Pensions Bulletin 2020/06

Trusteeship and governance – the Regulator reconsiders its approach

On 10 February the Pensions Regulator responded to its wide-ranging consultation on the future of trusteeship and governance that it launched last July (see Pensions Bulletin 2019/27). The tone of the response indicates that the Regulator intends to tread slowly and carefully and that any legislative change to support its previously communicated likely direction of travel in some key areas is a long way off – especially in relation to mandating the appointment of a professional trustee to all trustee boards.

Taking each topic in turn the Regulator intends to do the following:

• Trustee Knowledge and Understanding (TKU) – review and update its Code of Practice 7 covering TKU, including the scoping guidance, and review its Trustee toolkit (over the course of 2020-21) to make its expectations clearer. However, the Regulator’s single code project (see Pensions Bulletin 2019/28), will come first and consultation on this is now expected to be launched in the first half of 2020. Only when this single web-based code is finalised will the Regulator consult on its review and revision of the TKU-related content – hopefully in the early part of 2021. And after a reasonable period has elapsed from the finalisation of this content, the Regulator intends to run a regulatory initiative to test levels of TKU and consider appropriate action where they fall below expectations. The Regulator also intends to run a targeted employer campaign during 2020 and beyond to remind employers of their legal duty to allow trustees who are employees to have paid time off in order to perform their trustee duties as well as engage in relevant training
• Diversity – establish and lead an industry working group to find ways of supporting schemes to take steps to improve trustee diversity. The Regulator goes on to spell out some of the things it thinks this group should deliver. For the time being, it does not intend to require schemes to report on the steps they are taking to increase diversity on trustee boards

By contrast, the Regulator is not going to do any of the following:

• Professional trustees – make it mandatory for trustee boards to engage a professional trustee. Instead the Regulator will support the standards now owned by the Association of Professional Pension Trustees (APPT) along with the yet to be finalised accreditation process (see Pensions Bulletin 2019/28) and assess their impact, along with other initiatives, before taking any further action
• Sole trusteeship – make any changes to the way it regulates schemes that utilise a sole trusteeship model. Instead it is to support the industry code for sole trusteeship that the APPT is developing, and commission research on the scale and reach of sole trusteeship
• Winding up DC schemes with guarantees – produce guidance. Three reasons are given. Firstly, because it believes that viable solutions are available. Secondly because of the likelihood that the DWP will be producing some statutory guidance to help trustees establish whether their scheme is offering value for money for members and whether they should consider making improvements or consolidating – this is likely to follow from the DWP’s consultation on investment innovation and future consolidation (see Pensions Bulletin 2019/05) which has yet to report. And thirdly, because the Regulator is carrying out work with the Financial Conduct Authority to help independent governance committees and DC trustees carry out more effective value for money assessments – the outcome of this work should be published by the end of this financial year

The Regulator says that it will continue to monitor DC consolidation activity and work with both industry and the DWP to find solutions to overcome barriers to consolidation.

Comment

The tone of this response is in marked contrast to the blunt headlines used to launch the consultation. But the conclusions reached, especially in relation to mandating a professional trustee appointment, would seem to be the right ones. The ball is now firmly back in the Regulator’s court to deliver in other areas, working with industry bodies as appropriate.

It is disappointing that the Regulator has not yet been able to cut through on the problem of some DC schemes not being able to wind up because of the existence of old guarantees issued by insurance companies. However, it promises to work with the DWP on the possibility of assigning such benefits to a new trustee in order to unblock such wind ups. It will be interesting to see if this gets anywhere.

Is a pensions tax raid on the cards?

So it would seem from recent press reports, but whether or not this is merely pre-Budget kite-flying is unlikely to become clear until the Chancellor stands up to deliver his first Budget Speech on 11 March.

The reported rumour is of the Chancellor “restricting tax relief on pension contributions to the 20% basic rate”. No more details are given, but the message seems to be that for pension savers on marginal income tax rates of 40% or 45% (so broadly those on taxable incomes of £50,000 pa or more), the incentive to build up pension would be substantially lowered – or even reversed. For example, if this was overlaid onto the current “EET” system, a higher rate saver would pay some tax now on pension savings and pay tax again during retirement.

A restriction to the basic rate could be linked to two issues the Government has promised to address:

• The concerns of senior clinicians working in the NHS (see Pensions Bulletin 2020/03) possibly by removing the 2016-introduced taper for high earners. But whilst the removal of the taper could be done with one stroke of the legislative pen, restricting tax relief to the basic rate is much more complex to deliver and could need anti-forestalling legislation to guard against individuals, those who are able to, maxing out on their contributions before the new restrictions come in
• Action to ensure that all pension savers enjoy 20% tax relief on their own contributions regardless of how the scheme claims tax relief – and so bring to an end the tax discrimination being faced by some low earners who have been auto-enrolled into an occupational pension scheme (see Pensions Bulletin 2019/39). However, it is not straightforward to resolve this issue

Comment

We have heard nothing on these two issues in recent days. The proposal to restrict tax relief to 20%, on which there is plenty of speculation, but no detail, could be little more than a testing of the waters, but it is now possible that there will be a big announcement on pensions tax in just under a month.

FCA goes ahead with costs and charges disclosure requirements for contract-based workplace DC schemes

The Financial Conduct Authority is going ahead with its February 2019 proposals for contract-based workplace DC schemes to disclose costs and charges information to members (see Pensions Bulletin 2019/09). As originally proposed, this duty will be imposed on these schemes’ governance bodies, such as Independent Governance Committees. However, there are three important adjustments to the original proposals that have been accepted by the FCA on grounds of practicality:

• “One-worker” schemes, such as self-invested personal pension schemes, will be excluded for now. The FCA will consider if there is a better way in which such individuals can have this information provided to them
• For the first scheme governance year (from 1 January to 31 December 2020), scheme governance bodies will only have to report costs and charges information in respect of default options and funds. For subsequent governance years costs and charges information will need to be reported for all the funds and options that are available to members
• The Chair’s report will only need to provide the information in respect of the default options and funds – so long as the report contains a link to a website that sets out the costs and charges information for all the funds and options that are available to members

The above reporting has to be completed within seven months of the end of each governance year. There is also a new requirement that the information is communicated to members in a way that considers how members might reasonably use it.

The FCA has also clarified that the illustrations of the compounding effect of the aggregated costs and charges that it proposed will be required for a representative range of funds and options. The FCA refrains from giving guidance on the specific funds and options that should be included in this representative range.

The FCA also says that it is doing further work with the Pensions Regulator on the framework for assessing value for money, as set out in their joint strategy (see Pensions Bulletin 2018/42). This may include benchmarking costs and charges, together with performance and service metrics – further detail is promised for later in 2020.

The new rules come into force on 1 April 2020. They also contain some adjustments to the rules that asset managers must follow when calculating transaction costs.

Comment

Contract-based DC schemes, especially SIPPs, can have a far wider investment choice than their occupational counterparts and so it is understandable that the FCA has made these adjustments, not only to assist providers transition to these new rules, but also to ensure that members are not swamped with information, much of which would be irrelevant to them.

Setting governance years is of note – at or around 31 July starting in 2021 there will be a wealth of information on administration and transaction charges available online relating to the previous calendar year.

PASA proposes a Code of Good Practice on the DB transfer process

Instead of publishing the promised second of a two-part series on DB transfer guidance (see Pensions Bulletin 2019/27), on 11 February PASA launched a consultation on a comprehensive “Code of Good Practice” on defined benefit transfers.

As with the first part of the guidance published last July, this draft Code is based around three objectives: improve the overall member experience through faster, safer transfers; improve communications and transparency in the processing of transfers; and improve efficiency for administrators. As well as incorporating the July guidance, the draft Code extends the transfer process to more complex cases including those requiring significant manual intervention and partial transfers. However, the processes and example documents for each step of the process are similar to those published last July.

Depending on the complexity of the case, the draft Code suggests that the time required from receiving the member request to issuing a guaranteed quote should take between seven to ten working days, with an extra five working days if referral to the actuary is needed. Administrators are encouraged to take all reasonable steps to maximise automation in the calculation routine. Once the member confirms that they wish to transfer and returns relevant forms, the settlement process should take around nine to eleven days. For members above the minimum retirement age, the draft Code suggests that transfer quotes should be accompanied by an early retirement quote.

Consultation ends on 30 April 2020, and PASA expects to release the finalised Code on 1 September 2020. Schemes and administrators will then have 12 months to comply with what is a voluntary Code, but also one on which the Pensions Ombudsman may have cause to refer to if dealing with complaints from scheme members.

Comment

As with the earlier guidance, the amount of detail set out in this Code will not only provide a framework for administrators to process transfer requests, it will hopefully also give some comfort to members on the timescale and process involved; and the example documents, if widely adopted by the industry as standards, should help to speed up the transfer process. But the biggest prize is retaining member confidence, so that they are less likely to take decisions that are not in their best interest, including falling into the hands of pension scammers.

Employers fail in two more RPI switch cases

The difficulties in being able to deliver a switch away from the Retail Prices Index as the reference point for pension increases in a DB scheme were illustrated once more in two unrelated cases recently – one before the High Court and the other in front of the Pensions Ombudsman.

The case before the High Court involved the Britvic Pension Plan whose pension increase rule referenced “the percentage increase in the retail prices index” subject to either a 5% or 2.5% cap depending on the pensionable service in question, but then went on to say in brackets “or any other rate decided by the Principal Employer”. The issue at stake was what this last phrase meant. Did it allow the principal employer to substitute a rate that is higher or lower than would otherwise apply, or only a higher rate?

After running through the conflicting arguments put by Counsel for the employer on the one hand and that of the Trustee on the other, Justice Hodge found that the “better interpretation” was that the rule comprised a two-stage mechanism, with the Trustee having to apply capped RPI increases unless the employer, at the second stage substituted a higher rate.

Meanwhile the Pensions Ombudsman had to tackle a scenario relating to the Thales UK Pension Scheme where arguably the drafting of the pension increase rule had been bodged because whilst it talked about “the percentage increase in the retail prices index” subject to either a 5% or 2.5% cap depending on the pensionable service in question, it then went on to say “as specified by order under Section 2 of Schedule 3 of the Pension Schemes Act”.

This all worked fine until the Coalition Government started to use CPI instead of RPI as the relevant index to determine the statutory increases under this legislation. In this case the Trustee and employer were arguing that the legislative reference took primacy; a scheme member, in the form of an ex-trustee of the scheme, argued that the RPI reference was in effect ‘hard-coded’.

There were some complicating factors at play, including that, acting on legal advice, the Trustee initially had taken the hard-coding approach, only to change its mind when the employer conducted a review of benefits, in which it took the view that CPI should have been used automatically as from 2010/11. The Trustee agreed and implemented the change retrospectively.

Both parties were backed up by legal advice including that taken from leading Counsel, but Anthony Arter would have none of it. He dispensed with every single argument put up by the Trustee and employer and concluded that the RPI reference was hard-coded. The Trustee was directed to increase the member’s pension on an RPI basis and pay to the member any arrears that could have accrued, plus interest.

Comment

These two cases illustrate once more (along with the Atos case – see Pensions Bulletin 2020/05) how difficult it can be to adjust the pension increase rule to move away from a measure of price inflation that is now completely discredited.

The next stage in this saga is likely to be the Government’s promised consultation on changing the composition of the RPI, the details of which should be announced on Budget Day. Maybe, before we reach 2030 (and quite possibly 2025), how the RPI is constructed will have changed so radically that the principal drivers for the bringing of such pension increase rule cases before the Courts will no longer apply.

Pensions Regulator data shows impact of master trusts on DC market

The Pensions Regulator has published its DC Trust scheme return data for 2019/20. The accompanying press release focusses on the impact of master trust authorisation on the market leading to consolidation and a more stable market for DC workplace pensions.

Whilst this is indeed the case there are many other interesting statistics such as:

• Asset values (for occupational DC schemes with 12 or more members) are now £71.3 billion, an increase of 222% since the beginning of 2012, and up by more than £10bn in the last year
• The total amount transferred in to DC schemes decreased by 27% last year, a drop from £5.5 billion to £4 billion. This includes transfers from DB schemes and other DC occupational and personal schemes
• This year, the average assets per membership at retirement was £5,500. This is a 43% decrease since the beginning of last year and a 72% decrease since the beginning of 2015

Comment

The significant decrease in average assets at retirement is worrying. This may be due to the first cohort of auto-enrolled members reaching retirement age and so not having achieving significant DC assets. We hope this statistic increases in the future.

The decrease in transfers into DC schemes may represent a slowdown in consolidation activity after an initial flurry of work following new bulk transfer rules introduced from April 2018, although it is too early to be certain of that.

Pension Scams body proposes intelligence sharing tool

In what could be a significant development in the never-ending battle against pension scams, the Pension Scams Industry Group is proposing to “build a shared network of open source information on potentially dodgy arrangements, gathered by many practitioners as part of their due diligence” on pension transfer requests. To this end the Group is working alongside CIFAS; a not-for-profit organisation with expertise in gathering and sharing intelligence to prevent bank fraud.

This initiative is accompanied by a request to participate in a survey in order that the Group, along with the Police Foundation, can further understand pension scams. The survey, which has been open since January, closes on 14 February.

Comment

There have been calls for formal means of collaboration for many years, through such initiatives as black lists and indeed white lists, but they have never received the necessary blessing from the Pensions Regulator. This time it seems to be different. Depending on what is actually delivered, this could be an important step in bringing pension scams under control. But more needs to be done – such as through allowing schemes to block transfer requests where they have clear concerns about the destination scheme.

Trustees will be expected to act on climate change

Guy Opperman, the pensions minister, has promised in Parliament to deliver “game-changing guidance” on climate-related financial disclosures in March. This follows on from him writing to the largest UK schemes in September asking what they are doing when it comes to policies on environmental, social and governance (ESG) and climate change factors (see Pensions Bulletin 2019/39).

In a separate development, the Government has moved a significant amendment to the Pension Schemes Bill requiring certain occupational pension schemes to address climate change risks and opportunities. Details will be set out in regulations, but they include:

• Reviewing the exposure of the scheme to certain risks, determining a strategy for managing scheme exposure to climate change risks, setting targets relating to the scheme’s exposure to climate change risks, and monitoring performance against such targets; and
• Publishing certain information relating to the effects of climate change on the scheme

On both aspects, trustees will need to have regard to statutory guidance. Failure to comply with the regulations could result in the Pensions Regulator issuing compliance notices and then penalty notices, including referring the penalty notice to a Tribunal – with penalties being no more than £5,000 for an individual and £50,000 in any other case.

Comment

We understand that the minister was referring to the Pensions Climate Risk Industry Group guidance which is being launched at the PLSA Investment Conference on 12 March. This Group was set up in the wake of the Government launching its Green Finance Strategy last July (see Pensions Bulletin 2019/27).

The legislative development seems to have come out of the blue. How it meshes with the guidance promised by Mr Opperman is not yet clear. What is though, is this Government’s determination to make pension schemes address climate change risks.

Pensions Regulator says a few post-Brexit words

Following the UK’s exit from the EU the Pensions Regulator (with literally no fanfare) has set out its expectations in some areas for trustees to focus on during the transition period which ends on 31 December 2020.

There is separate guidance for both DB and DC trustees which makes suggestions in the areas of employer covenant (for DB), investment, operations and administration and member communications.

FRC issues its draft Plan and Budget for 2020/21

The Financial Reporting Council has published a draft plan and budget for the 2020/21 financial year. As the FRC is transitioning to the new Audit, Reporting and Governance Authority it has passed on publishing the customary three-year strategy document this year.

Much of the FRC’s focus for the coming year will be on corporate governance, including promoting the Stewardship Code to increase take up, assessing and updating the Corporate Governance Code and related guidance, and increasing the number of corporate reporting reviews.

One of the FRC’s other priorities is to launch a post-implementation review of its Technical Actuarial Standards.

Insofar as the pension levy is concerned, in 2020/21 the FRC wishes to raise £1.0m (down from a budgeted £1.1m in 2019/20) from those occupational pension schemes with 5,000 or more members and will confirm the levy rate to be applied, after considering data on scheme membership provided by the Pensions Regulator.

Consultation closes on 28 February 2020.

Comment

The latest iteration of the FRC’s TAS-suite came into being almost three years ago, so a post-implementation review is timely, but who is to action any recommendations is far from clear at this stage as the Government has yet to decide who is to take over the FRC’s role in the regulation of actuaries.

Little change in Scottish income tax proposed

The Scottish Budget, held on 6 February, has set 2020/21 income tax bands and rates that remain divergent from the rest of the UK, but are little changed from those set for the 2019/20 tax year:

• The income tax rates associated with new tax bands, first introduced in 2018/19, are unchanged; and
• Three of the key points in the tax bands remain frozen – ie the points at which the Scottish 19% starter rate commences (£12,500 pa), the Scottish 41% higher rate starts (£43,430 compared with £50,000 for the rest of the UK) and the point beyond which the Scottish 46% top rate of tax starts (£150,000)

Separately, and for the second year running, in December the Welsh Government proposed income tax rates that do not differ from those set by Westminster.

Comment

Scots with income above £30,000 pa pay more income tax than those in the rest of the UK; significantly so once their income exceeds £50,000 pa, making personal contributions to registered pension schemes more attractive than their counterparts south of the border – so long as they are not held back by the UK-wide annual allowance.