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High Court rules on transfer values in Lloyds Bank GMP equalisation case
On 20 November 2020, the High Court gave its ruling on transfer values in the GMP equalisation case of Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank plc. The ruling follows the landmark judgment in October 2018 in the same case in which the court held that scheme trustees must equalise benefits to take account of the different GMP ages which apply to men and women.
The ruling makes a key distinction between transfer values (a) paid where members exercise their right under cash equivalent transfer value (CETV) legislation; and (b) paid as a result of a trustee decision under the scheme rules. In relation to statutory CETVs, the judge held that trustees owed a duty to a transferring member to make a transfer payment which reflected the member's right to equalised benefits, and that trustees remained liable to the member for that breach. Where the transferring scheme still exists, a member will not be time barred from making a claim. The judge held that transferring scheme trustees should be proactive in considering whether there have been shortfalls in CETVs paid. However, the judgment does not address the issue of how far trustees are expected to go in topping up transfer payments where the administrative costs involved exceed the amount of any top-up due.
Where a transfer was made as a result of trustees making a decision under scheme rules rather than under CETV legislation, the legal position is different. It will not normally be appropriate for trustees to proactively revisit their own decisions. That is not to say that a member could not bring a claim in respect of an unequalised transfer value, but it would be for the member to convince a court that there had been a breach of duty by the trustees in relation to the original transfer value and that the trustees' decision ought to be set aside. That would involve the court looking at the particular circumstances of the case.
The judgment provides clarity in some areas but leaves some important questions unanswered. Most of the judgment considers the rights of individual members to bring claims rather than the position of the trustees of a scheme that has received a transfer. The judge recognised that there might be cases where the amount of a top-up payment might be greatly exceeded by the administrative costs involved in calculating and paying it, but the parties agreed that the judge would not rule on how trustees should approach this issue. The judge also didn't rule on the position where a member has since transferred out or otherwise ceased to be a member of the original receiving scheme.
The judgment draws a distinction between transfer values paid pursuant to cash equivalent transfer value legislation and other transfer values, but there may be situations in practice where the question of which category a transfer value falls into is not clear cut.
High Court clarifies scope of Fraud Compensation Fund
In the case of Board of the Pension Protection Fund v Dalriada Trustees Ltd, the High Court has clarified various aspects of the law relevant to the Fraud Compensation Fund (FCF) which is operated by the Pension Protection Fund. The FCF was established to provide compensation where a scheme's assets have been reduced as a result of a dishonesty offence. The case came about after the PPF was notified of a large number of claims on the FCF in respect of occupational pension schemes which had been used as vehicles for pension scams. The PPF sought court rulings on various legal issues in order to ensure that it correctly administered the scheme. One point of potentially wider relevance is the court's ruling on section 99 of the Pension Schemes Act 1993 which provides for trustees to be discharged from liability when they have paid a transfer value after the member has exercised his statutory right to a cash equivalent transfer value. The judge considered that trustees would not be discharged from liability under the legislation if they made a transfer to an arrangement which was a sham at the time of the transfer even if the trustees were unaware that the arrangement was not a genuine occupational pension scheme.
Even though some of the issues in this case will only be relevant to the PPF in its administration of the Fraud Compensation Fund, the judgment raises the possibility that trustees will not be discharged from liability to provide benefits if they make a transfer to an arrangement which they believe to be an occupational pension scheme, but which is actually a sham. This underlines the importance of trustees making appropriate checks in relation to the receiving scheme before paying a transfer.
Court orders rectification where members accidentally granted early retirement rights
In the case of SPS Technologies v Moitt the court made an order for rectification of the scheme rules where the effect of an amendment in 1998 had been that members who had transferred in service from another scheme were granted a right to retire early from deferred member status without actuarial reduction. Having considered the evidence, the judge concluded that the early retirement right in question had only been intended to apply in respect of pensionable service before closure of the "Barber window", ie the date on which the scheme took steps to equalise benefits for male and female members as required by the ruling of the European Court of Justice in the Barber case.
Rectification is a remedy whereby a court can order that a document should be re-written if it is satisfied that the wording of the document did not reflect the intentions of the parties. Factors which helped to persuade the judge that the wording of the rules had not reflected the intention of the parties in this case included:
- the illogicality in of applying an actuarial reduction to members retiring from active member status, but not from deferred status;
- the absence of any mention in correspondence at the time of any intention to disapply the early retirement reduction in its entirety to deferred transferred in members from age 60;
- the fact that following execution of the 1998 deed, an early retirement reduction continued to be applied to deferred transferred in members; and
- the lack of any commercial reason for the employer to have decided to provide more generous benefits to transferred in deferred members, especially at a time when the scheme's funding position was deteriorating and a resumption of employer contributions was contemplated.
EU Court holds fund management services not exempt from VAT
In the case of United Biscuits (Pension Trustees) Limited v HMRC, the Court of Justice of the European Union (CJEU) has held that pension fund management services are not exempt from VAT.
EU law provides for an exemption from VAT for insurance services. Until 1 April 2019, HMRC allowed insurance companies to treat their supplies of pension fund management services as VAT exempt (though the exemption did not apply to non-insurers providing such services). The trustees in the United Biscuits case had been seeking repayment of VAT charged by non-insurers in respect of fund management services, arguing that they should be treated in the same way as fund management services provided by insurance companies, but the CJEU held that the insurance exemption did not apply. It said that the essence of an insurance transaction was that the insurer undertakes, in return for a premium, to provide services in the event that a certain risk materialises. The fund management services provided to the trustee in this case did not include any cover for risk.
Court of Appeal dismisses legal challenge to women's state pension age changes
In its judgment in R (Delve) v Secretary of State for Work and Pensions, the Court of Appeal has dismissed an appeal against the High Court's refusal to grant a judicial review in the "Backto60" campaign. The appellants had been seeking to challenge the way in which state pension age for women was increased from 60 to 65. The court held that the change did not amount to unlawful discrimination. It also held that there had been no duty on the part of the government to notify those affected by the change in state pension age, and that the High Court had been entitled to conclude in its judgment that there had been adequate and reasonable notice given by the publicity campaigns implemented by the government over a number of years.
Pensions minister confident that Pension Schemes Bill will be law by end of year
Speaking at a Society of Pensions Professionals webinar in September, the pensions minister, Guy Opperman, said that he was "very confident" that the Pension Schemes Bill would become law by the end of the year. Regarding the Pensions Regulator's extended powers and the introduction of new criminal offences which are very broad in scope, the government has said that the Pensions Regulator will publish specific guidance on those powers after consulting with the industry.
In our September Update we reported on a House of Lords amendment which would have required any future scheme funding regulations to be drafted in consideration of the different funding requirements of closed and open defined benefit schemes. On 20 October the government proposed an amendment to the Bill which will reverse this change.
A clause in the Pension Schemes Bill allows the Government to make regulations prescribing additional conditions which need to be satisfied in order for the member to exercise a right to a cash equivalent transfer value. A cross-party group of five MPs including the chair of the Work and Pensions Committee had proposed an amendment which would alter the statutory right to a transfer where certain "red flags" potentially indicative of a pensions scam are identified. The pensions minister has said the government will consult on the relevant regulations after the Bill receives Royal Assent.
Trustees required to submit compliance report to CMA by 7 January 2021
Under the Investment Consultancy and Fiduciary Management Market Investigation Order 2019, scheme trustees are required to run a competitive tender process in relation to the appointment of a fiduciary manager where the fiduciary manager's mandate covers 20% or more of the scheme's assets. Trustees are also required to set strategic objectives for their investment consultant. As the law currently stands, trustees are required to submit a "compliance statement" to the Competition and Markets Authority (CMA) confirming the extent to which they have complied with the relevant requirements during the reporting period. "Reporting period" is not actually defined in the order, but appears to mean the first year during which the relevant provisions were in force and each year after that, so that the first reporting period will be the year commencing 10 December 2019. The statement must be submitted by 7 January 2021 to RemediesMonitoringTeam@cma.gov.uk.
The Order sets out specific wording for the compliance statement which must be accompanied by a certificate confirming that it has been prepared in accordance with the requirements of the Order, and that for the period to which the statement relates, the trustees have complied in all material respects with the Order and reasonably expect to continue to do so. If the scheme has a sole corporate trustee, the certificate must be signed by a director of the sole corporate trustee. In other cases the certificate must be signed by the chair of trustees unless there is no chair or the chair is not available, in which case it must be signed by another trustee.
At some point the government intends to amend the Occupational Pension Schemes (Scheme Administration) Regulations 1996 to incorporate the trustees' duties under the Order into the regulations, with the Pensions Regulator rather than the CMA being responsible for enforcement. The government consulted on draft regulations in July 2019, but has not yet published a response to the consultation. We cannot rule out the possibility that regulations could be laid at the last minute, but as the law currently stands, the requirement is to submit a compliance statement to the CMA.
"Stronger nudge" to pensions guidance to be implemented in law
In its policy paper "Stronger nudge to pensions guidance: statement of policy intent", the government has said that it will commence section 19 of the Financial Guidance and Claims Act 2018 which will require it to make regulations requiring scheme trustees to ensure that members wishing to receive or transfer money purchase or cash balance benefits have either received appropriate pensions guidance or opted out of receiving such guidance.
The policy paper explains that the government has carried out trials with three pension providers in which pension providers either offered to book a Pension Wise appointment for the relevant member or referred the member to the Money and Pensions Service who in turn booked a Pension Wise appointment. It was found that this increased the proportion of members taking up a Pension Wise appointment from 3% to 11%. The government therefore intends to consult on draft regulations which will require trustees of schemes providing money purchase/cash balance benefits to present taking guidance as a "normal" part of the process of transferring/accessing a pension, and to incorporate booking an appointment into their member engagement process at the point at which the member indicates they'd like to take guidance.
- Pensions Regulator
Guidance on protecting schemes from sponsoring employer distress
The Pensions Regulator has published guidance for trustees on protecting schemes from sponsoring employer distress.
The guidance stresses the importance of trustees having a fully documented "integrated risk management" (IRM) approach with workable contingency plans and suitable triggers.
The guidance contains a list of possible warning signs of financial distress, for example declining margins, order book deterioration and loss of trade credit. It identifies the following as key areas of focus for trustees where the sponsoring employer is showing signs of financial distress:
- knowing the sponsor's industry challenges and being able to spot key warning signs of financial distress. The guidance flags that understanding the employer's ability to meet future banking covenant tests is a key area of employer covenant monitoring. The guidance also contains an appendix listing possible warning signs of corporate distress;
- increased frequency of covenant monitoring with a change in focus from longer term forecasts to shorter term financial information such as monthly management accounts;
- performing a detailed review to understand the scheme's position in the event of employer insolvency;
- reviewing investment strategy focussing on whether the scheme's current level of investment risk is still appropriate;
- understanding the role of other creditors in distress scenarios. For example, creditors may seek security for existing debt;
- considering employer requests for scheme easements in distressed scenarios. The guidance says that it is very unlikely that trustees agreeing to release security will be in members' best interests and stresses the importance of obtaining legal and financial advice and fully documenting all decisions;
- information sharing. The guidance says that trustees should be aware of what financial reports are being prepared by the employer's management and align information requests where possible in order to receive pertinent information whilst minimising demands on management time;
- transaction activity. The guidance says that trustees should consider the impact of corporate transactions on the employer's ability to pay contributions and on scheme recoveries in an insolvency scenario;
- communication with members;
- being alert to scams and unusual transfer activity.
Where the insolvency of a sponsoring employer is looking likely, the guidance says trustees should take professional advice from specialist restructuring advisers to make sure all options to protect the scheme's position have been explored. It suggests that trustees look into enforcement options if they have security structures in place. It says trustees should be familiar with the PPF's contingency planning guidance and should also be alert to events needing to be reported to the Pensions Regulator under notifiable events legislation.
Regulator asks trustees to pledge to combat pension scams
The Pensions Regulator is asking pension scheme trustees, providers and administrators to sign an online pledge to combat pension scams. To make the pledge, trustees should commit to:
- regularly warn members about pension scams
- encourage members asking for cash drawdown to get impartial guidance from The Pensions Advisory Service
- get to know the warning signs of a scam and best practice for transfers by completing the scams module in the Trustee Toolkit and encouraging all relevant staff or trustees to do so; studying and using the resources on the Financial Conduct Authority (FCA) ScamSmart website, the Regulator's scams information and the Pension Scams Industry Group (PSIG) code; considering becoming a member of the Pension Scams Industry Forum by contacting PSIG
- take appropriate due diligence measures by carrying out checks on pension transfers and documenting pension transfer procedures
- clearly warning members if they insist on high-risk transfers being paid
- report concerns about a scam to the authorities and communicate this to the scheme member.
Regulator announces further return to "business as usual" reporting requirements
In our September Update we reported on the Pensions Regulator's June update to its guidance to say that most reporting requirements which had been relaxed at the start of the Covid-19 pandemic would resume as normal from 1 July. On 16 September, the Regulator announced a further move back to "business as usual" reporting requirements. In particular:
- from 1 January 2021, DC scheme trustees will be asked to resume reporting late contribution payments no later than 90 days after the due date (as opposed to the 150 deadline applied as a Covid-19-related easement);
- from 1 October 2020, the Regulator has reverted to enforcing the requirement for schemes to submit audited accounts and investment statement reviews, and to reviewing chairs' statements submitted to it.
Pensions Regulator Superfund guidance for prospective ceding employers and trustees
In October the Pensions Regulator published its "Superfund guidance for prospective ceding employers and trustees". A superfund is an arrangement incorporating an occupational pension scheme which allows an employer to sever its liability to fund a defined benefit scheme by transferring the assets and liabilities of the scheme to a superfund. Instead of a conventional employer covenant, the scheme's "covenant" is a "capital buffer" provided by external investors who expect a return and/or by the fee paid by the employer divesting itself of its defined benefit liabilities. The capital buffer sits within the superfund structure, but is not part of the occupational pension scheme.
The guidance says that the Regulator expects ceding employers to apply for clearance in relation to a transfer from their scheme to a superfund, and for trustees to demonstrate that they have done due diligence in relation to the transfer. Before trustees and sponsoring employers enter into any transaction with a superfund, the Regulator expects them to demonstrate why they believe the transaction is in the best interests of members and how it meets the following "gateway principles":
- a transfer to a superfund should only be considered if the scheme cannot afford to buy out now;
- a transfer to a superfund should only be considered if a scheme has no realistic prospect of buy-out in the foreseeable future, given potential employer cash contributions and the insolvency risk of the employer; and
- a transfer to the chosen superfund must improve the likelihood of members receiving full benefits.
The Regulator does not intend to issue a clearance statement in relation to any superfund before the Regulator has assessed it in relation to the requirements set out in its "DB superfunds guidance" (published in June 2020). Alongside its guidance the Regulator has published a web page with a summary of its assessment process for superfunds. In future the Regulator intends to publish on the page a list of superfunds which it has assessed and in relation to which it would consider clearance applications.
Once superfunds have been through the Regulator's assessment process, the superfund route may represent an attractive liability management option for some employers with defined benefit schemes. However, the Regulator's expectation that any transfer to a superfund should be the subject of a clearance application means that such a route will certainly not be a "quick fix", and the requirement for trustees and employers to be satisfied that the transfer to the superfund will actually improve the likelihood of members receiving full benefits sets the bar quite high.
Updated COVID-19 guidance on risk of creating DC default arrangement where funds temporarily closed
On 15 October the Regulator updated its DC scheme management and investment: COVID-19 guidance for trustees to flag the risk of creating a "default arrangement" when a member selects a fund to which contributions are paid, but contributions in respect of the member are subsequently redirected to an alternative fund as a result of the original fund (for example, a property fund) being closed or "gated" until the market normalises. The Regulator flags that this could result in the alternative fund becoming a "default arrangement" as a matter of law and therefore subject to additional legal requirements such as the requirement to have a statement of investment principles for a default arrangement, and the application of a charge cap if the scheme is used for auto-enrolment.
The Regulator says that where contributions are redirected as a result of the gating of the original fund, the only circumstances in which the alternative fund will not be a default arrangement will be if:
- the members were made aware before they selected the original fund that their contributions could be diverted to another fund in certain situations, and agreed to this when choosing the original fund; or
- the member's consent was obtained before diverting contributions to the alternative fund.
The guidance also addresses the situation where a gated fund reopens and contributions are therefore switched from the alternative fund back to the original fund. The Regulator takes the view that a pre-existing expression of choice may still apply in some circumstances depending on what the member has been told about how redirection will be applied.
Strategy discussion document
In October the Pensions Regulator published a discussion document on its corporate strategy for the next 15 years. The document identifies the Regulator's five strategic priorities as:
- Security: in the early stages of delivering its strategy, the Regulator intends to maintain its focus on ensuring that DB schemes are funded to meet their commitments. As assets in DC schemes grow, the Regulator plans to shift its primary focus to the security and value that those schemes provide savers.
- Value for money: the Regulator says it will actively pursue value for money throughout the pensions system, meaning that it expects savers' money to be suitably invested, costs and charges to be reasonable, and services and administration to be good quality and driven by robust data. Where consolidation occurs, the Regulator expects it to deliver improvements in the value of savers' outcomes.
- Scrutiny of decision-making: The Regulator says it will increase its focus on managing savers' exposure to both economic and environmental, social and governance risks. It says it expects decisions that affect savers to be fair and transparent and will intervene where it believes poor decisions may lead to bad outcomes for savers.
- Embracing innovation: The Regulator says it will encourage innovation and good practice, collaborating with the market to enhance security, efficiency, transparency, efficiency and choice. It will use its resources to intervene where it believes it will have the greatest impact on saver outcomes.
- Bold and effective regulation: The Regulator says it will "transform the way we regulate to put the saver at the heart of our work, driving participation in pensions saving and enhancing and protecting savers’ outcomes".
The closing date for feedback on the discussion document is 16 December 2020.
- Pensions Ombudsman
Ombudsman awards member £43,700 for transfer value delay
The Pensions Ombudsman has awarded a member £43,700 in a case where a scheme's delay in paying the member's transfer value meant that the member lost out on the opportunity to invest in the stock market immediately after the Brexit referendum (Mr T CAS-38354-V5L8). The Ombudsman had initially rejected the member's claim on the grounds that he could not conclude what actual loss the member had suffered or that such loss was reasonably foreseeable to his pension provider. However, the case was remitted to the Ombudsman after a successful appeal by the member to the High Court in the case of Tenconi v The James Hay Partnership. In that case the judge held that it was reasonably foreseeable that a member might suffer loss as a result of a delayed transfer value, and that expecting the member to identify the specific shares he would have purchased was setting far too high a test. The judge said that the Ombudsman firstly needed to reach a conclusion regarding the date on which the funds would have been received by the scheme in the absence of delay caused by maladministration. If the member was able to convince the Ombudsman that he would have invested the funds, the Ombudsman would need to consider the nature of the portfolio the member would have bought.
The Ombudsman concluded that in the absence of maladministration, the funds would have been received by 23 June 2016, the date of the Brexit referendum. Telephone calls between the member and his pension provider on 10 June 2016 showed that the member had said that 23 June 2016 was a key date for him so that he could take the opportunity of a fall in the market to "get some really good purchases in". The Ombudsman accepted the member's argument that had his pension fund been available to invest immediately after the leave vote, he would have invested the full £250,000 fund in the FTSE 100 Index, the member having provided the Ombudsman with a detailed explanation of his attitude towards investment and put forward a good case for investing in the FTSE 100 Index rather than individual stocks. He awarded the member £43,700 being the profit the member would have made had he invested his fund immediately following the leave vote in the period until August 2016 when his transfer value was actually received. The Ombudsman also awarded interest at the court's judgment rate of 8%.
This case illustrates the potential for a delay in processing a transfer value to result in a significant compensation award being made against the transferring scheme, particularly if it results in a member being out of the market at a time of market volatility. With the end of the Brexit transitional period on the horizon and continued uncertainty regarding the impact of Covid-19, the potential for significant stock market volatility is obvious, so scheme trustees should make sure they have processes in place to avoid delays to transfer values.
Complaint upheld where Trustees failed to act on member's request to re-issue transfer value quotation during exceptionally busy period
The Pensions Ombudsman has upheld a complaint against trustees who, at a time when they were receiving a particularly high volume of member enquiries, failed to act on a member's request to reissue a cash equivalent transfer value quotation in time for the member to act on it (Mr N PO-21990). For more information, click here.
Scheme entitled not to treat member's e-mail received after death as expression of wish form
The Pensions Ombudsman has dismissed a complaint from a deceased member's partner who argued that a lump sum death benefit held on discretionary trusts should have been paid in accordance with the terms of an e-mail from the member to his financial adviser in which the member set out his last wishes six days before his death (PO-40022). For more information, click here.
- Pension Protection Fund
PPF consults on draft levy determination for 2021/22
The PPF has consulted on its draft levy rules for 2021/22. For 2021/22 the PPF expects Covid-19 will only have a limited impact on levy bills because its insolvency risk model will be based on accounts information in respect of periods which in most cases pre-date Covid-19. The main effect of Covid-19 on employers' insolvency risk scores will be seen in the 2022/23 invoices.
At this point in its levy cycle the PPF would normally be expecting to conduct a full review of its levy methodology with a view to proposing rules for the next three year period. However, in the light of Covid-19 the PPF has decided not to do that and to adjust its rules on an annual basis for the time being. The PPF envisages returning to setting rules for three year periods or longer from 2023/24.
The PPF considers there is little doubt that Covid-19 will lead to it experiencing an increase in claims following employer insolvency. However, given its strong financial position at the start of the pandemic, the PPF considers there is no need to increase the total amount of the levy it collects for 2021/22.
For schemes with less than £20 million of liabilities, the PPF proposes to apply a reduction to their levy calculation. However, the PPF is proposing to reduce the risk-based levy cap to 0.25% of liabilities, meaning that a lower proportion of schemes will be protected by the cap.
The PPF expects to publish its final rules at the end of January 2021.
Government plans to align RPI with CPIH will significantly impact some scheme
In the response to their consultation on reform to RPI methodology, the government and UK Statistics Authority have announced that the methods and data sources of the Consumer Prices Index including owner occupiers' housing costs (CPIH) will be brought into RPI in 2030. As CPI is generally lower than RPI, the effect of this change will to be to reduce the value of RPI-linked assets (eg RPI-linked gilts) and RPI-linked benefits. The impact on defined benefit schemes will vary. Where a scheme holds RPI-linked gilts to match RPI-linked liabilities, the value of the RPI-linked liabilities will fall in line with the total reduction in the scheme's assets. However, where RPI-linked assets do not match liabilities, schemes will see a fall in asset values that is not offset by a fall in liabilities. In particular, schemes with CPI-linked liabilities hedged with RPI-linked assets will see the total value of their assets fall while the total value of their liabilities will remain unchanged.
Government to consult on mandatory simpler statements for DC schemes used for auto-enrolment
In a response to its consultation on simpler annual benefit statements the government has announced that it will consult later this year on a mandatory approach to simpler statement templates for defined contribution schemes used for auto-enrolment. The government will take as its starting point the two page statement template originally developed during its 2017 Review of Automatic Enrolment and will work with industry on the detailed design of the template. The government proposes to include a line in the simpler statement template on costs and charges and signpost the availability of more detailed costs and charges information elsewhere.
DWP consultation response to "Investment Innovation and Future Consolidation" includes proposed measures to encourage consolidation of smaller schemes
In September the government published its response to its consultation "Investment Innovation and Future Consolidation" aimed at improving outcomes for members of DC schemes.
The response includes draft regulations which will introduce a new "value for members" assessment for schemes that have been operating for at least three years and have less than £100 million in total assets. Trustees will need to compare their scheme with at least three large schemes (occupational or personal), at least one of which would be willing to accept a transfer of members of the smaller scheme. Where the smaller scheme cannot demonstrate value for members, the government will generally expect the trustees to wind it up and transfer the assets and liabilities to a larger scheme. The government proposes that schemes will complete the value for members assessment annually and report on it as part of the chair's statement and in the annual scheme return. The regulations will apply to a scheme following the end of the first scheme year to end after 5 October 2021.
The consultation also proposes some change to the automatic enrolment charge cap, having looked at whether this acts as a barrier to illiquid investment. From 5 October 2021, the government will alter the way the charge cap is measured in order to enable performance fees to be paid. The costs of holding real estate or infrastructure will also be excluded from the charge cap. There will be some clarificatory changes to the guidance dealing with how costs and charges information should be set out.
The government proposes to amend the regulations on reporting charges and transaction costs for self-select funds to reflect the policy intention that the requirement covers funds in which members are still invested, but which are no longer offered as an option. The government intends that the regulations should "bite" on schemes with effect from the end of the first scheme year after the regulations come into force.
There has been a longstanding exemption for wholly insured schemes from various aspects of the legislation on statements of investment principles (SIP) on the grounds that the combination of the scheme rules and terms of the insurance policies give trustees no discretion as to how the insurance company invests the scheme's funds. However, this exemption does not currently extend to the more recently introduced SIP requirements regarding the trustees' arrangements with their asset manager. The government intends to extend the exemption to cover these. However the government says that it does still require trustees of DC schemes invested in unit-linked contracts to cover various stewardship-related matters in relation to their default fund(s). This is on the grounds that trustees are free to enter into different insurance contracts in order to change the investments which make up the default.
DWP consults on "alternative quality requirements" applicable to defined benefit schemes used for auto-enrolment
The DWP has consulted on the "alternative quality requirements" which apply to a defined benefit or hybrid scheme used by an employer to satisfy its obligations under auto-enrolment legislation. Up until the end of contracting-out in April 2016, a defined benefit scheme could meet the auto-enrolment quality requirements by being contracted-out or by meeting a standard known as the "test scheme standard" (TSS). Following consultation in connection with the end of contracting out, the DWP introduced two alternative quality tests which could be used by defined benefit and hybrid schemes to meet the quality standards required by auto-enrolment legislation. The DWP is required to carry out a statutory review of the operation of the regulations which introduced the alternative quality standards. The purpose of the consultation was to satisfy that requirement, to ascertain how the tests are working in practice, and to ascertain whether any new issues have arisen since the last review in 2017. A response to the consultation is awaited.
Job Retention Scheme (furlough) extended to 31 March 2021
On 5 November the Government announced that the Job Retention Scheme (furlough) would be extended until 31 March 2021. The Job Retention Scheme (JRS) had been due to come to an end at the end of October. On 31 October the government had announced that it would be extended for a further month, but this was swiftly superseded by the announcement of its extension until the end of March.
For claims in the period 1 November 2020 to 31 January 2021, employers will be able to claim a grant for 80% of usual wages up to a maximum grant of £2500 per month per employee for the time the employee spends on furlough. Employers are responsible for paying National Insurance contributions and pension contributions on the full amount paid to the employee (including the grant) and will not be reimbursed for pension or National Insurance contributions. Employers are permitted to "flexibly furlough" employees meaning that an employee can work reduced hours with the employer claiming the JRS grant in respect of the period during which the employee is not working.
The Government says that it will review its policy in January to decide whether economic circumstances are improving enough to ask employers to contribute more. The Government had previously announced details of a "Job Support Scheme" which had been due to replace the JRS at the end of October, but the launch of the Job Support Scheme has now been postponed. The Government has also announced that the previously announced "Job Retention Bonus" will not be paid in February 2021 and that "a retention incentive will be deployed at the appropriate time".
Protected pension age easement ends
In our June Update we reported on the Government's decision to suspend tax rules that would otherwise have resulted in loss of "protected pension age" and penal tax charges where a public sector worker returned to work to support the Government's response to Covid-19. In its Pension schemes newsletter 124, updated on 6 October 2020, HMRC announced that the easement would come to an end and the usual tax rules resume with effect from 1 November 2020.
Government confirms normal minimum pension age to be raised to 57 in 2028
In an answer to a written question in Parliament, the government has confirmed that it intends to raise normal minimum pension age to 57 in 2028.
Pensions Dashboard Programme reports on progress
In October the Pensions Dashboard Programme (PDP) published a Progress Update Report. The aim of the PDP is to enable individuals to access information about their pensions online all in one place. The Report sets out an indicative timescale for the project as follows:
- 2020: Programme set up and planning. This includes recruiting the team, agreeing the "digital architecture", seeking approval to commence procurement for one or more suppliers for that architecture and setting the first iteration of data standards.
- From 2021: Develop and test phase. Upon completion of procurement the PDP will work with its chosen supplier(s) to begin building, integration and testing of the digital architecture. During this time, the PDP will continue to develop design and service standards and select the first dashboard providers for user testing.
- From 2022: Voluntary onboarding and ongoing testing. At this point the PDP will connect volunteer pension schemes and providers to the service using real data.
- From 2023: Staged onboarding and dashboards available point. In this phase scheme and providers will begin to be compelled by law to connect to the dashboard ecosystem and the number of findable pensions will be sufficient for it to be of use to a critical mass of consumers.
- Transition to business as usual. At this point the service will be running in a steady state. The timing of this phase is yet to be determined.
APPT issues warning about scam signatures
In its latest briefing, the Association of Professional Pension Trustees (APPT) warns that it has been alerted to a scam which involves lifting signatures from publicly available documents such as statements of investment principles and chair's statements and using those signatures to obtain information or carry out fraudulent transactions. The APPT suggests that versions of the documents that are published online should have signatures redacted or be type signed.
Government backs call for working group to address ESG stewardship barriers
The government has backed a call contained in the Association of Member Nominated Trustees' report "Bringing shareholder voting into the 21st Century" for a government-led working group to address barriers to scheme trustees being able to use voting rights in relation to scheme investments in order to exercise stewardship in relation to environmental, social and governance (ESG) issues. The report highlights in particular that where schemes are invested in pooled funds, trustees often in practice lack the ability to exercise influence in relation to the underlying investments.
Issues identified by the Association of Member Nominated Trustees (AMNT) include:
- overly complex and archaic voting infrastructure;
- underinvestment in the stewardship function by fund managers. The AMNT says it can no longer be a legitimate position for fund managers to cite lack of investment in the fund manager's stewardship function as a reason for maintaining the status quo of not implementing client policies;
- lack of transparency of voting policies and outcomes. The AMNT says that fund managers do not provide enough information in their public voting policies to enable asset owners to effectively benchmark the fund manager's policies against their own and to challenge the fund manager where applicable;
- the need for scheme-specific reporting requirements which would enable trustees to hold fund managers, and through them investee companies, to account in instances where there is significant disagreement on an issue.
DWP launches working group to address high number of small pension pots
In September the government announced the launch of a cross-sector working group to help address the issue of multiple small pension pots. The announcement said that the working group would report later in the Autumn with an initial assessment, recommendations and "an indicative roadmap of actions for industry, delivery partners and Government".
PLSA publishes vote-reporting templates to help trustees comply with duties
In previous Updates we have reported on new investment-related reporting requirements which came into force from 1 October 2020, including a requirement for additional information to be included in the scheme's annual report covering trustee voting behaviour and how the trustees have followed their policy on investment rights and engagement activity. The PLSA has published vote reporting templates to help trustees obtain the data they need from fund managers in order to comply with their duties.
ICO publishes detailed right of access guidance on dealing with DSARs
The Information Commissioner's Office (ICO) has published detailed guidance on dealing with data subject access requests (DSARs). The guidance is aimed at data protection officers and those with specific data protection responsibilities in larger organisations.
APPT code of practice for sole trustees
The Association of Professional Pension Trustees (APPT) has published a code of practice for professional corporate sole trustees of pension schemes. The code has no official standing, but was produced following consultation with the Pensions Regulator and has been welcomed by it. The code is not intended to apply to master trusts or to corporate trustees established for the sole purpose of running one or more pension schemes associated with a specific employer or group of employers.
The code says that professional sole corporate trustees should:
- be able to demonstrate that they have considered whether it is appropriate to accept the appointment;
- have processes governing how decisions are taken and recorded, with at least two accredited professionals involved in key decisions;
- have robust governance protocols to ensure that they manage potential conflicts of interest effectively and maintain independence from the sponsoring employer. Trustees who are removed or resign as a result of the sponsoring employer's actions should assess whether they need to make a report to the Pensions Regulator;
- implement measures to consider how best to ensure diversity and inclusion in their decision-making processes; and
- implement a number of internal assurance controls set by the ICAEW.
Master trust products aimed at transfers following pension sharing on divorce order
We are seeing master trusts entering the market for transfers from defined benefit schemes following a pension sharing order on divorce. Trustees' options are limited where they do not wish to retain the ex-spouse's benefits within the scheme, but the ex-spouse is not willing to cooperate with a transfer out. An individual annuity is one legal option, but if the transfer value is relatively small, annuity providers many not be interested. A transfer to a master trust is an alternative option for trustees to consider in such circumstances.
ISDA writes to European Commission re UK pension exemption and Brexit transitional period
The International Swaps and Derivatives Association (ISDA) has written to the European Commission requesting it to take steps to avoid UK pension funds ceasing to benefit from an exemption to the EMIR clearing obligation following the end of the Brexit transitional period.
The EU EMIR regulation imposes an obligation to centrally clear over-the-counter (OTC) derivatives contracts, but contains an exemption for pension schemes which use such contracts for hedging. The definition of "pension scheme arrangements" for the purposes of the exemption only applies to EU pension funds, so will not apply to UK pension schemes following the end of the Brexit transitional period on 31 December 2020. ISDA requests the Commission to take steps to continue to include UK pension schemes within the scope of the exemption. It points out that the cessation of the exemption would not only have implications for UK pension schemes, but also for EU fund vehicles used by UK pension schemes and EU firms that deal with UK pension scheme clients.