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Pensions Regulator

New Pensions Regulator powers in force from 1 October

On 1 October, many of the Pensions Regulator's new powers provided for by the Pension Schemes Act 2021 came into force, including new criminal offences, broadened "moral hazard" powers and a new power to impose financial penalties of up to £1 million.  On 29 September the Pensions Regulator (TPR) published various documents relating to its new powers, including its: 

  • Criminal offences policy;
  • revised Code of Practice 12: Contribution Notices, plus code-related guidance; and
  • revised clearance guidance. 

At the same time, it also published for consultation its:

  • draft Overlapping powers policy;
  • draft Monetary penalty powers policy; and
  • draft Information gathering powers policy.

The consultation period for the draft policies runs until 22 December 2021.

Criminal offences 

The new criminal offences of "conduct risking accrued scheme benefits" and "avoidance of employer debt" without reasonable excuse are punishable by up to seven years in prison and/ or an unlimited fine. 

TPR's Criminal offences policy provides guidance on how it intends to exercise its powers in relation to these new offences.  Although the new offences are very broad, and are not limited to acts or omissions of scheme employers (and their associates), TPRs policy says that their intention is to investigate and prosecute only the most serious cases.  That may be of some comfort where normal commercial activity may cause detriment to a scheme but, in view of the severity of the penalties, it will be important to consider the potential detriment and mitigation and ensure that there is contemporaneous evidence that that has been done.  This will help to demonstrate reasonable excuse if TPR does investigate a matter.

In assessing whether someone had a "reasonable excuse" for acting as they did, the three key factors TPR will consider are:

  • the extent to which any detriment to the scheme was an "incidental" consequence of the act or omission;
  • the adequacy of any mitigation to offset the detriment; and
  • where no or inadequate mitigation is provided, whether there was a "viable alternative" which would have avoided or reduced the detrimental impact.

TPR may also take into account the extent of communications with the scheme trustees before the act took place and, in the case of "a person who owes fiduciary duties to the scheme" (which would include a trustee) whether the person complied with those duties.

The policy has some helpful examples illustrating TPR's approach to particular scenarios (including a restructuring case study where the risks are looked at from the point of view of the different parties involved).  Although many of these illustrate extreme behaviour which seems clearly to fall on the side of being criminal or not criminal, the case study in particular is useful to get a feel of what TPR regards as potentially sufficiently serious to merit investigation and possible prosecution.

Our thoughts on the new Criminal offences policy 

Although the criminal offences can potentially apply to anyone except an insolvency practitioner, the Criminal offences policy suggests that the main people in TPR's sights as far as the criminal offences are concerned are not scheme trustees, but sponsoring employers, their parent companies and their directors.  However, trustees need to be able to spot corporate activity that could adversely affect the scheme.

Where corporate activity could have an adverse impact on the scheme, trustees should be prepared to negotiate robustly with the employer to ensure the impact on the scheme is mitigated (eg through the payment of additional contributions or the granting of additional security to the scheme).  The existence of the new criminal offences may strengthen the trustees' hand in negotiations with the employer.

Revised Code of Practice on Contribution Notices

Revised Code of Practice 12 sets out the circumstances where the material detriment test and / or the new employer insolvency test and / or employer resources test will be met.   The Code includes the following examples of circumstances in which TPR expects to issue a contribution notice:

  • the employer covenant is removed, substantially reduced or becomes nominal;
  • significant weakening of the scheme's creditor position;
  • some instances of paying a cash dividend or a return of capital by the sponsoring employer; and
  • early redemption or repayments of other significant creditor balances, before they are contractually due, that favour other creditors to the employer over the scheme.

Guidance accompanying the formal code gives more detailed examples of scenarios likely to fall within the contribution notice tests.  These include:

  • where the employer covenant becomes nominal or is materially reduced eg by a change to the employer or by a sale of a profitable business with consideration passed to the parent to pay a dividend;
  • a leveraged acquisition of the scheme's sponsoring employer or parent company guarantor  which would materially impact the amount the scheme would recover on insolvency; and
  • refinancing which increases secured debt and therefore reduces the scheme's recovery on insolvency.

Revised clearance guidance

Employers and persons associated or connected with scheme employers can apply to the Regulator for clearance which gives comfort that TPR will not exercise its "moral hazard" powers in relation to a particular transaction based on the information provided.  

TPR has also updated its guidance to include the new contribution notice tests.  The guidance makes clear that any clearance granted applies only to TPR's power to issue a contribution notice or financial support direction, not its power to bring a prosecution or impose a financial penalty.  Indeed, information provided to TPR as part of a clearance application could be relied on by TPR when using those powers.

The previous version of the guidance said that when negotiating with the employer, trustees should generally adopt the approach of a bank that has advanced a large unsecured loan, and that employers should view the scheme in a similar way.  The updated guidance has dropped the comparison of the pension scheme with a bank.  Instead it says that trustees should be guided at all times by their fiduciary duties to scheme members, and that employers "should take careful account of their obligation to fund scheme benefits".

The previous version broadly took the position that clearance was not necessary where the scheme was fully funded on a scheme's funding basis and/ or the accounting basis.  The updated guidance focuses on the buy-out basis meaning that TPR is likely to regard clearance (and by implication compensation for detriment) as appropriate even for well-funded schemes.

Draft overlapping powers policy

TPR's draft overlapping powers policy aims to provide guidance on TPR's approach where TPR potentially has the option of bringing a criminal prosecution or making use of its other powers. The draft policy says that TPR will prioritise enforcement which will lead to improved funding for the scheme.  Factors making it more likely that TPR will move directly to criminal proceedings include previous breaches, an ongoing pattern of non-compliance, a wilful failure to comply with requests by TPR for information, and circumstances where a breach continues to cause harm. 

Draft Monetary penalties policy

TPR has new powers to impose a financial penalty of up to £1 million for various breaches including conduct risking accrued scheme benefits.  TPR's draft monetary penalties policy says that where TPR is seeking to exercise the power for avoidance of employer debt/conduct risking accrued scheme benefits, TPR will allocate the conduct to one of three "bands" as follows:

  • Band HF1: Low culpability/low harm: £100,000-£400,000;
  • Band HF2: High culpability/low harm or Low culpability/high harm: £250,000-£650,000;
  • Band HF3: High culpability/high harm: £400,000-£1million.

Once TPR has decided which band the relevant act or omission falls into, its starting point will be to impose a penalty in the middle of the band, but it may adjust this in the light of aggravating or mitigating factors.

TPR plans to adopt a similar approach for non-compliance with its information gathering powers (including the notifiable events regime), but with an added "Band R" of up to £100,000 for breaches that cause minimal harm to the scheme.

Although this seems a helpful structured approach, it seems surprising that fines of up to £400,000 could be imposed in situations of low culpability and low harm.

Draft Information gathering powers policy

TPR's draft Information gathering powers policy explains that TPR can compel a person to answer questions, but is then not normally able to use answers obtained in this way in criminal proceedings or where asking its Determinations Panel to impose a financial penalty.  Where TPR is investigating with a view to bringing criminal proceedings, it will interview the person under caution and record the interview.  TPR cannot compel a suspect to answer questions at such an interview, but a failure to attend or answer questions in such circumstances could be used against the suspect in a future criminal trial.

Legislation

Increase to normal minimum pension age: Finance Bill closes transfer window

In our September Update we reported on the draft legislation to increase normal minimum pension age (NMPA) from 55 to 57 with effect from 6 April 2028.  On 4 November the Government published the Finance Bill which includes the provisions to make this change.  This contains an important change compared to the draft legislation originally published.  The previous draft would have allowed any member to retain a NMPA of 55 for all their benefits by transferring their benefits on or before 5 April 2023 to a scheme with rules that, as at 11 February 2021 (the date on which the change was first announced), would have given the member an unqualified right to take benefits from age 55.  The Government has effectively closed the door on this option, as the relevant rule will now only apply where the request to transfer was made before 4 November 2021.

Which members will retain a lower NMPA after 6 April 2028?

Members of pension schemes for the armed forces, police and firefighters will generally retain a NMPA of 55.  Members of other schemes who immediately before 4 November 2021 had an unqualified right to receive a benefit at an age lower than 57 will generally retain that right, provided the scheme rules already conferred that right as at 11 February 2021.  The legislation also preserves that right if a member takes a transfer value to another scheme.  If the transfer is an individual transfer rather than a bulk transfer, the lower NMPA is only preserved for transferred in rights, not benefits that the member may subsequently earn in the receiving scheme.

Our thoughts

Trustees should ensure that any member literature that refers to NMPA is up-to-date.  Where a scheme accepts transfer values, trustees should check with their administrators that the scheme's record-keeping system is able to cope with members who have one NMPA for transferred in benefits and a different NMPA for other benefits.

Major changes to transfer values regime in force from 30 November

Major changes to the law on transfer values took effect on 30 November.  The changes are designed to reduce the risk of members falling victim to pension scams.  

For transfers to most schemes, trustees will need to decide whether there are any "red flags" or "amber flags" as defined in the legislation.  A red flag is an absolute bar to the transfer.  An amber flag means that the transfer can only proceed if the member first takes "scams guidance" from the Money and Pensions Service (MaPS).  

Transfers to certain types of scheme are exempt from the requirement to consider whether red or amber flags are present, namely transfers to public service pension schemes, authorised master trusts and authorised collective money purchase schemes.  In a change from the original proposals, the presence of red or amber flags will always need to be considered for a transfer to a personal pension scheme.  (Under the original proposals, transfers to some personal pension schemes operated by insurance companies would have been exempt from the requirement.)

For more information, click here

Changes to "scheme pays" provisions where pension scheme input amount altered retrospectively

Draft Finance Bill provisions are due to alter the timescale within which the member can choose to use the "scheme pays" provisions where an annual allowance charge arises as a result of a retrospective change to the "pension input amount" (the value of benefits accruing in a tax year for annual allowance purposes).  The changes are being made in connection with changes to public sector pension arrangements following the Court of Appeal's judgment in the McCloud case, which held that public sector pension reform had given rise to unlawful age discrimination.  However, the changes to the "scheme pays" provisions are not limited to public sector pension schemes.

Broadly, the changes will allow an individual to elect the "scheme pays" option if notified retrospectively by the scheme administrator of a change in pension input amount.  The individual will normally need to make the election by giving notice within three months of being notified of the change.  The extension of the scheme pays provisions is subject to a long stop date of six years. 

Cases

Court holds Trustee entitled to rectification of amendment made in 1996

In a judgment relating to the Mitchells & Butlers Pension Plan, the court has ordered rectification of an amendment to the wording of a pension increase rule made in 1996 and carried through into subsequent definitive deeds and rules. Rectification is the process whereby a court can order wording in a document to be re-written if it is satisfied that it did not reflect the parties' intentions.

The wording of the original amendment took away a trustee discretion in relation to pension increases and instead gave the scheme employer power to decide the rate.  However, having heard evidence from numerous witnesses, the judge held that there had been no intention to make the change (which had been included as part of a general updating of the scheme's definitive trust deed and rules).  The scheme's current principal employer had not been the principal employer at the time the original amendment was made, and had raised legal arguments that this meant that the scheme should not be the subject of a rectification order.  However, its arguments were rejected by the court.

The judgment also considers what is required to comply with an amendment power provision requiring consultation with the scheme actuary before an amendment is made.  The judge held that the consultation requirement was not satisfied where the actuary was unaware that the wording of the pension increase rule had been altered.

GMP equalisation

GMP guidance on anti-franking

The GMP Equalisation Working Group, the industry working group formed to produce good practice industry guidance to support schemes in implementing GMP equalisation, has published guidance on anti-franking.  The GMP anti-franking rules set out in legislation are broadly designed to make sure that the revaluation provided on GMPs in deferment can't be offset against a member's other benefits.  The guidance explains that the anti-franking rules in legislation do not set out how the rules should be applied in an equalisation context where the equalisation obligation only applies in respect of part of the member's benefit (because no equalisation obligation applies to GMP accrued before 17 May 1990, the date of the Barber judgment).  The guidance sets out three potential techniques for applying anti-franking in such circumstances and contains worked examples showing the effect of using the different techniques.

GMP EWG communications guidance

The GMP Equalisation Working Group has published guidance on communicating with members about GMP equalisation at the implementation stage.  The guidance contains sections on: guiding principles for communicating with members; timing communications; what message is relevant to different categories of member; example wording; and a checklist of member communications which may need to be reviewed to take account of measures taken to implement GMP equalisation. 

Private Members' Bill on GMP conversion

The text of a Private Member's Bill designed to resolve some technical issues with GMP conversion legislation has been published.  Although the Bill is not legally a Government bill, it is in practice being used by the Government as a vehicle for making changes to the relevant legislation.  In particular, the Bill is designed to make clear that conversion can be undertaken in relation to GMPs of survivors as well as members, and to simplify the requirements that a converted scheme must meet in relation to survivor benefits.  The Bill also removes the existing requirement for employer consent and provides for this to be replaced by a new consent requirement to be set out in regulations.  The wording of the existing employer consent requirement can be ambiguous when the employers that have participated in a scheme have changed over time.

Our thoughts

If this Bill becomes law, it appears that it will go some way to simplifying GMP conversion legislation.  However, the Bill does nothing to address the tax issues that can arise in connection with GMP equalisation.

PASA Briefing Note on GMP Reconciliation and Transitions 

The PASA GMP Working Group has published a briefing note on GMP Reconciliation and Transitions setting out good practice for dealing with the transfer of GMP reconciliation records from an outgoing administrator to a new administrator.  The note says that administrators often complete GMP reconciliations "off system", often using Excel workbooks.  It says that the outgoing administrator should hand over any workbooks to the new administrator, and that it is not sufficient to provide only a report confirming the final position with no audit trail to show how this has been reached.

Pensions Ombudsman

Guidance on Communicating with members

The Pensions Ombudsman's office has published guidance outlining its views on best practice for communicating with members, including a set of "Top tips on how to avoid the Ombudsman".  The guidance is only two pages long, and many of the top tips cover fairly obvious points such as avoiding unnecessary technical terms, or providing an explanation of them where they must be used.  However, the guidance may serve as a useful checklist of points for trustees to consider if they are asked to review member communications.

Ombudsman holds Trustee entitled to find that individual was not member's biological child

The Ombudsman has held in a death benefits case that the Trustee had been entitled to conclude that the complainant was not the biological child of the deceased member and therefore not within the category of beneficiaries potentially eligible to receive all or part of the lump sum benefit (Miss CS PO-21507).

The Trustee had delegated to the scheme administrator the power to make enquiries and make decisions regarding death benefits in certain circumstances.  Following the death of the member (who had not completed an expression of wish form), the administrator obtained details of the member's cousin and wrote to him enclosing a declaration form which it said should be completed by the member's personal representative.  The form was completed by the member's sister, who stated that the member was single, intestate and did not have any children at the time of his death.  The administrator subsequently paid the whole of the lump sum to the member's sister.

The Trustee subsequently learned that deceased member had made a will in which he left most of his estate to the complainant's mother, with whom the deceased member had cohabited from September 2000 until December 2013 when the relationship ended and the member moved in with his sister.  The complainant had been born in 2002.  She understood the deceased member to be her father.  

Following the complaint, the Trustee took legal advice and reviewed the evidence regarding the complainant's relationship to the deceased member.  It identified the following evidence as supporting the conclusion that the complainant was not the member's biological child: the member was not named as the father on the complainant's birth certificate; the member's will described the complainant as being his partner's child, not the member's child; the member's former partner (who had initially raised the complaint) had been unable to provide supporting evidence of a father/daughter relationship; the member's sister's evidence was that the member had no children; and no DNA evidence had been provided.  The evidence pointing in the other direction was: the complainant and her mother referring to the member as the complainant's dad; a possible adverse inference from the fact that the member's sister refused to give a DNA sample; the member had named the complainant on his employer's Christmas voucher scheme; and a colleague had referred to the member having a child.  

The Trustee concluded that the evidence was not strong enough to meet the standard of proof required for the trustee to conclude that the complainant was the member's biological daughter.

The Ombudsman noted that the evidence did not all point in the same direction.  He concluded that in such circumstances, the Trustee needed to reach a conclusion on the balance of probabilities.  Having reviewed the available evidence, he concluded that the Trustee's decision that the complainant was not the member's biological child was "within the range of decision that a reasonable trustee could have made" and was not perverse.  The decision should therefore stand.  However, the Ombudsman did award the complainant £500 for the distress and inconvenience suffered as a result of the scheme administrator's failure to follow the guidance set for it by the Trustee which said that enquiry should be made of the member's immediate work colleagues in death in service cases.

Our thoughts

When investigating a deceased member's circumstances in order to decide on distribution of a lump sum death benefit, trustees may be faced with conflicting information from different family members.  This determination shows that the Ombudsman accepts that trustees may need to reach a decision "on the balance of probabilities" when confronted with conflicting evidence.  Encouraging members to complete expression of wish forms and ensure they are kept up-to-date may help to avoid this kind of difficult situation arising in the first place.

Member awarded £1000 for distress and inconvenience where misunderstood meaning of "unreduced" pension

The Ombudsman has awarded a member £1000 for distress and inconvenience in a case where the member opted to take voluntary redundancy on the basis of a misunderstanding regarding the meaning of the term "unreduced pension", which had apparently been explained to the member in a meeting as meaning that her employer would "meet the cost of the employee contribution up to [her] normal retirement age" (Mrs S CAS-33559-R2G1).  The member had understood this to mean that she would receive the same pension that she would have received had she remained in employment until her normal retirement age of 67, whereas what the member was actually entitled to on redundancy was immediate receipt of her accrued pension unreduced for early payment.

Our thoughts

This case illustrates that a term that has an obvious meaning to those familiar with pensions may require further explanation to members unfamiliar with pensions terminology.  In this case, the explanation of "unreduced pension" given to the member did not actually make sense, and the Ombudsman determination indicates that the member had to make a decision whether to take voluntary redundancy without having been provided with a specific benefit illustration for that scenario.  Providing the member with clear information on her pension entitlement before her voluntary redundancy decision would almost certainly have avoided the dispute.

Overpayments case: Ombudsman upholds "change of position" defence based on everyday living costs

The Ombudsman has upheld a "change of position" defence against an overpayment claim by the Teachers' Pension Scheme (TPS) where the beneficiary had spent more on everyday living costs as a result of the overpayment (Mrs S PO-23848).

Mrs S had been in receipt of a widow's pension under the TPS since the death of her husband in 1999.  In relation to members whose pensionable service ended on or before 31 December 2006, the TPS regulations provided that a widow's pension would cease to be payable if the widow remarried or started to live with another person "as if they were husband and wife".  In 2016, in response to a general exercise under which TPS asked beneficiaries to declare any change of circumstances, Mrs S declared that she had been cohabiting with a partner since January 2004.  In response to this, TPS stopped payments of the widow's pension and sought to reclaim the overpayments made since Mrs S had begun cohabiting with her partner.

The legal starting point where there has been a benefit overpayment is that the scheme is entitled to claim it from the recipient.  However, beneficiaries may have a defence to such a claim if they can show that they have changed their position such that it would be unjust or inequitable to require them to repay the overpayment either in whole or in part.  

The Ombudsman found that Mrs S had received the overpayments in good faith.  He said the courts had held that, where there has been a series of overpayments, a general change of position in the form of increased outgoings is possible, and that such a defence is not limited to cases where the monies have been spent on specific identifiable items of expenditure.  Mrs S did not have sufficient savings to repay the overpayment.  The Ombudsman found that the evidence indicated that Mrs S lived within her means and that her day-to-day expenditure was dictated by her income.  He found that, but for the overpayment, Mrs S would not have incurred the cost of her "slightly improved lifestyle".  He therefore held that Mrs S had a change of position defence and ordered TPS not to take any steps to recover past overpayments.

Our thoughts

This case indicates that where an individual has received benefit payments in good faith and does not have sufficient savings to repay an overpayment, the Ombudsman may look sympathetically on a "change of position" defence even if the member cannot point to specific items of expenditure incurred in reliance on the overpayment.

Consultations

Proposed changes to notifiable events regime: trustees to be provided with more information earlier

The government has consulted on proposed changes to the notifiable events regime which requires certain events, such as a decision to sell a scheme employer, to be notified to the Pensions Regulator (TPR).  The changes, expected to come into force in April 2022, will create two new notifiable events, namely:

  • a decision in principle by a scheme employer to sell a "material proportion" (broadly 25%) of its business or assets; and
  • a decision in principle by a scheme employer to grant or extend a "relevant security" (broadly security comprising more than 25% of either the employer's consolidated revenues or gross assets) where the secured creditor will rank ahead of the pension scheme.  This is subject to an exception for some refinancings.

The changes will also require a decision to sell a scheme employer to be notified when the decision in principle is made rather than when the final decision is made.

For the three types of notifiable event outlined above, more information will need to be provided to TPR and the trustees in an "accompanying statement" when the "main terms" have been agreed.  Subsequent material changes will also need to be notified to TPR and the trustees.

Our thoughts

Once in force, the changes should mean that trustees are provided with more information at an earlier stage about corporate activity that may impact the scheme. This should make it easier to seek mitigation while a proposed transaction is being negotiated rather than being presented with a "fait accompli".

Trustees may find that the proposed changes prompt sponsoring employers to seek to put in place or update non-disclosure agreements in order to protect the confidentiality of commercially sensitive information that is being shared with the trustees.

DWP consults on SIP and Implementation Statement guidance

The DWP is consulting on draft guidance setting out the DWP's expectations regarding: (a) how trustees comply with the requirement in their statement of investment principles (SIP) to state their policy on the exercise of voting rights attaching to investments, and on undertaking engagement activities in respect of investments; and (b) how trustees report in their annual Implementation Statement (IS) on how they have followed this policy, and on significant votes.

The guidance says that trustees must ensure that the IS can be read and understood as a standalone document.  Trustees must not simply cross-refer to or annex existing disclosures without also providing a statement in the IS which covers the relevant matters.

In relation to the SIP, the guidance says that the DWP expects trustees to either set their own voting policy or, if they have not set their own policy, acknowledge responsibility for the voting policies that asset managers implement on their behalf.  It says that it is not sufficient for trustees to simply report that they have delegated stewardship to their asset managers.  Where trustees are not undertaking voting decisions themselves, the guidance says they still have a responsibility to monitor their asset managers and challenge them where appropriate.  If a person making voting decisions on the trustees' behalf is unable to provide required voting information at the time of the IS, trustees should explain what information is missing and why.  Where trustees use the voting policy of the asset manager, they should summarise whether this aligns with the scheme's stewardship priorities.  

The consultation closes at 11.45pm on 6 January 2022.

Consultation on extension of climate change reporting requirements for largest schemes and master trusts

We have previously reported on the new climate risk reporting and governance requirements applicable to occupational pension schemes with assets of £1 billion or more and to authorised master trusts regardless of size.  The DWP is currently consulting on draft amending regulations which will extend the reporting requirements applicable to such schemes by requiring them, as far as they are able, to report on their investment portfolio's alignment with the Paris Agreement on climate change.  The consultation runs until 6 January 2022.

DC developments

New simpler annual benefit statement requirements for money purchase auto-enrolment schemes

The Government has confirmed that it will introduce new requirements for simpler annual benefit statements for money purchase auto-enrolment schemes from 1 October 2022, six months later than originally planned. Statements will have to be no longer than one double-sided sheet of A4 (subject to an exception where a different format is needed to comply with the Equality Act 2010).  The regulations were published at the same time as the Government's consultation response, together with statutory guidance on the format and content of statements which includes an illustrative template.

At the same time as confirming the Government's intention to legislate for simpler annual benefit statements, the pensions minister also announced that the Government plans to legislate for a "statement season", designed to maximise the impact of annual benefit statements.  Details of the statement season plans have not yet been published.

Pensions Regulator and FCA joint discussion paper "Driving Value for Money in defined contribution pensions"

In September the Pensions Regulator (TPR) and FCA published a joint discussion paper inviting views on developing a framework and related metrics to assess Value for Money (VfM) in all DC pension schemes regulated by TPR or the FCA.  This comes against a background of various requirements for schemes to assess VfM.  In particular, as reported in our last Update, trustees of schemes with assets of less than £100 million (which have been operating for at least three years) will in future be required to compare their scheme with at least three large schemes.  Where the smaller scheme cannot demonstrate VfM, the trustees will generally be expected to wind it up and transfer the assets and liabilities to a larger scheme.

The paper seeks views on:

  • the extent to which TPR and the FCA should make clear their expectations for how VfM should be assessed; and
  • whether they should establish, or encourage others to establish:
    • standard metrics for quantifying VfM;
    • benchmarking mechanisms that enable comparison of the VfM achieved by schemes or providers; and
    • standard reporting formats for VfM assessments.

Comments on the discussion paper are requested by 10 December 2021.

Government to restrict flat fee charges on some pots of £100 or less

The Government has confirmed in a consultation response that it will amend legislation governing the charge cap applicable to default arrangements in schemes used to satisfy an employer's auto-enrolment obligations.  The change will prevent flat fees being levied on pots below £100.  It will come into force on 6 April 2022.

The same consultation had also proposed to move from the current three permitted charging structures to a single charging structure for in scope default arrangements which would be a single percentage annual management charge based on the value of the member's default fund.  However, a broad majority of respondents to the consultation were against moving to a universal charging structure, and the Government intends to consider the consultation responses in more detail before making a policy decision on this issue.

Budget announcement re consultation on charge cap

As part of the Budget announcements on 27 October, the Government announced an intention to consult further on changes to the charge cap.  The consultation will "consider options to amend the scope so that the cap can better accommodate well-designed performance fees to ensure savers can benefit from higher return investments, while unlocking institutional investment to support some of the UK’s most innovative businesses."

Pensions Regulator updates guidance to cover temporary closure of gated funds

In October the Pensions Regulator (TPR) updated its Managing DC benefits guidance highlighting the potential for responses to the closure of gated funds to result in the creation of a "default arrangement". This is important because default arrangements are subject to additional legal requirements, eg the charge cap and the requirement to produce a default fund statement of investment principles. A gated fund is one which has temporarily closed in response to market volatility.  This is more likely to happen where funds have significant illiquid assets such as property.  The updated guidance flags that redirecting contributions into an alternative fund until the gated fund reopens could result in the alternative fund becoming a default arrangement.  TPR says that it believes that the only circumstances in which this will not result in a default arrangement are if either:

  • members were made aware before they selected the original fund that contributions could be diverted to another fund in certain situations, and agreed to this when choosing the original fund; or
  • the trustees contacted the members before diverting contributions and obtained their consent.

The guidance also flags that when a gated fund reopens, trustees need to consider whether the pre-existing expression of choice still applies or whether any further action or member consent is needed.

Miscellaneous

Recommendations of Taskforce on Pension Scheme Voting Implementation

On 20 September the Taskforce on Pension Scheme Voting Implementation published its recommendations to government, regulators and industry on how to increase and improve the quality of the voting of equity shares by occupational pension schemes.  The Taskforce was set up by the Government in 2020.  Its report includes a list of 24 specific recommendations.  Some of its recommendations for trustees have been incorporated into the Government's draft SIP and Implementation Statement guidance on which it is currently consulting.  (See item in Consultations section above.)  The report also contains various recommendations for the FCA regarding how it regulates asset managers in relation to voting activity and disclosure.  The report recommends that all asset managers should offer pooled fund investors the opportunity to set an expression of wish in a fund "at the cost of implementation" (though such cost should not include the cost of upgrading IT).  It also recommends that the Pensions Regulator should use third party compliance notices against asset managers that frustrate the ability of trustees to meet their existing duty of reporting on significant votes.

Trustees must submit second annual compliance statement to CMA by 7 January 2022

In our December 2020 Update we reported on the requirement for trustees to submit an annual compliance statement to the Competition and Markets Authority (CMA)  confirming that they have complied with the Investment Consultancy and Fiduciary Management Market Investigation Order 2019.  The order requires trustees 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.  The requirement to submit a compliance statement applies whether or not the scheme uses a fiduciary manager.  The deadline for trustees to submit their next compliance statement is 7 January 2022.  The statement will cover the one year period commencing 10 December 2020.  For more detail on the compliance statement requirement, click here

Budget announcement: top up for low earners in net pay arrangements

As part of the Budget announcements on 27 October, the Government published its plans to make top up payments to individuals whose income is below the income tax threshold and whose pension scheme uses the Net Pay Arrangement for tax relief.  Such individuals can currently lose out compared to members of a scheme that uses the Relief at Source method to provide tax relief.

Key Contacts

Rachel Rawnsley

Rachel Rawnsley

Partner, Head of Pensions
United Kingdom

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Jade Murray

Jade Murray

Partner, Pensions
United Kingdom

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Catherine McAllister

Catherine McAllister

Partner, Pensions
United Kingdom

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Rachel Uttley

Rachel Uttley

Partner, Pensions
United Kingdom

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