- Pensions Regulator updates key aspects of its Covid-19 guidance
- NEST reports low opt-out rates following last year’s increase in auto-enrolment contributions
- Covid-19 pension-related announcements
- April 2020 RPI was incorrect but remains the official figure
Pensions Regulator updates key aspects of its Covid-19 guidance
On 16 June the Pensions Regulator announced a number of changes to the Covid-19 suite of guidance built up since lockdown in March. Four of its guidance notes have been updated and the changes they contain are set out below. A blog from David Fairs, Executive Director of Regulatory Policy, Analysis and Advice, sets the scene for the changes – explaining, amongst other things, that trustees are being asked to resume reporting certain key information to the Regulator so it can ensure that risks are being managed and savers protected.
DB scheme funding and investment: COVID-19 guidance for trustees
This guidance, originally issued on 27 March (see Pensions Bulletin 2020/14) has had a major rewrite. It now sets out an update of the Regulator’s view of the impact of Covid-19, explains how the Regulator will continue to adapt its regulatory approach whilst continuing to provide guidance to trustees dealing with difficult decisions. It is worth noting that the Regulator states that it will “continue to monitor the situation but [does] not anticipate further updates [to this guidance] unless circumstances change significantly” – so this is likely to be the shape of how the Regulator regulates for some time to come.
Some of the highlights of the new guidance are as follows:
- Contribution suspensions or reductions – while the Regulator recognises that such measures may continue to be appropriate, and expects trustees to be open to “reasonable” requests from the employer, it does now expect that with the improved visibility of employers’ financial situations, trustees will undertake due diligence before agreeing a new suspension or reduction. Where such a proposal is deemed appropriate, the Regulator reiterates that the trustees must seek to put in place other protections and mitigations and sets out some examples of what it has in mind. It also expects that if there is good evidence that the covenant has materially worsened and is not expected to recover in a reasonably short timeframe, trustees should consider whether it would be in the members’ best interests to update the scheme’s funding arrangements to more accurately reflect this position
- Valuations currently being finalised – the Regulator continues to “not require trustees to allow for relevant experience since the effective date of the valuation in their recovery plan” but “expect[s] trustees to consider whether the post-valuation experience is relevant when agreeing the recovery plan in the context that the employer’s affordability may now be constrained”. It also continues to recognise that some trustees may decide that it is in the best interest of their members to take more time to consider the scheme and employer’s current situation rather than submit a valuation and associated documents which may need to be renegotiated soon
However, the Regulator now stresses that it cannot waive the valuation reporting requirements, including the requirements to report agreements to suspend or reduce contributions. It therefore expects trustees, wherever possible, to comply with their reporting requirements from 1 July 2020 but says that it will “continue to regulate pragmatically and sympathetically”.
- Defined benefit transfer values – 30 June 2020 sees the end of the three month period in which the Regulator indicated that it did not intend to take regulatory action against trustees who decided to suspend transfer quotations and payments in order to review transfer terms or assess the administrative impact of any increase in demand for transfer values. The Regulator now expects any breaches to be reported from 1 July 2020, but highlights that trustees may, having taken advice, consider taking advantage of the existing flexibility in the legislation which provides for additional time (up to three months) to issue transfer quotations “for reasons outside their control”
A few other new nuggets of note:
- Where the employer is suffering cashflow problems and/or trustees and employers are concerned about the costs of advice, the Regulator suggests that it may be sensible for trustees to check whether their trust deed and rules allows for expenses to be paid from scheme assets, even if the employer usually pays
- Where there are competing stakeholders, such as in refinancing or restructuring situations and trustees may find it difficult to ensure their interests are properly addressed, the Regulator suggests that trustees take advice (including legal advice) on their negotiation options as they may have more leverage than they realise
- The new guidance incorporates a helpful list of questions that trustees could consider to help them understand risks to the scheme’s sponsoring employer’s covenant. It also provides explicit reassurance to trustees facing difficult decisions that “if hindsight proves that they made the ‘wrong’ call, they will be able to defend their decision” if they have ticked specific boxes when making those decisions
DB scheme funding: COVID-19 guidance for employers
This guidance, originally issued on 27 March (see Pensions Bulletin 2020/14) has been adjusted to ensure that it is consistent with the updated trustee guidance and to place more of an emphasis on the benefits of working with the trustees. But it covers the same issues as before – asking employers to keep trustees informed of relevant developments (now explicitly highlighting discussions with other stakeholders, including banks and other lenders), saying that the Regulator will be reasonable in scenarios where trustees are being asked to agree to a previously unforeseen arrangement (so long as certain conditions are met) and continuing to recommend that employers document their position regarding the treatment of their schemes.
COVID 19: An update on reporting duties and enforcement activities
This guidance, originally issued on 9 April (see Pensions Bulletin 2020/16) and setting out certain reporting and enforcement easements, has been recast in the light of the Regulator’s decision to resume most reporting requirements from 1 July 2020 for those running an occupational pension scheme.
The guidance says that from this date, reporting requirements will resume as normal, including for:
- Suspended deficit repair contributions – trustees will need to submit a revised recovery plan or report of missed contributions
- Late valuations and recovery plan not agreed
- Delays in cash equivalent transfer quotations and payments
- Failure to prepare audited accounts
- Master trusts – where formal reporting is expected to resume
The guidance goes on to cover the following:
- Late payment of contributions – the introduced 150-day backstop to reporting of late employer contributions continues. This will be reviewed at the end of September 2020. It now seems clearer that the Regulator has only DC schemes in mind
- Chair’s statements and failure to prepare audited accounts – the Regulator will continue not to review any DC chair’s statements it receives – now until 30 September 2020 – they will be returned unread. The Regulator will take a pragmatic approach to late preparation of audited accounts and will accept delays to 30 September 2020
- Investment governance – the Regulator does not expect to take regulatory action if a review of a statement of investment principles (or statement in relation to any default arrangement) is not delayed beyond 30 September 2020
Outside the guidance the Regulator has said the following in its press release:
- Annual benefit statements – the Regulator will continue to take a pragmatic approach accepting that the impact of Covid-19 means schemes need additional time to issue these to members
- DB transfers – trustees should continue to issue a template letter to all members requesting a transfer value quote (see Pensions Bulletin 2020/18) and monitor requests for concerning patterns. Trustees who identify unusual or concerning patterns should contact the Financial Conduct Authority
Scheme administration: COVID-19 guidance for trustees and public service
Minor changes have been made to this guidance, originally issued on 2 April (see Pensions Bulletin 2020/15). The changes comprise maintaining services for potentially vulnerable members and some additional content on reducing the burden on administrators.
Comment
The review of this guidance is unsurprising as the original easements were proposed for a three-month period ending on 30 June and so an update at this time, now that the Regulator has had a chance to assess how pension schemes and employers are navigating these challenging times, was to be expected. It is however telling that the Regulator has acknowledged that some DB sponsors are likely to continue to ask to suspend or reduce contributions for the foreseeable future. Separately, the reassurance from Charles Counsell, the Regulator’s Chief Executive, that it will continue to take a “flexible and pragmatic approach” to Covid-19-related breaches will be welcome.
NEST reports low opt-out rates following last year’s increase in auto-enrolment contributions
NEST has published interesting analysis examining what impact last year’s increase in minimum auto-enrolment contributions to 8% has had on the opt-out rates of its members.
The headline result is that after the second phased increase in April 2019 the opt-out rate of newly enrolled members did increase from 6% to 9%.
The NEST research also found that the second phased increase led to a small rise in cessations by existing members but broadly speaking the longer a member had been enrolled, the less likely they were to leave NEST. This suggests that retirement savings through NEST have become normalised.
Comment
This is one of the first publications analysing the effect of the 2019 contribution increase. Whilst the rate of opt-outs by new joiners did show a material increase proportionately, the fact that the opt-out rate has remained below 10% is a good result for the policy and shows the positive effect of the likely inertia by existing members.
Although it only covers NEST’s own membership it is likely to be reflective of the national workforce and thus will be of great interest to policymakers at DWP as and when they start the next review of the auto-enrolment requirements.
Covid-19 pension-related announcements
Since last week’s Pensions Bulletin, announcements and posts influenced by the Covid-19 health emergency in the world of pensions include the following:
- On 12 June HMRC issued a policy paper setting out how the Coronavirus Job Retention Scheme will change from 1 July, with a useful table showing how the Government’s support for wages and associated costs will reduce from August through to October. In particular employers will have to pay NICs and pension contributions for furloughed employees from August. This policy paper follows the announcement made by the Chancellor about these changes on 29 May (see Pensions Bulletin 2020/23). The necessary Treasury Direction is awaited. The Scheme is due to end on 31 October
- On 15 June the Pensions Regulator updated its automatic enrolment and pension contributions guidance, last extended on 6 May (see Pensions Bulletin 2020/20) in order to reflect the above changes to the Coronavirus Job Retention Scheme. In particular, the guidance now acknowledges the new HMRC rules permitting employees to work part-time after 1 July whilst still being furloughed and that for new claims after 1 August employers cannot claim their pension contribution for furlough pay. The new guidance also extends, from 30 June to 30 September, the cut-off before which if there has been a breach of the 60-day consultation period where employer contributions are proposed to be reduced to the statutory minimum in the context of a DC scheme, the Regulator is likely not to take regulatory action
- On 16 June the Money and Pensions Service (MaPS) published its 2020/21 Corporate Plan, which had been delayed since April. In the context of the impact of Covid-19 on its pensions guidance service, MaPS notes it saw a small initial drop in overall demand for pensions guidance, but received an increased number of calls on certain matters, including from those concerned about the impact of market volatility on their pensions savings, those unsure whether they should push back their planned retirement, and those dealing with the impact of bereavement or ill health, as well as a range of other challenges resulting from the pandemic. MaPS expects overall demand to return to at least normal levels in the near-term, with the potential for some spikes later in the year due to the economic challenges – for example, scheme closures as a result of business failures.
Comment
The HMRC policy paper is short but will require payroll teams to understand the position as it changes from month to month over the summer.
April 2020 RPI was incorrect but remains the official figure
The Office for National Statistics has issued a correction notice in which it says that, due to an error, the published RPI annual growth rate of 1.5% in April should have been 1.4%. However, in line with the published revisions policy, the index level for April 2020 will not be corrected and so the 1.5% annual increase stands.
The data issue causing the error has been corrected and so will not affect the May 2020 and future RPI figures. The error occurred because the source data used in the compilation process did not accurately reflect the level of interest rates in the mortgage market.
Comment
Those pension schemes that use the April RPI to set pension increases will likely be paying more out to pensioners than had the ONS got its sums right. But this should be short-lived as any increase by reference to April 2021’s RPI should cancel out any unintended generosity as a result of the April 2020 figure.
