UK: The Pensions Bill Lumbered

Last Updated: 7 September 2016
Article by Alison Hills

Will the Pensions Bill offer any help to hard pressed schemes burdened by funding deficits? – wonders Alison Hills.

This article was first published in Pensions World on 1 September 2016.

In a nutshell: 

  • the new Pensions Bill, as well as covering money purchase schemes, the stronger regulation of master trusts and the introduction of a cap on early exit charges, will inevitably cover issues relating to final salary schemes
  • many schemes across the country feel that they have been unfairly lumbered with continuing to pay generous revaluation and pension increases
  • the Pensions Regulator is going to be given additional powers to authorise and supervise master trusts and intervene when necessary.

On 18 May, it was announced that there would be a new Pensions Bill. While most of the changes relate to money purchase schemes, including the stronger regulation of master trusts and the introduction of a cap on early exit charges, it is inevitable that the Bill will cover issues which relate to final salary schemes.

Recently, the world of final salary schemes has had rather a lot to deal with, in particular the collapse of the sponsor of the BHS pension scheme and the reluctance of Tata Steel UK to fund its pension obligations under the British Steel Pension Scheme (BSPS).

The main issue most schemes are facing at the moment is a significant funding deficit. Many sponsoring employers have been sitting tight, hoping that an increase in bond yields would arrive and help to reduce, or in some cases eliminate, their scheme's funding deficit. For those schemes that have not adopted liability driven investments, Brexit will have dashed (or at least significantly delayed) these hopes.

The BSPS is a prime example of the funding difficulties many schemes are experiencing. Tata Steel is unable to fund the Ł700m deficit and the government is now considering various proposals made to it by the trustee of the BSPS and Tata Steel, in the hope that the UK's failing steel manufacturing industry will not be further damaged by this enormous pension scheme deficit.

Limited funds

Many schemes across the country feel that they have been unfairly lumbered with continuing to pay generous revaluation and pension increases, simply because of the way their governing documents were drafted – in many cases, decades ago when the difficulties now faced by final salary schemes had not been anticipated. One of the options which the government has been asked to consider by Tata Steel and the BSPS trustee is a relaxation of the law which prevents the scheme from altering its revaluation and pension increase provisions. Any changes made may well be brought in under the new Pensions Bill. This would certainly be welcomed with open arms by the vast majority of schemes which find themselves with such hard coded provisions.

However, unfortunately for other schemes it has been made very clear that any leniencies offered will be strictly limited to the BSPS. Such changes would, of course, be less welcome to scheme members, who would inevitably see a reduction in their benefits. But where there are limited funds, it is almost impossible to please sponsors, trustees and members alike.

Tighter regulation

The changes to tighten the regulation of master trusts are likely to be welcomed by all, except perhaps by some of the providers, who will see an increase in their workload. The majority of employers have now passed their auto-enrolment staging date and master trusts have provided an easy solution for many of these employers who have had to consider pension provision for the first time. There have been numerous new entrants in the market offering auto-enrolment solutions. This has brought with it concerns that such master trusts are not properly regulated.

With many employers seeking minimal professional advice on the selection of such providers, we are very supportive of these new protections.

Master trusts will, under the new requirements, need to demonstrate that they meet strict new criteria before entering the market (although arguably this is too little too late, as surely there cannot be capacity for many new master trust providers in a market which seems to be fairly saturated).

More powers for TPR

The more reassuring news is that the Pensions Regulator is going to be given additional powers to authorise and supervise master trusts and intervene when necessary. This certainly seems to be the most appropriate body to take on this role. This should go some way to ensuring the safety of members' benefits for the future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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