The government has reassured the House of Lords that open defined benefit schemes have nothing to fear from the proposed new DB funding code, in the final debate before the pension schemes bill receives Royal Assent. 

 

The pension schemes bill returned to the House of Lords on Tuesday and is now awaiting Royal Assent. 

 

 

Much of the debate in the Lords centred on the treatment of open DB schemes under the new DB code. Several peers had expressed concern that open schemes would be forced into very low risk investments thereby becoming unaffordable and being closed as a result, with an amendment seeking to ensure the different treatment of open schemes in primary legislation. 

 

The government and the House of Commons were however reluctant to write this into primary legislation. The under-secretary for work and pensions, Baroness Stedman-Scott, said that “the government is very sympathetic to the thinking behind the amendments, but there are very good reasons why we don’t want to deal with them on the bill”. 

 

She said there was a risk that attempting to deal with it in primary legislation will inadvertently undermine the regime as a whole and “the ability of the Pensions Regulator to tackle the issues these reforms were designed to address”.  

 

Therefore, she said the best way to deal with them “is in regulations following a full consultation”. This would provide the option to adjust the parameters “should the economic situation demand it”, she argued. 

 

 

However, she sought to reassure the House saying that the Department for Work and Pensions “confirms that detailed provisions for ongoing defined benefit funding, including any necessary assessment criteria and metrics, will be set out in regulations and in TPR’s funding code of practice, which will acknowledge the position of open and less mature schemes”. The Bespoke route will be fully scheme-specific, she said. 

 

The government “can commit to an engagement programme with interested parties”, she added, including DB schemes that are still open and immature. The consultation will be informed by this engagement, she noted. 

 

The department will also publish a regulatory impact assessment of draft regulations, and TPR will publish an impact assessment alongside the DB code. 

 

 

Those who had voiced concerns over the treatment of open schemes not only worried about member benefits, but about schemes’ ability to support the economic recovery after the pandemic. 

 

Baroness Altmann told the House that “member benefits are not necessarily best protected by so-called derisking”, warning that lower expected returns would force employers to divert more cash towards pension funds. 

 

The assets of employers "are particularly valuable now as we try to recover from the damage of the pandemic”, she said. The money should be used “to allow pension fund assets directly to boost growth” by investing in infrastructure, social housing or early-stage growth businesses, she argued. “All these should deliver better returns than gilts.” 

 

This would be a better use of assets than investment in gilts and employers paying high deficit repair contributions which attract tax relief, observing that this constitutes “a massive drain on the exchequer”. The vast majority of pensions tax relief, £50bn a year, “has been spent on deficit repair contributions in DB schemes”, Altmann noted. 

 

 

Baroness Stedmann-Scott reassured her and others saying: “We absolutely do not want to see good and viable DB schemes close unnecessarily."  

 

Although she said that open schemes should be able to provide the same level of security to members as closed schemes, she added: “I want to make it absolutely clear this does not mean they should invest in the same way as closed schemes.” 

 

She said the government accepts that for some schemes, “derisking is not the best way to safeguard member benefits”. 

 

The Pensions Regulator recently stated in its response to the first DB code consultation that there had been “misunderstandings”, and that it had clarified its view on open schemes in a blog from early December. In this, David Fairs, executive director of policy, analysis and advice, said it was reasonable to give immature schemes room to invest in more volatile, return-seeking assets, as long as they have a strong employer covenant. 

 

Less mature schemes, he said, “should be able to invest with greater freedom than their more mature comrades. This is all positive. But the crunch question is… should trustees be able to assume that the scheme will remain open forever and so adopt an investment strategy that reflects this and take credit for those returns in their funding?”