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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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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Defined benefit (DB) pension schemes promise their members a pension for life. However, while one member may live to age 75, another might live to age 95. When working out how much money a DB scheme needs to fund the benefits it has promised members, trustees (or rather their actuarial advisers) therefore have to make an assumption about how long, on average, members will live – a longevity assumption.

If that longevity assumption proves to be incorrect and the scheme has to pay benefits for longer than expected, the trustees will need to find additional money to fund those benefits. And usually they will look to the scheme’s sponsoring employer for that money.

Finding ways of managing a scheme’s longevity risk is therefore beneficial for both the trustees and the employer. One way of doing this is a transaction called a longevity swap. Between 2009 and 2018, nearly 50 pension schemes entered into longevity swaps, including schemes sponsored by Astra Zeneca, AkzoNobel, BA, BAE Systems, BMW, BT, Heineken, ITV and Rolls-Royce.


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You may have seen recent – sensationalist – media headlines like:

“’We’re coming for you’ – Amber Rudd’s warning for bosses reckless with employee pensions” (ITV News)
“Reckless bosses who put workers’ pensions in danger could be jailed for seven years” (The Mirror)
Seven-year jail terms unveiled for pension fund mismanagement” (The Guardian)

The

Employers and trustees who use a guarantee or charge to reduce their pension scheme’s Pension Protection Fund (PPF) levy may need to re-execute that guarantee/charge in order for it to be taken into account in calculating the scheme’s 2019/20 PPF levy.

The PPF provides protection for members of DB pension schemes whose sponsoring employer becomes insolvent. It is funded in part by an annual levy payable by DB pension schemes.


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