What greater regulatory scrutiny means for small schemes
In addition to announcing its new “tougher” stance, the Pensions Regulator has said it will take a more proactive approach to smaller schemes’ compliance with its requirements and expectations.
This followed a survey of defined benefit schemes’ approach to the Pensions Regulator’s DB funding code of practice, showing that while most schemes are currently following the regulator’s standards of governance, smaller schemes are lagging behind.
The regulator has concluded that smaller schemes tend to have poorer governance standards, particularly around assessing trustee fitness and performance, and in relation to taking and managing funding risk.
Part of the watchdog’s new approach is to have dedicated contacts and one-to-one supervision for larger and riskier schemes.
However, it is not just larger schemes that will be the focus of regulatory attention. Being a small scheme will not mean being off the regulatory radar.
The regulator plans to take a more directional approach to smaller schemes. It expects to revise some of its guidance so its requirements are clearer, and to subject schemes of all sizes to more scrutiny.
It aims to be more involved so that it can identify at an earlier stage situation, which may require intervention, and to tell trustees what they should be doing. Failure to comply with directions could result in more serious enforcement action.
In practice, this could involve imposing recovery plans on employers, particularly if plans to grant it new powers in this year’s Department for Work and Pensions white paper are brought into force, which are designed to strengthen the regulator’s ability to take action.
Is it time to update your approach?
Experience suggests they are already taking a more assertive stance in relation to valuation submissions, being more likely to demand explanations of delays and instructing trustees to complete various tasks by particular deadlines.
Trustees of smaller DB schemes and their sponsoring employers are likely to need to change their approach to valuations, funding negotiations and ongoing covenant monitoring if they are to avoid significant intervention from the regulator.
They need to be prepared for more regulatory scrutiny and to have decisions questioned or agreements challenged. Trustees of small schemes may find they have a better negotiating position with their employer as a result.
The watchdog’s new approach will probably require trustees and employers to devote more time to managing their small DB pension scheme, and to take more advice, if they do not want to have funding or other requirements imposed on them.
Partner Vikki Massarano
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.