DWP acknowledges that news of increased deficits, combined with a number of high profile cases during 2016, have led some commentators to declare that there is a fundamental problem with the funding and regulation of these schemes.

It is therefore seeking views across four broad areas: funding and investment; employer contributions and affordability; member protection; and consolidation of DB schemes.

In considering DB scheme investment strategies and asset classes, DWP wants to explore whether there is scope to encourage or facilitate some schemes to make better investment decisions, and to mitigate any barriers to the greater use of alternative asset classes. It is also looking at whether the current valuation and funding arrangements influence schemes to make overly cautious and short term investment decisions.

On the issue of employer contributions and affordability, DWP says its recognises that some companies are paying very substantial deficit repair contributions which may not be sustainable in the long term, and wants to examine what might be done for these ‘stressed’ schemes and their sponsoring employers, and the difficulties in doing so.

Possible options include allowing a struggling business to more easily separate from their pension scheme, renegotiating benefits, providing more intensive support from the pensions regulator and enhancing the powers of the regulator so that it could separate the scheme from the employer or wind up the scheme in specific circumstances. 

Drawbacks

DWP notes that all of these options have significant drawbacks and could raise ‘moral hazard’ issues, where sponsors might be tempted to look to reduce their liabilities by taking advantage of any easement available.

As regards member protection, DWP says it is considering whether the regulator should take a more proactive role in scheme funding and be more explicit about the level of risk it is appropriate for a scheme to take. On the issue of corporate restructuring, it has been suggested that the regulator would be more effective if it had powers to act proactively in order to prevent certain corporate activities, although DWP says it would regard a blanket requirement on parties to obtain clearance ahead of any planned corporate actions as ‘disproportionate’.

Finally the consultation considers ways in which small DB schemes could be aggregated into one or more consolidation vehicles in order to reduce costs, improve investment options and governance. DWP says it favours greater voluntary consolidation, but does not support the development of an  arms length government body which would do this. Instead it is asking for views on whether the government should provide some structures or incentives to encourage the pensions industry to innovate and to provide new consolidation vehicles.

Raj Mody, PwC's global head of pensions said the green paper would give ‘some hope’ to employers struggling with the rising cost of their DB schemes. The firm’s Skyval index suggested UK pension deficits stood at around £470bn at the start of February, and the proposals for easement in cases of distress could reduce this significantly. 

‘We should not overestimate what a green paper by itself is designed to achieve. It is mostly at this stage exploratory, and asks more questions than it provides answers or definitive conclusions. It will take some time for the ideas to be developed into detailed proposals, agreed, and then come into law. But it is encouraging that the government is willing to enter into a wide ranging debate on the issues,’ he said.

The consultation closes on 14 May.

The green paper on security and sustainability in defined benefit pension schemes is here.