Regulator provides practical help on integrated risk management
Building on the recently issued guidance for employer covenant (see Pensions Bulletin 2015/35) and the funding defined benefits Code of Practice, the Pensions Regulator has issued guidance on Integrated Risk Management (IRM) this week.
IRM is a tool that is intended to help trustees identify and manage (in an integrated way) the employer covenant, investment and funding risks faced by a pension scheme. IRM is very much intended to be a joint effort between the trustees and the employer.
The guidance highlights five important steps associated with effective IRM:
- Initial considerations for putting an IRM framework in place
- Risk identification and the initial risk assessment
- Risk management and contingency risk planning
- Documenting the decisions; and
- Risk monitoring
There are helpful examples and questions for both trustees and employers to ask themselves spread throughout the guidance.
Comment
Trustees and employers are well advised to consider the co-operative approach to risk management outlined in this useful guidance. The questions for each to answer will help identify the major risks affecting each and encourage a joint approach to finding the most appropriate solutions. For many schemes the next time to consider this in detail will be in the context of the next covenant review, investment strategy review and/or actuarial valuation.
Whilst the guidance is certainly useful, it is perhaps surprising that it has taken nearly a year and a half to arrive since the even greater focus on integrated risk management brought about by the July 2014 Scheme Funding Code of Practice.
Innovative legal solution to documentation mistake approved by the High Court
It has been some time since we last reported (see Pensions Bulletin 2014/17 for example) on a mistake in pension scheme documents necessitating a trip to court to sort it out.
In the BCA case a mistake was made in the pension increase rule when scheme documentation was consolidated in 2011. Previously the rules stated that LPI increases would apply to pension accruals after 5 April 1997 and a flat rate of 3% would apply to pensions accrued previously.
Somehow, during the drafting of the consolidated rules, the wording which specified which indexation applied to which accrual period was left out so that the pension increase rule simply does not make sense.
The BCA trustees took leading Counsel’s advice. This advice was that a mistake had clearly been made and that the best way to fix it would be to obtain an authorisation from the court under Section 48 of the Administration of Justice Act 1985. This provides that a lawyer with a ten year High Court qualification (such as Counsel in this case) may have his legal opinion authorised by the court, where there is no dispute. This has the effect – without prejudice to subsequent challenge – that the scheme rules may be interpreted as if the mistake had not been made. The scheme rules themselves are not changed and indeed, if they were to be, would likely come up against a Section 67 block.
The BCA trustees duly followed this route and the High Court provided the necessary authorisation, subject to a requirement that the trustees notify the members of this proceeding via their next regular communication.
Comment
So far as we can see this is the first time that the Section 48 route has been used to fix a mistake in scheme rules. As this was such an obvious error we can see why there was no bid to use the rectification procedure (see Pensions Bulletin 2009/20 for some background) – this would have involved more time and money and, crucially, more than one party to the proceedings.
We also think that it is notable that we are seeing less of these sorts of execution difficulties fetching up in the courts. The statutes of limitations may finally be running out on mistakes made in the early/mid 90s regarding equalisation following the European Court’s Barber judgment. There does seem to be some trade along these lines about how pension increase rules were written but we do hope that there will be less and less of these cases for us to report as time goes on.
DB landscape reaches a point of relative stability?
Stability over the year is the buzzword in this year’s Purple Book, but in jointly publishing the tenth edition with the Pensions Regulator, the Pension Protection Fund takes the opportunity to restate the seismic shifts over the past decade and highlight the necessity of effective risk management.
The compendium reports that over the year to 31 March 2015:
- Schemes closed to future accrual increased from 32% to 34%, whilst the proportion of schemes still open remains the same at 13%. A further 2% of schemes are in the process of winding up, which leaves by far the largest percentage of schemes (51%, down from 53%) closed to new members
- Scheme funding deteriorated from 97% to 84% on a section 179 basis and from 67% to 62% on a full buyout basis. The aggregate section 179 funding position – a deficit of £244.2 billion – is the largest at an end-March date since the PPF was established. Section 179 funding levels decreased by a further 3.1% for the six months since 31 March 2015
- Asset allocation continued its de-risking journey with the equity share falling from 35.0% to 33.0% and the gilts and fixed interest share rising from 44.1% to 47.7%
Looking back at what has been a decade of major change in the PPF-eligible scheme universe the Purple Book highlights the fact that, amongst other things, the proportion of schemes open to new members and future accrual has fallen by two-thirds over the period, the equity share of asset allocation has almost halved and the gilt and fixed interest share has risen by two-thirds.
Much of the analysis of the 2015 Purple Book is based on new information from 5,945 scheme returns issued in December 2014 and January 2015 and returned to the Pensions Regulator by the end of March 2015, representing virtually all of the PPF-eligible schemes.
For a comparison with last year’s report see Pensions Bulletin 2014/46.
Comment
Although the DB landscape has been relatively stable over the past year, with the impact of the new pension freedoms not being analysed until next year’s Purple Book and the possibility of a reform to pension tax on the horizon, whether this will continue remains to be seen.
Pensions Tax Manual updated
The Pensions Tax Manual (PTM) is HMRC’s web-based public interpretation of pensions taxation law and is a very important and substantial resource for understanding the topic.
The PTM has now been updated and published after the public “draft” version was first released earlier this year (see Pensions Bulletin 2015/14).
HMRC has told pension contacts that the update reflects feedback given to HMRC, as well as the changes introduced by the (first) Finance Act 2015 (see Pensions Bulletin 2015/15), but not the Finance (No 2) Act 2015 (which received Royal Assent on 18 November 2015 – see Pensions Bulletin 2015/49). HMRC intends to make further changes to the PTM for this in a future update.
The updated PTM does not indicate which pages have been amended since the first draft version for public comment, but HMRC promises that a ”list of the significant changes” will be included in its next Pensions Newsletter.
Comment
Pensions tax law is complex and unintuitive in the way it interacts with the many different real life pension situations. So the PTM is a very important resource for pension schemes to get confirmation of HMRC’s readings on common situations.
It will take some work for those who contributed comments on the draft to see whether their requests have been taken on board – and what else has changed. Certainly we can see that some key helpful material from the PTM’s predecessor, the Registered Pension Schemes Manual, that we asked to be reinstated into the PTM is still not there (albeit the RPSM pages will continue to be accessible on HMRC’s archive pages). Except where there is strong evidence to the contrary, perhaps the only practical way forward may be to assume that any such losses have been made in the interest of keeping the PTM as short as possible, and are not as a result of HMRC changing their reading.
We do have some sympathy with HMRC on the fact that the new PTM is already out of date at publication (November’s Finance (No 2) Act 2015 retrospectively changed Annual Allowance calculations potentially for accrual as far back as 7 April 2014, as well as introducing the Tapered Annual Allowance for future tax years), which highlights the constant and very rapid pace of change in pensions tax. But this means that it may be dangerous for those who are not totally on top of pensions taxation to rely on the PTM – it has to be read with Newsletters and a welter of other information about current changes.
Finance Bill 2016 draft legislation published
Just before we finalised this week’s Pensions Bulletin, the Government published draft legislation for the Finance Bill 2016 together with a mass of supporting material. This includes several very important pension taxation topics.
We intend to report on this development in next week’s Pensions Bulletin.
DWP research shows steady worsening in outcomes under the new State Pension
A new research report published by the Department for Work and Pensions shows that there is a tail off in positive outcomes as the new State Pension settles in over its first 15 years.
The report contrasts projected outcomes under the new State Pension with those had the current state pension system continued. It finds that in the first 15 years of the new system, around 75% of people reaching State Pension Age will have a higher state pension than under the current system.
Women are projected to do slightly better than men, but what comes through for both sexes is the tail off in the improvement. 50% of men and 40% of women reaching State Pension Age between 2026 and 2030 are projected to have worse outcomes.
What also is of interest is the DWP’s “winners and losers” summary which appears to be much more comprehensive than previous information published by them. The report acknowledges that many workers will drop from earning £5.80 per week for each qualifying year under the current system to £4.45 per week for each qualifying year under the new system.
The report is focussed solely on the state benefits people will receive – so for anyone currently contracted-out it does not consider how much extra they will pay in national insurance contributions as a result of the move to the new State Pension.
The report also states that the new State Pension will be uprated by the triple lock. To date it was not clear whether the Government’s commitment in relation to the Basic State Pension would be extended to the new State Pension and there has yet to be an announcement to this effect.
Comment
The report does not state that the new State Pension will lead to more losers than winners than had the current system continued, but this could well be the case since the new State Pension has been designed so that, over time, it will lead to significant cost savings. In this regard it is telling that the analysis stops short at 15 years. Had it continued beyond this point, the fact that the new State Pension system is less generous than the one it replaces would become very apparent.
MPs are briefed about the new State Pension
Two comprehensive documents have been published by the House of Commons Library relating to the new State Pension.
The first, weighing in at over 60 sides, looks at the development of the proposals for the single tier pension. Amongst other things “The new single tier State pension” makes clear that the new State Pension is expected to result in the rate of growth of overall expenditure on pensions and pensioner benefits as a proportion of GDP to reduce, but only from around 2040.
The second examines the transitional arrangements and the gainers and losers from the introduction of the new State Pension. “The new State Pension – transitional questions” references the DWP research reported above, hints that the triple lock might apply (with a final decision to be made shortly before implementation) and says that only 37% of those reaching State Pension Age in 2016/17 will receive the full amount of the new State Pension directly from the state.
DWP says more about the COPE
In the latest refresh of booklets and guides to the new State Pension, the Department for Work and Pensions has added a factsheet introducing readers to the Contracted-out Pension Equivalent amount.
The COPE is an estimate of the amount of the old additional State Pension that the individual will not receive due to being contracted-out prior to April 2016. As such, it feeds directly into the forecast of the new State Pension.
The factsheet explains what the COPE is through a series of questions and answers.
Comment
Although the publication of this factsheet is necessary, it is unfortunate that it makes continual reference to an amount equivalent to or more than the COPE being delivered by workplace or personal pension schemes through which the individual contracted out. DC scheme members in particular may find it difficult to secure that level of pension from the national insurance contributions they saved.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
