Paul Maynard , the Pensions Minister spells out his intent on open DB schemes

1. Sir Stephen Timms,
Chair
Work and Pensions Select Committee
House of Commons
SW1A 0AA
Paul Maynard MP
Minister for Pensions
18th December 2023
Caxton House
Tothill Street
London, SW1H 9AJ
Dear Sir Stephen,
Proposed Scheme Funding Regime — Open Defined Benefit Pension
Schemes
Thank you for your letter of 19th July 2023 regarding our plans to introduce a
new defined benefit (DB) scheme funding regime. I am grateful for the
Committee’s comments, which echoed what many of our stakeholders told us
during our consultation on the draft Regulations.
In developing the Regulations and the new DB Funding Code, both DWP and
The Pensions Regulator have been acutely aware of the need to take account
of the specific needs of open schemes. Your letter set out two potential options
that could help address how open schemes are treated:
• make explicit and separate reference to the requirements on open schemes in
both Regulations and the Funding Code; and
• remove the requirement for open schemes to fund and invest towards a
position of low dependency on the employer.
We agree with the Committee, and many within the pensions industry, that
open schemes should not be forced into an inappropriate de-risking journey.
We had always intended flexibility for open schemes and are aware that this
may not have been clear in the draft Regulations that were consulted on.
Therefore, we will be making it explicit in the Regulations that open schemes
can take account of both new entrants and future accruals in setting their
funding plans. The Pensions Regulator will also ensure that open schemes are
more prominently referenced and highlighted in their revised Code.

2. However, we do not believe that there is a need for separate arrangements, or
indeed a separate regime, for open schemes. Although some schemes may
technically be considered to be ‘open’ as they are admitting small numbers of
new members, they are still nevertheless maturing, much like a closed scheme.
To provide a separate regime for such schemes would leave the system open
to inappropriate gaming and may not effectively protect members’ benefits,
which is a fundamental cornerstone of our proposals.
In the proposed regulations, the need to de-risk will be explicitly linked to the
extent to which the scheme is currently or is likely to become more mature in
the future, as well as on the strength of the sponsoring employer.
This scheme specific approach ensures that if an open scheme is not maturing,
it will not get closer to the point at which it is expected to become significantly
mature and will not therefore have to move towards low dependency.
Therefore, where appropriate, open schemes can continue to invest in a
significant proportion of long-term productive assets.
The Scheme Funding and Investment Strategy Regulations will be laid before
Parliament in the New Year.
Please be reassured that we will be publishing a full impact assessment
alongside the Regulations and the Government response to our consultation.
I would like to thank you and the Committee again for your input.
Yours sincerely,
Paul Maynard MP
Minister for Pensions

3. 19 July 2023
Laura Trott MBE MP
Minister for Pensions
Department for Work and Pensions
(By e-mail only)
Dear Laura,
Proposed new funding regime—open DB schemes
We are grateful for your commitment to take account of the Committee’s conclusions and
recommendations in deciding how to proceed with proposals to introduce a new funding
regime legislated for under the Pension Schemes Act 2021 (s123).1 You told us on 12 July 2023
that you intended to look again at the proposals and come with a decision on how to proceed,
hopefully in the autumn.2
Concerns about the potential impact on open schemes were debated when the legislation was
before Parliament in November 2020. The then Pensions Minister, Guy Opperman MP, said that
“open schemes with a strong sponsoring employer that are immature and have managed their
risk appropriately should not be forced into an inappropriate de-risking journey.” He said the
Government committed to ensuring that:
The secondary legislation works in a way that does not prevent appropriate open
schemes from investing in riskier investments where there are potentially higher returns
as long as the risks can be supported and members’ benefits and the Pension Protection
Fund are effectively protected.3
The evidence we have received to our current inquiry on Defined Benefit Pension Schemes, and
our previous one on Defined benefit pensions with LDI, suggests the Government has not
effectively delivered on this commitment in the draft guidance.
In our view, the Government must do so, to help achieve two important objectives:
• Enabling pension schemes to invest in the UK economy. It is clear from the
Chancellor’s Mansion House speech on 10 July and your comments following the
speech, that the Government is keen for pension schemes to invest in the UK economy
where this is consistent with providing the best possible outcome to pension scheme
1
Q304, 22 March 2023
2
10.30am
3
PBC Deb 5 November 2020 c80

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members.4 We agree. Open schemes do invest in the UK economy. They are concerned
that the funding code will limit their ability to do so.
• Supporting people to achieve adequate incomes in retirement. As we noted in our
Report on Saving for Later Life, people who have access to a defined benefit (DB)
pension are much more likely to be on course for an adequate income in retirement,
than those who do not.5
Concerns
In our Report on Defined Benefit Pension Schemes with Liability Driven Investments, we noted
concern that the proposals could exacerbate existing trends for scheme closures and difficulties
supporting the Government’s growth agenda.6 It is clear from evidence to our current inquiry
on DB schemes that these concerns persist.7
A core concern with the current proposals is the requirement on open schemes to define and
fund towards a target of having low dependency on the sponsoring employer, even when they
are not expected to mature in the foreseeable future.8 This would require them to de-risk,
increasing the cost of ongoing DB accrual unnecessarily, potentially making it more expensive
for employers (and in shared cost schemes, such as the railways’ and universities’ schemes, also
employees). This could have the effect of accelerating scheme closures. XPS Pensions Group
said it was seeing this “limit the ability for sponsors to argue for following higher-returning
strategies even with other contingent protections (guarantees and securities) being in place.”9
The Universities Superannuation Scheme (USS) told us that it was concerned both about the
drafting of the new rules and how they might be applied:
over time, as significantly mature schemes become the norm, and regulatory and policy
knowledge and experience is built around de-risked schemes at or near their ‘end-
game’, inappropriate expectations or requirements of remaining open schemes and
their sponsors might be set.10
A compelling reason to revisit the proposals is to ensure they are appropriate to the
circumstances of today. Since the inception of the policy in 2016, the overall trend has been for
4
Chancellor Jeremy Hunt’s Mansion
5
Protection pension savers: five years on from the pension freedoms: Saving for Later Life, Work and Pensions
Committee, June 2023, para 26
6
Defined benefit pension schemes with Liability Driven Investments, Work and Pensions Select Committee, June
2023, paras 144 and 149
7
DBP0054 (PLSA); DBP0063 (Railways Pension Trustee Company Limited); DBP0078 (Universities Superannuation
Scheme)
8
DBP0063 (Railway Pension Scheme Trustee Company Ltd)
9
XPS Pensions Group, DBP0041
10
DBP0078 (Universities Superannuation Scheme)

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aggregate scheme funding levels to improve.11 In addition, the cost of building up new benefits
in a DB scheme has fallen, by around 5%, from 20–25% to 10–15%, in the case of the Railways
Pension Schemes.12 This provides a new and more favourable environment in which it is easier
for employers to keep schemes open. This opportunity must not be undermined by a new
funding regime which increases costs unnecessarily.13
Options
We understand that two things would help address these concerns:
• Explicit and separate reference to the requirements on open schemes in both
Regulations and the Funding Code; and
• Removing the requirement for open schemes to fund and invest towards a position of
low dependency on the employer.14
There are important reasons to justify a different approach for open schemes:
• Where they remain open at a time that most have closed, this is because the sponsoring
employer(s) has taken an active decision to keep them open on the grounds that it
meets their needs or those of their workforce.15
• A pipeline of new and younger members means assets do not need to be liquid and a far
longer investment horizon is possible. In fact, where supported by a strong employer
covenant, open DB schemes are able to carry long-term risks as part of their investment
strategy, even as they approach maturity.16
Some witnesses before us argued that more is needed: for example, that The Pensions
Regulator (TPR) should have a new objective to have regard to future build-up of benefits
rather than just to protect benefits already built-up. We will explore this further as our inquiry
proceeds.
11
PPF 7800 index – June 2023, Chart 1.
12
Q21 Oral evidence to the Work and Pensions Select Committee 21 June 2023
13
Q15 Oral evidence to the Work and Pensions Select Committee 21 June 2023
14
Supplementary evidence (Railway Pension Scheme Trustee Company Ltd); DBP0078 (Universities
Superannuation Scheme); DBP0054 (Pension and Lifetime Savings Association)
15
DBP0078 (Universities Superannuation Scheme); Q17 [Joe Dabrowski]
16
Pensions and Growth, PLSA, June 2023; Q17-18

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In our LDI Report, we recommended that you should publish a full impact assessment of the
current proposals, including the impact on financial stability and on open DB schemes.17 This is
still needed to allow a more fundamental review of the policy, which we heard many are
concerned will increase ‘herding’ in investment strategies.
We hope that these comments are helpful to you as you continue to develop the new funding
regime. As is usual practice with the Committee’s correspondence, I will be publishing this
letter and your response on the Committee’s website.
Yours sincerely,
Rt Hon Sir Stephen Timms MP
Chair, Work and Pensions Committee
17
Defined benefit pension schemes with Liability Driven Investments, Work and Pensions Select Committee, June
2023