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Pensions Bulletin 2021/51

Pensions & benefits Policy & regulation

FCA settles its DC stronger nudge rules

The Financial Conduct Authority has finalised new rules that require pension providers operating in the contract space to ‘nudge’ their consumers to Pension Wise in order that consumers can benefit from guidance before they access their DC pension savings. The new rules apply from 1 June 2022 and follow a consultation launched in May (see Pensions Bulletin 2021/19).

The rules are in broadly the same form as consulted on and apply to providers of personal and stakeholder pension schemes, including operators of self-invested personal pensions. They require that when a consumer has decided, in principle, how to access their savings, a provider must:

  • Refer the consumer to Pension Wise guidance
  • Explain the nature and purpose of Pension Wise guidance
  • Offer to book an appointment, and where the consumer accepts the offer, book the appointment or provide the consumer with sufficient information to book their own appointment

Providers will also be required to confirm and record whether the consumer opted out of receiving this guidance.

The FCA’s proposed guidance to providers that they may assume that consumers over 50 who are transferring are doing so for the purpose of accessing their pension savings (and so need to be nudged), has also been retained. However, the nudge is not necessary if providers can establish that the consumer is transferring for another reason.

The FCA’s response to the consultation also covers those areas that were part of a separate discussion element to drive greater take-up of guidance services – including the possibility of introducing a cooling off period should a consumer want to opt out of the appointment and of there being earlier nudges. The FCA will consider the feedback received alongside that received to its Pensions Consumer Journey Call for Input issued in May (see Pensions Bulletin 2021/21) and work closely with the DWP, Pensions Regulator, MaPS and others to decide what to take forward.

Comment

Now that the FCA rules have been settled it surely must only be a short while before the DWP settles its regulations impacting access to DC benefits in occupational pension schemes on which it consulted in July (see Pensions Bulletin 2021/29) and hoped to introduce from April 2022.

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PASA launches data matching conventions for pensions dashboards

The Pensions Administration Standards Association (PASA) has published initial guidance on data matching conventions (DMC) that every pension scheme will need to reach a landing on in order to respond to “find requests” from pensions dashboard users. The guidance document is accompanied by a useful call to action. Supplemental guidance may be issued in due course.

The initial guidance, whose production was announced by PASA in July (see Pensions Bulletin 2021/32), suggests that many schemes will compare a dashboard user’s surname, date of birth, and national insurance number against the records they hold, but this could be risky if the scheme’s records are inaccurate. It therefore suggests that schemes may need to assess and then seek to improve these data elements in order to have confidence that this “Option 1” DMC can safely be used. If by the time the dashboard goes live they do not have sufficient confidence in the accuracy of these data elements, more sophisticated data matching approaches may be needed, two of which (Options 2 and 3) are outlined.

Comment

This is a useful introduction into the potentially complex world of setting up data matching conventions that need to balance regulations shortly to be issued in draft, compelling schemes to carry out matching, and the prospect of fines being issued by the Information Commissioner for data breaches as a result of mismatching.

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PPF confirms compensation cap to no longer apply in valuations

The Pension Protection Fund has issued new valuation guidance requiring that PPF valuations with effective dates from 1 December 2021 must ignore the compensation cap, in keeping with the Hughes judgment (see Pensions Bulletin 2021/30). This new requirement applies to PPF levy (section 179) and PPF entry (section 143) valuations, as well as other PPF entry-like valuations (section 152 and section 156 valuations).

The new G9 guidance for section 179 valuations also provides that schemes that have not yet implemented GMP equalisation can continue to make an allowance for it on a "best estimate" basis (it is the only element of the calculation to be performed on that basis). However, this simply reflects a September 2019 information note that has now been withdrawn.

As previously set out in interim guidance, no allowance needs to be made in section 179 valuations for the Hampshire or Bauer judgments. The effect of these are (respectively) that the PPF compensation value should be at least 50% of the scheme pension value, and that any reduction to PPF compensation must not take members below or further below the poverty line.

By contrast, for section 143 valuations the PPF has published a new information note clarifying how the additional liabilities caused by both judgments, which must be included in the section 143 valuation in addition to the Hughes judgment, should be calculated. There is also updated valuation guidance (version H7) and an updated information note containing additional information for carrying out a section 143 valuation.

Comment

Schemes with a large number of previously capped members could see a significant deterioration in future section 179 valuation results, with all that this could mean for their PPF levy. This in turn may encourage such schemes to put off the next section 179 valuation until required to submit one.

Separately, the DWP will need to bring forward legislation to formally change how PPF compensation is calculated so that it will reflect all three judgments. But insofar as Bauer is concerned, it appears that the DWP may be looking into removing the effect of this ECJ judgment.

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PPF sets out latest risk snapshot in its Purple Book

In the 16th edition of the Purple Book published on 7 December, the Pension Protection Fund shows a significantly improved position as at 31 March 2021 compared to that in its 15th edition.

As at 31 March 2021, 49% of schemes were in deficit, with an aggregate deficit for these schemes of £129bn – down from £229bn at 31 March 2020. It is these schemes that count should insolvency strike their sponsors. Also, since 31 March 2020, the aggregate funding ratio on a section 179 basis has increased from 94.9% to 102.8%.

The overall trend for de-risking has continued, with 19% of scheme assets now invested in equities compared to 20% in 2020. The number of schemes in the PPF’s universe has also continued to fall as more schemes buy out, merge or are wound up.

The report also examines the PPF’s probability of being self-sufficient by 2030 – an increase from 83% as at 31 March 2020 to 95% as at 31 March 2021. This figure was published in the PPF’s annual report and accounts in October (see Pensions Bulletin 2021/43).

Comment

These results are not a surprise and were foretold in the PPF’’s annual report and accounts. The improved financial position is mainly due to market movements from the very testing market conditions as at 31 March 2020 – rising gilt yields since then driving down liability values by more than the corresponding decrease in asset values, together with ꢀlarge increases in equity values.

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MaPS publishes its annual report and accounts

The Money and Pensions Service has published its annual report and accounts for the year ended 31 March 2021 revealing a substantial increase in its expenditure compared to the previous year. However, much of the increase from £106.6m to £138.5m was taken up by its debt advice operating segment whose costs increased from £54.3m to £79.7m.

Turning to the pension parts of MaPS operations, the cost of the “pension freedoms” segment was essentially unchanged (£28.3m compared with £28.1m), whilst its “pension guidance” segment cost £8.1m (up from £5.7m).

In addition:

  • The pension freedom service, relating to the Pension Wise guidance provided to those who have DC pension pots and who need to understand their options in order to make an informed decision when taking their benefits, delivered 215,645 sessions – up by just over 10,000 on last year
  • The pension guidance service, covering a wide range of pensions-related matters, delivered 228,524 sessions – up by just under 15,000 on last year

As with the previous reporting there is little mention of the pensions dashboard and no indication given of the costs that have been incurred by MaPS or those likely to be incurred in the near future.

Comment

These pension services can surely only grow over the near term, with transfer out requests that are amber flagged needing to be referred since 30 November 2021 and more DC option guidance sessions likely to be booked once the ‘stronger nudge’ proposals come on stream in around June 2022.

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Withholding pension information case acts as a reminder of the Regulator’s expanded powers

The Pensions Regulator has published details of a criminal prosecution that has concluded in which a Mr Bootes, who claimed to newly be an ambassador for the Gambia, was fined £80,000 by Brighton Magistrates Court, having been found guilty of two charges of neglecting or refusing to provide information and documents to the Pensions Regulator, without reasonable excuse.

The Regulator sought this information under its wide provision of information powers set out in section 72 of the Pensions Act 2004 in connection with breaches of the auto-enrolment legislation. The prosecution followed under its section 75 powers.

Mr Bootes’ whereabouts are unclear, and it may be that the fine will never be paid.

Comment

What is not mentioned is that had this case been conducted under the expanded powers that came into operation on 1 October 2021, the Regulator might have chosen not to instigate a criminal investigation, but instead applied a fixed penalty that subsequently escalated for each day’s failure to provide the information. Not only might this have been a quicker and cheaper process for the Regulator, the fine might have soon exceeded £80,000.

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Auditing DB figures in the scheme sponsor’s accounts

The Institute of Chartered Accountants in England and Wales has published guidance in relation to the audit of defined benefit scheme assets and liabilities in the scheme sponsor’s accounts.

The guidance has been written to help better organise audit requests by clarifying the roles of the various parties and looking at what is good practice when managing auditor requests in relation to assets, liabilities and disclosures. The material is arranged under two parts:

  • Part 1: Relationships and Independence – which provides a brief overview of the roles and the relationships of the different parties
  • Part 2: Auditor requests – which highlights best practice in managing requests in relation to assets, liabilities and disclosures

Comment

This is a short introduction to the subject and should be of assistance to auditors in organising this aspect of their work. However, it is very much about the mechanics of running the audit rather than resolving any current issues.

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State pension transitional protection increases put through

Two sets of regulations have been laid which for those reaching State Pension Age on or after 12 April 2022:

  • Increase that part of any transitional new State Pension, which when calculated as at 6 April 2016, was above the then full rate (the “protected payment”), by the increase in the CPI (so by 12.2% for the six year period ending on 5 April 2022)
  • Increase that part of any pension debit or credit on divorce, that has been applied to such a “protected payment”, by the increase in the CPI since the debit or credit was created on or after 6 April 2016

The State Pension Revaluation for Transitional Pensions Order 2021 (SI 2021/1320) and The State Pension Debits and Credits (Revaluation) Order 2021 (SI 2021/1319) come into force on 11 April 2022 for most purposes.

Comment

These are part of the annual adjustments necessary to the new State Pension and are broadly as expected.

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