Now that the General Election dust has settled, the new Labour Government should swiftly turn its attention to some key unanswered questions in relation to occupational defined benefit (DB) schemes.
Firstly, the new DB scheme funding regime comes into effect on 22 September 2024, and it is now certain we will not have an accompanying regulatory Code of Practice by then.
This is a problem because the Pensions Regulator (TPR) can’t just issue a new Code of Practice – it has to lay in Parliament for a certain period of time before it can come into effect. As Parliament was suspended just after the election was called the clock had temporarily stopped, and is expected to stop again for this summer’s recess.
A key component of the legislation requires DB schemes to be fully-funded on a low-dependency basis by the time they reach ‘significant maturity’ – a term which is not explicitly defined in legislation, but instead left to TPR to set out in its Code of Practice.
So, without that code (and therefore the definition), DB scheme sponsors and trustees will not have certainty that their low-risk funding approach is mapped out over a watertight timeframe. The funding code therefore needs to be laid in Parliament as a matter of pressing urgency.
Establishing laws for capital-back consolidators
As we still don’t have a proper regulatory framework - only interim guidance from TPR – a legislative regime for capital-backed consolidators (superfunds) must also be introduced by the new Government as soon as possible.
While TPR’s guidance has allowed the first superfund transactions to be completed, a robust legislative footing would give greater confidence to more trustees who believe a superfund transaction to be in the best interests of their members. And with an appropriately strong legal foundation, promised by the previous Government, the range of end-game options for DB schemes widens and as a result potentially improves outcomes for members.
Returning surplus assets
Importantly, and off the back of the Mansion House reforms, we need government support for (and clarity around) the proposals set out in relation to returning surplus assets to employers and members.
This will help to open up the prospect of more DB schemes running-on and potentially investing billions to aid UK economic growth.
The increasing feasibility of run-on could change employers' perception of DB schemes from obligations to asset, with potential benefits to all stakeholders including the employers themselves and their scheme members.
Reforming the Pension Protection Fund (PPF)
The new Government should also prioritise reforming the PPF levy.
The PPF itself has called for amending legislation which would enable it to reduce its annual levy to zero without limiting future collections. As it stands, the law restricts year-on-year increases in the levy collection to 25%, meaning the PPF cannot stop collecting a levy now otherwise it will never be able to collect one again in future.
The current legislation is clearly no longer fit for purpose and consequentially, the PPF is charging levy-paying DB schemes hundreds of millions of pounds that it no longer needs to.
Prioritising pending reforms
There are a significant number of important programmes of reform that were left in the balance when the General Election was called and Parliament suspended – and many more initiatives that remain long overdue, for example Collective Defined Contribution (CDC) regulations or pensions dashboard development. Read our latest update on the Pensions Dashboards Programme.
The new leadership should focus on these – and resist calls, at least in the early days of the new Government, for wide-ranging reviews which would potentially further delay or even de-rail these initiatives.