Pensions experts eye DB reforms ahead of Govt green paper

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Pensions experts are looking ahead to possible changes to indexation and member protection as the Government prepares to release its green paper on the future of defined benefit schemes.

The Government has given a timetable of early 2017 to release its verdict on the problems and solution in the DB space, with pensions minister Richard Harrington suggesting it could be released this month.

However, market commentators remain unclear on the exact timing of the report, with some predicting it would be made public nearer Easter.

Former pensions minister Steve Webb says: “These things have to be agreed across Government, and in the process the Treasury have to sign it off and might be concerned about anything that looks like they are being too hard on employers or growth.”

Webb predicts four main themes will come out of the paper: indexation, member protection, consolidation, and valuation.

Hargreaves Lansdown head of retirement policy Tom McPhail expects similar themes to emerge.

McPhail says: “Within member protection I think we’ll see quite a lot on regulatory powers and trustee responsibility. One of the interesting aspects of [the FCA’s] asset management market study paper was the weak control exercised by trustees of smaller schemes. Harrington has since referenced this regulatory paper.”

Aegon head of pension Kate Smith says that it is unlikely any radical changes in indexation will result from the Government’s review.

She says: “Indexation did appear to be off the table. They’ve looked at this several times, and it does seem to be a difficult thing to do to change pension increases from one index to another if its hard-wired into the pension scheme.

“Maybe that’s back on the table…there should be something about helping employers manage their costs.”

Smith says a potential solution would be to offer trustees more “encouragement” to allow more partial transfers of DB pots.

However, she says she is cautious on any plans to consolidate smaller DB schemes into master-trust style frameworks to alleviate the burden on employers.

The issue with consolidating schemes, Smith points out, is that each with have a different level of solvency.

She says: “It’s difficult to see how assets could truly be pooled and may have to be ring-fenced somehow.”