The Pensions Regulator (TPR) has confirmed that it will be looking to strengthen its evidence base on defined benefit (DB) discretionary payments, as campaign groups warn that the aims of the Pension Schemes Bill could be at risk from "recalcitrant" employers.

The Work and Pensions Committee (WPC) held a session yesterday (22 October) to hear evidence on the impact of non-inflation indexation, particularly affecting some with pre-1997 pension rights, from leading figures from affected retirees’ campaign groups.

In evidence to the Work & Pensions Select Committee, the BP Pensioner Group (BPPG) - representing more than 3,000 members of the BP UK Pension Fund, warned that employer veto and trustee board conflicts of interest risk securing the government’s policy aims of releasing fund surpluses to drive UK investment and benefit savers.

In written evidence to the committee, the BPPG argued that the bill provides inadequate protection against "recalcitrant" employers who may simply use a veto power to completely block or minimise surplus sharing and frustrate the government’s good intentions.

Pensions Minister, Torsten Bell, previously suggested that changes to DB surplus rules in the Pension Schemes Bill could actually help address discretionary increase issues, arguing that trustees could negotiate an agreement on indexation before agreeing to any DB surplus release.

However, the BPPG argued that the 50:50 sharing of surplus envisioned in the bill's impact assessment could be "no more than an unrealistic aspiration" without more specific directions or controls.

Evidencing this, the BPPG pointed out that despite a longstanding policy to protect pensions from erosion by inflation if the BP Pension Fund had “sufficient resources”, BP has repeatedly vetoed trustee recommendations for discretionary increases, whilst holding a record surplus.

Speaking in front of the WPC, a retired BP senior manager speaking on behalf of BPPG, Jonathan Popper, said: “It comes down to giving all trustees the powers to deal with companies and to be genuinely independent.

"For four years running, BP has rejected affordable discretionary increases despite a record £4bn pension fund surplus. BP’s track record suggests the company is determined to resist sharing surplus with its pensioners.

"We believe that the provisions of the Pension Schemes Bill must be strengthened so that employers can’t hang on to the surplus and that pensioners get a fair share.”

This problem is not isolated to BP pensioners, as the committee also heard from representatives of the American Express UK Pensioners Justice group and Hewlett-Packard Pension Association.

The American Express UK Pensioners Justice held up its experience as a demonstration of how discretionary pension increases can be arbitrarily removed from oversight, leaving pensioners financially exposed despite strong employer profitability.

It also agreed with BPPG's calls for change, arguing that, without legislative safeguards or at a minimum, a strict Code of Conduct, the Pension Schemes Bill risks institutionalising inequality between employers and pensioners.

Given this, it argued that the Work and Pensions Committee has a "crucial opportunity" to restore fairness by ensuring pension funds serve their intended beneficiaries first and foremost - the members who earned them.

The issue is not a simple problem, however, as the WPC also heard from representatives for TPR, who warned that discretionary increases are “a really complex decision".

Appearing in front of the committee, TPR head of policy, Fiona Frobisher, argued that most DB schemes already provide increases “written into the rules,” with discretionary cases being a smaller subset of the market.

Frobisher admitted that “most people don’t get it if it’s discretionary", suggesting that "it’s only around 15 per cent of schemes where they’re relying on the discretionary increase for pre-97 that are providing it.”

However, whilst Frobisher acknowledged the impact that’s having on pensioners, she emphasised that discretionary increases are “a really complex decision,” requiring trustees to consider “the long-term objective for the scheme… is this buyout, is this run-on, or do they have something different...and all of these are conversations we expect them to have with their employer”

She also stressed the broader factors that need to be weighed up, including scheme funding levels, future funding security, and the impact that inflation and the decrease in purchasing power are having on members.

TPR interim executive director of market oversight, Julian Lyne, highlighted the role of the regulator's guidance in making these decisions, noting that TPR shared guidance earlier this year, which encouraged trustees to look at all the points mentioned.

The pair also confirmed that TPR is looking to increase its evidence base around this issue in the future, as Frobisher confirmed that TPR will be including more questions on the reasoning behind discretionary increases in this year's DB survey.

Lyne also confirmed that TPR is already in discussion with schemes about this issue, suggesting that the Pension Schemes Bill has been used by many trustees as a "catalyst" for conversation with sponsors about their options.

"We see that whole decision-making process as being a partnership between employer and employees in terms of the trustees as well, " Lyne stated.

"Clearly, with 4,800 schemes, they vary depending on the individual arrangements, but we're really keen to push the partnership approach because they're best placed to make the decisions and understand all the various moving pieces in any decision. "

Both officials also stressed the need to ensure members are aware that this issue “is not a situation of fraud or a scam," and to ensure that members fully understand the issue at hand.

In particular, Lyne clarified that this is about “the discretionary piece, which is not part of that explicit [pension] promise,” stressing that members “are getting the pension they were promised,” which is TPR's role, even though inflation has eroded real value.

"So I think TPR sees its role very much as helping trustees navigate what are very complex issues as best we can," Lyne clarified.

This stance was shared by Association of Professional Pensions Scheme Trustees (APPT) chair, Rachel Croft, who said: "It must be remembered that discretionary increases are by definition not mandatory.

"Trustees, increasingly helped by the guidance of professional trustees, are best placed to navigate the labyrinth of variables and work to the right answer for the members and the sponsoring companies, balancing often competing interests and managing risk.

"One size will not fit all, and in any given set of circumstances, it is possible for there to be a range of reasonable outcomes.

“There is a danger that, through public debate, an expectation is created by implying discretionary increases should always be granted or are the first port of call.

"This may miss out the nuances when the circumstances do not make it either affordable or practical or where awarding discretionary increases would risk impacting the ability to deliver the benefits set out in the scheme rules.

---