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Gov’t paper only scratches surface on DB pension reform

The government has recognised the problems facing defined benefit schemes but its recent green paper failed to find any solutions, instead delivering vague and insufficient outcomes

Gov’t paper only scratches surface on DB pension reform

Describing the government’s defined benefit (DB) green paper released last week, one commentator on Twitter used the analogy of closing the stable door after the horse has bolted.

There has been rising concern about the future affordability of many DB schemes. The negative headlines caused by British Home Stores’ (BHS) collapse has led many to conclude the government has been too slow to address this issue.

Going green

Action was inevitable and it came last week in the shape of the Department for Work and Pensions’ (DWP) 103-page green paper on the security and sustainability of DB schemes. Pensions minister Richard Harrington was quick to dispel the myth of a ‘systemic crisis’ in the DB system, contrary to some tabloids ‘wanting us to believe disaster is everywhere’.

Harrington told New Model Adviser® he was hopeful the work would prevent future cases like BHS, and the ‘changes to the system [would] ensure it could cope with whatever is thrown at it’.

The paper included a number of proposals designed to create a more robust framework. The idea of a voluntary superfund consolidation vehicle was included, which would see lots of smaller schemes merge into bigger ones to cut administration costs.

Helping hand

The paper featured the idea that when employers are in difficulty, there could be a case to allow schemes to ‘suspend indexation’. Furthermore, it said moving to a level playing field on indexation between the retail price index (RPI) and consumer prices index (CPI) should be considered: CPI has been lower than RPI for 22 out of the past 27 years.

Such benefit-reducing measures are likely to create further negative headlines for the government, with stories of cuts to pensions already filling column inches. But given the scale of the deficits facing so many schemes, such tactics are necessary.

Addressing this issue would never be easy for the DWP but while it did discuss these difficult topics, the paper failed to come to any conclusions or outline definitive action the government would take. The language was far from conclusive, with the DWP saying the phrase ‘there may be a case’ seven times in the document, signalling a vague plan of action.

In government a white paper is a statement of policy with concrete proposals. A green paper details issues and points out possible solutions, but makes no commitment to any actions.

Royal London director of policy Steve Webb described this paper as ‘one of the greenest green papers in living memory’.

‘It is just a document with a lot of pros and cons of ideas that we already know the pros and cons for,’ he said.

Waiting time

The former pensions minister was also concerned there would be a significant time gap between this paper being published and any changes being made. ‘In my experience the lead time from thinking about an idea to making it happen can be years,’ he said.

‘So if they do think there are problems, like if there should be more power for The Pensions Regulator, this delay may mean years before action, and will we see another BHS [in that time]?’

Harrington declined to give an indication on whether we are likely to see a white paper this year. Nor was he drawn on his opinion on specific matters, insisting he did not want to pre-empt the industry response to the document.

So while the government is right to tackle the UK’s creaking DB system, meaningful reform is far from on the horizon.

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