DB policy update: Government responds to Work and Pensions Committee

On 30 April, the House of Commons Work and Pensions Committee published the Government's response to its March 2024 report on defined benefit (DB) pension schemes.

Much of the response boils down to saying that policy announcements will be made "in the Spring". However, it provides some updates and summarises the Government's stances on a range of issues.

• Public sector consolidator: Buyout and consolidation into commercial superfunds "may not work for everyone" and the Government "continues to explore whether a small, focused Government Consolidator, run by the PPF [Pension Protection Fund], could be an option for schemes less attractive to commercial providers."
  Exploring whether there should be a public sector consolidator stops short of the previous Government's commitment (supported by the current pensions minister, Torsten Bell, before he entered Parliament) to establish one. Saying that any public sector consolidator would be "small" and "focused" might also disappoint some advocates of this proposal. The PPF has previously argued that a bigger consolidator could do more to advance the "productive finance" agenda and recently told the Financial Times that it had increased the proportion of assets it would anticipate investing in "the juicy stuff the Government wants".
• PPF levies: As announced in January, the Department for Work and Pensions (DWP) will "consider" changing legislation to give the PPF more flexibility to vary levies year by year; the PPF said then that this could lead to 2025/26 levies being reduced from £45 million to zero. There are hints that changes will be made: the Government talks about the benefits that changes "will" have, whilst the PPF's reaction statement reaction statement says "we warmly welcome DWP's intent to make the changes we need".
• PPF compensation/use of reserves: DWP is "working closely" with the PPF to "future-proof" compensation and recognises the "very real impacts" of not increasing compensation in respect of benefits accrued before 6 April 1997. However, any compensation enhancements would affect the public finances (with PPF assets and liabilities featuring in government accounts), and "we will need to work through the issues to ensure a balance can be struck". There is no mention of refunding levy payers.
• Surplus access: No new details are given, pending the announcement due in the Spring, but the minister's covering letter says that "stringent funding safeguards" will have to be satisfied where schemes that are not winding up make payments to the employer. Figures cited in a Government press release in January gave the impression that schemes might have to remain at least 100% funded on a low dependency basis (rather than on a buyout basis, as now), but this was not stated explicitly.
• Discretionary pension increases: The Government takes concerns about a lack of discretionary increases eroding standards of living "very seriously" and says trustees and sponsors "need to think carefully about the impact inflation has". Working with The Pensions Regulator (TPR), DWP aims to understand why schemes are not making discretionary increases in respect of pre-1997 pensions. It says that, when surplus sharing agreements are made easier, this might sometimes lead to discretionary increases being awarded.
• Trusteeship: A public consultation this year will explore how to strengthen trustee capability and governance. This will examine: additional support for lay trustees (potentially informed by records of trustee toolkit use); the accreditation framework; and what, if anything, should be done to address real or perceived conflicts of interest under the sole trustee model.
• Funding regime: The funding and investment strategy regulations that came into force in 2024 will be reviewed within the next five years. The Government is "not persuaded that merely allowing more risk to be taken in the regulatory regime will be sufficient to persuade trustees to adopt a higher risk asset allocation".
• Superfunds: Legislating through the Pension Schemes Bill to establish an authorisation and supervision regime for superfunds is described as a "key reform" and positioned as enabling DB assets to "work harder to benefit members, employers and the broader economy". It is anticipated that some details will be left to regulations, following further consultation. Separately, the FCA's regulatory initiatives grid recently reported that TPR anticipated beginning work on the Superfund Code from early 2026.
  In a blog last week, TPR estimated that, at the end of 2024, 40% of schemes could potentially have passed the "gateway test" for superfund entry, based on buyout not being a realistic prospect in the foreseeable future. Viewed alongside the estimate in analysis accompanying TPR's Annual Funding Statement that only 46% of schemes had buyout deficits at this date, this indicates that a scheme's prospects of buying out in future would not usually be considered an obstacle to a superfund transaction where buyout is not affordable now.

Contact

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David Robbins

Director, Retirement

email Email

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