- DWP publishes its review of the 2021 Conditions for Transfers Regulations
- Bank of England launches “system-wide exploratory scenario exercise”
- High Court confirms the need for actuarial confirmation to validate certain rule changes
DWP publishes its review of the 2021 Conditions for Transfers Regulations
The DWP has published a report on its review of the Conditions for Transfers Regulations 2021 eighteen months after they came into effect in November 2021 (see Pensions Bulletin 2021/47).
The review involved participation from pension providers and administrators, legal firms, professional bodies, industry groups and regulators – and looked at whether the regulations are effective and also whether there have been any unintended consequences of this legislation.
On the first point, the DWP notes that the feedback from the industry is that “the original policy intent of preventing or minimising the risk of someone transferring into a scam pension scheme remains appropriate and in general the regulations are the way to deliver that”. The DWP also estimates that the regulations have stopped approximately 2,000 transfers taking place which may otherwise have been fraudulent / scams.
The review goes on to acknowledge that there are issues with the practical application of certain provisions in the regulations, noting in particular two issues that have been consistently raised by the industry since the regulations came into effect (see Pensions Bulletin 2022/26) – that the “incentives red flag” is incorrectly blocking transfers due to the different interpretation of the flag by some providers, and that “the overseas investment amber flag” can mean that an amber flag needs to be raised, even when schemes have no actual concerns.
The review concludes with the DWP undertaking to “conduct further work with the pensions industry and the Pensions Regulator to consider if changes could be implemented to the regulations to improve the pension transfer experience, without undermining the policy intent”.
Comment
We welcome this evidence that these regulations have given trustees the tools to act where they have concerns about the legitimacy of a transfer. However, we are concerned that the incentives red flag and the overseas investments amber flag in particular are still causing delays and issues for pension savers.
This coincides with LCP’s own experience that around 90% of the transfers we dealt with were referred for Pension Safeguarding appointments simply because the receiving scheme has overseas investment funds with no other immediate reason for an amber flag.
Although the DWP has acknowledged these concerns and undertaken to conduct further work to consider if changes could be made to these aspects of the regulations, we are disappointed that no timescale for such changes has been proposed and we urge the DWP to make the necessary amendments as quickly as possible.
Bank of England launches “system-wide exploratory scenario exercise”
The Bank of England has launched its first system-wide exploratory scenario exercise (SWES), with the twin objectives of improving its understanding of how banks and non-bank financial institutions (NBFIs), including some pension schemes, behave during stressed financial market conditions – such as the “dash for cash” in March 2020 and the turbulence in the gilt market last autumn – and investigating how those behaviours can interact to amplify shocks in markets and pose risks to UK financial stability.
In an initial information gathering phase, participants have been asked to provide information to help the Bank understand how they consider, model and manage risks associated with liquidity needs under market stress, how they are likely to respond to such liquidity needs, and additional actions likely to be taken to deleverage, reduce risk exposure or rebalance portfolios.
This will then enable the Bank to design a stress scenario for the next phase of the exercise which will comprise two rounds later this year: In the first round participants will be asked to model the impact of the shock, and how they would respond to this stress scenario; the Bank will then identify how that scenario may be affected by these collective actions and go on to ask how an updated scenario which takes into account any potential amplification effects might lead the participants to take different actions.
The Bank has worked with the Financial Conduct Authority and the Pensions Regulator to select those being asked to participate, who reflect the wide range of institutions that engage in UK financial markets and include some pension schemes. The Bank is at pains to stress that the exercise is not a test of the resilience of the individual participants but that the Bank’s focus is system-wide, including on important UK financial markets and their resilience in times of stress.
The Bank anticipates publishing the full list of participants and details of the stress scenario later in the year, with a report to conclude this exercise expected to be published in 2024.
Comment
This is an ambitious exercise to run across such a wide range of institutions – and with participants being actively involved in both the design and the execution of the exercise, it will be interesting to see what insights will be provided into the impact of system-wide dynamics following a severe but plausible stress to financial markets.
With pension schemes being among the participants and the close involvement of both the Pensions Regulator and the FCA, this initiative should give pension schemes better information with which to manage their own risks.
High Court confirms the need for actuarial confirmation to validate certain rule changes
In a case involving Virgin Media, the principal employer of a formerly contracted out DB scheme, the High Court has restated the understood position that an actuarial confirmation is a necessary condition when changes to scheme benefits are proposed that might affect contracted-out rights that accrued between 6 April 1997 and 5 April 2016.
The case centred on a reduction in how deferred pensions were revalued, which was implemented by a 1999 Deed. This affected those benefits that accrued from 8 March 1999. Another Deed change took place in 2010 which closed the scheme to new members effective from 21 June 2010. The actuarial confirmation for the 2010 Deed change was on file, but that relating to the 1999 change could not be found. As it was not clear whether it had been issued, the case proceeded assuming it had not been issued.
Additional benefits to the value of £10m in relation to benefits accrued between the above two dates was the consequence if the Court ruled that the confirmation was essential in order to validate the 1999 Deed.
The law in question relates to so-called Section 9(2B) rights. These are all the benefits that accrue in a contracted-out DB scheme from 6 April 1997 (until this form of contracting out came to an end on 5 April 2016). In order to contract out, the scheme needed to pass a test that the benefits being promised for future service were at least as good as those provided by a reference scheme, with an actuarial certificate being issued where this was the case. And every time a rule change was proposed that had the potential to impact any Section 9(2B) rights, an actuarial confirmation had to be sought to the effect that the scheme continued to provide benefits at least as good as the reference scheme.
Various arguments were presented on behalf of Virgin Media, as to why the confirmation for the 1999 changes was not needed for the rule change to be valid, that if needed it related only to benefits that had accrued before the rules changed and in any event was only needed if the changes were potentially adverse. However, on examination of the law in question, the judge was not persuaded on any of these counts. She ruled that an amendment to scheme rules that related to section 9(2B) rights was void if it was introduced without the required actuarial confirmation, that such confirmation related to both past and future service section 9(2B) rights and voidness applied to all alterations to section 9(2B) rights, not just those alterations that would or might adversely affect such rights.
Comment
None of this is a surprise, but this is apparently the first time that this issue has been argued out in Court. What this case does do is shine a light on an issue that may well have on occasion been overlooked by schemes processing rule changes.
Trustees of DB schemes formerly contracted-out on a reference scheme basis may wish to revisit their files to check that every rule change that could impact such contracted-out rights has an actuarial confirmation documented alongside it. And for the scheme in question, a further search may now be carried out for what could be a very valuable piece of actuarial advice.
