Regulator highlights the main investment issues for DB trustees
The Pensions Regulator has published new investment guidance for trustees of occupational pension schemes that provide defined benefits.
The guidance reminds trustees of the issues they should be considering when setting investment strategy and contains examples highlighting how the theory can be put into practice. It follows the common principles set out in the Regulator’s DC investment guidance and covers most investment “hot topics”, including:
- An Integrated Risk Management approach and considering employer covenant
- Monitoring investments, governance and your own performance as a trustee
- Considering environmental, social and governance factors
- Managing the conflicts of interest in a fiduciary management arrangement
- Journey planning
- Liability Driven Investment and Diversified Growth Funds; and
- Mitigating operational risks and collateral management
The guidance also reminds trustees of some of their duties, for example:
- “The fundamental purpose of your investment powers is to generate returns in order to enable the scheme to pay promised benefits as they fall due”
- “You should not take account of the PPF cover when deciding on investment strategy”
The Regulator has chosen a loose definition of “investment adviser”, applying it to a range of professionals that may include in-house employees (for the largest schemes), an external investment consultant, or the scheme actuary. This is broader than one might usually consider “investment advice”, but is largely consistent with the requirement for trustees to obtain the advice of someone with relevant knowledge of pension scheme investments before preparing or revising a Statement of Investment Principles.
The guidance highlights the main risks trustees should consider when setting their investment strategy. There is also a helpful summary. See John Clements’ blog for an LCP viewpoint.
Comment
The guidance is a good read for trustees of schemes with defined benefits but be aware it raises more questions than it answers. This document will help make sure trustees consider the right issues for their scheme, but it remains up to trustees and their advisers to come up with the right investment solutions!
Final PPF Determination issued - with a day to spare
On 30 March the Pension Protection Fund issued its final levy rules for 2017/18. As promised there are no changes of substance to the “provisional” version published in December (see Pensions Bulletin 2016/51), apart from the addition of a special rule for eligible schemes that cease to have a substantive sponsoring employer.
This new rule was published for a two-week consultation at the end of February (see Pensions Bulletin 2017/08) and only applies to new arrangements set up from 1 January 2017. The response to this consultation was published with the final levy rules, and the PPF has confirmed that the final rule for 2017/18 is unchanged from the consultation. However, the PPF has also agreed that, in view of the comments it has received, further consideration will be needed for the next triennium.
Deadlines for most actions have now passed for the 2017/18 levy season, but schemes can still certify deficit-reduction contributions before 5pm on 28 April 2017 and certify full block transfers that have taken place before 1 April 2017 before 5pm on 30 June 2017.
Comment
The new rule for schemes without a substantive employer has been rushed through for this levy season without practitioners and pension schemes having time to properly consider the implications. We welcome the PPF continuing to seek stakeholder views on the proposals as part of the consultation for the next triennium.
High Court: the alternative to RPI is … RPI
The Thales case concerns the sponsoring employer of a pension scheme trying to change the inflation index used from the Retail Prices Index (RPI) to the Consumer Prices Index because the compilation of the RPI index had changed.
The pension scheme provides both career average revalued earnings (CARE) benefits and final salary benefits. For the CARE section the rate of revaluation during accrual is related to the RPI. However, if the RPI is not published or is materially changed, the employer, with the consent of the trustees, is required “to determine the nearest alternative index to be applied”. So the court is asked if the RPI has been materially changed and, if so, what the nearest alternative index should be.
Following consideration of expert testimony Mr Justice Warren held that:
- RPI had “materially changed” (because its compilation had changed as a result of the introduction of the UK House Price Index into it)
- The employer is required to determine an alternative index (with the agreement of the trustees)
- But the nearest alternative index to the RPI is the (current) RPI! It is not open to the employer in response to a material change in compilation to determine any other index
For the final salary section the issue is that the rules provide that, normally, pensions in payment will increase by the lesser of 5% pa and RPI. But if RPI is revised to a new base or otherwise altered the trustees must determine the new basis of increases having regard to the alteration made to the RPI.
The court is asked whether RPI has been otherwise altered and, if so, what basis the trustees should determine. Mr Justice Warren held that RPI has been “otherwise altered” but, similarly, the trustees cannot select some other index. It has to be the RPI as currently compiled.
Comment
The outcome might have been different if the rules had provided for a “different” or “another” index. Nevertheless this is something of a marker from the judge that it may still be legally hard to switch from RPI to CPI. But everything will depend on the actual words used in each scheme.
Pensions dashboard prototype to be unveiled next week
The ABI has announced that a prototype of the pensions dashboard has been delivered on time (see Pensions Bulletin 2016/37) and demonstrated to Government ministers. The prototype dashboard will be unveiled to the public on 12 April as part of FinTech week.
A Q&A document issued by the ABI outlines what the pensions dashboard will do and gives screenshot examples of what it might look like. It outlines the four basic steps in the technology:
- The enquirer confirms their identity (using a process similar to gov.uk/verify)
- The enquirer clicks a box to give permission for their details to be sent to multiple pension schemes, providers or a third party connection they might be using
- Queries are sent to all the different pension schemes and providers (including the State Pension) looking for pension pots matching the enquirer’s details
- The system shows all the pensions it finds, with an estimated value at a particular retirement age. It will also show an estimated monthly or annual income at retirement. The ABI states that for many enquiries this information will be produced in seconds
It appears that the dashboard will be offered by a range of different providers rather than a single, central service.
The project remains on course to be available to consumers by 2019.
Comment
The example screenshots look appealing and contain useful information that should make life easier for savers. We have previously noted that significant challenges remain in order to make the dashboard universal across the whole pensions space, but the signs from the first stages of this enormous project are promising.
Lifetime ISAs launch – but few companies are currently offering them
This week sees the launch of the Lifetime ISA, but less than a handful of providers are offering it from day one with many apparently either not being able to create a suitable product in time or simply deciding not to offer it.
Last month’s Budget confirmed that the Lifetime ISA would be launched on 6 April 2017 (see Pensions Bulletin 2017/11) despite protests from some that the introduction be put back a year due to time constraints.
Comment
The Government would undoubtedly have liked to see more Lifetime ISA offerings ready at launch date, but at least there are some that the Government can point to as evidence of a “successful” launch. The Lifetime ISA has been much talked about over the last year or so. Now that it is finally available it will be interesting to see what take-up rate it enjoys.
DWP consults on charge cap and member-borne commission regulations
Draft regulations implementing a cap on early exit charges for occupational pension schemes and the second stage of the ban on member-borne commission for occupational pension schemes used for auto-enrolment purposes have been published for consultation by DWP.
The cap on early exit charges follows the Government’s consultation response in November 2016 (see Pensions Bulletin 2016/46). Early exit charges must not be applied to new joiners from 1 October 2017. For existing members on 1 October 2017 there cannot be early exit charges greater than 1%, any charges below 1% cannot be increased and new charges cannot be applied. In both cases the cap applies on or after the age at which members become eligible to access the pension freedoms (currently age 55) but before the member’s expected retirement date. Multiple early exit charges should be combined for these purposes, whilst the Government intends to exclude Market Value Adjustments (MVAs) and terminal bonuses from these tests.
The proposals are consistent with those applied to personal and stakeholder pension schemes but apply from 1 October 2017 rather than 31 March 2017. Providers must confirm in writing to trustees that they are complying with the charge cap requirements within one month of 1 October 2017 (or the date they become service provider to the scheme if later).
The second stage of the ban on member-borne commission (which includes any charge on members that is used to pay an adviser to the employer or member, or to reimburse a service provider for such a payment) tackles arrangements that were in place before 6 April 2016. See Pensions Bulletin 2016/09 for details of the first stage, which applied to new and adjusted arrangements.
The regulations ban member-borne charges from being used to recover the cost of any ongoing payments made to advisers from 1 October 2017 (note that payments made before October 2017 are still allowed). The draft regulations appear to indicate that service providers could have six months from 1 October 2017 to start meeting the member-borne commission requirements.
Comment
These measures are by and large implementing the final stages of known Government policy. They should improve the pension outcomes for affected members, and as such should be seen as a welcome step forward.
New Scottish rates of income tax start today
The new Scottish rates of income tax, which see Scottish taxpayers pay 40% tax when their earnings reach £43,000 (as opposed to £45,000 in the rest of the UK) come into force today.
PAYE systems should now be in a position to differentiate Scottish taxpayers from those in the rest of the UK. See Pensions Bulletin 2017/09 for further details.
FRC finalises budget and pension levy
The Financial Reporting Council has now finalised its plan, budget and levy requirement for 2017/18. The FRC’s priorities for 2017/18 and the headline overall funding requirement (£36m) are all broadly as signalled in the draft consulted on last year (see Pensions Bulletin 2016/51).
The pension levy is also as previously signalled - £3.12 per 100 members for all defined benefit and defined contribution schemes with 5,000 members or more.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
