Changes to pensions funding
11th April, 2018
In last month's White Paper, the Government set out plans to review the way defined benefit pension schemes are funded.
The plan is for the Pensions Regulator (the Regulator) to consult during the course of 2018 and into 2019 in order to revise the Defined Benefit Funding Code of Practice, which will then be supplemented and strengthened by legislation “at the earliest opportunity”.
The Government intends to create new powers for the Regulator to enforce the new clearer funding standards and take action in the event of non-compliance through sanctions, fines and improved funding powers. These will take effect alongside more effective and more efficient anti-avoidance powers (the existing contribution notices and financial support directions).
Essentially, the Regulator will have more powers to tell employers to put money into their defined benefit pension schemes, whether or not the employers think they can afford it. The Regulator may be able to impose its own view of affordability. This is aimed at avoiding a repeat of the Carillion situation where the Regulator had a multitude of meetings with the directors but seemed unable to ensure they paid more into their scheme.
All this reform will require changes to primary legislation, and the White Paper itself admits this may not be possible before the 2019-2020 parliamentary session at the earliest.
Some commentators are concerned that more mandatory standards mark a return to the bad old days of the Minimum Funding Requirement, when schemes were funded according to their hypothetical compliance requirements as opposed to their real-world financial needs. This may or may not be the case in the future. But what is certain is that room for manoeuvre will decrease and scrutiny of measures taken by employers and trustees will increase.
The detail is still a long way off. However, a window of eighteen months or so is not all that long when it comes to planning acquisitions, disposals or restructures, the viability of which may well be affected by changes in the funding regime of pension schemes.
Hence, now is a good time to take stock and determine what may be achieved in that time window to manage or reduce scheme liabilities, or ensure that the liabilities sit with a statutory employer that can more easily bear them, on the basis of the known regime. A company’s or a group’s future financial plans may well be disrupted by a more restrictive pensions funding regime.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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