risk approach to investment that threatens to inadvertently finish off the few remaining DB schemes still open to new members.
With an improvement in funding levels over the past decade presenting new challenges and opportunities for schemes, the report calls for a fresh approach both to funding regulation and the treatment of surpluses in pension and compensation schemes.
Among recommendations on the latter, the report calls for DWP and TPR to look at ways of ensuring the reasonable expectations of scheme members for benefit enhancement are met where there has been a history of discretionary increases.
On the new funding regime proposed by the Government to come into force in September, the Committee’s inquiry heard concerns that open schemes would be forced to de-risk unnecessarily, potentially leading to premature closure.
The Committee calls for the Government to address such concerns in the final version of the Funding Code and for TPR’s objective to protect the Pension Protection Fund to be replaced with a new duty to protect future, as well as past, service benefits.
PPF reserves now stand at £12 billion and the report calls for legislation to allow the levy to be reduced to zero and for compensation levels to be improved.
To encourage better governance, the Committee welcomes the introduction of a trustee register to improve TPR oversight. The report notes TPR’s view that consolidation, including through pension Superfunds, is one of the main ways to improve governance, and calls for the required legislation as soon as possible.
Rt Hon Sir Stephen Timms MP, Chair of the Work and Pensions Committee, said: “Defined benefit pension schemes are hugely important to savers planning for a comfortable retirement and for the UK economy.
“The improvement in scheme funding levels presents opportunities for both to benefit, but a new approach to regulation and governance is needed to protect the best interest of scheme members and allow still open schemes to thrive.
“The flexibility afforded by the much-improved financial position of the PPF, which we applaud, gives the Government an opportunity to ensure open schemes are not hindered by overly cautious restrictions imposed by regulations.
“While many trustee boards operate to high standards, new standards for trustees can foster confidence that this is the case across DB schemes.”
The report follows up on some of the points raised during the Committee’s previous inquiry into DB pensions with Liability Driven Investments, which examined the events of autumn 2022. The Committee heard that a repeat of the events was now unlikely given the steps taken to improve resilience.
A full list of the Committee’s conclusions and recommendations is available on Pp 54–58 of the report.