Defined-benefit Pension Schemes

Debate between Julian Knight and Laura Smith

Tuesday 10th July 2018 Westminster Hall

[Laura Smith]

I apologise to the hon. Gentleman—it was hard to hear him because of the sound of the fans. I will come on to those points.

Basing assumptions on gilts may artificially inflate deficits and future service costs for the sponsoring employer and scheme members. That may lead to the unnecessary closure of schemes to new members and future benefit accrual. Unison’s experience is that some employers would rather pay more and use the increase in costs as an excuse to close their DB scheme, saving money by transferring members into a DC scheme with lower employer contributions, which results in reduced pension benefits for scheme members.

Not only are DB schemes desirable, but they can be affordable and good value for money. We should do everything we can to protect them. The Government’s role should be to provide an adequate regulatory framework, meaningful enforcement and appropriate incentives to help encourage sound decision making and ultimately to provide decent pensions. I welcome the Government’s White Paper and the regulator’s ambition to be clearer, quicker and tougher.

I hope that the Minister can provide me with a little more clarity or reassurance about three issues. First, there appears to be no new relief for employers struggling with DB liabilities. Although I welcome the suggestion that there should be penalties for directors who do not take sufficient care of scheme members’ interests, without support for struggling employers, tougher rules may simply incentivise more of them to close DB schemes in favour of DC schemes with inferior pensions for workers. Secondly, what additional resources are being provided to ensure TPR has the capability and capacity to effectively regulate the sector?

Thirdly, encouraging consolidation over alternative options would not prioritise the protection of members’ benefits, which should be the Government’s primary focus. I understand that insurance buy-out remains the best solution for guaranteeing member benefits in DB schemes. Securing member benefits should be paramount. With an insurer, members are almost certain to receive their benefits in full. The Association of British Insurers believes that prices are the best consultants have ever seen, and that that option is available to smaller schemes.

Although I understand there is a need to provide options for employers that simply cannot secure a buy-out, any new framework should not incentivise consolidation purely on the basis that it is a cheaper option. The risk of investment failure was highlighted by the Pension Protection Fund in a submission to the Select Committee on Work and Pensions. In the absence of a substantive employer, the security of members is entirely dependent on the investment performance of the fund and the associated buffer. Consolidation is therefore less secure than buy-out, and profit withdrawal in years of good investment returns may lead to scheme failure by preventing a strong build-up of reserves.

Consolidation also means that risk, rather than being dispersed across several schemes, becomes focused on one investment strategy. Different consolidators may be inclined to pursue the same investment strategy, resulting in a high correlation of risk in the DB sector. Obviously, that may lead to all schemes failing at the same time. I am also concerned that younger members may shoulder the risk of commercial consolidators collapsing. We should not pursue any policy that leads to greater intergenerational unfairness.

To put it plainly, I am concerned that the option to consolidate or transfer into a super-fund may be seen by some employers as another bolthole to escape their liabilities on the cheap.

[Julian Knight (Solihull) (Con)]

I thank the hon. Lady for securing this important debate. She is making a very good speech in many respects, but one of the concerns about DB schemes is that some that have existed for a long time have few members but a large legacy. A scheme may have only 100 employees, for example, but a very large legacy behind it. I wonder whether she recognises that super-consolidation may be an option for such schemes.

[Laura Smith]

I touched on why I have concerns about that.

As I said, securing member benefits should be paramount. What reassurance can the Minister give me that the eventual framework will ensure that employers’ decisions are focused on that objective? If an employer has the means to get a buy-out and that is the best way to guarantee scheme members’ benefits, it should get a buy-out. We need a framework that incentivises decision making on that basis.

Will any legislation that is enacted be applied retrospectively to cover commercial consolidators formed in the intervening period? I am concerned that a two-tier system of regulation would provide loopholes for those willing to exploit them. Directors of sponsoring employers must have personal liability—there must be criminal offences and heavy fines.

I support the White Paper’s push for clearer, quicker and tougher regulation. I commend the Minister’s efforts and I hope that the White Paper leads to measures that further protect defined-benefit pensions. However, I remain concerned that over-zealous prudence and assumptions threaten otherwise affordable DB schemes. There should be additional support and relief for struggling schemes. I would like to be confident that TPR will be given the resources it needs to have the capability and capacity to regulate effectively in the light of any changes. I am concerned that consolidation—although it may be the best option for some schemes—will be seen as an acceptable cheaper option that does not prioritise protecting scheme members’ benefits when more secure alternatives, such as buy-out, are available and within the means of the employer.

We must endeavour to build a framework that incentivises workers to save responsibly and deters directors from behaving irresponsibly. Paying dividends must not be prioritised at the expense of protecting pensions. I would be grateful if the Minister responded to the issues I have outlined and committed to looking into the ongoing matter at Bentley Motors, which is of concern to more than 1,000 people in Crewe and Nantwich who work for the company, and to working with me to promote a dialogue that has the protection of scheme members’ benefits at its heart.