Coronavirus and pension schemes
The global transmission of Coronavirus has led to a fast-changing situation around the world which inevitably is impacting pension schemes in the UK. We are leading this week’s Pensions Bulletin, produced remotely by LCP’s research team, with the news so far relating to pensions.
DB schemes
Significant falls in gilts yields and equity values have led to a deterioration in funding levels for many DB schemes, and conditions remain volatile. Covenant strength is likely to have become less certain, especially for employers in certain industries, which may in due course result in more calls on the PPF as some employers are forced to institute insolvency proceedings. An initial examination of what this health emergency could mean for DB schemes is set out in a blog from two LCP consultants, Francesca Bailey and John Parnis England.
We had been expecting the Pensions Regulator to issue its annual funding statement for DB schemes by the end of March. However, it now appears that it will be delayed until after Easter. Clearly, in what was likely to have been a further transition-type statement to the Regulator’s proposed new funding and investment regime for DB schemes, it will now have to change focus and address the Coronavirus emergency.
DC schemes
Many of those saving for retirement will have seen substantial decreases in the value of their retirement pot and will be concerned about what this will mean when they need to draw on it. Those already doing so will have a heightened sense of concern where they had chosen to remain significantly exposed to growth assets.
Operational risk
The pandemic has the potential to challenge the day to day functioning of pension schemes in areas such as trustee governance, adviser capability and third-party support.
It is in this area that the Pensions Regulator has something to say, when on 12 March it issued a short statement addressed to trustees of pension schemes. It mentioned the need for trustees to have appropriate monitoring and contingency planning in place and to be alive to risks that would have significant consequences for their scheme and members.
Such planning should include having a business continuity plan setting out what actions would be taken if certain events take place that would impact the running of their scheme. Trustees should also understand their service providers’ business continuity arrangements.
Pension Schemes Bill
We understand that further examination of the Pension Schemes Bill, which completed its Committee stage in the House of Lords on 4 March, has been delayed in order to make time for emergency legislation to address the pandemic.
The Coronavirus Bill, which has yet to be published at the time of writing, is to be time-limited, allowing public bodies across the UK the tools and powers they need to carry out an effective response to this emergency. Amongst its provisions it will alter aspects of the NHS pension scheme so that certain staff who have recently retired from the NHS can return to work, and also allow retired staff who have already returned to work to increase their commitments if required, without having their pension benefits suspended.
FCA response
The Financial Conduct Authority is putting back, to 1 October 2020, its closing dates for responses to open consultations and calls for input and rescheduling most other planned work.
IR35
On 17 March Steve Barclay, Chief Secretary to the Treasury, announced that the changes to the “IR35” off-payroll working rules due to come into force on 6 April 2020 will be deferred to 6 April 2021. This means that the scope of auto-enrolment will not be widened to contractors until next year – employers will have been planning for this year.
Mr Barclay emphasised that this is a deferral not a cancellation and that the Government is committed to re-introducing this policy when the crisis has passed.
PPF operations
The Pension Protection Fund has published guidance. This reassures PPF and Financial Assistance scheme beneficiaries that the PPF has contingency plans in place to ensure that payments continue if the outbreak escalates.
For PPF levy payers the following is communicated:
- Hard copies of contingent asset documents are no longer required – these are now to be submitted by email. We assume that the same deadlines apply
- While they cannot approve extensions to deadlines in advance the PPF will consider them if key individuals are unable to finalise documents because they are unwell or due to self-isolation
- E-signatures may be accepted in some circumstances
Navigating uncertain times – our thoughts
At LCP we have produced an action plan that sets out actions for trustees, primarily of DB schemes, in the areas of governance, covenant, investment and funding. It suggests that the issues raised are taken in the above order. Our action plan has been sent to all our clients. We hope you find it of use.
Comment
These are clearly very worrying times to which all involved in the management and operation of pension schemes will need to respond appropriately as events unfold. We can expect more announcements from the Government and regulatory bodies in the coming weeks. We hope that all our readers are keeping well and taking all the necessary precautions for their own health and that of others.
DB transfers – quotation rates fall to lowest level for 3 years and we look at where transfers are being taken
LCP continues to monitor the pattern of transfer quotations for the DB schemes we administer. In the latest quarter (Q4 2019), the number of transfer quotations was down 17% from the previous quarter, with 1.2% of deferred members receiving a quotation. This continued the fall-off in activity seen in Q3 2019 and is the lowest level of transfer quotation activity since Q3 2016. Take-up rates were also down this quarter with 22% of quotes paid out. This is well below the average take-up rate over the last three years of 28%.
Pension schemes administered by LCP paid out 1,250 DB transfers, totalling over £470m, during the two years 2018 and 2019. We have looked at where these transfers were paid and so, by extension, where financial advisers are advising their clients to take them.
- Over the 2-year period, the largest sector receiving transfers was traditional insurers, with 44% of transfers going their way. These transfers were generally at the smaller end, with an average of just over £300,000
- Over a quarter of all transfers went to independent platforms (investment platforms operated by independent firms). These tended to be larger transfers with an average of around £490,000 per member
- Just under a quarter of all transfers went to vertically integrated advisers (wealth management firms with a financial adviser arm), with an average transfer value of £410,000
- The two other destination groups with material numbers of transfers were occupational pension schemes, with 2% of transfers (generally smaller, with an average of £150,000) and overseas QROPS arrangements with 2.5% of transfers (primarily to arrangements operated in Malta)
More details of the transfer experience of the schemes we administer can be found in our latest bulletin.
Climate guidance for trustees published
On 12 March the DWP published draft guidance, along with a quick start guide, both of which have been produced by an industry working group to help trustees evaluate the ways in which climate-related risks and opportunities may affect their schemes. We summarised and commented on the contents of the working group’s guidance in our News Alert published on the same day and Sapna Patel has written a blog about it.
Comment
This significant development, supported by Guy Opperman MP, the Minister for Pensions and Financial Inclusion, is linked to the amendments to the Pension Schemes Bill proposed by the Government last month (see Pensions Bulletin 2020/06), as a result of which occupational pension schemes will be required to address climate change risks and opportunities and to publish climate-related information.
Latest move in Box Clever dispute
The Pensions Regulator has imposed a six month deadline on ITV to put financial support in place for the Box Clever pension schemes according to a statement that it published on 17 March.
This is the latest development in proceedings that now relate to events of more than two decades ago. For our most recent summary see our report on the Court of Appeal’s decision last year in Pensions Bulletin 2019/25.
Comment
Now that the Supreme Court has refused ITV’s application to appeal the Court of Appeal’s decision one might imagine that the regulatory action is coming to an end. But this may be premature. The courts have upheld the Regulator’s right to issue a financial support direction, but they haven’t ruled on the amount of the financial support. Arguments about this could take up years more.
GMP Equalisation Group tackles the ‘When to rectify?’ question
The industry group looking at practical issues regarding GMP equalisation has published guidance that examines the question as to when schemes should rectify member records for differences in GMPs brought about as a result of an exercise comparing their GMP records with that held by HMRC. Until the GMP equalisation issue came on the scene, it was normal for such GMP rectification exercises to follow on as a matter of course once the GMP reconciliation exercise was complete or nearly complete.
The guidance recommends four steps for trustees to undertake in order to make the right decision for their scheme, bearing in mind the equalisation exercise that will also need to be completed.
Comment
Although GMP rectification should be progressed within a reasonable timeframe given the need for trustees to ensure that schemes are paying their members the right benefits, the prospect of a GMP equalisation exercise can mean that it is right to delay in order to do the two exercises together.
But quite when GMP equalisation can be carried out is at best uncertain for many schemes, with the guidance suggesting that for many these exercises will not start before the end of 2020 and some will not be implementing equalised benefits until 2023 and potentially beyond this date.
Pensions Regulator updates its cross-border schemes guidance
On 12 March the Pensions Regulator updated its “no-deal” Brexit guidance published last October (see Pensions Bulletin 2019/39), but only by way of adding a rider at the top to the effect that now the UK has left the EU but is in the transition period until the end of 2020, things will largely remain the same for cross-border schemes as if the UK had not left. However, the Regulator warns that should the UK exit the transition period with no UK-EU trade deal in place, the Regulator’s October 2019 “no-deal” guidance will apply.
The Regulator promises to issue further guidance on steps that trustees of authorised and approved cross-border schemes should take to prepare their schemes for any changes that will apply to them post-transition.
Seafarers remain in the auto-enrolment net
Seafarers and offshore workers were originally excluded from the auto-enrolment legislation but were eventually brought within scope. However, the regulations doing so contain a sunset clause which would take both out of scope on 1 July 2020. Following a consultation in 2017 (see Pensions Bulletin 2017/31), the sunset clause is now to be revoked by the draft Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2020 which have been laid before Parliament.
