Pensions Bulletin 2019/41

General Election spells curtains for the Pension Schemes Bill

The Pension Schemes Bill (see Pensions Bulletin 2019/39) is the key pensions casualty in the Government’s legislative agenda following the decision by the House of Commons on 29 October 2019 to back a ‘one-line’ Bill for an early General Election to be held on 12 December 2019.

Assuming the Bill completes its passage through Parliament very shortly, Parliament is to be dissolved on 6 November, and the Pension Schemes Bill will fall. And with the dissolution of Parliament, “purdah” will begin – the convention that the Government will not make any major policy announcements whilst campaigning is in progress.

The Chancellor cancels the Budget

The 6 November Budget, announced on 14 October, and intended to be the first Budget after the UK leaves the EU, is not to be. Its cancellation was due to Parliament voting for a delay to the UK’s withdrawal from the EU. It is not clear when the Budget will be delivered, but it will now not be until after the General Election.

Brexit deferred again – what it means for pensions

The UK’s departure from the EU has been put back again – this time from 31 October 2019 to 31 January 2020 (or such earlier time as Parliament approves the withdrawal agreement). As a result, another Order will need to be laid before Parliament resetting “exit day” away from 31 October 2019.

This Order is important because otherwise many EU Exit regulations, including those relating to pension schemes, would come into force on Halloween.

For example, the Occupational and Personal Pension Schemes (Amendment etc.) (EU Exit) Regulations 2019 (SI 2019/192) which were made in February, come into force on exit day making minor and technical changes to UK pensions legislation to ensure retained EU law continues to operate effectively, and to address other deficiencies arising from the withdrawal of the UK from the EU. Amongst other things, these regulations revoke all the UK legislation relating to cross-border pension schemes.

However, it now seems, from the European Union (Withdrawal Agreement) Bill, which is currently before Parliament (albeit ‘paused’ and soon to be lost thanks to the General Election), that if our departure from the EU is accompanied by a withdrawal agreement, the implementation period ending on 31 December 2020 provided for in the Bill will mean that during this period, although the UK will not be a Member State, all EU law, including that made during this period, will apply to the UK.

As a result, the Bill, amongst other things, provides for all mentions of exit day in regulations relating to the UK’s exit from the EU to be replaced with references to the end of the implementation period. Cross-border pension schemes should be able to continue undisturbed until at least the end of 2020.

FRC publishes new UK Stewardship Code

The Financial Reporting Council has launched a significantly revised version of its UK Stewardship Code following a consultation at the start of the year (see Pensions Bulletin 2019/05).

The FRC notes that the Code is voluntary and sets a standard that is higher than the minimum UK regulatory requirements but also states that it “substantially raises expectations for how money is invested on behalf of UK savers and pensioners. In particular, the new Code establishes a clear benchmark for stewardship as the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society”.

Key changes in the new Code, which takes effect from 1 January 2020, include:

• An extended focus that includes asset owners, such as pension funds and insurance companies, and service providers as well as asset managers. The FRC says that this will help align the approach of the whole investment community in the interest of end-investors and beneficiaries

• A requirement to report annually on stewardship activity and its outcomes. Signatories’ reports will show what has actually been done in the previous year, and what the outcome was, including their engagement with the assets they invest in, their voting records and how they have protected and enhanced the value of their investments. The FRC says that this greater transparency will allow clients to see how their interests are being served

Signatories will also be:

• Expected to take environmental, social and governance factors, including climate change, into account and to ensure their investment decisions are aligned with the needs of their clients

• Expected to explain how they have exercised stewardship across asset classes beyond listed equity, such as fixed income, private equity and infrastructure, and in investments outside the UK

• Required to explain their organisation’s purpose, investment beliefs, strategy and culture and how these enable them to practice stewardship. They are also expected to show how they are demonstrating this commitment through appropriate governance, resourcing and staff incentives

The Code now comprises twelve ”apply and explain” Principles for asset owners and asset managers, with reporting expectations relevant to their role. There are also six “apply and explain” Principles for service providers with reporting expectations.

Provisions included in the consultation draft of the Code have either been incorporated into Principles of the final Code or as reporting expectations. This replaces the proposal in the consultation of ten ‘comply and explain’ Principles with supporting Provisions supported by detailed Guidance.

The consultation Feedback Statement sets out the transitional timetable for moving to the new Code. In brief, the FRC will no longer accept new signatories to the 2012 Code after 31 December 2019. Throughout 2020 the FRC will engage with investors to communicate its expectations for the quality and content of annual Stewardship Reports.

Applicants seeking to be included in the first list of signatories to the 2020 Code must submit their first report by 31 March 2021. The FRC will assess the reports it receives and those investors meeting its reporting expectations will be included in this first list, which the FRC expects to publish in the late summer of that year.

In a co-ordinated move the Financial Conduct Authority has also published its Feedback Statement from the parallel joint consultation on building a regulatory framework for effective stewardship. The FCA states that it will not impose further stewardship-related requirements on life insurers and asset managers now, but it does intend to act on several points to help address some remaining barriers to effective stewardship.

The FCA goes on to say it will consider the need for any further actions as the new Stewardship Code takes effect, so that the regulatory framework continues to support effective stewardship.

Opposite-sex civil partnerships to be available at the turn of the year?

The promised regulations, extending civil partnerships to opposite sex couples have been laid before Parliament in draft form. This follows the Government publishing in July its plans to extend, by the end of 2019, civil partnerships in this way (see Pensions Bulletin 2019/28).

The regulations allow two people who are not of the same sex to form a civil partnership in England and Wales, providing in the main for them to be treated in law in the same way as a same-sex couple who are in a civil partnership.

The regulations (in Schedule 3) also sweep through a whole raft of existing law, both primary and secondary, including some applicable to public sector pension schemes, occupational pension schemes generally, social security provision, the Pension Protection Fund and the Financial Assistance Scheme, to ensure that references to married couples and civil partners work in the new context.

The regulations are intended to come into force on the later of 2 December 2019 and the day after when the regulations are made in final form. But now that a General Election is to be held it is not clear whether these regulations can be approved by Parliament before dissolution.

The Scottish Parliament is currently considering a Bill which will allow opposite-sex couples in Scotland to form a civil partnership. Similar provisions will come into force in Northern Ireland from 13 January 2020.

Successful rectification application fixes drafting error

Mistakes in pension scheme documents can be very costly. They can sometimes be fixed. One way to do this is to apply to the court for rectification. On 18 September 2019 the High Court approved an application for rectification by a pension scheme sponsor.

In 1992 it was decided to implement “5% LPI” for the scheme’s Category D members; that is, increases to pensions in payment (in excess of GMP) of the lesser of 5% and the annual increase in the Retail Prices Index. Announcements were sent to members to this effect.

These pension increases were to be documented in the scheme’s governing documents in a deed executed in 1996. Unfortunately, the deed provided for increases of the greater of 5% and RPI. So, instead of a cap on pension increases, the rule operated as a collar. In a period of high inflation the members would get inflation increases, but in a period of low inflation they would get 5%. The estimated cost of this mistake was between £9m and £10m.

When the sponsor came to fix the mistake they made an application for rectification rather than attempt to make a construction argument that the deed could somehow be interpreted as providing what was intended when the announcements were issued in 1992. As the judge said: there is no obvious basis for construing "greater" as meaning "lesser".

Nevertheless, there was absolutely no evidence at all when the deed came to be written that there was any intention to change the increases promised in the earlier announcement. A representative beneficiary on advice declined to contest the application. The trustees could not recall the discussion of the amending deed and as such their evidence was neutral. And the clincher was the witness statement from the drafter candidly admitting that she made a mistake. Accordingly, the judge felt able to issue the order fixing the mistake.