MPs have argued that changes to proposed regulation and improvements in governance standards are needed “urgently” to ensure private sector defined benefit (DB) schemes remain an active part of the pensions landscape and work in members' best interests.

The comments were made as part of the Work and Pensions Committee's report on DB pension schemes, which argued 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.

However, the WPC warned that two decades of regulatory and policy caution from the Department for Work and Pensions (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.

Given these concerns, and recent improvements in DB funding levels presenting new challenges and opportunities for schemes, the report called for a "fresh approach" both to funding regulation and the treatment of surpluses in pension and compensation schemes.

In particular, the committee urged the government and regulators to address concerns that the new funding DB regime, to come into force in September, could force open schemes DB to de-risk unnecessarily, potentially leading to premature closure.

In addition to this, it said that the government should set out how it plans to promote retirement income adequacy in the future and the role it sees DB schemes, particularly open schemes, playing in this.

It also argued that TPR’s objective to protect the Pension Protection Fund (PPF) should be replaced with a new duty to protect future, as well as past, service benefits.

Discretionary increases

The committee also recommended that DWP and TPR explore ways to ensure that scheme members’ reasonable expectations for benefit enhancement are met, particularly where there has been a history of discretionary increases, after it heard from scheme members who were concerned that their interests would be overlooked in this process.

In addition to this, it encouraged TPR to undertake research to better understand the extent of the problem surrounding discretionary increases.

The committee said that changes to PPF compensation levels should also be considered, noting that "the PPF is now fairly confident that it is secure and able to meet future claims from its existing funds, with £12bn in reserves".

The WPC highlighted these reserves as an "opportunity" to consider how both levy payers and scheme members can benefit from this, backing broader industry calls for DWP to legislate to give the PPF more flexibility to reduce its levy to zero, knowing it can increase it again if needed.

In addition to this, the committee recommended that the government legislate to improve PPF compensation levels, after its inquiry found that, for PPF members, the priority was indexation of pre-1997 benefits, which have had a disproportionate impact on women and older scheme members.

It also argued that the same must apply, funded by the taxpayer, to Financial Assistance Scheme (FAS) members, who tend to have more of their service before 1997.

Changes to DB surplus rules

The report also touched on the DWP's consultation on plans to allow DB surpluses to be extracted in a wider range of circumstances, arguing that whilst this is an important consideration if the government wants to encourage well-funded schemes to run on, these proposals must not put member benefits at risk.

Given this, it said that DWP should conduct an assessment of the regulatory and governance framework that would be needed to ensure member benefits are safe and take steps to mitigate the risks before proceeding.

The committee also said that it was yet to be convinced that the PPF underpin would be an effective incentive to trustees to consider increasing their investment risk, arguing that DWP and TPR should consider whether there are changes to the funding regime that could give trustees confidence to take appropriate investment risk.

Improving governance

The committee welcomed the introduction of a trustee register as part of efforts to encourage better governance, arguing however, that mandating accreditation could be needed in future.

The report pointed out that while many trustee boards work well, TPR has long had concerns about governance standards in some schemes, particularly smaller ones, acknowledging the regulator's hopes that consolidation will help to address this by reducing the number of small schemes.

However, the committee argued that "this is not a foregone conclusion", warning that pension superfunds have faced significant challenges in getting off the ground in the absence of a statutory regulatory framework; and although DWP is consulting on proposals for a public consolidator, "the model raises significant questions which are still to be answered".

Given this, it argued that the government should consult on the detailed proposals of the superfunds legislative framework to protect member benefits and then introduce primary legislation for pension superfunds as soon as possible.

It also argued that DWP and TPR need to invest in driving high standards of governance across pension schemes more broadly.

As part of this, the committee recommended that DWP legislate to make accreditation mandatory for professional trustees, or at least set a date for this; explore ways to ensure lay trustees have the time and resources to become accredited; and set out plans for ensuring every trustee board has at least one accredited member, lay or professional, and a timetable for achieving that.

It also encouraged DWP to introduce measures to improve the accountability of sole trustees and to enable scheme members to be involved in their appointment.

Commenting on the report, WPC chair, Stephen Timms, said: "DB 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.”

Commenting in response to the report, a DWP spokesperson said: "We are in a strong position with DB pension schemes enjoying high levels of funding.

"Our new regulations promote better – and clearer – funding standards, while retaining the benefits of a flexible, scheme-specific approach.

“Our DB options consultation is ongoing to seek views on how schemes can provide better outcomes for savers. We remain committed to progressing legislation for the permanent superfund regime as soon as parliamentary time allows.”

Also responding to the recommendations, a spokesperson for TPR stated: “It’s our job to make sure pension savers get their promised benefits, and although funding levels are at their best levels in recent memory with around 80 per cent of pensions schemes fully funded, we are not complacent.

"Schemes can rapidly be affected by market conditions, corporate activity and insolvency events, which is why we make sure that effective long-term risk management is at the heart of our approach and the forthcoming DB Funding Code and Regulations.

"The code also allows for open schemes with a strong sponsoring employer to invest a significant portion of their portfolio in growth assets.

"We will consider the committee’s recommendations carefully and respond in due course.”

Adding to this, PPF interim CEO, Katherine Easter, said: “We welcome the publication of the Work and Pensions Committee’s DB inquiry report.

"This is an important report, and we are considering carefully the specific conclusions and recommendations relevant to the PPF.

"We are committed to delivering good outcomes for both our current members and levy payers informed by DWP consultations and supporting members in the wider DB landscape.”

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