In this bulletin we take a look at ten key pensions issue for employers in the coming year.
1. GMP equalisation
In October 2018, the landmark judgment in Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank plc established beyond doubt that scheme trustees must adjust scheme benefits to equalise for the effect of GMP ("guaranteed minimum pension") legislation that treats men and women unequally. The costs of equalising benefits can be significant and more than one approach to equalisation is possible, so this is an area where trustees and employers should be liaising closely.
For more detail, see our e-bulletin.
2. Pensions Regulator focus on employer dividends
Following public criticism in the wake of the BHS and Carillion insolvencies for being slow to make use of its powers, the Regulator has been keen to send the message that if it sees employers paying out substantial dividends, it does not expect to see long recovery periods for making good a scheme deficit. In December 2018, the Regulator reported that it had commenced regulatory action against a utility company in relation to exactly this issue. The Regulator discontinued its action after the scheme trustees and employer agreed a funding plan with significantly increased employer contributions, strengthened actuarial assumptions and a dividend sharing mechanism providing for deficit repair contributions to be accelerated if dividends exceed an agreed threshold.
3. One-to-one Pensions Regulator supervision
Another part of the Regulator's strategy for becoming a quicker, tougher Regulator is the introduction of dedicated one-to-one supervision for 25 of the biggest defined contribution, defined benefit and public service schemes. The Regulator will also pilot a "higher volume" supervisory approach with approximately 50 defined benefit schemes to assess compliance with messages in the Regulator's 2018 annual funding statement. Over time the Regulator expects hundreds of schemes to experience "higher volume supervisory approaches". We are already seeing evidence of the Regulator's new approach, with the Regulator asking trustees to provide significant amounts of information regarding how they comply with their legal duties.
4. New DB funding code
During 2019, the Pensions Regulator plans to consult on its new code of practice on funding defined benefit schemes, with a consultation on options planned for spring 2019 and a consultation on the code itself in autumn 2019. Although the code is not expected to come into force until 2020, employers with defined benefit schemes should monitor developments in this area for any indicator of changes which could impact their existing approach to scheme funding, particularly given the Pensions Regulator's increased focus on the relationship between employer dividend payments and deficit reduction contributions.
5. A busy buy-out market
We expect to see high levels of activity in the annuities market with many schemes seeking to buy out liabilities, so we would recommend clients seeking to buy out liabilities to undertake preparatory work early so that they are in a position to act quickly when the annuity price is right.
6. Defined benefit superfunds
The Government is currently consulting on a new regulatory regime for defined benefit "superfunds", occupational pension schemes set up for the purpose of consolidating defined benefit scheme liabilities by allowing existing schemes to transfer liabilities to the superfund. Although currently at an early stage, the establishment of a superfunds regime could provide a new mechanism for employers to divest themselves of legacy defined benefit pension liabilities in circumstances where a buy-out with an insurance company is not affordable.
After the rush to ensure compliance with GDPR in the run up to its coming into force in 2018, there can be a temptation to see GDPR compliance as "last year's issue", but it's important to remember that the obligation to comply with GDPR is ongoing. In a pensions context, GDPR issues can arise when employers wish to contact scheme members directly for the purpose of liability management exercises, eg offering enhanced transfer values.
8. RPI v CPI indexation
Eight years on from the government's decision to change the statutory basis for pension increases from RPI to CPI, questions relating to this issue continue to occupy the courts. In Barnardo's v Buckinghamshire, the Supreme Court concluded that a reference in the scheme rules to "replacement" of RPI referred to it being replaced as an official index, not the scheme trustees choosing to replace it. In British Telecommunications plc v BT Pension Scheme Trustees Limited, the Court of Appeal held that RPI had not "become inappropriate" for the purposes of calculating pension increases. In the coming year, we expect to see a Supreme Court ruling in the case of British Airways plc v Airways Pension Scheme Trustee Ltd, a case which stems from the RPI/CPI change, but which may well have wider implications regarding extent to which scheme trustees are allowed to use their powers to increase scheme liabilities without employer consent.
9. PPF requirement to re-execute contingent assets
The Pension Protection Fund (PPF) has confirmed that "Type A" or "Type B" contingent assets (broadly, guarantees or security over land, cash or assets) that are subject to a fixed cap will need to be in the PPF's current standard form, published on 18 January 2018, in order to be recognised in the levy calculation for 2019/20. Therefore contingent assets on earlier versions of the standard form will need to be re-executed and submitted to the PPF if they are to be recognised for levy purposes. The deadline for re-executing and making the necessary online submission to the PPF is midnight on 31 March 2019 (a Sunday). With Brexit due to happen on 29 March, there is obvious potential for businesses to be preoccupied around that time, so it would be wise to ensure PPF submissions are dealt with well in advance of the deadline.
10. Change to the law on excepted group life schemes
From the start of tax year 2019/20, a change to the law around "excepted group life schemes" (EGLSs) will allow benefits to be paid to a wider class of person without the premiums being taxable as a benefit in kind. Employers providing such schemes should review the rules to check whether they are drafted in a way that avoids the need for premiums to be taxed as a benefit in kind while maintaining maximum flexibility in relation to payment of the benefits.