New research from The Pensions Regulator (TPR) shows the majority of defined benefit (DB) savers are in well-run larger schemes which are showing year on year improvements, but small DB schemes are lagging behind.
Smaller schemes tend to display poorer governance standards, with trustees placing less emphasis on assessing the fitness and propriety of new trustee board members. They also perform worse than larger schemes on meeting the principles of TPR’s funding code, particularly around taking and managing risk.
To address the issues highlighted in its latest DB research and response, TPR is continuing its action to drive good governance and administration in all schemes, regardless of size.
As part of its new regulatory approach, TPR is stepping up its proactive involvement with smaller schemes to assess their performance in key risk areas, including governance, covenant, investment and funding. It will provide clear, directive feedback to the trustees of a number of small schemes. Schemes which do not act on the feedback may face further action.
There are further examples of TPR’s new approach to regulation regarding small schemes, including using its powers to address risks and improve outcomes.
For example, TPR initiated an investigation to explore whether support for a DB scheme with 130 members and a buy-out deficit of £33 million should be provided by the parent company. The intervention contributed towards much stronger support for the scheme being put in place by the parent company.
David Fairs, Executive Director of Regulatory Policy, Analysis and Advice, said: “Under our clearer, quicker and tougher approach, schemes in all segments of the pensions landscape can expect to receive greater scrutiny from us. In particular, we are taking a far more directional approach to small schemes to drive up standards and ensure all members are in well-run schemes.
“It is challenging to be a scheme trustee and we continue to help trustees, of all size schemes, meet the standards we expect and make a positive difference for their members.
“We are reviewing and streamlining our existing guidance to make sure our expectations are clear. This includes outlining how we will be quicker to take enforcement action where standards are not being met by using our existing powers more often, and any new powers that may be provided by Government.”
To set clear expectations for DB trustees, TPR has started work on a new DB funding code, as outlined earlier this year in the Government’s DB pensions White Paper. The code will aim to introduce clearer funding standards to help trustees and employers to agree good funding outcomes for their schemes and which should, alongside any expansion of TPR’s powers, better equip it to take enforcement action.
1. The survey reveals a positive picture in relation to the majority of the DB funding code principles. Highlights include:
- nearly all of trustees (92%) and 87% of employers interviewed had read the funding code of practice or a summary of it
- the large majority of trustees (between 88% and 98%) and employers (between 87% and 98%) met each of our expectations under the working collaboratively principle
- the vast majority of trustees (94%) have clarity on which employers are legally liable to support their scheme, helping to inform their decision making in accordance with the long term view principle.
2. The report summarises findings from the 2018 quantitative survey among DB schemes carried out between 1 and 28 March 2018. The survey was conducted by IFF Research, an independent market research agency, on behalf of TPR. An initial 400 interviews were conducted (with 250 trustees and 150 employers). Additional qualitative interviews were undertaken with 27 trustees.
3. In 2014 TPR published a new DB funding code of practice. The code sets out nine key funding principles that are applicable to all schemes when trustees and employers seek to put in place an appropriate funding plan and comply with the scheme funding requirements to achieve this aim. Since its publication, the new code has been supplemented by guidance to help trustee boards and employers to meet the expectation set out in the code.
4. TPR will be engaging actively with industry throughout to ensure the revised DB code is based on expert input, has industry consensus and provides practical guidance on long-term funding. It will initially consult on options for a clearer framework early next year, with a consultation on the new draft code expected later on next year.
5. Under the White Paper’s proposals, DB trustees will also be required to prepare a chair’s statement. The package of measures constitute a strengthening of the comply or explain regime around funding as schemes and sponsoring employers will need to demonstrate to TPR how their approach is prudent and appropriate.
6. Where standards in the funding code are not being met, the Government’s proposed changes to TPR’s powers, including Section 231 funding power, are designed to strengthen its ability to take regulatory action, which could include imposing an appropriate recovery plan.
7. TPR’s scheme funding powers fall under Section 231 of the Pensions Act 2004. We asked the Government for improvements to existing legislation to make Section 231 a more practical and effective regulatory tool, and we welcome the White Paper’s proposals for change.
8. TPR is the regulator of work-based pension schemes in the UK. Our statutory objectives are: to protect members’ benefits; to reduce the risk of calls on the Pension Protection Fund); to promote, and to improve understanding of, the good administration of work-based pension schemes; to maximise employer compliance with automatic enrolment duties; and to minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of TPR’s functions under Part 3 of the Pensions Act 2004 only).