Source · Select Committees · Work and Pensions Committee
Recommendation 5
5
Rejected
Replace TPR's PPF protection objective with protecting future and past pension service benefits.
Conclusion
TPR’s approach to scheme funding has been driven by its objective to protect the PPF. We agree with those who told us that the objective now looks redundant, given the PPF has £12 billion in reserves. Two decades of regulatory policy caution have almost entirely destroyed the UK’s DB system. DWP and TPR need to act urgently to ensure they do not inadvertently finish off what few open schemes remain by further increasing the risk aversion, even while the risks of default have reduced substantially. Open and continuing schemes need confidence that the additional flexibilities that have been promised will be reflected in the actual approach regulators take in future. To signal the change in approach needed for this, the objective to protect the PPF should be replaced with a new objective to protect future, as well as past, service benefits. TPR should work with the pensions industry on what the change would mean in practice and what capabilities it will need to deliver on it effectively. (Paragraph 52) Scheme surplus
Government Response Summary
The government rejects the recommendation to change TPR's objective, stating it does not believe the PPF objective is a key factor in employer decision-making and that an independent review did not recommend this change. It will formally respond to the 'Options for Defined Benefit Schemes' consultation in the Spring.
Government Response
Rejected
HM Government
Rejected
The Government agrees it is important to ensure that the regulatory framework does not influence schemes to be too risk averse. However, we do not believe that TPR’s PPF objective is a key factor in employer decision- making. There are multiple drivers behind decisions to close DB schemes in favour of defined contribution provision, such as improvements in longevity increasing scheme liabilities. TPR’s objectives were thoroughly considered by Mary Starks in her independent review, which was published in September 2023. This acknowledged that TPR’s objective to reduce the risk of schemes ending up in the PPF could increase risk aversion but also noted that “it will be strongly in the interests of affected savers to be paid out by their scheme rather than be compensated by the PPF–the more so for those still in accrual.” Accordingly, that review did not recommend changing this objective. TPR already seeks to balance its objective to reduce the risk of schemes falling into the PPF against its objective to minimise adverse impacts on the growth of the employer’s business, recognising that the best protection for a DB pension scheme is a strong and profitable employer. Against the backdrop of an evolving DB landscape, we will continue to work with TPR to ensure that it has the regulatory framework and powers it needs for the future. We will continue to monitor this and take action where necessary. Scheme Surplus Overall, DB schemes are in a positive funding position, with billions of pounds in surplus funding across the DB universe. As the Work and Pensions Select Committee (WPSC) report highlights, many schemes are moving to buy out with insurers or have taken other measures to secure their liabilities. Many schemes are banking the gains of surplus funding and in aggregate, member pensions are better protected. There are also opportunities for these assets to bring greater benefit to employers, scheme members, and the wider economy. With this changing DB landscape, it is vital that trustees can access a variety of options. Member security is of utmost importance, and our overriding priority is to ensure schemes pay out the full value of pensions. DWP’s 2024 consultation on ‘Options for Defined Benefit Schemes’5 sought feedback on the treatment of scheme surplus. We have considered the feedback received and thank those who contributed their expertise. The Government will respond formally to this consultation in the Spring.