Compass - Winter 2020 / 21
Compass provides commentary and analysis of recent legislative and regulatory developments affecting pensions and employee benefits.
Winter 2020 - 2021
Welcome to the Winter 2020 / 21 edition
Compass provides commentary on and analysis of recent legislative and regulatory developments affecting pensions and employee benefits.
This edition of Compass opens with a focus on the perennially hot topic of Guaranteed Minimum Pension (GMP) equalisation, considering the significant ruling in the Lloyds Bank case regarding past transfers that included GMP.
The court ruled that schemes have a duty to ensure that they have paid the correct transfer values historically, which may compel them to make top-up payments in respect of transfers as far back as 1990.
Our second article focuses on the Data Standards Guide released by the Pensions Dashboards Programme.
This is a key step in the development of the dashboard project, which will continue to gather pace throughout the year, with voluntary onboarding targeted for 2022.
Following this, we discuss The Pension Regulator’s recent initiative to establish an industry standard ‘pledge’ to combat pension scams.
The Regulator calls on trustees, providers and administrators alike to make the pledge as part of a commitment to stopping scammers and protecting pension savers.
Our fourth article focuses on the Government’s push for simpler annual benefit statements as a means for increasing member engagement.
The Department for Work and Pensions (DWP) has released its response to the outcome of its industry consultation on the issue and has indicated its preferred way forward, including a mandatory ‘season’ for all schemes to issue their statements and a set two-page template for them to adopt.
Elsewhere in Compass, we cover:
- DWP proposals to give members a ‘stronger nudge’ regarding retirement guidance
- Regulator guidance on Defined Benefit (DB) ‘superfunds’
- Brexit’s impact and the end of the transition period
- A new taskforce charged with improving trustee stewardship of scheme assets that are invested in pooled funds
- An update on the general levy
- A round-up of other news.
GMP equalisation and past transfers out
GMP equalisation and past transfers out
The High Court has ruled that trustees must revisit past transfers out to allow for GMP equalisation.
In 2018, the High Court delivered a landmark ruling that the inequality between men and women in respect of GMP benefits is not compatible with UK or EU legislation.
However, the judgment left several important issues unresolved, including whether schemes are required to revisit benefits after a member has transferred out to another scheme.
The High Court was again asked to rule on such matters in respect of the Lloyds Bank schemes, and it published its long-awaited follow-up judgment on 20th November 2020.
High Court ruling
The judge concluded that the trustees owed a duty to a transferring member to make a correctly-calculated transfer payment that reflected the member’s right to equalised benefits.
Therefore, where the initial transfer payment was inadequate on this basis, the trustee is obliged to make a top-up payment to the receiving scheme on the transferred member’s behalf. Any claim by a transferring member is not time barred, either under the scheme rules or under the Limitation Act 1980. Crucially, this means that transfers as far back as 1990 are in scope.
The judge stopped short of compelling schemes to proactively make top-up payments to all affected members but pointed out that “…the Trustee does need to be proactive in that it must consider the rights and obligations which I have identified, the remedies available to members and the absence of a time bar and then determine what to do”.
This comment was made because the administration costs of remedying past transfers may greatly outstrip the amount needed to make a correction.
To account for the delay in being made, the top-up payment should include interest applied at 1% above base rate.
Some flexibility is allowed for schemes to adopt an alternative to a top-up, but the trustee can’t require a member to accept a residual benefit nor can the member require the trustee to provide a residual benefit.
The judgment isn't clear about what approach should be taken if it isn’t possible to make a top-up payment to the receiving scheme. Instead, it suggests that the outcome in a particular case would be based on what the parties agree or a court orders.
Individual non-statutory transfers
In the case of individual transfers made under provisions in the scheme rules (that is those made where the member didn’t have a statutory right to one), the judge ruled that the trustee acted under a power conferred by the scheme rules.
As the power has been exercised, the transferring member no longer has rights under the transferring scheme and no top-up is required unless the member disputes the execution of power in court.
It was determined that, for bulk transfers in which mirror image benefits were provided and the relevant actuarial certificates are valid, there’s no remaining liability with the Lloyds' schemes.
Bulk annuity transactions, such as buy-ins or buyouts, aren’t mentioned in the ruling, so trustees of schemes that have been involved in these exercises may wish to consider taking their own legal advice.
The obligation for a scheme to equalise for the effect of any transferred-in GMP earned after 17th May 1990 applies regardless of whether it receives a top-up payment from the transferring scheme.
This is a complex area and the judgment raises several issues for trustees that will need detailed consideration as part of their GMP equalisation projects. The impact of the ruling will be scheme-specific and dependent on the number of past transfers-out the scheme has made that included a GMP built up between 1990 and 1997. They will need to consider how the top-ups are calculated and whether administrators hold the necessary data to do so. They may also find it difficult to identify those who may be affected as they’re likely to have limited data on members who have transferred out.
Although the judgment clarifies the extent of trustees’ obligations to revisit past transfers, it was specifically in relation to the Lloyds schemes, so it didn’t address some scenarios relating to transfers. Trustees of affected schemes should discuss their individual circumstances with their advisers and seek further legal clarity if necessary.
We have published a Spotlight that looks at the judgment in more detail. Please speak to your usual Capita contact if you would like a copy.
Pensions dashboards – data standards
Pensions dashboards – data standards
Pensions dashboards are a long-awaited service expected to allow information about a person’s UK pension savings to be consolidated and presented online in one place.
The intention is to include State, public sector, occupational and contract-based pensions (whether personal pensions or annuity contracts).
The rationale behind this initiative is that it will help people to reconnect with any lost pension pots as well as supporting better planning for retirement and financial wellbeing.
While ideas and proposals in this area have been circulating for some time, the pace of implementation has recently accelerated.
The Pension Schemes Act 2021 contains the legislative framework to introduce pensions dashboards and the powers to compel schemes to provide information on demand to support them.
The clear political will for this reform is shown by the Pensions Minister’s comments in December.
I am ambitious for the future of dashboards, as a place where people can easily see what they can expect at retirement, and the value their current providers are giving them. My message to pension providers remains, get dashboard data ready."
Guy Opperman, Minister for Pensions and Financial Inclusion
Pensions Dashboards Programme (PDP)
The Money and Pensions Service (MaPS) established the PDP to design and implement the infrastructure that will make dashboards work. On 15th December 2020, the PDP published its key Data Standards Guide, a key step in the project’s development.
The PDP has concluded that initial dashboards should aim for as broad a coverage as possible, to enable people to see most, if not all, of their pensions in one place.
This “find and view” approach will require enough data to link entitlements to individuals and to provide basic information about those entitlements, but it won’t provide more in-depth information until a later date.
Previous research has found that people exhibit “a low tolerance for an incomplete dashboard”, a principle that has guided the PDP’s thinking.
Timing – key phases
The PDP has set out the following planned phases in the programme:
- Programme set-up and planning during 2020, which includes first procurement steps for suppliers of the digital architecture and setting the first iteration of data standards.
- Development and test phase from 2021, which includes onboarding suppliers and building and testing the digital architecture.
- Voluntary onboarding and ongoing testing from 2022, which connects volunteer pension schemes and providers to the service, using real data.
- Staged onboarding from 2023 with schemes and providers compelled by law to connect to the dashboard ecosystem over a period of time rather than all at once. Master Trusts are expected to be early adopters.
- Dashboard available point – once an acceptable level of coverage has been reached, dashboards will be released / announced to the public.
- Transition to business as usual – this is the final phase and will involve the service running in a steady state.
A key point to recognise is that the pension dashboard ecosystem doesn’t store any information itself. It acts as a highway, switchboard or conduit between those who have data (ultimately the pension scheme providers) and those who want it (the individual members).
Its role is to authenticate the member (the identity service) and then to find their various pension pots (the pension finder service), collate and present the information in a consolidated format. Naturally, this will require all necessary digital data to be accurate and available on electronic demand.
The challenge then becomes the need for schemes to be ready to deliver that accurate digital data.
Does their existing administration system allow this? If not, a potential solution will be to use specialist integrated service providers (ISPs) to store their data and manage this process for them.
Types of data
The Data Standards Guide sets out in detail the data that will be required. A brief description is given below but clearly trustees will need to scrutinise the details and compare them with what data they currently hold.
- Find (match) data - data sent to providers from the pension finder service once a person’s identity has been verified. It will be a mixture of (a) data asserted by the identity service and (b) data provided by the person. Schemes (or their appointed ISP) will check their records against that data and determine if there’s a match.
- View data - this is the information that pension schemes and providers must return to the dashboard so that it can be made available for people to view.
View data falls into separate classes:
- Administrative data – this is details about the pension scheme, the administrator and the employer
- Estimated Retirement Income (ERI) - a one-off amount (such as a separate lump sum and / or a regular income). Multiple blocks of data will be needed to convey separate tranches of benefit. This information doesn’t need to be current at the time of request, but it must fit with existing disclosure requirements
- Accrued pension data - the value of the pension accrued to date
- Additional data – signposts to other online material.
Action for pension schemes on view data
The PDP is calling on pension schemes to review and prepare their data in the light of these data standards before compulsory onboarding starts in 2023. Trustees and their administrators must:
- Ensure that the required data items relating to the various types of pension can be returned accurately
- Plan how they would like dashboard users to interact with the scheme administration
- Ensure that information on a person’s ERI, along with the calculation date and the date payable, can be returned on demand.
There is no question that providing accurate data in a timely, automated manner will be a serious challenge for many schemes over the next few years and it’s important to recognise that the political will exists to deliver this reform. Providing digital data on demand will necessitate the modernisation of administration and record-keeping arrangements for many cases and a failure to grapple with the challenge now may see some falling foul of their legal obligations in the future. This message is amplified against a background of the potential for capacity limitations on how much work the pensions industry can do between now and 2023.
As matters develop during the next year, we think that many trustees facing the constraints of their existing administration arrangements and systems will have to explore using an ISP to collate their data, ensure that it is dashboard-ready and manage the demands of an online and on-demand service. There may be benefits in pooling their resources.
Please speak to your usual Capita contact if you would like more information.
Pledge to combat pension scams
Pledge to combat pension scams
The Regulator has launched an initiative urging the pensions industry to publicly pledge to combat pension scams.
The Regulator, the Financial Conduct Authority (FCA) and the Government have all made it clear in recent years that those responsible for running pension schemes have a part to play in protecting their members from scams.
The Regulator has now launched an initiative calling on the pensions industry to publicly pledge to combat pension scams (details are on its website).
The pledge sets out the minimum steps that the Regulator expects trustees to take to protect members, and it follows the Pensions Scams Industry Group (PSIG) Code of Good Practice.
Those that make the pledge will agree to:
- Regularly warn members of the risk of scams
- Encourage those requesting cash drawdown to call the Pensions Advisory Service for free, impartial guidance
- Learn the warning signs of a scam and best practice for transfers
- Take appropriate due diligence measures and document pension transfer procedures
- Clearly communicate concerns to members if high-risk transfers must be made
- Report concerns about a scam to the authorities and communicate this to scheme members.
Once trustees have committed to making the pledge, the Regulator expects them to take action (if not already in place) to ensure that the principles are met. Those that do this will be able to self-certify to the Regulator that they have put in place the practices outlined in the pledge.
There is a new Trustee Toolkit module that outlines the processes that all trustees and providers are expected to follow to keep savers safe.
Anyone involved with the transfer process, including trustees, are expected to complete this module.
The Regulator currently has no plans to publish the list of those that have signed up but may look to do so in the future. This is because the pledge is viewed as a public commitment and it would aim to demonstrate that schemes are continuing to put their members first and are ensuring that they are meeting expectations.
Many schemes already comply with the latest version of the PSIG’s ‘Combating pension scams – a code of good practice’ and therefore arguably already go further than required under current legislation. As the commitments for taking the pledge build on this important document, we’re not witnessing a new direction of travel but it does let members and potential scammers know that the scheme is on the look-out for red flags that may signal a pension scam.
Even if schemes don’t decide to make the pledge, its six steps have the scope to make a positive impact for members and completing the new module in the Trustee Toolkit will provide trustees with further education.
DWP consultation response – simpler annual benefit statements
Simpler annual benefit statements for workplace pensions
In November 2019, the DWP published a consultation on simplifying annual benefit statements for qualifying defined contribution (DC) workplace pension schemes.
The consultation has since closed, and the Government has published its response. It aimed to gather feedback on four main areas, discussed below, to improve engagement with members and support retirement planning.
Consistency and simplicity in design of benefit statements across providers
Across the industry, there were mixed responses to the proposals about simplifying the design of benefit statements. The Government wants providers to use a two-page template statement.
Some of the respondents, however, have said that they already have their own shortened statements, developed after (potentially expensive) research and user-testing, which are longer than two pages.
While many respondents agreed with the design principles and descriptors set out in the consultation, some also expressed concerns about their prescriptiveness. Questions remain about the proposed template and whether it’s suitable and doesn’t impede future personalisation and innovation.
Despite the lack of consensus, the Government believes that a jargon-free statement template is the right approach. Due to the lack of voluntary adoption of the two-page statement, the DWP will consult later in the year on a mandatory approach to simpler statement templates.
Clearly displaying costs and charges in pounds and pence on statements
On the matter of costs and charges, responses were again mixed. The Government wants to show costs and charges in pounds and pence, on the benefit statement itself.
Few respondents disagreed with this proposal in principle, but questions were raised about whether including this extra information conflicts with the aim of shortening and simplifying statements. Other respondents said that poorly presented information may confuse members and even put them off saving for their pensions.
Currently, legislation requires relevant schemes to publish information on costs and charges on a publicly available website. The Government believes that this remains appropriate and proposes that annual statements should include a line on costs and charges, signposting to the more detailed assessment available online. Benefit statements should also signpost to information on the scheme’s investment strategy.
Encouraging members to open their statements
The Government made several proposals in the consultation to encourage people to open their benefit statements. These include a ‘statement season’ when all providers would send out their statements, and using coloured envelopes to mark the contents as benefit statements.
Concerns about the potential for fraudulent behaviour were raised over the use of specifically-coloured envelopes, and there was no consensus among respondents on this point. The Government has therefore decided not to take this proposal forward at the moment.
The idea of a statement season created more positive interest among respondents. However, some potential barriers were identified too, such as the operational challenges of producing statements across all schemes in a condensed timeframe.
A peak period each year created by a statement season could also negatively affect customer service during that time.
Some concerns were also raised about it inhibiting personalisation in communications, as schemes could no longer offer members the option to receive their statements at their preferred time.
The Government concluded that a mandatory statement season provides an opportunity to promote conversation about and engagement with pensions and is beneficial overall. So it will consult further regarding a mandatory approach for timing and provision of an annual written benefit statement.
Clarify ownership and alignment of the assumptions used to calculate illustrations on statements across providers
Finally, there was a consensus among respondents that the illustration assumptions proposed in the consultation were apt, and the DWP has confirmed that it will continue to work to identify the most appropriate ownership of these assumptions.
The consultation response makes it clear that the Government sees simpler and consistent annual benefit statements as key to engaging members with their retirement, an objective that all in the industry should support. The Government has taken on board some of the industry’s feedback and dropped some of its more contentious proposals. Despite some mixed views, the DWP will move ahead with introducing mandatory uptake of a shorter, two-page statement for DC schemes, and a common statement season across the industry.
Further consultation is expected before these changes are introduced but trustees should be aware of the proposals and be ready to engage their advisors and administrators to ensure that their schemes are ready to comply as more details become available.
Stronger nudge to pensions guidance
Stronger nudge to pensions guidance
Following successful trials, the DWP has announced proposals to introduce a new ‘stronger nudge’ regime, aimed at helping savers to choose to obtain free pensions guidance so that they can make better-informed decisions when accessing their pension savings and be protected from scams.
Since Pension Freedoms were introduced in 2015, people can access their pension benefits from the age of 55 and have a greater range of options for doing so.
The Pension Wise advisory service was launched as part of these changes to provide free, impartial guidance to help individuals aged 50 and over to understand the options available to them. It transferred to MaPS at the beginning of 2019.
Demand for the Pension Wise service has grown year on year since it launched and there has been debate about how to promote the take-up of guidance in the most effective way.
The stronger nudge regime
The DWP published a statement of policy intent that laid out plans for occupational pension schemes to be required to nudge members towards taking guidance from Pension Wise (if they haven’t already done so) when they seek access to their pension.
This follows trials, led by MaPS, which showed that more savers set up an appointment with Pension Wise when providers explained the nature and purpose of the guidance and either offered to book a guidance appointment for them or transferred them to Pension Wise to book the appointment themselves. The trial found little difference between the two and, for both, 14% of savers who didn’t report having had guidance before agreed to make an appointment, which is 11% more than the control group.
The Government will consult on draft regulations that would require pension trustees to present taking guidance as part of the retirement process. The FCA will introduce rules to implement the regime for personal pension and stakeholder schemes.
The new stronger nudge duties are intended to apply to trustees of occupational pension schemes whose members make applications to start receiving flexible benefits or to transfer pension rights. This means that trustees of DB and DC schemes will have to make changes.
The Government wants to allow trustees and managers the flexibility to choose a process that works best for them, but stipulates that they must take proactive steps to facilitate appointments for their members. The Regulator is expected to introduce guidance for trustees to help to implement the measures.
The intended regulations will specify that a member stating that they have received guidance is sufficient for the transaction to continue without the nudge. A new duty to record any opt-outs from guidance will sit with the scheme trustees and managers.
The regime will help savers to “make informed choices about their financial futures” and that he wants “taking guidance to become a natural part of the journey savers embark on when making decisions about their pension pots”. He further noted that “these measures will help protect consumers from scams”.
Guy Opperman, Minister for Pensions and Financial Inclusion
Although the numbers accessing Pension Wise guidance appear to be on the rise, they’re still not great and so measures that try to increase take-up are welcome. There still remains the question of whether the nudge towards guidance should be given earlier in the retirement journey, as many people will have already decided what action they want to take when they come to access their benefits.
TPR publishes new guidance on DB superfunds
TPR publishes new guidance on DB superfunds
Following the launch of the interim regime for superfunds in June 2020, The Regulator has now published new guidance for trustees and sponsoring employers of DB schemes considering transferring to a DB superfund.
The new guidance aims to help trustees and employers to understand and meet the Regulator’s expectations.
While superfunds can offer good outcomes, they may not be suitable for all schemes.
A superfund allows for the severance of all or part of an employer’s liability of a DB scheme by either:
- Replacing the employer with a Special Purpose Vehicle (SPV) employer, a shell employer to preserve the scheme’s PPF eligibility; or
- Replacing the employer’s obligation to fund the scheme’s liabilities by a new corporate entity (technically still deemed an “employer” for PPF purposes) backed with a capital injection to a capital buffer.
The Regulator’s expectations
Before trustees and their sponsoring employers enter into a superfund, they must demonstrate why they believe it’s in the best interests of their members and how the transaction meets the gateway principles.
The gateway principles state that a transfer to a superfund should only be considered if:
- The scheme cannot afford to buy out
- The scheme has no realistic prospect of buy-out in the foreseeable future
- It increases the likelihood of its members receiving benefits in full.
The ceding scheme should apply for clearance and for the trustees to demonstrate they have done their due diligence.
A transfer to a superfund will be considered a new category of clearance, a Type A event. Ceding employers are expected to apply for clearance, providing evidence of the gateway principles outlined above.
Where trustees can’t provide evidence that the principles have been met, a clearance statement will not usually be provided. When a transaction proceeds, it should normally take place within three months of the clearance statement being issued.
The role of the sponsoring employer
The sponsoring employer will usually provide any additional capital required to meet the superfund’s entry price and to facilitate the transfer. It will play a key role in providing and coordinating the information needed for a clearance as well as being the clearance applicant.
It will be expected to provide the trustees with the required professional advice and to ensure that they have everything they need to consider such a transaction. They will also be expected to take their own professional advice regarding the transfer.
The role of the trustees
Transferring to a superfund is a significant decision and, therefore, trustees must carry out their own due diligence to demonstrate that the transaction is in the members’ best interests. The depth of such due diligence will depend on the scheme’s size and the requirements for transfer.
Areas the trustees’ diligence would be expected to cover include other options available to improve the scheme’s position, whether the superfund is suitable for its members and consideration of the funding and investment objectives, the conflicts of interest policy and whether the transfer is in line with the gateway principles outlined above.
Trustees will need to consider whether there has been any material detriment in past corporate activity or any recent value extraction.
If this is the case, they should investigate what further or alternative steps it would be appropriate to take. Given the complexity of such transactions, trustees should obtain appropriate professional advice. They may even consider appointing an independent trustee to provide such expertise.
Given the change to the scheme, members may consider accessing their benefits early or transferring out of the scheme. Trustees should therefore communicate clearly with them openly and transparently throughout the transaction. When members still want to transfer, trustees should direct them appropriately to allow them to make their own informed decision. Members should be encouraged to take independent financial advice and be referred to the Pensions Advisory Service for impartial guidance.
Alternative options available
Trustees should consider whether there are other forms of support to improve member security in the longer term other than transferring to a superfund.
Any assessment should include costs, security and the suitability for scheme members. Other options may include entering a DB master trust, capital-backed arrangements or access to economies of scale and improved governance.
Superfunds can be a good option for some schemes, although they do present their own risks and, therefore, it’s important that trustees carry out their own in-depth due diligence. This new guidance makes clear what is expected of trustees and their sponsoring employers to ensure that the best option for scheme members is achieved.
If schemes are considering a DB superfund, notification should be sent to the Regulator as soon as possible to allow early engagement and for any issues to be discussed at the earliest opportunity. This new guidance shows that the Regulator is committed to superfunds and is supportive of such transactions; given this, it will be interesting to see how their popularity grows over the coming years.
The transition period following the UK’s departure from the European Union ended at 11pm on 31st December 2020, and the UK-EU trade agreement then took effect.
Many significant aspects of UK pensions law have been derived from the EU, such as several key governance requirements, the current scheme funding legislation and a great deal of anti-discrimination law. However, these have mostly been incorporated into UK law, which means that UK pensions law is largely unaffected by the ending of the transition period.
EU case law also affects matters such as the compensation levels that the Pension Protection Fund (PPF) has to offer and it’s an open question as to whether and when the UK may wish to move away from that. There are also broader areas of employment law where the footprint of EU law has been significant, such as the Transfer of Undertakings (Protection of Employment) Regulations 2006 and the age discrimination legislation. Interpretation of legislation now belongs to the UK courts and the higher courts (such as the Supreme Court and Court of Appeal) can depart from past decisions of the Court of Justice of the European Union.
Where these changes really have an effect is in the realm of scheme members and employees who either work or live overseas, who have been seconded to work in the EU or European Economic Area (EEA), or who will retire in the EU or EEA.
Specific advice and guidance will be necessary in this area. It may also be appropriate to alert scheme members that they should take their own personal advice if they plan to move and live outside the UK, as in some limited cases there may be implications for their future retirement plans.
One area in which the EU has been significant is the protection of personal data. Personal data is any information that can be used to identify a living person and includes names, delivery details, IP addresses and HR data such as payroll details. It’s used by most organisations in their daily operations.
An example of this mattering in this context is a UK company that receives customer information from an EU company, such as names and addresses, to provide goods or services.
Some time ago, the UK Government decided to fully bring the EU basis set out in its General Data Protection Regulation (GDPR) into UK law and this was achieved by the Data Protection Act 2018.
However, ceasing to be in the EU and ending the transition period means that the UK is in scope to be treated as a third country for the purpose of personal data transfers between it and the EEA.
Following the recent UK-EU trade agreement, the UK Government has announced that the treaty agreed with the EU contains a ‘bridging mechanism’ that will allow personal data to flow freely from the EU (and EEA) to the UK for six months, until there is time for the EU to make decisions on the adequacy of the UK’s arrangements.
This should enable businesses and public bodies across all sectors to continue to freely receive data from the EU (and EEA) for now. The UK has, on a transitional basis, deemed the EU and EEA to be adequate, allowing for continued data flows from the UK to the EU and EEA.
As a sensible precaution while the UK awaits an EU adequacy decision, Capita continues to engage with EU and EEA organisations that transfer personal data to us, to ensure that we have appropriate transfer mechanisms in place (such as standard contractual clauses) to safeguard against any interruption to the free flow of personal data.
Please speak to your usual Capita contact if you have any questions.
Taskforce on pension scheme voting implementation
Taskforce on pension scheme voting implementation
The Pensions Minister, Guy Opperman, announced the setting up of this new taskforce on 1st December 2020, so that occupational pension scheme trustees can properly exercise the voting rights attached to the assets they own.
He wants this new working group to examine the current, overly complex and archaic voting infrastructure as well as underinvestment in the stewardship function in fund management.
The general view is that, as it stands, pension scheme trustees who invest in pooled funds have effectively surrendered their rights to vote at the annual general meetings of the companies that they invest in.
The new working group or taskforce is to look at ways to correct this and, ultimately, improve trustees’ stewardship of their investments.
In his speech, the Minister stated that the new group will look at:
- facilitating the delivery of solutions to voting system issues that overcome the present obstacles to trustees implementing their own policies
- increasing the number of asset managers who are prepared to engage with their clients’ preferences and either follow them or (as a minimum) “align or explain” on trustee voting policies
- recommending regulatory and non-regulatory measures to ensure that asset managers’ approaches converge with voting policy and that execution converges with trustees’ policies and preferences, especially in pooled funds.
Although the taskforce will be supported by the DWP, it will be independent of it.
The Minister also announced that he’s taking forward a recommendation from the UK Sustainable Investment and Finance Association for a central directory of statements of investment principles (SIPs), as also supported by the Regulator. He was clear that “we urgently need to call time on SIP statements like ‘we leave it all to our fund managers’”.
He’s looking to the taskforce to support and advise on the development of voting policies for occupational pension schemes, along with further proposals for the better disclosure of votes in a standardised and comparable way.
The aim is to allow trustees and, ultimately, savers to see the quality of the service they’re getting.
This is another step in the steady improvement of investment and fund management governance and engagement that has been taking place over the last few years.
It’s obvious that the Government believes that trustees need to step up their practice to make it more professional.
They should take the opportunity to better understand the practical limits on engagement and stewardship of their fund’s assets and keep an eye on possible future developments. Trustees may wish to discuss this further with their investment advisers
General levy and funding for pension industry protection bodies
General levy and funding for pension industry protection bodies
The Government has launched a consultation on restructuring the general levy paid by pension schemes.
The general levy recovers the funding provided by the DWP in respect of The Pensions Regulator, the Pensions Ombudsman and the Money and Pensions Service.
The levy rates are set in regulations and are reviewed annually by the DWP. The rates were last increased in 2008 / 09, were reduced by 13% in 2012 / 13 and have been at the same level since then.
Due to historic shortfalls between the amount recovered and the costs of funding these bodies, the levy deficit is expected to reach approximately £80m by March 2021.
Amendment regulations were laid in February 2020 that would have increased the levy rates by 10% from 1st April 2020 to begin to address the levy deficit that had accumulated.
These regulations were subsequently revoked as a result of the Covid-19 pandemic.
Causes for the increase in costs funded by the levy include the Government’s reforms to strengthen the Regulator’s powers to protect members from unscrupulous employers, increased demand for pensions guidance and dispute resolution, and the new work being done to develop pensions dashboards.
The new consultation, which closed on 27th January 2021, seeks views on the Government’s three proposed options for change to the general levy’s structure and rates for the next three years, from April 2021 onwards.
The three options are:
- Increase rates and introduce separate levy rates for DB, DC, Master Trust and personal pension schemes (with larger levy rate increases proposed for DB and hybrid schemes compared with other types)
- Increase rates and introduce a separate, lower set of levy rates for Master Trusts
- Retain the existing levy structure and increase rates.
The consultation makes it clear that the Government favours the first option, noting that it would reflect the differing levels of supervisory attention better, but the levy would still be based on how many members are in a scheme.
The effect of the preferred option will be that, by 2023 / 24, the levy payable by a DB or hybrid scheme would more than double.
This can be compared with a DC scheme paying around 50% more in 2023 / 24 than now, while Master Trust and personal pension schemes look to have an increase in the region of 7% to 10%.
Fraud Compensation Fund case - PPF Board v. Dalriada Trustees
Fraud Compensation Fund case - PPF Board v. Dalriada Trustees
The High Court has ruled that the Fraud Compensation Fund (FCF) may provide compensation to members who have fallen victim to scam schemes.
The FCF is a statutory fund established in 2004, which is managed by the board of the Pension Protection Fund (PPF) to provide support to occupational pension schemes that have suffered financial losses due to offences involving dishonesty.
The PPF was unclear whether pension savers falling victim to scam schemes were eligible for compensation from the FCF under existing legislation.
For clarity, it submitted an example claim to the court in which members were incentivised to transfer their pensions from genuine occupational pension schemes into a scam scheme and requested a ruling on whether the FCF could consider them eligible for compensation.
The High Court ruled in November 2020 that victims of scam schemes are indeed eligible for compensation from the FCF (provided the other, usual conditions for eligibility are met) and clarified certain principles for the FCF to apply in determining whether scam schemes are covered by its remit.
This outcome has been welcomed as a positive step towards protecting pension savers.
Following the hearing, the PPF released a statement confirming that it will now proceed with processing claims that it has already received and noted that this will take some time due to the level of investigative work required in such cases.
The statement also stressed that the FCF is intended as a last resort and that attempting to recover assets should always be prioritised over awarding compensation.
The ruling ties in with current cross-regulatory initiatives to protect victims of pension scams. The FCF may now provide a similar protection for members of occupational pension schemes that the Financial Services Compensation Scheme may offer to members of personal pension schemes.
The industry will now wait to see whether the ruling leads to a significant increase in compensation being paid out by the FCF.
The PPF’s most recent annual reports and accounts (published in October 2020) indicated that it had received applications with an estimated aggregate claim value greater than the total amount of compensation that the FCF has paid out since its inception.
Inevitably, an increase in the number of successful claims for compensation may see the levy increased to fund them. For now, there’s no announcement by the PPF about what the FCF levy will be in response to the court hearing.
Small Pots Working Group report
The Small Pots Working Group outlines recommendations for the Government and pensions industry
The DWP has published the Small Pots Working Group report, which seeks solutions to the increasing number of small dormant defined contribution pots.
The Group identified several recommendations and actions for the industry and Government to work together on to tackle the issue.
Automatic enrolment has increased workplace pension participation but also increased the risk that the pension savings of lower earners and people who move jobs frequently become fragmented into a number of deferred, small pension pots.
The Pensions Policy Institute (PPI) estimates that, without intervention, the number of deferred pension pots in Master Trust schemes could increase from 8m to 27m by 2035.
The current average pot size within Master Trust schemes is estimated to be around £1,000.
The report recognises that initiatives such as pensions dashboards could facilitate more consolidation in the future.
While support for such member-initiated consultation should continue to be explored, the report commented that this alone is unlikely to stop the growth of small deferred pension pots. Action enabling automated low-cost transfers and consolidation should be prioritised.
Providers with multiple pots in charge-capped default funds for the same deferred member should look to consolidate these. Where this isn’t possible, providers should work towards implementing a single customer-facing view.
The report calls on the industry to establish operational-focused groups to investigate and address administrative challenges that will need to be overcome to underpin mass transfer and consolidation systems. It suggests that member-exchange proof-of-concept trials involving low value small pots within Master Trust schemes should be developed and prioritised, as they would offer an opportunity for learning through testing. A feasibility report could be produced in summer 2021.
The Group suggested two specific models of small pot consolidation for consideration: the default small pot consolidation scheme and the automatic ‘pot follows member’ solution. It recommended that the DWP and the pensions industry work together to develop an initial cost / benefit analysis in the second half of 2021 to assess the options further.
Given the risks that the growth of small pots presents to scheme members and their access to good quality pension provision, it is imperative that workable solutions are identified and successfully implemented.
Pensions Minister Guy Opperman
Protecting schemes from sponsor distress
Protecting schemes from sponsor distress
The Regulator has published new guidance for trustees of DB schemes about monitoring for sponsoring employer distress and taking appropriate steps when necessary.
In its view, such trustees should be preparing now for the possibility that their scheme’s sponsoring employer faces difficulties.
Trustees are the first line of defence for savers. The faster they act, the more options and greater time they’ll have to protect members’ retirements. Trustees should know the signs of distress, and preparations can be made before these signs appear.
Mike Birch, Regulator’s Director of Supervision
The Regulator expects schemes to be treated fairly by employers. Trustees should monitor their employer’s trading and, where the employer needs to undergo restructuring or refinancing or is making disposals, they should have open discussions with it and other stakeholders to ensure that the scheme is being treated fairly to protect their members’ best interests.
This will require access to relevant information and trustees may need to take appropriate professional advice.
The Regulator is clear that all trustees should adopt an integrated risk management governance approach.
This should be fully documented, with practical contingency plans and suitable triggers for further activity.
The guidance contains illustrative examples of how a scheme’s position can be undermined by unexpected events, sudden changes in fortune or corporate activity.
In our view, many schemes could benefit from their trustees adopting an up-to-date integrated risk management approach. Trustees should take the opportunity to brief themselves on this new guidance and related background, particularly in these difficult and uncertain times.
Please speak to your usual Capita contact to find out more.