Lockdown eased but the Coronavirus Job Retention Scheme is extended
Much of the focus at the beginning of this week was on the easements to the lockdown announced by the Prime Minister on 10 May in a television address to the nation, with important detail following the next day. But it is the extension of the Coronavirus Job Retention Scheme announced by the Chancellor on 12 May that is arguably the more significant development insofar as pension provision is concerned.
Initially intended to run for three months until the end of this month, and subsequently extended to the end of June (see Pensions Bulletin 2020/17), the Scheme delivering financial provision for furloughed workers will now run until the end of October. As currently, the Government will pay to the employer a sum equal to 80% of the furloughed employee’s usual monthly wage, up to a cap of £2,500, along with the employer NIC and the 3% minimum auto-enrolment employer pension contribution on this capped wage.
However, the intention is that from the start of August, employers will be able to bring furloughed workers back to work part-time and have to start sharing, with Government, the cost of the Scheme. Full details are promised by the end of May.
Comment
The Pensions Regulator’s guidance on auto-enrolment and pension contributions, written in the context of the Scheme, remains in point and coincidentally has been recently extended (see article below).
Inevitably, attention is now turning to how the Scheme is to be paid for and when the Government may make this clear. Recent speculation includes raising income tax and ending the triple lock on State pension increases, but could pensions tax relief be looked at once more?
Another RPI/CPI case – almost, but not quite
Another case has come before the High Court concerning whether or not a DB pension scheme can change the way in which it calculates pension increases. In this instance the employer came tantalisingly close to achieving a move away from the RPI.
The 2013 rules of the Arup UK Pension Scheme define the “Index” for pension increase purposes as:
"subject to Rule H1.03 (Changes in the Index), the Index of Retail Prices (All Items) published by the Office for National Statistics"
Rule H1.03 provides that:
"If the composition of the Index changes or the Index is replaced by another similar index, the Trustees, after obtaining the Actuary's advice, may make such adjustments to any calculations using the Index (or any replacement index) as they consider to be fair and reasonable"
The wording about replacement is quite common. The wording about composition less so. Nine questions were asked about whether the ability to make “adjustments” in H1.03 had been triggered and if so what happened next.
Had the Index been replaced?
The first five questions were about whether the Index had been replaced and if so what the powers and duties of the Trustees would be. But the judge concluded that the Index had not been replaced because the “…RPI is "replaced" only if it is discontinued and another similar index is introduced or declared by the responsible body to be in its place, and that the Rule does not contemplate any form of "functional" replacement”. So, the question of the powers and duties of the Trustees did not arise.
Had the composition of the Index changed?
Answering the next four questions involved analysing whether there had been any change in “composition” and if so the nature and extent of any adjustments that could be made. Here, the judge took the view that “a substantial change must be produced in the end result” and that any such change cannot be at a date earlier than the adoption of the latest set of Rules.
This then led him to hold that “the change in 2010 in the way in which price data for clothing and footwear were collected and analysed [for the purposes of compiling the RPI] was capable of being such a change in composition, but it is now too late for the Trustees to act on it because it predated the adoption of the present Rules”. It was also held that the change in 2017 in the way housing cost data was incorporated in the RPI, is a change in composition, giving the Trustees power in principle to make adjustments and that it was not too late, in principle, for them to do so.
Moving on to the nature and extent of the adjustments that the Trustees could make as a result of the 2017 composition change, the judge held that switching from the RPI to another index (such as CPI or CPIH which was desired by the employer) was not supportable as it failed the fair and reasonable test.
Whether or not the permitted adjustment for housing cost data will be made in practice is unclear. It was reported that if a switch to CPI was allowed it would have the effect of reducing the scheme’s funding deficit by £75-85m. Even if the headline percentage reduction for housing was small it might still have a funding (and accounting) impact sufficient for it to be worthwhile for the employer to pursue.
Comment
We have become used to seeing the failure of arguments that scheme rules may be construed so as to permit a switch from RPI to CPI and the ultimate result is the same here. What distinguishes this case is what the judge said about composition, albeit that the timing of scheme rule updates did not help the employer.
The ruling may provide some encouragement to sponsors of schemes who wish to explore the possibility of changing their method of indexation. As ever, what is possible remains very scheme-specific, with this case illustrating that achieving a trigger for change does not necessarily give a green light to make the desired change.
Other Covid-19 pension-related announcements
Since last week’s Pensions Bulletin, other announcements and posts influenced by the Covid-19 health emergency in the world of pensions include the following:
- On 6 May the Pensions Regulator extended its automatic enrolment and pension contributions guidance first published on 9 April (see Pensions Bulletin 2020/16). The main change is to the section headed “Coronavirus Job Retention Scheme”, which has had appended to the end a new sub-section “Automatic enrolment duties for furloughed staff”. This explains that employers’ auto-enrolment duties continue to apply to furloughed staff, but such staff should be assessed on the pay they are receiving. The guidance covers the use of postponement, automatic re-enrolment and requests to join a scheme
- On 12 May the Institute and Faculty of Actuaries’ Continuous Mortality Investigation published its fifth weekly report on mortality data. This latest report shows a substantial reduction in adverse mortality to that previously reported (see Pensions Bulletin 2020/19), providing further evidence that the UK is now past the peak of deaths in this stage of the pandemic. Nevertheless, the number of deaths in England and Wales in the week ending 1 May of 17,953 was 6,587 (58%) greater than expected, with 6,035 having Covid-19 mentioned on the death certificate. The IFoA sounded a cautionary note at this decline in excess weekly deaths, saying that “it is likely that the fall in excess deaths will be more gradual over the coming weeks than the earlier rise, as seen in other countries”. The accompanying report suggests that by 11 May there could have been between 56,000 and 63,000 more deaths in the UK since the beginning of 2020 than expected
Financial Services Regulatory Grid launched
The Regulatory Initiatives Grid announced in March (see Pensions Bulletin 2020/11) has been launched a little earlier than expected by the Financial Services Regulatory Initiatives Forum (which includes the Bank of England, FCA, HMT and PRA). The first edition of the Grid sets out the planned regulatory workplan of Forum members over the next twelve months, rather than the two years that had been intended, although this should be increased to 24 months in future editions. As previously announced it is intended to help firms and other stakeholders understand – and plan for – the timing of the regulatory initiatives that may have a significant operational impact on them.
The pensions and retirement income chapter contains initiatives led by the FCA. These are concerned with raising conduct and service standards within the sector and comprise the following:
- The Fourth thematic review into DB-DC pension transfer advice: supervisory action will continue throughout the year whilst formal engagement using data collected from firms is tentatively scheduled for Q3 2020
- The review of the effectiveness of Independence Governance Committees: this is listed but no timescale has been provided
- The second Assessing Suitability Review of the advice consumers receive around retirement income: this is tentatively scheduled for the first half of 2021
As a reminder the original announcement noted that other regulators such as TPR, FRC and ICO would be invited to join the Grid on an ad hoc basis as appropriate.
The Grid is a one-year pilot exercise and feedback is requested from stakeholders.
Comment
The Grid covers the forthcoming significant regulatory initiatives for the entire financial services industry – with contract-based pensions being just one small part of it – but we welcome this attempt to help affected firms plan their regulatory workload over the next twelve months.
