Pensions Bulletin 2019/21

Further delay likely for the Pensions Bill

The announcement on 24 May that Theresa May will step down as leader of the Conservative Party on 7 June, setting off a leadership election unlikely to conclude until shortly before Parliament rises for the summer recess, inevitably pushes back when we will see the Pensions Bill.

Received wisdom is that the Pensions Regulator cannot release its summer consultation on broad options for the new funding framework (see Pensions Bulletin 2019/19) until a Queen’s Speech announcing that there will be a Pensions Bill amongst the Government’s legislative programme has been delivered. And that Speech will now have to be penned by a new Government lead by Mrs May’s successor. Quite when we will hear that Speech is very uncertain, but it seems most unlikely before the summer recess and early autumn is disrupted by party conferences. Added to which there is no certainty that the new Government will survive the vote that follows the Queen’s Speech.

Comment

The timing of delivery of the Pensions Bill is now a complete unknown. It is also now possible to speculate that there will not be a Pensions Bill at all as the new Government may be forced into holding a General Election.

Pensions Regulator publishes its predictions for Tranche 14 valuations

This year’s analysis from the Pensions Regulator of the expected results of the latest set of DB schemes’ three-yearly actuarial valuations falling due contains similar messages to those revealed this time last year in relation to the previous set (see Pensions Bulletin 2018/23).

This year it is the turn of “Tranche 14” valuations – those with valuation dates between 22 September 2018 and 21 September 2019 – and they show that schemes undertaking valuations at the 31 March 2019 central point are likely to have marginally improved funding levels from those reported three years ago. However, the position for individual schemes can vary greatly depending on their valuation dates and their funding and investment strategies – in particular, schemes undertaking valuations as at 31 December 2018 are likely to show worsened deficit positions.

After allowing for deficit reduction contributions (DRCs), only about 30% of schemes’ current recovery plans remain on track to remove the deficit revealed at the previous valuation, around 50% would need to increase contributions by up to 100%, whilst the remaining 20% would need to more than double their contributions to retain their current recovery plan end date.

Once again, the Regulator finds that the majority of sponsoring employers (ie those in relation to tranche 14 schemes) have seen an increase in the nominal value of their profits and balance sheets over the last three years, although there is a wide distribution of how profit has changed across and between individual companies and there remains a considerable proportion of schemes whose employers have experienced a decline in profits over the period.

Looking across all FTSE 350 companies that sponsor DB schemes, the Regulator reports that the ratio of dividends to DRCs has increased, with such companies paying on average just over 14 times more on dividends than on DRCs, compared to just over 10 times four years prior; the figures for companies outside the FTSE350 are just under five and just over four respectively.

The report also reveals the segmentation of tranche 14 schemes by employer and funding characteristics – 50% have strong or tending to strong employers with the scheme’s funding position considered to be strong, 9% have strong or tending to strong employers but with a weak funding position and/or long recovery plans, 20% have weaker employers but scheme funding is on track to meet long term targets, 18% have weaker employers and a weak funding position, whilst 3% have employers unlikely to provide adequate support to what is a stressed scheme. This snapshot is virtually identical to tranche 13 schemes reported on last year.

This year’s report further splits these figures into mature (at least 50% pensioner liabilities) and immature (less than 50% pensioner liabilities) schemes, as explained in this year’s Annual Funding Statement (see Pensions Bulletin 2019/09). It shows that strong or tending to strong employers are likely to have less mature schemes (52% compared to 48% of more mature schemes), while at the lower end, weaker employers with weaker funding positions are more likely to have more mature schemes (22% compared to 16% of less mature schemes).

Comment

As last year, the Regulator’s analysis supports the contention that many DB scheme sponsors have the financial firepower to increase contributions to their schemes, with such likely to be necessary for many of them as once again, good investment returns over a three-year period since the last valuation have been largely cancelled out by lower expected investment returns for the future leading to increased liabilities.

MPs call on pension fund trustees to end fossil-fuel investments

On 22 May the House of Commons had a 1½ hour debate on "Pension Funds: Financial and Ethical Investments" in which there was strong support from the participating MPs for pension funds to divest from fossil fuels and calls for stronger regulations in this area.

In his closing speech, pensions minister Guy Opperman said that the Pensions Regulator is planning to publish further guidance on managing the climate change risk in advance of the revised regulations for statements of investment principles coming into force in October. This would appear to be a reference to the guidance initially promised for delivery by the end of November 2018.

He went on to say that "... the Government intend to announce further transparency measures on the topic of responsible investment in the coming weeks, in respect of the shareholder rights directive". This is something we already knew to expect since the deadline for this amended EU directive to be transposed by member states is 10 June (see Pensions Bulletin 2017/02).

The minister also had an opinion piece in The Times (paywalled) on the same day in which he outlined his vision for pension scheme investments to help tackle climate change and the housing shortage. He wants to go beyond the current requirement for schemes to state their policy on environmental, social and governance factors and harness three scheme attributes: “a lot of capital, an ability to think very long term and no political agendas”.

Comment

There is lots in the pipeline on the ESG front for trustees to think about as the new SIP requirements loom, but it remains to be seen how feasible it is for the Government to “go beyond” anytime soon given Brexit paralysis. If they do, we would expect any new climate requirements to reflect the diversity of possible approaches that trustees might take, rather than mandating one particular approach such as divestment which may not be the most effective way to address climate risk in investment portfolios.

In the meantime, all trustees will need to review and update their Statement of Investment Principles before 1 October 2019 to ensure that they are compliant with legislation coming into force on that date. The Regulator’s guidance on this is already six months late – it surely cannot be delayed for much longer.

EMIR refit – new pension exemption agreed by European Council

The informal exemption from the clearing requirement for over-the-counter derivatives for pension schemes (see Pensions Bulletin 2019/08) has been formalised by the European Union.

On 28 May the European Union Regulation amending the 2012 European Market Infrastructure Regulation (EMIR) was formally published and becomes law on 17 June 2019. Amongst the changes to the 2012 Regulation is a new means by which the clearing requirement is to be activated. First, it does not operate for the first two years and secondly, the exemption can be extended twice by a further year if reports that the European Commission must prepare “… concludes that no viable technical solution has been developed and that the adverse effect of centrally clearing derivative contracts on the retirement benefits of future pensioners remains unchanged”.

The regulation also retrospectively validates the informal exemption that has applied since the legal exemption ran out on the 2012 Regulation on 17 August 2018.

Comment

So, in theory, formal exemptions could continue into 2023. However, it may well be that no “technical solution” will be found by then, in which case we are back to the same old problem that bedevilled the 2012 Regulation.

This does seem a most odd way to deliver policy. It would surely have been better if the EU had properly thought through the implications of applying the EMIR requirements to pension schemes at the outset, rather than scrambling round to give themselves legal powers to extend the extension while they work out how the requirements might apply, potentially more than a decade after they first came in.

Of course, because of Brexit it remains to be seen whether UK schemes will be subject to the requirement if/when the exemption finally expires, but it is now clear that there is no immediate concern, for which we are thankful.

FRC finalises accounting reform for multi-employer schemes

On 24 May the Financial Reporting Council finalised its proposed amendments to financial reporting standard FRS 102 (see Pensions Bulletin 2019/05) to address the transition from DC to DB accounting for a multi-employer pension scheme.

As proposed back in January, the change will apply for accounting periods beginning on or after 1 January 2020 with early application permitted.