Pensions Regulator expresses concern over aspects of DC and DB governance
Reporting on two surveys that it commissioned, the Pensions Regulator has set out how it will tackle poor standards of stewardship and risks around small and medium-sized schemes by making its expectations of trustees clearer and enforcing against non-compliance.
In its response to the two surveys, the Regulator says that although the majority of DB and DC members are in relatively well-run schemes, this is a feature of larger schemes being better managed – results for individual small and medium-sized schemes are disappointing as:
- They tend to display poorer governance standards
- Many such DC schemes, and a significant number of DC schemes used for auto-enrolment, are not meeting standards around administration, investments and value for members; and
- Significant issues remain among DB schemes, in particular around integrated risk management and fair treatment of the scheme by the employer
In line with its 21st Century trustee work the Regulator intends to take a range of actions focused on being clearer about what it expects schemes to do, taking greater enforcement action where they are not complying and encouraging substandard schemes to consolidate where appropriate. In particular the Regulator will:
- Shortly launch a programme of communications to trustees, advisers and employers covering the basics of good governance
- Streamline its existing stock of guidance to ensure it continues to reflect its regulatory priorities and can be easily accessed on its website (which is to undergo a refresh); and
- Produce a guide on what a good chair’s statement looks like to help the trustees of DC schemes meet the standard set out in legislation
Trustees will be asked to report on their record-keeping standards in the scheme return so the Regulator can intervene and enforce if necessary if trustees are failing in their duties and not taking appropriate steps to improve their records.
The Regulator also says that it is taking a tougher line with DB schemes that fail to complete their valuations on time, and is working with government partners and providers of legacy schemes to develop a consistent approach to winding up DC orphan schemes. It will also be encouraging DC schemes that are unable to provide value for money to consolidate into better run, better value products.
Comment
There does seem to be a significant and continuing problem with governance standards among smaller schemes, both DC and DB. Some of the survey responses are shocking – for instance 14% of small scheme DC survey respondents said that they had never had a trustee meeting!
The Regulator continues to develop its approach to supervising these schemes on several fronts but it is clear that we can expect to see more use of enforcement powers for “routine” compliance failures.
Second Finance Bill of 2017 legislates for provisions withdrawn from the Finance Act 2017
The Government has now introduced a new Finance Bill to legislate for the various provisions that should have been in the Finance Act 2017, but were withdrawn in April due to time constraints imposed by the General Election (see Pensions Bulletin 2017/18).
The two pensions tax measures that were removed are now to be found unchanged in the new Bill. They are:
- The drop in the money purchase annual allowance from £10,000 to £4,000; and
- The increase in the income tax exemption for employer-provided pensions advice from £150 (provided the advice costs no more than this), to £500 with no cliff edge
Both these provisions will have retrospective effect from the tax year 2017/18 and have also been given temporary validity by the Ways and Means resolutions passed by Parliament on 6 September.
The remainder of the Bill covers almost all the other provisions that were removed from the original Bill, with the exception of a couple of items that have been either deferred or withdrawn.
Comment
The reinstatement of these two pensions tax measures had been widely expected following the General Election, with their backdating confirmed by the Government in July (see Pensions Bulletin 2017/30). We now look forward to HMRC updating the provision of information requirements to reference the £4,000 limit and to finalising its guidance on the operation of the £500 income tax exemption for employer-provided pensions advice that was published in March.
Will the new personal injury discount rate impact compensation for loss of pension rights?
Last week the Lord Chancellor and Secretary of State for Justice announced that the discount rate used to calculate compensation awards in personal injury claims will increase from the -0.75% pa set earlier this year. This could have implications for the recently settled guidance on compensation for loss of pension rights in Employment Tribunal litigation (see Pensions Bulletin 2017/34).
In this guidance, “complex cases”, such as where the claimant has lost pension rights from a DB scheme relating to a long period, the “Ogden tables” (used to calculate compensation for personal injury claims) are put forward for use with a discount rate of -0.75% pa.
However, following an uproar over the use of this discount rate for personal injury claims, the Government has published a Command Paper containing draft legislation (by way of amendments to the Damages Act 1996) which if enacted will lead to the rate being:
- Set by reference to expected rates of return on a low risk diversified portfolio of investments rather than very low risk investments as at present
- Reviewed within 90 days of the legislation coming into force and, thereafter, at least every three years; and
- Set by the Lord Chancellor following consultation with an expert panel (other than on the initial review which would be by the Lord Chancellor with advice from the Government Actuary) and, as at present, HM Treasury
It is expected that if the discount rate were set today under the new approach it would fall in the range 0% to 1%.
Comment
For many years the discount rate used in personal injury claims was set at 2.5% pa, so when it was decided to change it to -0.75% to reflect current low yields on very low risk investments, the impact on compensation calculations was severe. The change of approach will mitigate this, but it seems unlikely to happen until 2018. In the meanwhile the -0.75% rate will continue to be used.
Advisory Group to develop guidance on pensions on divorce
A Pension Advisory Group has been set up to conduct an interdisciplinary review of how pensions are treated on divorce and to produce a Family Justice Council pension guide for the legal profession and divorcing public.
The Group, which comprises a multidisciplinary group of judges, academics, actuaries, financial experts, family and pension lawyers drawn from each branch of the legal profession, and a family mediator, hopes to produce a final report and guide by December 2018. The topics covered are to comprise:
- Certain legal questions and how the Court’s discretion under section 25 of the Matrimonial Causes Act 1973 is applied in this context (section 25 sets out the factors about the parties’ circumstances which the court is under a duty to take into account before making various orders for financial provision in relation to the separating parties, such as a pension sharing order)
- The assumptions used by experts when valuing pensions and calculating pension sharing and offsetting outcomes; and
- What regulation, qualifications and/or expertise experts should have in order to assist the Court with its section 25 discretion – with the possibility of developing a uniform technical standard
It is hoped that the report and guide may encourage a consistency of practice which the Group argues is currently lacking.
Comment
We would welcome guidance in this often difficult area. Although the final guidance cannot and will not change the law concerning the treatment of pensions on divorce, it may provide some useful assistance to those within the pensions industry, such as scheme administrators, who need to respond to requests from legal practitioners and the court when a couple divorce and their pension rights need to be assessed. But it seems that its main focus is to be of assistance to family law practitioners who may not always have an in depth understanding of how pensions are treated on divorce.
Regulator prosecutes bus company over alleged auto-enrolment failure
The Pensions Regulator has announced that a bus company and its managing director are being prosecuted for failing to comply with the law on automatic enrolment in respect of 36 members of staff. The offences will be tried in Brighton Magistrates’ Court on 4 October 2017. A potentially unlimited fine awaits the company and its managing director if found guilty.
Comment
The Regulator states that this is the first time that it has launched prosecutions for these offences. It is yet another sign of the Regulator taking a more muscular approach to its role.
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.
