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Parliamentary Select Committee enquiry into defined benefit pension schemes: Show-stopper or damp-squib?

Parliamentary Select Committee enquiry into defined benefit pension schemes: Show-stopper or damp-squib?

Introduction

Not content with its Report on the BHS Scheme (issued on the 20 July 2016) the Parliamentary Select Committee (the Committee) announced on 8 August 2016 a wide ranging enquiry into defined benefit (DB) schemes and asked for written submissions on 5 topics by 23 September 2016.

Below is an overview of the Committee’s remit and our comments on whether the Committee’s recommendations are likely to result in new legislation. In our view the forthcoming Select Committee proceedings will produce a lot of ‘hot’ air, no new legislation but perhaps a sea change in TPR’s working methods.

Enquiry’s scope

The Chair of the BHS enquiry, Frank Field MP, said on 8 August:

“The lessons of BHS must be learnt. This may mean strengthening the powers and resolve of the Pensions Regulator to act early, quickly and firmly with those who seek to avoid their pension responsibilities. It is important, however, that businesses that are run reputably and responsibly are not put under undue restriction. Ultimately, defined benefit schemes must be placed on a sustainable footing.”

The whole framework for DB schemes is therefore being excavated to see whether its foundations are fit for purpose. The main areas to be microscopically examined are:

  • The Pensions Regulator (TPR);
  • the Pension Protection Fund (the PPF);
  • role and powers of pension scheme trustees;
  • relationship between TPR, PPF, scheme trustees and sponsoring employers; and
  • balance between meeting pension obligations and ensuring the on-going viability of sponsoring employers.

From the Committee’s further comments it is clear it will focus on whether TPR’s powers need strengthening and should be more pro-actively exercised. For instance, the Committee says it will enquire into the following:

  • “whether specific additional measures for private companies or companies with complex and multi-national group structures are required;
  • the pre-clearance system, including whether it is adequate for particular transactions including the disposal of companies with DB schemes;
  • powers relating to scheme recovery plans; and
  • the impact of the TPR’s regulatory approach on commercial decision-making and the operation of employers”

Our observations

TPR’s powers and particularly its anti-avoidance powers (contribution notices and financial support directions) were very carefully constructed on TPR’s creation under Pensions Act 2004. This was strengthened in 2008 by adding the additional test of material detriment to members’ accrued benefits. TPR has issued many guidance notes on how it will exercise its powers and reports of their use in particular cases. Further adjustment was made in 2014 when in relation to the scheme funding legislation TPR was given an additional statutory objective namely “to minimise any adverse impact on the sustainable growth of an employer”. Whilst further adjustments may be needed at the fringes, the legislation itself as interpreted by the Courts is in our view mostly fit for purpose. The problem lies more in the way TPR approaches its powers, at least in part, because TPR is under-resourced.

Following the Committee’s enquiry into BHS, corporate transactions are clearly under the microscope. Takeovers of listed companies will usually involve the application of the Takeover Code’s pension provisions, but applying similar provisions to private transactions seems inappropriate. Please contact us for details of the Takeover Code’s pension provisions.

Progress of the Select Committee’s enquiry

Following the close of the window for submissions on 23 September 2016, it seems likely there will be further televised Committee hearings this Autumn. TPR and the PPF are already due to give evidence on 10 October. At the time of writing, details of further Committee hearings have yet to be announced.

Likely upshot of the new enquiry

The Committee is likely to report and make recommendations by 31 December 2016. We doubt whether any new legislation will appear in 2017 or perhaps at all because:

  • the Government is very pre-occupied with BREXIT and will become increasingly so as legislation in many areas (not just pensions) is re-examined in the light of BREXIT and in some areas re-shaped;
  • the Government itself is reviewing the valuation bases for schemes and may suggest its own solutions;
  • the eventual outcome of the BHS debacle may influence the Government’s approach; it remains to be seen whether Sir (?) Philip Green and TPR/PPF will reach agreement and, if so, on what terms (please see our separate article [insert hyperlink] in this issue of Pensions Compass); and
  • the Government’s approach to the British Steel Pension Scheme may define the Government’s approach to defined benefit schemes in some areas (e.g. mandatory indexation of pensions).

The Labour party has said it wants TPR’s powers over corporate transactions to be strengthened and for corporates’ powers to pay dividends to be restricted in certain circumstances. In the normal course, a General Election is not due until 2020, however political life is full of surprises!

Our conclusion

We doubt the Committee’s recommendations following its new enquiry will lead to any major new pension legislation. However, we do expect a more pro-active approach from TPR and the PPF to corporate transactions particularly where the corporate is in a near insolvency situation.

For further information please contact Clive Weber.

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