Pensions Bulletin 2023/50
Pensions & benefits Pensions dashboards Policy & regulation
- DB schemes – Pensions Regulator sets out expectations of corporates in M&A activity
- Purple Book highlights further improvements in DB scheme funding positions
- FCA launches advice guidance boundary review
- FRC finalises TAS 300
- PPF restructuring and insolvency guidance refreshed and extended
- Pensions Regulator updates cyber security guidance
- PASA’s dashboard “connection ready” guidance and call to action
- Certain EU-influenced pensions case law now codified in UK law
DB schemes – Pensions Regulator sets out expectations of corporates in M&A activity
In a recent speech, Nausicaa Delfas, Chief Executive of the Pensions Regulator, has set down some expectations in relation to the conduct of corporates where M&A activity involves a DB scheme.
She starts by saying that the Regulator’s role is not to prevent transactions, but to make sure that DB scheme members’ interests are protected and that when M&A activity takes place without mitigating against potential harms to the scheme, the Regulator can consider using its anti-avoidance powers that have been significantly extended by the Pension Schemes Act 2021.
She then turns to the missing piece in the Regulator’s extended powers, saying that the Government has committed to extending the type of events that trustees and employers must notify the Regulator about under the Notifiable Events Regime and that the final regulations (see Pensions Bulletin 2021/37) will be brought forward in due course.
In the meantime, in line with previous guidance from the Regulator, she asks that companies engage with trustees from the outset of any M&A activity and always treat the scheme fairly with other creditors. Trustees, for their part are expected to reach out to the Regulator. The Regulator says that it will talk directly to employers, group companies, third party purchasers and banks, can respond quickly to meet commercial deadlines, and will assess transactions where there is material detriment to the scheme, to ensure there are appropriate mitigations in place.
She goes on to say that there are three things management teams can do to ensure that the Regulator is satisfied in any M&A activity:
- First, they should provide trustees with direct access to the bidder at the earliest opportunity
- Second, corporates should ensure that any M&A activity is backed with a well thought out business plan which considers the scheme’s long-term funding objectives and how they will ensure the scheme stays protected
- Third, corporates should stay true to their word. If the trustees and the Regulator agree an acceptable arrangement, it should not be watered down after the transaction has taken place
She concludes by saying that the Regulator is not in the business of slowing down M&A transactions unnecessarily, provided savers’ interests are met. The Regulator wants schemes to be treated equitably and so early engagement in the process will give the best chance that agreement can be gained all round.
Comment
To a large extent these expectations reflect market practice as it has evolved in recent times following the significant increase in Regulator powers. It remains important for all parties involved in M&A activity to seek early advice on the appropriate time to get the Regulator involved, recognising the various regulatory risks and expectations.
As to the notifiable events extension, the last we heard, on 30 November was that there was “significant uncertainty around delivery” of the changes (see Pensions Bulletin 2023/49).
Purple Book highlights further improvements in DB scheme funding positions
On 6 December 2023 the PPF published the 18th edition of the Purple Book, which illustrates the continuing – and accelerated – trend of improvements in aggregate DB scheme funding levels. The net funding position on a section 179 basis of schemes in the DB universe improved to a surplus of £358.9bn in the year to 31 March 2023 (from £193bn in 2022) and the aggregate funding ratio of these schemes on a section 179 basis improved from 113.1% to 134.3%.
As at 31 March 2023, only 16% of schemes were in deficit on a section 179 basis (18% fewer than a year previously, which itself had been a historical low), with an aggregate deficit for these schemes of £8bn (down from £61bn at 31 March 2022). It is these schemes that could impact the PPF should insolvency strike their sponsors.
The Purple Book also reveals that the number of schemes in the DB universe has fallen slightly from 5,131 to 5,063 over the year due to schemes winding up, merging or claiming on the PPF. The universe also remains highly fragmented, with a long tail of smaller schemes.
The key themes of the Purple Book 2023 were also highlighted in a blog by the PPF’s Chief Actuary, Shalin Bhagwan.
Comment
Both the Purple Book and the accompanying blog highlight the significant improvement in DB scheme funding positions, which is attributed mainly to rising gilt yields driving down liability values, while sounding a note of caution around as yet unknown consequences of the full impact of the LDI crisis in 2022. The blog also makes it clear that the PPF is keen to run any public consolidator that the Government might choose to establish.
FCA launches advice guidance boundary review
The Financial Conduct Authority and HM Treasury are seeking views about three proposals to help people make more informed investment and pensions decisions. This is fulfilling a promise made in August (see Pensions Bulletin 2023/32).
These proposals are intended to address the problem of the “advice gap” that exists around financial decisions. Broadly this is the gap between generic information or guidance and specific tailored advice or recommendations based on analysis of detailed holistic information about the individual concerned. The latter requires the person giving the advice to be FCA-authorised and, for workplace pension schemes in particular, this has long been seen as a problem area when trustees are trying to help their scheme members make informed decisions about complex financial matters.
The three proposals, which the FCA considers could potentially all work alongside each other, are as follows:
1. Clarifying the boundary between advice and guidance
The FCA will further clarify the boundary between regulated advice and general guidance and provide greater certainty that where certain support is being provided it does not constitute a personal recommendation in given circumstances under the current regulatory framework.
An example given of where this could be helpful is a pension provider warning a consumer about their withdrawal rate potentially being unsustainable by explaining for how long the pension pot may last at that withdrawal rate.
2. Targeted support
Targeted support would introduce a new regulatory framework under which broader support to consumers could be offered based on limited information and without explicit charges. This would enable providers to help consumers make an informed decision based on what would be appropriate to a person in similar circumstances, ie “people like you”. This targeted support could be offered without explicit charges but with clear disclosure of how a consumer pays for the service through other associated charges.
One of the examples given for how this might work is where a customer contacts their pension provider to access their pension savings for the first time. The provider describes the different decumulation options available. The provider then asks the customer a limited number of questions, based on their individual pension pot, to understand their circumstances and their attitude to risk. Based on this, the pension provider identifies a product designed for the needs, characteristics and objectives of a target market that aligns with the customer’s answers.
3. Simplified advice
Firms will be permitted to offer a simplified form of advice that will enable them to support consumers with simpler needs and smaller sums to invest, and to do so in a commercially viable way. This is intended to differ from the current holistic regulated advice regime by being a one-off service whereby a firm would take into account only relevant information about a specific consumer need. However, it is important to note that the FCA is proposing that all pension decumulation decisions are excluded from simplified advice.
An example given of where simplified advice might be appropriate is where a consumer has a lump sum saved in deposit accounts. They wish to invest for the long term, targeting growth in excess of inflation and cash interest rates. They have never invested before and are nervous about making a decision on their own. They approach a firm offering simplified advice as they want a recommendation that is personal to them, at that point of time, and on this specific need. They are willing to pay a fee for this service.
Other matters
The review also has a short chapter covering the specific considerations for pension scheme trustees and although it does attempt to set out in what situations trustees (and employers) will need FCA authorisation it does acknowledge that many trustees have raised the advice gap as constraining the support they can provide. The review also acknowledges that DWP’s recent decumulation proposals (see Pensions Bulletin 2023/47) will need to be taken into account.
Additionally, the review asks for feedback about how these proposals may affect FCA-authorised firms that sponsor a Master Trust, with the FCA noting that although Master Trusts themselves are regulated by the Pensions Regulator, the service they offer is much closer to a financial service when compared to a traditional single employer pension scheme.
Feedback is requested by 28 February 2024.
Comment
The FCA’s proposal that pension decumulation decisions are too complicated to incorporate into a simplified advice regime is sure to raise some eyebrows and it will be interesting to see what response that specific proposal receives.
Overall, we welcome the review and hope that it will result in savers and consumers making financial decisions that lead to better outcomes. We also hope that the review will provide greater certainty to scheme trustees about the support they can offer to members, particularly in light of the DWP’s proposals about decumulation.
Finally, it is interesting to read that the FCA is considering the impact of these proposals on Master Trust operations which up to now have been regulated by the Pensions Regulator.
FRC finalises TAS 300
The Financial Reporting Council has announced the publication of version 2.0 of Technical Actuarial Standard 300: Pensions (TAS 300). This follows a consultation launched in May 2023 in which the FRC’s proposals were set alongside that for a new TAS 310 on collective money purchase schemes (see Pensions Bulletin 2023/19).
As had been proposed in May, the new version of TAS 300, which comes into force in respect of technical actuarial work in scope and completed on or after 1 April 2024, includes revisions and new material in relation to actuarial factor advice, bulk transfers and superfunds. The bulk of the standard, that deals with scheme funding matters, is unchanged, other than the addition of one new principle. Thankfully, the FRC has returned to the version 1.0 definition of such work – its May 2023 proposal had unintended consequences as we reported then.
Turning to the other changes:
- The actuarial factor advice section is largely as proposed, but with adjustments to reflect consultation responses
- The bulk transfer section is also largely as proposed, but with some clarifications as to the circumstances in which the various provisions apply. However, the scope has been extended with the intention of picking up certain buy-in work
- The section dealing with superfund capital adequacy has been adjusted to make clear that it covers two specific scenarios
The FRC is also considering feedback received in relation to TAS 310 and will issue a separate feedback statement and impact assessment in due course. In what seems to be an unfortunate error, the new version of TAS 300 no longer carves out technical actuarial work undertaken for collective money purchase schemes.
The FRC has set up a webinar on 11 January 2024 for stakeholders to discuss the revised standard.
Comment
In most areas the FRC has responded constructively to concerns raised during the consultation process and the new TAS 300 should be capable of ready adoption by pensions actuaries in 2024. However, difficulties remain with the bulk transfer section as the FRC decided against setting out separate principles for the very different pieces of work that fall under this heading.
PPF restructuring and insolvency guidance refreshed and extended
The Pension Protection Fund has refreshed its suite of nine restructuring and insolvency guidance notes and has also added four more. The new additions are as follows:
- Guidance Note 10 – which sets out the PPF’s approach to certain claims that a DB scheme may have after the insolvency of an employer of that scheme, such as for the pension scheme ‘section 75’ deficit and on the Redundancy Payments Service
- Guidance Note 11 – which sets out the PPF’s approach where there is a proposal from a prospective employer to ‘rescue’ the scheme from PPF assessment. The guidance note includes how the PPF addresses conditional scheme rescues
- Guidance Note 12 – which provides some detailed assistance in completing Redundancy Payments Service forms to ensure prompt processing of claims by the Service in respect of unpaid contributions to the scheme and to help reduce the number of instances in which claims are rejected for technical reasons
- Guidance Note 13 – which, following the recent Biwater case (see Pensions Bulletin 2023/31), sets out the tests and issues that the PPF believes are key for trustees deciding whether a DB scheme should be allowed to continue with a distressed employer. This guidance note has been produced with legal assistance
Comment
These latest additions to the guidance note suite are a useful blend of the underlying legislation and how the PPF operates in these areas. Of particular note is Guidance Note 13, which starts by making the point that in a distressed employer case the trustees cannot take advantage of the existence of the PPF to justify conduct that would otherwise be improper.
Pensions Regulator updates cyber security guidance
The Pensions Regulator has announced the updating of its guidance on cyber security, first released in April 2018 (see Pensions Bulletin 2018/16). As before, it is intended to help scheme trustees and managers meet their duties to assess risk, ensure controls are in place, and respond to incidents.
The guidance is intended to set out the practical steps that can be taken to meet the Regulator’s expectations that are to be set out in the forthcoming General Code.
The guidance is notably different to the April 2018 version. One change is that at the end the Regulator is now asking to be sent reports of significant cyber incidents, on a voluntary basis, as soon as reasonably practicable so that it can build a better picture of the cyber risk facing the pensions industry and scheme members. For this purpose, it seems that an incident is significant if it is likely to result in any of the following: a significant loss of member data; major disruption to member services; and a negative impact on a number of other pension schemes or pension service providers.
Comment
We welcome the development of this guidance in what is an ever-changing area. In particular, it has much more to say about being prepared for and responding to cyber incidents, including member communications, reflecting the unfortunate reality that cyber risks can crystallise in pensions systems as we have found out this year (see Pensions Bulletin 2023/20).
PASA’s dashboard “connection ready” guidance and call to action
The Pensions Administration Standards Association has released “connection ready” dashboard guidance which aims to help schemes and providers be in a position to commence the brief process to connect their scheme to the PDP ecosystem (described as the “final 5%” of the work to prepare for dashboards) by their assigned connection deadline date confident that they have completed the preparation (the other “95%” of the work required) that will enable them to meet their duties post connection. These connection dates are staggered dates to be confirmed, but expected to be between late 2024 and October 2026, and the guidance looks to highlight the time, effort and planning that will be required to be “connection ready” by these dates while still providing ongoing administration services.
The guidance explores the key areas of preparation which must be considered and addressed (“assessment”), the outcomes which must be achieved in these areas and how to deliver them (“implementation”) and how success can be evidenced (“evidence”) and links throughout to previous useful material from other organisations as well as to that from PASA. It also includes an example timeline illustrating how the totality of the work required may take 18 months or longer for a single scheme (in isolation) which is yet to address connection.
This guidance is published alongside a “call to action” for schemes and providers which sets out the top five actions schemes need to take now in connection with dashboard connection readiness and is the first in what is expected to be a series of publications of supporting materials including practical tips for certain connection ready activities, checklists of key actions and outlines of connection ready decisions which must be made at a scheme level.
Comment
This guidance is driven by PASA’s serious concerns about the loss of momentum around key elements of preparation for dashboard connection as a consequence of the continuing absence of a formal staging timetable for schemes following the March-announced reset. The illustrative timeline included highlights how important it is that schemes do not de-prioritise their dashboard preparation work, but it is understandable that this is happening in light of all the other priorities that trustees and providers have to consider in the next 36 months.
Certain EU-influenced pensions case law now codified in UK law
The two sets of draft regulations we saw in September that are necessary to codify in UK law a number of court decisions that were influenced by EU law when the UK was an EU member have now been laid in final form. These regulations are necessary because otherwise one of the effects of the Retained EU Law (Revocation and Reform) Act 2023 (see Pensions Bulletin 2023/26) would be for such decisions to lose their effectiveness in UK courts for cases brought after the end of 2023.
- The Pensions Act 2004 and the Equality Act 2010 (Amendment) (Equal Treatment by Occupational Pension Schemes) Regulations 2023 (SI 2023/1308) relate to the Allonby and Walker cases (see Pensions Bulletin 2023/37 for further details)
- The Pensions Act 2004 (Amendment) (Pension Protection Fund Compensation) Regulations 2023 (SI 2023/1309) relate to the Hampshire and Hughes PPF compensation cases (see Pensions Bulletin 2023/37 for further details)
Both sets of regulations come into force immediately before the end of 2023. For the PPF cases the PPF has issued guidance setting out the methodology for calculating the minimum level of compensation required under the Hampshire judgment for schemes entering an assessment period on or after 1 January 2024.
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.
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