This post is from Con Keating and first appeared in Portfolio Institutional

Alongside its new DB white paper (Protecting Defined Benefit Pension Schemes) the Department of Work and Pensions published a summary of the responses to the earlier DB Green Paper (Security and Sustainability in Defined Benefit Pension Schemes). This consultation drew 835 responses, of which 439 were submissions from members of the Hewlett Packard and BA schemes, for whom there was special interest. The number of responses to the individual questions posed varied wildly; as few as 26 for one question. The Long Finance response to that consultation, which I co-authored, has been downloaded over 1200 times, which is quite remarkable given its length – at 126 pages it is longer than the Green Paper itself. Much of that is concerned with a deconstruction of the Pensions Regulator’s misconceived and misleading narrative surrounding DB pensions. We were sufficiently concerned by this to call for the establishment of a Royal Commission to investigate it fully.

The White Paper is pre-occupied by much more than the issues raised in the Green Paper. Several high-profile employer insolvencies, such as Carillion, have influenced the political agenda. The Parliamentary Work and Pensions Committee, whose aggressive interrogations and stentorian, minatory pronouncements are legend, has provided all the encouragement needed. Any pretence of a sense of proportion has been abandoned. The Pension Protection Fund has been called upon to cover just 2% of the membership of DB schemes after twelve years in existence. Its actuarial liabilities are just £22 billion when bulk annuity purchases are projected to be £30 billion in the current year alone. The insolvency rate of employers has proved to be far below the insolvency rate of the general population of companies. Even transfers out of DB, at £34 billion last year, dwarf insolvencies.

The most eye-catching proposal in the White Paper is to “…legislate to introduce a criminal offence to punish those found to have committed wilful or grossly reckless behaviour in relation to a pension scheme…”, which is augmented by the idea that legislation should be introduced to: “… give the Regulator powers to punish those who deliberately put their pension scheme at risk by introducing punitive fines”. Perversely, we view this as a positive development. It makes redundant our call for a Royal Commission to investigate the duties of trustees and responsibilities and powers of the Regulator since it moves the venue for those deliberations to the courts.

Among the obvious early casualties there, are likely to be the valuation standards enshrined in the Pensions Act 2004. The counterfactual nature of these renders them of little or no probative value when trying to establish recklessness, or much else for that matter. In turn, that opens many of the regulator’s other nostrums, particularly those on trustee duties and responsibilities, to challenge by considered argument and explicit judgement.

Communications from the Pensions Regulator have taken an increasing belligerent tone in recent years, and the recent annual DB funding statement is no exception. Yet again the Regulator has added to Trustee burdens. On transfers: “We would ask trustees to keep records of transfer activity, including details of the advisers and the schemes to which transfers are made.” This process of adding to the so-called duties and tasks of trustees by the Regulator has become casual and is insidious as “ask” becomes “expect” and ends as “require”. This example may be trivial, but the codes and guidance and other inventions of the Regulator are not.

We are now seeing direct intrusions into corporate finances. The demonization of dividend payments is a prime example. It appears that our politicians and the Regulator will not be content until all DB pension liabilities are funded to the level of their future cash values, and that even then we would probably hear calls for additional funding to cater for some risk of their imagination.

There is little doubt that we can expect to see these changes – to quote the Pensions Minister: “…we will give the regulator the powers…” Not much point then in following the consultation processes or responding to any of them.

We can expect the courts to see straight through the spin of “protecting members’ pensions” – if that really were the objective, the solution is simple: have the pension protection fund pay the full benefits of members. We can expect the courts to challenge the overfunding of DB pensions that results from the use of counterfactual discount rates and consideration of events that may or may not happen after the demise of a sponsor. It seems certain that they would see that as being no more appropriate than setting aside corporate funds today for payment to shareholders or other creditors after insolvency.

Not many of the nostrums of the legislation and Regulator are likely to survive such scrutiny; not integrated risk management, not the section 75 claim amount and not even the prudential buffer of technical provisions valuations. The sad thing is that none of this will resurrect our private sector DB system. Finance directors have rightly concluded that once is accident and twice, bad luck, but three times and more, enemy action. It may just save what little still exists.