- Pensions Regulator consults on criminal offences policy
- IORP II finally arrives in the Regulator’s major code of practice re-write
- Pensions Regulator looks to the future
- Transfers shift towards independent platforms
- Finance Bill 2021 published
- Large pension schemes called on to share scam data
Pensions Regulator consults on criminal offences policy
The Pension Schemes Act 2021 created two new criminal offences relating to DB schemes: avoidance of employer debt and conduct risking accrued scheme benefits. These are serious offences with punishments of up to seven years in prison upon conviction.
The Pensions Regulator, the prosecuting authority in England and Wales, has now launched a consultation on its draft policy which sets out its approach to the investigation and prosecution of the new offences. Importantly, the Regulator states that its understanding of the policy intention behind these new offences is that they are not intended to achieve a fundamental change in commercial norms or accepted standards of corporate behaviour in the UK. Despite the potential otherwise, they are intended to enable the Regulator to address the more serious intentional or reckless conduct already within the scope of its contribution notice powers, or that would be in scope if the person was connected with the scheme employer.
We expect the relevant sections of the Act to be commenced from 1 October 2021. While it is extremely unlikely that the new offences will apply retrospectively, the draft policy does state that evidence pre-dating 1 October may be relevant to investigations and prosecutions of actions after this date, if, for example, it indicates someone’s intention.
Which cases may be prosecuted?
The draft policy sets out some example criteria that warrant investigation and prosecution as follows:
- The primary purpose of the suspect’s conduct is the abandonment of the scheme without provision of appropriate mitigation
- Significant financial gains have been unreasonably made to the detriment of the scheme
- There has been some other unfairness in the treatment of the scheme; and/or
- The trustees, the Regulator and/or the Pension Protection Fund have been misled or not appropriately informed
Examples of the sort of thing that the Regulator has previously encountered that might be appropriate for prosecution are:
- The sale of an employer without replacing an existing parental guarantee over the employer's section 75 debt, resulting in the loss of the guarantee (in circumstances where the trustees were not told about the sale in advance)
- The purchase of an employer with no further investment into its business, subsequent mismanagement of the company, and extraction of value before the company went into administration
- The stripping of assets from an employer, which resulted in substantial weakening of the support for the scheme
- Taking steps to bring about the unnecessary insolvency of the scheme employer with the intention of buying the employer’s business without the scheme
Who may be prosecuted?
The offences are drawn widely in the legislation so that “any person” may be liable to be tried and punished, including someone who helps or encourages someone else to commit either of the new offences. The draft policy sets out some examples of where advisers could be prosecuted, but they are extreme in nature.
Reasonable excuse
The Act provides that a person does not commit an offence if the suspicious act, omission or course of conduct has a “reasonable excuse” – and in bringing a prosecution it is for the Regulator to demonstrate that the defendant does not have one.
However, there is a lot of doubt about what a reasonable excuse means in a pensions context. The draft policy states that there will be three factors which will be significant for the Regulator in determining whether or not there is a reasonable excuse:
- Whether the detrimental impact on the scheme / likelihood of full scheme benefits being received was an incidental consequence of the act or omission, as opposed to a fundamentally necessary step to achieve the person’s purpose
- The adequacy of any mitigation provided to offset the detrimental impact
- Where no, or inadequate, mitigation was provided, whether there was a viable alternative which would have avoided or reduced the detrimental impact
For each factor example scenarios are given, but many are relatively straightforward, leaving open the question of what other scenarios would not be regarded as containing a “reasonable excuse”.
Consultation closes on 22 April.
Comment
It seems quite clear that certain, previously lawful but possibly problematic, activities will be outlawed. We commented (see Pensions Bulletin 2021/10) that scenarios like Silentnight might not be possible once the new offences come in. The Regulator’s pointed reference to “unnecessary insolvencies” is a clear indication that this and similar types of fancy footwork’s days are likely to be numbered, due to the deterrent effect if nothing else.
Unfortunately, there might still be conventional business finance activities that are borderline. One aspect of the draft policy is helpful here. Document, document, document! If you do ever find yourself being interviewed under caution it will be really great to be able to demonstrate, with evidence, that whatever it was that you did, you did it for innocent reasons.
IORP II finally arrives in the Regulator’s major code of practice re-write
The Pensions Regulator has issued 15 codes of practice since it was given the power to do so in the Pensions Act 2004. The Regulator was obliged by the legislation to issue some of these. They cover a mixed bag of subjects and, by the Regulator’s own admission, they are difficult to navigate, duplicate some of the material in Regulator guidance and some of them are out of date.
The Regulator has therefore been undertaking an almost complete re-write (see Pensions Bulletin 2019/28) and on 17 March launched a consultation on the 149 page draft code which will, initially, replace ten of the fifteen codes. The document is web-based with a draft also available to view – we understand that the modular format is inspired by the Highway Code!
The codes set out the way in which the Regulator expects schemes to comply with the law. The new version sets out the Regulator’s expectations mainly via bulleted lists within 51 topic-based modules which it hopes will make it easier for users to find what they need. The Regulator is at pains to state that publishing such lists does not mean that a tick-box approach to governance will be acceptable.
As we are increasingly seeing in official documents, the Regulator has adopted government communication principles in its use of language to help users distinguish between legal duties and its expectations. In the new code, legal duties are shown by using the word ‘must’, whilst Regulator expectations use ‘should’. ‘Need’ is used where there is no expectation or legal requirement in place, but that process is necessary to allow a scheme to operate.
But this is not just a consolidation/simplification. As well as new material relating to climate change, stewardship, cyber-security, continuity planning, investment and administration the code sets out the requirements for the effective system of governance mandated by the 2018 governance regulations made under the European Union’s “IORP II” Directive (see Pensions Bulletin 2018/42).
The key IORP II requirements are those relating to the “ESOG”, the effective system of governance. These themselves are set out in various modules of the new code. These are listed and cover a wide range of subjects.
However, the stand-out requirement is for pension schemes with more than 100 members to carry out an “own risk assessment” (ORA) each year. The ORA “is an assessment of how well governance systems are working, and the way potential risks are managed”. Furthermore “The ORA is a substantial process, and the governing body may need to expand its risk assessments to fulfil our expectations”.
There are over two pages of detailed content for the ORA set out in the code. Schemes in scope (DB and DC) should prepare and document their first ORA within one year of the code coming into force and then annually thereafter. We do not know when the code will come into force yet. The consultation document states that it will be phased in, presumably later this year so it is probably wise for trustees to plan to carry out an ORA some time in 2022.
Updating the code and possibly integrating it with the Regulator’s suite of guidance is intended to be an ongoing process without a fixed end date. Consultation closes on 26 May.
Comment
At a high level we welcome this ambitious initiative. Life will be a lot easier for the regulated community and its advisers if all, or most, of the Regulator’s materials are in one, easy to navigate, place.
We are a little less happy with a whole new raft of prescriptive governance requirements. Even though we have known for a long time that these would come in one day it is another substantial item on already overcrowded trustee agendas.
Pensions Regulator looks to the future
The Pensions Regulator has published its Corporate Strategy document looking ahead to the next 15 years and committing to balance its focus to better acknowledge that there has been a “significant and structural” shift in the pensions landscape – from DB to DC and consequently from schemes to ‘pension savers’. There are apparently now more than 15 times as many active savers accumulating in DC schemes than there are active members of DB schemes and, although the Regulator’s statutory objectives remain unchanged, it recognises that it will now need to balance the current and future needs of millions of newly enrolled DC savers with the responsibility of ensuring that DB pension promises are delivered.
A draft of this document was published for consultation in October last year (see Pensions Bulletin 2020/43) and the Regulator’s response to the responses received and contributions from stakeholders at a series of roundtable events at the end of last year can be found here. The final document reflects some of the points made in these responses, including:
- A firmer recognition of savers’ increasing interest in investment decisions being consistent with their environmental, social and governance values
- A greater emphasis on protecting and enhancing outcomes for all kinds of savers, in addition to clearer recognition of the impact of certain protected characteristics (such as disability, gender, age and ethnicity) on saver outcomes; and
- A commitment to move quickly on value for money for pension savers, starting with the publication shortly of a discussion paper
The five strategic priorities and associated strategic goals proposed in the draft document remain unchanged, though the narrative in each section has been expanded to reflect the discussions that have been had. These priorities emerged from an analysis of different factors that influence savers’ retirement outcomes from various perspectives, including looking at the relationship between age, income and retirement savings, and aim to put the saver at the heart of the Regulator’s work.
Also accompanying the strategy document is a blog from Charles Counsell, CEO of the Pensions Regulator.
Comment
The analysis underpinning this strategy document appears to have been thoughtfully carried out and it has been improved by the feedback from the industry. It is especially interesting to see the Regulator’s in-depth discussions on the specific priorities, challenges and opportunities facing Baby Boomers, Millennials and Generation Z. However, it remains to be seen how smoothly the Regulator is able to introduce the necessary balance, while also addressing short-term priorities such as dealing with the aftermath of the pandemic and protecting people from scams.
Transfers shift towards independent platforms
We have issued our latest quarterly update on the transfer quotations and payment activity for the DB schemes we administer. The main headlines include:
- Transfer quotation levels in Q4 2020 were down 11% from the previous quarter, with 1.2% of deferred members receiving a quotation in this quarter. This is the second lowest level we have seen in any quarter since 2016
- 26% of quotes were taken up in the latest quarter. This is up from 21% in the previous quarter, and is the highest take-up rate since Q3 2018
- We have revisited our analysis from last year on where members are taking their transfers, comparing 2020 to 2018 and 2019. Dividing the destinations into three categories, we found that traditional insurers’ share of the market has dropped, with 38% of the payments. The independent platforms have picked up much of this market share, with 29% of the payments, which additionally tend to be larger value payments
- The largest providers, St James’s Place, AJ Bell, and Royal London, increased their collective share of the market to over 37% of transferred amounts in 2020, up from 27% the previous year
- As for the first wave, the second wave of the Covid-19 lockdown led to a reduction in transfer activity, with the rate of requests falling by around a third over November and December, although early indications are that this has rebounded over January and February.
More details, including charts, are available here.
Comment
The increase in take-up rates is interesting and could mean that those members who are requesting quotes are more serious about transferring. In addition, the greater concentration of transfers to fewer destinations reinforces the need for good quality advice, and means that trustees and employers may want to consider supporting pension scheme members by offering access to a professional advisory service. This will become increasingly relevant if transfer activity continues to grow as the UK comes out of lockdown.
Finance Bill 2021 published
On 11 March the Government published the Finance Bill covering, amongst other things, changes announced in the Budget on 3 March. Topics included that impact or potentially impact pensions include the following:
- Freezing the Lifetime Allowance at its current level of £1,073,100 until 6 April 2026, at which time, unless specific action is taken otherwise the allowance will again attract annual CPI increases
- Maintaining until 5 April 2026 the income tax personal allowance and higher rate threshold at the levels they will increase to from 6 April 2021 – £12,570 and £50,270 respectively
- Increasing the rate of corporation tax to 25% on profits over £250,000 from 1 April 2023 (with a tapered increase for companies with profits between £50,000 and £250,000)
- Introducing the “super deduction” from corporation tax, allowing businesses to claim tax relief of up to 130% on investment spending over the next two years (ie before the rate increase above comes into effect)
The implications of many of these measures were discussed further in our Special Budget Bulletin on 3 March (see Pensions Bulletin 2021/09).
The Bill also includes updated provisions previously consulted on in July last year, in particular the legislation covering collective money purchase schemes, which, when the Bill is enacted, will enable such schemes to operate as UK-registered pension schemes (see Pensions Bulletin 2020/30).
Comment
The impending increase to the rate of tax relief on employer contributions to pension schemes associated with the 2023 increase in corporation tax rates and the tax incentive to prioritise investment spending in the two years preceding this increase may make for interesting conversations between DB scheme trustees and sponsors when it comes to the scheduling of deficit repair contributions.
Large pension schemes called on to share scam data
The promised letter from Guy Opperman to pension schemes not currently sharing market intelligence about pension scams through the Pension Scams Industry Group (see Pensions Bulletin 2021/07) has now been sent – to around 90 large schemes. The Government press release issued on 11 March sets out this letter, which has a simple message – please join PSIG and share your scam data – and points to PSIG’s website for further details.
Comment
The hope is that by boosting the number of organisations that share information on potential scams, everyone can benefit from each other’s experience and identify trends so that the ever-evolving scam threat can be spotted early. PSIG in turn can use this data to inform Project Bloom – the multi-agency taskforce which coordinates efforts to combat pension scams and fraud.
