Happy new year! So, 2020 didn't quite turn out as everyone thought it would! As a consequence, many pension issues this year are rolled over having not been progressed last year.
So, what will be the key issues for defined benefit pension scheme trustees and employers in the coming year? We think these are the top five.
1. Tougher Regulator powers including criminal offences and penalties of up to £1m
The Pension Schemes Bill, likely to be enacted early in 2021, will strengthen the Pensions Regulator's powers by:
- criminalising acts which reduce the likelihood of pension scheme benefits being received (subject to a "reasonable excuse" defence). This raises the risk that, with the benefit of hindsight, the Pensions Regulator might take the view that a routine activity such as corporate acquisition or refinancing amounted to criminal activity;
- broadening the circumstances in which the Regulator can use its "moral hazard" powers to require an employer or connected party (potentially including an individual director) to provide financial support for a pension scheme;
- providing for the possibility of new regulations to require some corporate transactions to be notified to the Pensions Regulator or scheme trustees in advance; and
- allowing the Regulator to impose penalties of up to £1 million for some breaches.
All this could come into sharp focus this year when many scheme sponsors are likely to continue to face financial pressures and tough decisions. One initial step to consider is training for your Board on these new requirements, to ensure they are aware of these and appropriate decision-making processes can be taken and documented - we can assist with this.
2. A new scheme funding regime
Having consulted in 2020 on the principles for a new defined benefit scheme funding code, the Regulator plans to publish the second part of the consultation this year, setting out detailed proposals for the code itself. In a separate but related development, the Pension Schemes Bill will require trustees to put in place a new funding and investment strategy setting out target funding levels and investment plans which will need to be agreed with the employer. (The timescale for bringing these provisions into force is not yet known.)
3. GMP Equalisation
November 2020 saw the High Court give its third ruling in the landmark case of Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank plc regarding trustees' duties to equalise benefits for the effects of unequal GMPs. As guidance has been issued by the Industry Working Group and HMRC and as no appeals or further cases are expected, trustee boards should now be taking forward their GMP equalisation projects. In practice, the key issue facing many trustees will be that they do not hold the data that would be necessary to carry out an equalisation calculation with 100% accuracy and it may be time consuming and costly to collate the data they do have available. Trustees will need to take sufficient steps to comply with their fiduciary duties whilst employers will want to avoid disproportionate costs. In many cases this may be a fine line to navigate and we'd expect trustees and employers to want to set up joint working groups to manage this issue.
4. De-risking: will 2021 see superfunds take off?
We expect to see a continued focus on de-risking in 2021. We saw significant levels of buy-in/buy-out activity in 2020 across not only large but also smaller schemes and we expect this to continue in 2021. Where an immediate full buy-out is not achievable, we have seen a trend of clients undertaking partial buy-ins as a stepping stone towards full de-risking and we expect that to continue as pricing means this can often be possible with little or no negative impact on a scheme's technical provisions. Schemes that are a few years away from their first buy-in transaction should also start to consider the work required to best prepare their scheme for a buy-in transaction so that once they are ready to go to market they can achieve a quick and efficient transaction at an optimal price. This is increasingly important given schemes are likely to be competing against many other schemes for insurer attention as the market gets busier. This preparatory work involves both data work and wider benefit due diligence to avoid any nasty surprises down the line. It also requires consideration of the protections in place for the trustee and how any residual risks at buy-out will be dealt with. We have assisted numerous clients with this preparation and can help draw up project plans or scope out the type of task you/your schemes may want to undertake.
For schemes with insufficient resources to buy out benefits with an insurance company in the foreseeable future, 2021 may be the year that a transfer to a commercial "superfund" becomes a possibility as the Pensions Regulator shortly intends to publish a list of superfunds which it has assessed as meeting its expectations and is supervising on an ongoing basis.
5. Ongoing impact of Brexit and Covid-19 on sponsoring employer covenants
With many businesses grappling with challenges posed by both Brexit and Covid-19, employer covenant strength will be a particularly key area of focus for trustees of defined benefit schemes. The Regulator has issued a number of guidance notes during 2020 to help trustees and employers through the difficulties posed by Covid which among other things indicates that the Regulator expects written agreements were there is a suspension to employer contributions, and information sharing protocols to make clear what information employers will share with trustees and when. Whilst some schemes may have information sharing protocols written down, in some cases they may no longer be fit for purpose. Given the increased focus on this, it may be worth "dusting off" any such document your scheme has in place to consider if it would benefit from being updated, especially since the Regulator may ask to see this and you may need to demonstrate you have been using this. For those employers with more material financial difficulties the Regulator has issued some specific guidance and trustees and employers with weaker covenants especially should familiarise themselves with this. The guidance makes clear the Regulator expects trustees to be able to spot warning signs that the scheme's employer is in financial distress, and to increase the frequency and intensity of covenant monitoring if the employer's covenant deteriorates.