The Pensions Regulator (TPR) has confirmed plans to publish guidance for trustees on the issues they should bear in mind when considering alternative arrangements for consolidation or risk management, stating that “buyout is not the only option”.

In its response to the Work and Pensions Committee's (WPC) defined benefit (DB) inquiry, TPR noted that while recent funding improvements have meant that more schemes are able to consider buyout, capacity in the market is limited, with a “significant potential gap”.

However, the regulator emphasised that “buyout is not the only option”, pointing out that, in addition to being able to run on, alternative arrangements for consolidation and other forms of risk management are already available or coming to the market.

“These range from financial arrangements that may help trustees deal with specific risks, or get them to a particular goal, to governance-type arrangements that aim to help trustees improve the day-to-day management and/or make the management of the scheme more efficient," TPR explained.

“This is an area for further growth and innovation and the more viable options schemes have available to them the better. We will be publishing guidance for trustees setting out the issues they should bear in mind when considering these alternative models.”

In addition to this, TPR confirmed that it is also in the process of reviewing its June 2020 guidance for superfunds to ensure it remains fit for purpose and that superfunds are a secure and viable option for schemes.

The regulator suggested that the recent innovation and growth in consolidation models is particularly relevant for smaller schemes, explaining that while elements of the buyout market and alternative models do cater for the smaller end of the pensions landscape, it is likely that these will be more focused on larger schemes.

“We believe there is space for further work to support the market and consider how smaller closed schemes can better access buyout and wider consolidation options, particularly as their funding improves and they near their end game,” it continued.

These concerns were shared by the Pension Protection Fund (PPF), which argued in its response to the committee that further consideration of how smaller scheme consolidation could be facilitated is needed.

However, the lifeboat said that it is ready to support any suitable solutions, with TPR also encouraging the government to give any legislation in this area broad consideration, including the potential role for a PPF-style consolidator in "filling gaps".

Despite this, the regulator clarified that it does not believe the right environment exists to mandate consolidation for DB schemes, arguing that the landscape lacks an appropriate and specific legislative framework that would set the right level of standards and expectations of consolidators, including any options for a PPF-style consolidation solution.

“We believe that a legislative framework is necessary to ensure that savers are sufficiently protected as well as to give confidence to the market and encourage schemes to consider differing consolidation options,” TPR wrote.

“If the right legislative environment is to be established, there needs to be clear policy objectives and articulation of the problem that particular consolidation solutions are seeking to resolve.

"For example, it may be appropriate to incentivise or require consolidation of schemes with poor standards of governance or which lack long-term viability.”

Raising trustee standards

TPR’s submission to the WPC inquiry argued that improving the quality of trustee boards also goes “hand in hand” with consolidation of DB schemes, revealing that progress on encouraging trustee accreditation has been “slower than [TPR] would like”.

TPR suggested that whilst it is unable to force trustees to seek accreditation, there is a “strong case” to develop and implement a framework that supports and strongly encourages this.

TPR stated: “The Pensions Management Institute (PMI) and the Association of Professional Pension Trustees (APPT) have developed a trustee accreditation programme, with significant input from TPR, to encourage and evidence high standards of trusteeship.

“However, take up has been slower than we would like. We are working with these bodies to increase the standards expected of those obtaining accreditation.

“There are challenges which must be resolved but we would like to see someone who meets professional standards sitting on every pension scheme board. This could be via accreditation or an authorisation regime.

“We believe the measures we have outlined will drive up the quality of trustee boards, but it is an area that we keep under constant review and maintain an ongoing dialogue with industry.”

Commenting on its efforts to improve the regulation of trustees more broadly, TPR revealed that it plans to put in place mechanisms to track individuals across schemes in a way that it cannot currently.

This work, according to the TPR's submission, aims to provide a better understanding of the standards of governance in particular schemes and allow TPR to hold those responsible for them to account, as well as provide the regulator with greater insight on the demographics and diversity of those performing the role.

In addition to this, TPR revealed that it is currently reviewing its Trustee Toolkit, in order to make the toolkit more accessible, more focused on core knowledge and understanding and able to deliver a solid foundation for those performing the governance role.

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