Members of defined benefit (DB) pension schemes will have their protections boosted, with proposals under consultation.
Under the proposals, DB schemes will be required to have long-term plans set out in a funding and investment strategy, with these plans also submitted to the Pensions Regulator (TPR).
DB schemes are sometimes called “final salary” or “career average” pensions. They promise members a certain level of income when they retire, based on their salary.
But they are expensive to run as people live for longer and have become increasingly rare. The Pension Protection Fund (PPF) protects people with a DB pension when an employer becomes insolvent.
The consultation, launched by the Department for Work and Pensions (DWP), follows the passage of last year’s Pension Schemes Act, which set out the framework for new regulations.
Nearly 10 million people across the remain in DB schemes, the DWP said, with around one million of those still actively paying into one.
Collectively, DB schemes manage a total of approximately £1.7 trillion worth of assets.
The DWP said the proposed measures will contribute towards clearer funding standards and support trustees and employers to plan their scheme funding over the longer-term, embedding good practice already seen in the market, as well as requiring trustees to report progress against scheme targets.
Minister for pensions Guy Opperman said: “Most DB schemes are well managed. However, despite the safeguards in place, best practice is not universal.
“Our intention is to have better – and clearer – funding standards, whilst retaining the strengths of a flexible, scheme-specific approach. It is nether ‘one size fits all’, nor about micro-managing schemes. Every scheme will be treated on its merits.
“Millions of people rely on defined benefit schemes. Our new measures will help ensure they are protected for the long-term.”
The plans will also enable TPR to intervene more efficiently to protect members when needed.
Where a scheme appears to be falling short of its legal requirements, the regulator will be able to step in and engage with the scheme to ensure compliance and boost member security.
Charles Counsell, chief executive of TPR said: “I welcome the proposed measures which will help trustees to focus on long-term planning and risk-management, reflecting the good practice that many well-run defined benefit schemes already demonstrate, and enable TPR to regulate DB scheme funding more efficiently and robustly in the future.
“We will now take into account the draft regulations as we shape our new DB funding code of practice, which we expect to consult upon in the autumn. We want schemes to have the continued flexibility on funding to suit their circumstances, while improving journey planning and security for pension savers over the long term.”
The consultation will run for 12 weeks from July 26, with the DWP particularly seeking feedback from trustees and managers of DB schemes, sponsoring employers, industry professionals, scheme members, and other stakeholders.
A survey by PwC, which collected more than 360 responses, indicated that 80% of schemes surveyed already have a long-term funding plan in place.
John Dunn, head of pensions funding and transformation at PwC, said: “Only a minority of schemes – one in five – have yet to formulate a long-term funding plan.”
He said these schemes may be waiting for a new code of practice on DB funding “as their starting gun”.
Jonathan Camfield, a partner at consultancy LCP (Lane Clark & Peacock) said: “Trustees and sponsors should already be preparing for this new world.”