In December 2018, the Government published a consultation on the consolidation of defined benefit pension schemes (the "Consultation"). The Consultation was a further step towards introducing a regulatory regime for the commercial consolidation of defined benefit pension schemes, an area that was a key feature of the Government's Green and White Papers, published in February 2017 and March 2018 respectively.
The Consultation sought views on a wide range of topics relating to the new proposed regulatory regime. Proposals have been put forward in areas such as:
- the authorisation and supervision criteria for these consolidator vehicles (often referred to as "Superfunds")
- financial sustainability tests
- governance standards
- transfers to Superfunds
- the Pensions Regulator
Responses to the Consultation
The Consultation closed on 1 February, and Baker McKenzie has responded to several key questions raised in the Consultation. The Consultation is grappling with several policy issues, such as: ensuring an innovative Superfund market is created; the impact upon the insurance buy-out market; and protecting members' pension benefits.
Baker McKenzie commented on proposals to prevent certain pension schemes from entering a Superfund where a scheme is, or could foreseeably be, funded at a level where it could afford to secure its liabilities with an insurance company (which are recognised as providing greater member security given mandatory capital requirements).
Our response viewed these as potentially over-prescriptive and counter-intuitive: for instance, could it result in an employer deliberately reducing contributions so that a plan was not "over-funded" and prevented from entering a consolidator? Baker McKenzie proposed that a more effective and appropriate approach would be for scheme trustees to consider a proposal "in the round", without being constrained by specific Government restrictions on entering a consolidator. Considering proposals in the round would involve trustees weighing up a consolidator against other available options – such as continuing with their employer or buy out – and evaluating these in accordance with their overriding legal obligations, in particular their duties to the plan members. What trustees should include in their assessment could be set out in Regulator guidance, and the Regulator should have notification and veto rights over Superfund transfers.
Jonathan Sharp, a partner in the Baker McKenzie pensions team in London, commented that: "this is an interesting and exciting area for the pensions industry, but we do recognise the difficult questions that the Government is grappling with to balance the interests of members, market innovation, and the existing insurance market. However, we do not yet feel that the right balance has been struck, and would welcome a shift by the Government away from prescriptive regulatory requirements to a more flexible approach of relying on existing trustee legal duties and schemes' professional advisers' guidance, particularly that of covenant advisers, whose input will be crucial in enabling trustees to make decisions."