For a few years now, the Government has been considering ways to enhance the security and sustainability of pensions in the UK, and to protect defined benefit (“DB“) pension schemes. These considerations were documented in the Pension Schemes Bill. Due to lack of Parliamentary time (aka a little thing called Brexit and the general election), the Bill was put on hold but remained very much on everyone’s minds. The Committee Stage in Parliament began last week, so now seems like a good time to refresh our memories about the key provisions of the Pension Schemes Bill from an employer’s perspective.

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This post will be of interest to employers who have a defined benefit pension scheme.

Background

Defined benefit (DB) pension schemes were once the pension arrangement of choice for paternalistic employers seeking to provide competitive benefit packages for their employees.

In more recent times, however, difficult investment environments, increasing life expectancy, low gilt yields and in many cases shrinking company size, have left companies with expanding DB pension schemes burning a hole in their balance sheet. Sound familiar? It is unlikely you would have missed the press coverage surrounding BHS and Tata Steel, and the issues that those companies faced.


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Consultation on RPI/CPI changes delayed

Judged to be to be a “poor measure of inflation” by the UK Statistics Authority (UKSA), its view is that before the Retail Prices Index (RPI) is scrapped, it should be aligned with a variant of the Consumer Prices Index which includes owner-occupier’s housing costs (CPIH).

Although the Government rejected the proposal to remove RPI, it agreed to consult on whether to align CPIH with RPI and the timing of this.   It confirmed that no change will be implemented for five years (before February 2025).   The Government also confirmed that its objective is for CPIH to become its headline measure over time but was silent on whether it might start to issue CPI-linked gilts.


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The Pensions Regulator (TPR) is the body responsible for regulating workplace pension schemes in the UK. Where an employer operates a defined benefit trust-based pension scheme for its employees, legislation requires it to notify TPR if certain events occur. Some events must always be notified, while others only need to be notified in certain circumstances.

On 15 October, the eagerly awaited Pension Schemes Bill (the Bill) had its first reading in the House of Lords. Whilst the Bill addresses the launch of collective defined contribution (or CDC) pension schemes and includes provisions enabling pensions dashboards, employers will be particularly impacted by the new requirement on trustees to produce a funding

The possibility of a Pensions Bill in the next parliamentary session should provide clarity on the funding framework for defined benefit (DB) schemes.

The Government’s white paper in March 2018 proposed that the Pensions Regulator should issue a revised code of practice focusing on how prudence is demonstrated when assessing scheme liabilities, appropriate factors for recovery plans, and ensuring that a long-term view is considered when setting the funding objective. Some or all of the funding standards contained in this revised code would be given statutory force.


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Recent determinations of the Pensions Ombudsman¹ have considered the extent to which employers should provide information on pension rights to employees who have notified them of a terminal illness.

The law

There is no general duty on employers to advise employees about their pension rights, or to safeguard employees’ economic well-being. Indeed, the law prohibits anyone other than a person authorised by the Financial Conduct Authority from advising on pension rights.

However, a distinction should be drawn between “advising” and “providing information”. In some situations the law imposes specific duties on employers to provide information about pension rights to employees. When the law is silent, however, getting things right can be tricky.


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Mayer Brown’s UK Pensions Group has launched a monthly video series providing a snapshot of recent developments and issues of current importance in the UK pensions industry. In the first episode, available on our YouTube channel, partner Richard Goldstein looks at the issue of DB superfunds and, in particular, the UK government’s recent consultation

We recently advised a pension scheme on a buy-out of its defined benefit (DB) liabilities with an insurer. In the run up to the transaction, the employer and the trustees looked very carefully at whether the scheme had enough assets to make the transaction possible. It was touch and go, but in the end the assets were just enough.

This made me think about how important taking benefit de-risking action as part of the journey to full funding can be. On its own, each benefit de-risking step does not have a transformative effect on funding. But, as part of a wider programme of funding and investment action, benefit de-risking can make the difference between getting to 100% funding on a buy-out basis and not.


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Guaranteed minimum pension (GMP) conversion offers the opportunity for defined benefit schemes to simplify their benefits, potentially saving costs and making schemes more attractive to be bought out with an insurer.

Age-old question

One of the great unanswered questions of pensions law has finally being answered. In October last year, the High Court in the Lloyds Bank case determined that pension schemes have to equalise for the effect of GMPs. As part of the judgment, the Court confirmed the effectiveness of the GMP conversion legislation issued by the Department of Work and Pensions (DWP).

Also, in a follow-up judgment, the Court confirmed that GMP conversion, known as the “D2 method”, can be used as a route to achieve equalisation. This effectively allows a scheme to pay the higher of two amounts, based on the value of the member’s GMP and an opposite sex comparator’s GMP, rather than run on dual records for service between May 1990 and April 1997.


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