WELCOME TO OUR LATEST EDITION OF OUR TRUSTEE QUARTERLY UPDATE!
This update covers the legal position in England and Wales.
- Pensions dashboards
Latest dashboards developments
There have been numerous developments over the past quarter relating to the introduction of pension dashboards, the online platforms which will allow individuals to access information about all their pension schemes in one place. These include:
- the Government's response to its consultation on the draft Pensions Dashboards Regulations along with a Summary of key policies;
- a consultation on the Dashboards Available Point (ie the point at which dashboards become accessible to the public);
- the Pensions Regulator's initial guidance on dashboards;
- a Bill to prohibit trustees from being indemnified from scheme funds for breaches of the dashboards legislation;
- a consultation by the Pensions Dashboards Programme on the standards underpinning pensions dashboards;
- PASA guidance on validating the accuracy of member data;
- PASA guidance on pensions dashboards value data with a checklist of action points for scheme administrators; and
- updated PASA guidance on using scheme data to match dashboard "find requests" by members with relevant records.
Government consultation response
The Government's consultation response did not announce any fundamental changes in policy, though it has put back by 2 months the staging dates for master trusts with 20,000 or more relevant members and money purchase schemes used for automatic enrolment with 20,000 or more relevant members. The Government has also announced a change in the way the staging date for hybrid schemes will be determined. Hybrid schemes will need to count the relevant members across both the money purchase and non-money purchase sections and treat the entire membership of the hybrid scheme as a non-money purchase scheme for the purpose of determining the staging deadline. The staging date for public service schemes has been put back by 5 months.
Some respondents to the consultation had expressed concerns about the benefit information to be provided in respect of deferred members of defined benefit schemes, as many defined benefit schemes do not routinely provide benefit statements for deferred members. The Government will allow a simplified approach to be used for calculating deferred members' defined benefits, but this will be a transitional measure that only applies for two years from a scheme's connection date.
In relation to data protection, the consultation response flags that that the matching, combining or comparing of data from multiple sources automatically requires a data protection impact assessment (DPIA). The Government's consultation response includes a link to the ICO's response to the consultation which flags that schemes may need to update their privacy notices regarding how they process data.
Action points for Trustees
Key action points for trustees in relation to pensions dashboards include:
- ensuring they have a general understanding of the requirements in relation to pensions dashboards;
- identifying their scheme's staging date;
- liaising with their scheme administrators regarding their plans for connecting to the dashboard. Key for the administrator questions include:
- Do you plan to connect directly to the dashboard or use a third party provider?
- Are you on target to be dashboard ready within the required timescales and what testing has been done to date?
- Is our scheme's data "dashboard ready" (eg available automatically)?
- What are your plans regarding the data matching criteria to be used?
- What are your plans for communicating with members about dashboards?
- considering the terms of the trustees' contract with the scheme administrator, eg:
- do service descriptions/KPIs need to be updated?
- will there be extra costs?
- what liability does the administrator have if the scheme fails to meet its dashboard obligations?
- considering action required in relation to data protection, eg the need to carry out a DPIA, update privacy notices and consider contractual arrangements if a third party processor is used to connect to the dashboard;
- considering what to say about dashboards in communications with scheme members.
DWP seeks views after Employment Tribunal judgment casts doubt on age discrimination exemption
We are aware that the DWP has written to a number of schemes in an effort to gather data on the importance of the age discrimination exemption that applies to pensionable service before 1 December 2006. This follows the Employment Tribunal (ET) decision in Beattie v 20-20 Trustee Services Limited in which the judge found that the exemption is incompatible with the EU directive on age discrimination.
If schemes were unable to rely on the age discrimination exemption for pre-1 December 2006 pensionable service, this would have far reaching effects. However, we don't think schemes should be reviewing their practice at this stage for the following reasons:
- ET judgments do not set legally binding precedents that other courts must follow;
- the ET decision is being appealed, with a hearing scheduled for November 2022;
- the ET decision related to a very specific set of circumstances (restrictions on benefits in a PPF assessment period) without examining the wider implications. Much of the decision was based on case law relating to discrimination against same sex partners without fully considering whether the reasoning applied equally in an age discrimination context. We therefore think there's a significant possibility of the judgment being overturned on appeal;
- since Brexit, the status of EU law in the UK has changed, so a decision based on EU law principles could be overturned, either by a decision of the Supreme Court or Court of Appeal or by legislation.
Government consults on changes to scheme funding regulations
The Government is consulting on draft regulations regarding the funding of defined benefit pension schemes. The regulations flesh out more of the detail on the requirement introduced by the Pension Schemes Act 2021 for schemes to have a formal funding and investment strategy. They also introduce a specific requirement that deficits should be cleared as soon as the employer can reasonably afford. For more detail, click here.
Fiduciary manager rules: Pensions Regulator to assume responsibility for enforcement
We have previously reported on the Investment Consultancy and Fiduciary Management Market Investigation Order 2019 which requires trustees to run a competitive tender process in relation to fiduciary manager appointments covering 20% or more of the scheme's assets. Trustees are also required to set strategic objectives for their investment consultant. Until now trustees have been required to submit an annual compliance statement to the CMA. From 1 October 2022, regulations will transfer responsibility for enforcement from the CMA to the Pensions Regulator (TPR). TPR is due to add new questions to the scheme return asking about compliance, and it will no longer be necessary for trustees to submit a compliance statement to the CMA.
- Pensions Regulator
Regulator publishes expectations of trustees on refinancings
The Pensions Regulator (TPR) has published a blog post highlighting its expectations of DB scheme trustees and sponsoring employers where the employer undertakes a refinancing. Although presented as a reiteration of TPR's current expectations, the blog sets out some specific expectations that aren't currently reflected in other guidance.
Key points are:
- TPR expects employers to disclose to trustees the details and draft legal documents relating to any refinancing. This should be done in good time before the transaction completes so that trustees can do their due diligence on the impact on the pension scheme;
- TPR also expects the employer to share with the trustees any forecasts, scenario analysis and other information provided to lenders;
- TPR expects trustees to consider the detail, not just the big picture, eg:
- changes to the cost of the new debt and how this impacts employer free cash flow and thus potential impacts on the employer's ability to fund the pension scheme;
- debt structure and whether this is in a form which could mean the debt burden varies over time;
- the impact of security and cross guarantees on their recovery as a creditor in a hypothetical insolvency;
- financial covenants and the impact on the pension scheme as creditor in the event of a breach;
- restrictive covenants – with trustees told "to be mindful" of (ie potentially object to) covenants that could impact the pension creditor, eg restrictions on pension scheme funding;
- TPR expects trustees to consider the impact of debt transactions where control over existing lending passes from one counterparty to another, as this could precipitate a change in lending strategy (including changes to how the lender might approach a covenant breach) or highlight potential risks facing an employer. Where trustees become aware of such a transaction, they are told to proactively work with the employer and new lender to assess any change in the circumstances of the employer or the lending strategy, and any consequent impact on the trustee’s assessment of covenant.
What isn't new is the reminder of the basic regulatory expectation: "Our expectations of sponsoring employers and trustees in the context of refinancing are simple. It is critical to understand the implications of any refinancing on the pension scheme and the employer covenant, and to mitigate — to the extent possible — any detriment caused." TPR's expectations are of course backed by its moral hazard and criminal sanction powers.
DWP and TPR issue joint statement on transfers and TPR revises guidance
On 5 July the DWP and the Pensions Regulator (TPR) issued a joint statement on the regulations governing cash equivalent transfer values, and TPR made some changes to its guidance on dealing with transfer requests. The changes refer to the possibility of making use of discretionary powers under the scheme rules to make a transfer value payment despite the presence of an incentive payment (a "red flag" preventing the payment of a statutory cash equivalent transfer value) or overseas investments in the receiving scheme (an "amber flag" requiring scams guidance to be taken before a statutory cash equivalent transfer value can be paid). The guidance suggests that trustees could exercise discretionary powers under the scheme rules to make a transfer this where they consider the scam risk to be low.
This development appears to be the direct result of a particular pension provider accusing other pension providers/administrators of taking advantage of the transfer value rules (which changed with effect from 30 November 2021) to avoid making transfers. The accusation received a lot of coverage in the pensions press. Unsurprisingly, those accused responded that they were simply complying with the terms of the regulations.
The guidance gives some comfort to trustees who wish to use discretionary powers under their scheme rules to make a transfer despite the presence of overseas investments (amber flag) or an incentive to make the transfer (red flag) where there is no indication that the flag is indicative of a scam. However, the regulations themselves have not changed and the TPR guidance simply says that trustees "may consider" granting discretionary transfers in certain circumstances, not that they should.
- Pensions Ombudsman
Ombudsman holds administrator and employer partially liable for tax due to late payment of death benefit
In a case involving a section of the Railway Pension Scheme, the Ombudsman has held the scheme administrator and the employer partially liable for the tax incurred as a result of a lump sum death benefit being paid outside the two year window for paying the death benefit tax free (Mrs NIR CAS-55335-N3F2). However, the Ombudsman only made an award for two thirds of the tax rather than the full amount, holding that the potential beneficiaries has been partially responsible for the delay. For more detail, click here.
Ombudsman rejects complaint by member not awarded discretionary pension increase
The Pensions Ombudsman has dismissed a complaint by a member who had not been awarded a discretionary pension increase (Mrs R CAS-46341-T0B3). Until 2016 the scheme had a practice of awarding discretionary pension increases to pensioners on relatively low annual pensions who met specified criteria. Increases could only be awarded with the employer's agreement. No further discretionary increases had been awarded since 2016, initially due to uncertainty over the impact of the Lloyds Bank court case on GMP equalisation. The question of whether to grant discretionary pension increases had subsequently been reviewed on an annual basis, but taking into account including funding of the scheme, upcoming costs, and investment market conditions, the employer had decided not to grant discretionary increases.
The Pensions Ombudsman did not uphold the member's complaint. He said that it had been entirely reasonable to suspend any further discretionary increases pending the outcome of the Lloyds Bank GMP equalisation case, and he had seen no evidence that the employer had acted perversely in reaching subsequent decisions.
Current high inflation rates have resulted in an increased focus on the issue of discretionary pension increases. This Ombudsman decision reflects the principle that the Ombudsman will not interfere in the exercise of a discretion unless there is evidence that the decision-maker has acted perversely or not followed a proper decision-making process. Complaints by members regarding the exercise of a discretion (whether by the scheme trustees or employer) are unlikely to be upheld where the decision-maker can show that it has considered the exercise of the discretion and followed a proper decision-making process.
Member awarded £2000 for maladministration where incorrect pension quoted over four year period
The Ombudsman has awarded £2000 to a member who was provided with incorrect pension figures over a four year period in the run up to his retirement, though he rejected the argument that the member should be paid the higher pension incorrectly quoted (Dr N CAS-35685-R6X1).
Dr N was a member of the Principal Civil Service Pension Scheme. In 2004 he started making additional contributions to the Scheme under an arrangement which allowed him to purchase additional years of service. He subsequently ceased making contributions having purchased 122 additional days. However, when the member asked for a retirement estimate in August 2014, he was incorrectly quoted a pension based on him having purchased three years and 247 days of additional service. A different incorrect figure of four years and 204 days was used in a benefit statement in March 2017.
When Dr N wished to start receiving his pension in 2018, he sought to make use of an arrangement which allowed him to buy out the early retirement reduction under the scheme. He sent a cheque to the scheme administrators for £74,500 in the expectation that he would receive a pension of approximately £19,800 pa. However, shortly after his cheque cleared, he was informed that the correct buy-out cost was £61,800 and that his pension would be £16,407.18.
The Ombudsman rejected Dr N's argument that he should receive a pension at the incorrect higher rate quoted to him, but awarded him £2000 for the severe distress and inconvenience caused.
The Ombudsman's starting point is that a member is generally only entitled to the correct level of benefits under the scheme rules, and this is still the case even where the member has been incorrectly quoted higher figures over a prolonged period. £2000 is at the higher end of the scale for distress and inconvenience awards. It appears that in this case there were multiple instances of the member receiving slow responses to his queries and being provided with incorrect information.
Ombudsman rejects complaints against transferring schemes that transferred to pension liberation vehicle
The Ombudsman has rejected two complaints against schemes that made transfers to a scheme which turned out to be a pension liberation vehicle. The Ombudsman rejected the complaints on the grounds that the transfers complied with accepted standards at the time (Mr S PO-29578 and Mr R PO-28951).
Both transfers took place in 2016 and were made to the Optimum Retirement Benefits Plan ("Optimum Plan"). The Optimum Plan was registered with HMRC as an occupational pension scheme. It was administered by Optimum Financial Solutions Limited ("Optimum") which was regulated by the FCA. In February 2018, Optimum was wound up by the High Court. It subsequently emerged that the trustee had used the Optimum Plan assets to make high risk investments which were now worthless.
In Mr S's case, the provider of the transferring scheme had:
- checked the FCA register and ascertained that Optimum was regulated by the FCA;
- checked whether the Optimum Plan was on its internal list of high risk schemes and found that it wasn't; and
- checked that the Optimum Plan had been established for more than 12 months.
The Ombudsman noted that the Pensions Regulator's "Scorpion" leaflet identified the following as warning signs of possible pensions liberation:
- receiving scheme not registered or only newly registered with HMRC;
- member attempting to access a pension before age 55;
- member pressuring the trustees/administrators to carry out the transfer quickly;
- member approached unsolicited;
- member informed that there was a legal loophole;
- receiving scheme previously unknown to the provider, but now involved in more than one transfer request.
The Ombudsman concluded that there had been no reason for the transferring scheme provider to conclude that any of these flags were present. He also noted that Mr S had a statutory right to a cash equivalent transfer value. Taking these factors into account, the Ombudsman did not uphold the complaint.
The circumstances of Mr R's case were similar to those of Mr S, and the Ombudsman did not uphold the complaint. One issue raised in Mr R's case was that, although Optimum was regulated by the FCA, its FCA permissions did not cover advice on pension transfers. However, the Ombudsman concluded that the fact that Optimum was FCA-registered at all would have given the transferring scheme's provider some comfort that Optimum would behave in a professional manner. He concluded that the transferring scheme's provider was not under an obligation to do more than carry out a basic check that Optimum appeared on the FCA's register.
These determinations show that when dealing with complaints about past transfers, the Ombudsman's approach is to judge them by reference to accepted standards at the time. Under the current transfer values regime in force since 30 November 2001, trustees are generally required to request evidence of an "employment link" before making a transfer to an occupational pension scheme. Inability to satisfy the employment link requirement is an "amber flag", meaning that the member must receive scams guidance from MaPS in order for the transfer to proceed. Had the current regime been in force in 2016, it appears that neither Mr S nor Mr R would have been permitted to transfer without first receiving scams guidance, as neither would have been able to provide the required evidence of an employment link.
- DC developments
PASA updates its DC Governance Guidance
In June PASA published an updated version of its DC Governance Guidance. The guidance includes sections on:
- scheme data;
- decumulation (ie the point when a member takes benefits);
- controls and processes;
- management information;
- the chair's statement; and
- transitions (eg switching scheme administrators, moving to new administrative platforms or consolidating schemes).
High inflation raises revaluation rate issues for trustees
The current high inflation rate raises issues regarding the revaluation rate which should be used for the purposes of calculating early retirement benefits and transfer values. We have seen a number of actuaries raising this with our trustee clients.
The key issue is that high inflation will impact significantly on the statutory revaluation rate used to calculate deferred members' benefits. However, orders stipulating the statutory revaluation rate are only made once a year with effect from 1 January. We understand that the approach generally taken across the pensions industry until recently has been only to reflect known inflation rates in transfer values once the revaluation order takes effect on 1 January. This has been the case even though the rate that will be used is in practice known several months earlier, as the reference date for the calculation has historically been in September.
If benefit calculations are not adjusted before 1 January, this can produce a calculation "cliff edge" with a member's benefits being significantly higher if calculated as at 1 January compared to 31 December. If trustees follow this approach, that begs the question whether they are complying with their duties to be reasonably satisfied that early retirement benefits are at least equal in value to the member's normal retirement benefit, and to ensure that transfer values reflect the best estimate of the cost of providing members' benefits. We suggest that trustees discuss this issue with the scheme actuary if they have not already done so.
PLSA guidance on Own Risk Assessments
The PLSA has prepared a guide for trustees preparing an Own Risk Assessment (ORA).
In 2021 the Pensions Regulator (TPR) published a draft single Code of Practice incorporating the content of ten out of TPR's 15 existing codes. The new code is expected to be finalised later this year. The code includes a requirement for trustees to establish an "Effective System of Governance" (ESOG). This is essentially a collection of policies and procedures that a scheme should have in place in order to be operating effectively. The new single code will contain a requirement for trustees to carry out an annual "Own Risk Assessment" (ORA) to assess how well the governance systems are working. TPR describes the ORA as a "substantial process" and says that schemes may need to expand their risk assessments to fulfil TPR's expectations.
The guide sets out some key questions which trustees may wish to consider when assessing the effectiveness of the scheme's governance system. These include:
- Is the aim of the policy clear without reading the full document?
- Is the policy written concisely, minimising the use of technical language and defining any jargon?
- Does the policy reflect the reality of how the scheme is operated?
- Could a newly appointed trustee use the policy to correctly follow a process?
- Does the policy reference the most recent legislation?
- Do all the trustees know the policy exists and how to access it?
- How would members react if they read the policy?
- Is it clear when the policy was written and when it was last reviewed?
Areas of focus
The guide suggests climate change, stewardship, inclusion and diversity, and cyber risk are four key areas of governance on which trustees should be focussing.
GMP equalisation checklist for past transfers out
The cross-industry GMP Equalisation Working Group has published a checklist of decisions which trustees will need to make when dealing with GMP equalisation in relation to past transfers out. Examples of decisions covered by the checklist include:
- whether to treat non-statutory transfers in the same way as statutory transfers;
- whether to pay interest on top-up payments at the rate of 1% simple over bank base rates (ie the interest rate used in the Lloyds Bank GMP judgment); and
- whether to adopt a "de minimis" policy to limit the number of past transfer out cases to be reviewed.