The government has said that it will consider changes to the Pensions Protection Fund (PPF) compensation framework, including pre-1997 indexation, as well as announcing plans to consult on measures to improve scheme governance later this year.

The updates were shared as part of the government's response to the Work and Pensions Committee's (WPC) recommendations for the defined benefit (DB) pension market, which was shared last year.

In particular, the response provided further updates on the government's work to address pre-97 indexation issues, an issue that it has faced growing scrutiny from the committee on in recent months.

In its response, the government acknowledged that it has heard "significant" calls to review the level of compensation received by PPF members and assistance from the Financial Assistance Scheme (FAS), specifically in relation to the award of pre-97 indexation.

It also confirmed that the Pensions Minister has met with PPF and FAS members who have been affected by the lack of protection from inflation and has heard firsthand the very real impacts and difficulties they have experienced.

However, the government emphasised that any change in this area has "significant implications" on public finances for both the taxpayer funded FAS and for the PPF which is levy funded.

"Assets and liabilities for the PPF are reflected within the government accounts, and any use of the PPF reserve and increases in future liabilities have an impact on the public finances," it stated.

"Ministers continue to take advice on options, we will need to work through the issues to ensure a balance can be struck between all parties, including the interests of members of failed schemes, the levy payers who support the PPF and taxpayers. This is an important issue, and one where we will continue to work with PPF.

"We are committed to consider and reflect on what we have heard on the issue of PPF and FAS rules on pre-97 indexation and recognise DB pension scheme members' income in retirement may have been significantly eroded by the recent period of high inflation."

In line with this, the response confirmed that the government is considering how it might address this issue and will provide further detail "in due course".

This update was welcomed by the PPF, with a spokesperson for the lifeboat confirming that levy changes and fresh consideration of its compensation framework, particularly pre-97 indexation, are "top priorities" for the PPF.

"We welcome the active engagement with colleagues in government and will continue to work constructively with them to progress these issues with urgency, reflecting the strength of feedback from members, levy payers and industry bodies for change," the PPF spokesperson stated.

Early findings on pre-1997 discretionary increases revealed

The government also shared an update on broader pre-97 discretionary increases, having recently confirmed that the Department for Work and Pensions (DWP) is working with The Pensions Regulator (TPR) to gather information on the number of schemes providing discretionary increases on pre-97 benefits.

The response provided some of the findings from this work, revealing that 67 per cent of schemes allowed in their scheme rules for the provision of discretionary benefits to their members.

However, of those that allowed for the provision of discretionary benefits, less than a third (32 per cent) had provided these benefits to members in the previous three years, 15 per cent of which was for pre-97 accrual.

Given this, the government confirmed that it is working with TPR to understand the reasons why schemes are not making discretionary pre-1997 payments and monitor trends.

"The government takes the concerns raised very seriously. Members of these pension schemes are now understandably concerned at seeing inflation erode the value of their retirement income," it stated.

"Pension scheme trustees and sponsoring employers need to think carefully about the impact inflation has on members’ benefits when they are making decisions about benefit
increases."

It also suggested that its recently announced reforms on the use of surpluses in DB schemes will make it easier for individual schemes to make decisions that improved outcomes for both sponsoring employers and members, which could include discretionary benefit increases.

Taking steps to improve governance

More broadly, the government confirmed that it will be looking at trusteeship and governance later this year, with plans to consult on measures to improve governance of trust-based schemes later this year.

This consultation will consider how TPR and the DWP could provide additional support for those lay trustees who require it.

Accreditation is also set to be a key focus, as the government confirmed that TPR's ongoing work in the trustee space will help to understand whether current accreditation arrangements are robust enough.

"We intend to consult on the framework of accreditation and governance in our public consultation later this year," the government confirmed.

In addition to this, the response confirmed that the trustee register is still under development as TPR focuses on centralising trustee information.

Public sector consolidator remains an option

Work to consider options for a DB public sector consolidator is also continuing, as the government's response suggested that the PPF could play a valuable role in DB consolidation.

"We continue to explore whether a small, focused government consolidator, run by the PPF, could be an option for schemes less attractive to commercial providers," the response stated.

"Stakeholder feedback to the ‘Options for DB schemes’ consultation will help shape what we do, and the government will respond to the consultation this Spring."

More updates to follow in full DB options response...

Whilst there were fewer updates on broader DB changes, the government confirmed that further updates on the DB market will be shared as part of its response to the ‘Options for DB schemes’ consultation, which is to be shared this spring.

Pensions Minister, Torsten Bell, commented: "The positive funding position across much of the private sector occupational DB universe presents new opportunities for schemes, with many now in
surplus.

"We have announced that we will pave the way for well-funded DB pension schemes to share surplus funds with sponsoring employers and members to fuel growth, unlock investment into the economy and ensure members remain protected, with stringent funding safeguards.

"We will set out details as we respond to the ‘Options for DB schemes’
consultation this spring. We are also taking action on recommendations from the Committee’s report on the Pension Protection Fund Levy.

"Together, these changes create opportunities for DB schemes to support growth, freeing up capital for investment in their sponsoring employers and benefitting members.

"While we are making positive changes through these already announced reforms, we want to go further.

"Reflecting on the committee’s recommendations, we will explore ways to strengthen trustee capability and governance, to ensure we safeguard member benefits and maximise economic growth in a consolidated landscape.

"Our pensions market is one of the largest in the world. Both open and closed DB pensions play a key role in providing retirement income for many individuals. We want to ensure they continue to do so, for many years to come."

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