NEWS   |    June 24, 2016

Arc Pensions Law responds to public consultation on British Steel Pension Scheme

The public consultation about the British Steel Pension Scheme, released 26 May 2016, set out various options for potentially changing the British Steel Pension Scheme as a part of a wider package of Government support. Our concern is the wider issue of finding solutions to this problem for the whole universe of DB schemes and in our response below we focus on the fourth option put forward in the consultation document, which would allow for bulk transfers without individual member consent to a new scheme paying lower levels of indexation and revaluation.

We welcome the opportunity to respond to this consultation on what is a perennial problem for defined benefit workplace pension schemes – addressing funding shortfalls, particularly when the sponsor is not likely to be able to meet the shortfall in full. We recognise the benefits of enabling the business to continue, where possible, giving continued employment to at least some employees. This is particularly relevant in the situation – which is becoming progressively more common – where the DB scheme has long ceased accrual, and most of the members have ceased to be employed by that employer. In that situation, the business is required to continue funding the benefits for former employees, where the current employees are earning less generous benefits.
We recognise the important contribution that the establishment of the PPF has made to the security of member benefits, for a large number of members who without its creation would have lost a larger proportion of their benefits. However, it is a blunt instrument which may not be the most effective solution in every case:

  • The level of compensation provided is (for good reason, given that it is funded by a levy on other DB schemes) limited, and strongly focused on members with lower benefits
  • The structure of the compensation entitlement creates significant cliff edges, which given the heavy bias towards members with lower scheme pension promises, arguably creates unfairness; recent changes allowing longer service to be recognised provide only a limited mitigation of this problem
  • Although it provides (essentially) a guarantee for members, it is a “one-size-fits-all”, “all or nothing” solution where the position for the members is crystallised at the point of entry, and there is no possibility of any improvements in future to put against the loss crystallised at the point of entry.

Given these limitations, a review of the current law in this area is welcome, if the outcome is a more sophisticated approach incorporating flexibilities, enabling more scheme-specific solutions to be adopted. We therefore welcome that the issue is being considered.
In this response we will concentrate our focus on the fourth option put forward in the consultation document, since our concern is the wider issue of finding more appropriate solutions to this problem for the universe of DB schemes.
In principle we agree with the logic behind the approach of creating a new scheme to assume the liabilities of the at-risk member benefits, where the size of the assets are sufficient at that point to provide superior levels of benefit to those that would be available to members, should they instead enter the PPF. We would expect that the rules of the new scheme as to the apportionment of asset values between members would reflect those of the old scheme, rather than a single universal basis as applies under the PPF.

There is then a question as to whether members should be given the choice between a transfer to the new scheme or to the PPF, or whether the trustees should be empowered to organise the transfer for all members as they consider appropriate. We are of the view that the complexity of the situation and the uncertainties of the various outcomes mean that even if member consent is obtained, there is a strong possibility that such consent will not be informed consent, which could create difficulties for the trustees at some future point. We consider it entirely appropriate therefore that the trustees should be given the power to make the decision on behalf of the membership, which would be entirely consistent with trustees’ equitable duty to act in the best interests of the beneficiaries.

However, there is one area where we would strongly oppose the proposals as set out in the consultation document – the proposal for the option to be available only for schemes containing more than a specified minimum number of members (proposed to be 100,000). This restriction is a logical response where the purpose behind the proposal is to limit the eligible cases to a very small number. However, this is a flawed approach, for two reasons:

  • Any cut off level will be arbitrary and will be unfair for trustees of those schemes that are below the cut off level. Experience shows that it is rarely possible to get a decision from every member, regardless of size of the scheme – for example they may fail to respond to correspondence or may simply refuse to make a decision; the difficulties are more likely to arise where a scheme has closed to accrual, with members often becoming less engaged as a result, and many of them uncontactable
  • If a transfer is deemed to be in the best interests of the members due to the comparison with PPF level benefits (which must be a prerequisite) then it stands on its own merits. The size of the transferring scheme is irrelevant, and if used as an arbitrary distinction creates unfairness for members of smaller schemes.

We consider that the other conditions to be met, proposed in paragraph 150 of the consultation paper, are appropriate.

Statutory override to allow RPI to CPI conversion for all schemes

Finally, whilst not directly contained in the consultation, we would like to raise a related issue that is causing problems for a number of schemes struggling to provide benefits at the level set out in their rules. A number of schemes, due to the restrictive way in which their rules have been drafted, are unable to reflect the change in statutory pension increases from RPI to CPI, which was introduced in 2011. This puts them at an unfair disadvantage to those schemes that do not have restrictive rules, and which are therefore able to take advantage of the current statutory easement. In many cases the distinction is due to an arbitrary historic drafting approach that “hard-coded” RPI, almost certainly unintentionally.

It seems both equitable and beneficial that there should be a level playing field between all schemes. We would therefore advocate giving an overriding statutory power, to allow trustees of all schemes to change from RPI to CPI if they are satisfied it is proper for them to do so. The power could be confined to situations where member benefits after its application, though lower than provided by their scheme rules, would be greater than those that would be provided by the Pension Protection Fund. The flexibility to change the index in such a situation would be of benefit both to the members and the sponsors – and to the PPF and levy payers.

Such an amendment would, we suggest, be an appropriate one to complement the consultation paper’s fourth option mentioned above.

Arc Pensions Law
23 June 2016

The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. Arc Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.

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