Aggregation and benefits curbs would be more effective in addressing pension scheme underfunding than fines, says expert

Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com, said enabling the consolidation of pension schemes, the creation of a new statutory aggregator fund, and giving greater powers to pension trustees to reduce the benefits provided for in schemes to offer greater long-term sustainability, would be more effective measures than new powers to issue punitive fines. 

Scholefield was commenting after the Work and Pensions Committee made recommendations to tackle pension scheme underfunding in a new report on DB pension schemes. The recommendations made are intended to "reduce the chances of cases such as BHS occurring again", the Committee said. 

BHS was placed into liquidation earlier this month. The company had entered into administration earlier in the year, but no buyer for the business was found. When BHS went into administration its pension scheme had a £571 million deficit.

Scholefield said: "The report by the Work and Pensions Committee keeps the focus on the issue of how we deal with unsustainable pension schemes. The UK government is also expected to publish a Green Paper in the new year which will look into that precise issue." 

In its report, the Committee called on the government to use its forthcoming Green Paper to consult on giving TPR powers to levy "punitive fines" of up to three times the amount TPR demands pension scheme sponsors pay to address underfunding of the scheme under its existing powers. It said, though, that "the intention would be that such fines would not need to be imposed: they would act as a nuclear deterrent to avoidance". 

The Committee said that if those powers were available today and applied to the case of BHS, where TPR has reportedly asked for a £350 million contribution to address the company's pension deficit, TPR could threaten to levy a fine of up to £1 billion. 

The Committee's report also contained a range of other recommendations. It said pension trustees "should be empowered to take decisions in the long term interests of scheme members", including making adjustments to how pension benefits accrue to make schemes more sustainable.

It said: "We recommend that in its forthcoming Green Paper the government consult on means of permitting trustees to propose changes to scheme indexation rules in the interests of members. These proposals should be subject to regulatory approval but the presumption should be in favour of change. This measure should not only facilitate permanent changes to indexation rules; in many cases a conditional arrangement, whereby the scheme and employer have some breathing space to overcome difficulties, but then revert to more generous uprating when good times return, may be most appropriate." 

The Committee also called on the government to make it easier for pension schemes to be consolidated. It also said there is "a very strong case for the creation of a statutory aggregator fund to facilitate the consolidation of the assets and liabilities of small schemes". The aggregator fund would be managed by the Pension Protection Fund (PPF) and employers would be able to join the fund even if they are not insolvent, it said. 

"This would be an attractive alternative to the insurance company buy-out market, especially for smaller employers which often find this option prohibitively expensive or unavailable," the Committee said. "An aggregator fund would bring greater stability and certainty to scheme members. It would also increase the chances that small employers could continue to thrive, invest and employ. We envisage a proposal whereby the sponsoring employer would agree a conditional programme of contributions at the point of transfer to the aggregator form but would then cease to be otherwise connected to the scheme." 

The Committee said the government should also make it mandatory for businesses to obtain clearance from TPR for some corporate transactions "that could be materially detrimental to the funding position of a DB scheme". 

The circumstances in which mandatory clearance would be required would need to be "narrow to prevent a disproportionate effect on normal economic activity", but could include "the sale or merger of a scheme sponsor where the pension deficit is higher than a fixed proportion of the value of the company", it said. 

Scholefield of Pinsent Masons said: "Looking at the report as a whole, one measure which would have a big effect in tackling the problem of unsustainability of DB pension schemes is the recommendation that it is made easier to consolidate, in particular, small pension schemes. An aggregator fund would offer greater stability to those schemes and offer a way out for employers that can struggle to afford such schemes. In addition, the measures recommended to make it easier to adjust the benefits on offer in pension schemes would also help improve sustainability." 

"The combination of those measures would be likely to have a greater impact and help remove the behaviour which the Committee seeks to address than the threat of large fines against businesses. Economic conditions are at the heart of underfunding of pension schemes, rather than any wrongdoing on their behalf," he said.