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JANUARY/FEBRUARY 2020 Pensions Round-Up
JANUARY/FEBRUARY 2020
Pensions Round-Up
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ContentsIntroduction 03
The Pensions Regulator 04
PPF and DWP 09
Case law 10
Legislation 12
HMRC 14
Other news 16
On the horizon 17
Contact details 18
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Introduction
Welcome to the latest edition of DLA Piper’s Pensions Round-Up newsletter in which we provide an overview of developments in pensions legislation, case law and regulatory guidance.
In this edition we look at key developments from January and February 2020 including the following.
• The Pensions Regulator: updates to the guidance on DB to DC transfers; the response to the July 2019 consultation on the future of trusteeship and governance; and a compliance and enforcement bulletin.
• Pension Protection Fund: the publication of the Purple Book 2019.
• Department for Work and Pensions: the outcome of the annual review of the automatic enrolment earnings trigger and qualifying earnings band.
• Case law: a High Court judgment concerning the construction of an employer power in a scheme rule on pension increases; and a High Court judgment which considered whether a scheme’s rules permit an index other than RPI to be used for calculating pension increases.
• Legislation: the re-introduction of the Pension Schemes Bill to Parliament; regulations making amendments to the provisions of the Local Government Pension Scheme concerning exit credits; and a consultation
on amendments to the trust registration elements of the anti-money laundering legislation.
• HMRC: the publication of countdown bulletins; pension schemes newsletters; and a newsletter about GMP equalisation.
• Other news: a consultation from the Pensions Administration Standards Association on a draft code of good practice in relation to DB transfers.
• On the horizon: a timeline of some of the key future developments in pensions to help employers and trustees plan ahead.
If you would like further information about any of the issues raised in this edition of Pensions Round-Up, please get in touch with Cathryn Everest or your usual DLA Piper pensions contact. Contact details are at the end of this newsletter.
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The Pensions RegulatorDB to DC transfersIn the November 2019 edition of Pensions Round-Up (page 4) we reported on updates made to the part of the Regulator’s “DB to DC transfers and conversions guidance” about the statutory requirement for trustees to check that members with safeguarded benefits (such as defined benefits) have received appropriate independent advice from an adviser with the relevant permission under the Financial Services and Markets Act 2000 before they transfer or convert their safeguarded benefits to acquire flexible benefits (such as money purchase benefits). This requirement is subject to an exception where the value of the member’s benefits in the scheme is £30,000 or less. Before carrying out the transfer, the trustees must check that the company or business providing the advice has permission to carry on the relevant regulated activity by checking the Financial Services Register maintained by the Financial Conduct Authority (FCA).
The updates to the guidance in November related to some changes being made to the FCA’s Financial Services Register. It noted that, as a result of the FCA replacing its Approved Persons Regime with the Senior Managers and Certification Regime, certain individuals, such as those carrying out customer-facing roles, will be subject to a certification regime carried out by their firm and most will not appear on the FCA register going forward. The guidance also stated that a new FCA directory containing data on certified individuals will be released in 2020. A new paragraph in the guidance stated that trustees should continue to check the Financial Services Register for firm
details and went on to state that they “will then need to contact firms to confirm that the relevant individual works for that firm or check an appropriate third-party directory”. We noted in the November 2019 edition of Pensions Round-Up that trustees of DB schemes should liaise with their administrators about updating the scheme’s transfer processes in order to reflect this new paragraph of the guidance.
There have been further changes to the guidance since those made in November 2019. Some updates have been made to the list of bullet points which set out how to verify details on the Financial Services Register including to note why the Regulator recommends using the firm reference number as the search criteria where possible. The sentence referred to above has also been further updated so that it states that trustees “can then contact firms to confirm that the relevant individual works for that firm or check an appropriate third-party directory”.
The section of the guidance on applying to the Regulator for more time to complete a transfer request has also been updated by adding a link to the relevant form and some new wording about submitting applications at least six weeks before the deadline for a transfer request expires in order to give the Regulator sufficient time to consider the request.
The issue of DB to DC transfers subject to the statutory advice requirement is also mentioned in a blog published by the Regulator on 31 January which includes that:
• the Regulator expects trustees “to provide all relevant information to savers in a clear and timely manner so that they have time to obtain appropriate independent financial advice”;
• trustees should not transfer any benefits until they have received a written request from the member “and specifically checked that they have received any necessary independent financial advice from an appropriate adviser”; and
• ensuring that transfers are carried out correctly and safely “is a cornerstone of good governance”
Trusteeship and governanceIn the July 2019 edition of Pensions Round-Up (page 4) we reported on the Regulator’s “Future of trusteeship and governance” consultation which looked at proposals in three key
The Regulator does not explain why the November version of the guidance stating that trustees will “need” to contact the firm to confirm that the relevant individual works for it has since been updated to state that trustees “can” do so. It may be because the legislation states that the trustee must check that “the company or business providing that advice has permission” to carry on the relevant regulated activity “by checking the Financial Services Register maintained by the FCA”. However, as the Regulator’s guidance refers to contacting the firm in this way, it seems to us that it would be good practice for trustees to follow this step and trustees should consider updating their transfer processes to reflect this.
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areas – trustee knowledge and understanding (TKU), scheme governance and DC scheme consolidation. On 10 February the Regulator published its response to the consultation and reported that a record 114 written responses were submitted during the consultation highlighting broad support for the Regulator’s view that all savers should benefit from efficient and well run pensions with the right people in place to make good investment decisions and deliver value for money. The response document provides a summary of the responses received, including feedback gathered at stakeholder events, and sets out what the Regulator intends to do next. In this article we focus on some of the key actions that the Regulator intends to take.
TRUSTEE KNOWLEDGE AND UNDERSTANDINGThe Regulator notes that although the concept of TKU has not changed since it was introduced, the nature of what trustees need to know and understand has changed as the law and risks facing pension schemes has altered. It therefore intends to review and update its code of practice on TKU, with the review also extending to the scoping guidance on TKU and supporting web pages. As part of this work, the Regulator will look to incorporate the TKU expectations which were communicated in its 21st century trusteeship campaign. It will also
seek to simplify how it presents its expectations on TKU so that these are differentiated by trustee role type and type of scheme.
In July 2019 the Regulator also published a statement reporting on its plans to combine the content of its 15 current codes to form a single, shorter code and to consult on this. The response reports that the consultation on the single web-based code will include content on new topic areas such as ESG (environmental, social and governance), including climate change, and will provide an easier look-up function for trustees to locate content more easily. The Regulator states that the single web-based code will form the foundation for its subsequent review and revision to TKU-related content.
Once the revised TKU content and guidance is in place, and after a reasonable period has been given for schemes to adjust, the Regulator plans to run a regulatory initiative on TKU. Regulatory initiatives involve the Regulator contacting a large number of schemes about a particular risk and engaging with those that have not adequately addressed the risks identified. The response notes that it is therefore important that, in advance of that initiative, the Regulator is clear about how TKU compliance and trustee competence can be demonstrated in practice. The consultation asked questions
about whether there should be legislative change to introduce requirements for trustees to demonstrate how they have acquired a minimum level of TKU and a minimum level of ongoing learning. However, the response confirms that, rather than seek to change the TKU legislation to require qualifications or Continuing Professional Development (CPD), the Regulator will look to articulate a range of acceptable methods for demonstrating TKU when it reviews and revises the TKU code and guidance. The Regulator will also explore whether to set expectations on what it thinks is appropriate for ongoing learning including setting indicative number of hours and types of activities that count towards learning.
The response also considers the Trustee Toolkit, stating that the Regulator intends to review the Toolkit to see whether and where it can be improved, with the review extending to how the Regulator can improve learning so that content is relevant and how trustees can more easily convert learning into the practical steps needed to manage their scheme well.
The Regulator also intends to run a targeted employer campaign to remind employers of their duties in relation to paid time off for performing trustee duties and undergoing relevant training.
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SCHEME GOVERNANCE STRUCTURESThe response reports that the Regulator believes that it would be beneficial to create an industry working group to bring together “the wealth of material and experience that is available to help pension schemes (and employers) improve the diversity of scheme boards”. In the first instance the Regulator will chair the group (with a view to others taking on the role later) and envisages that the group will deliver: (i) a clear definition of what is meant by diversity and inclusion; (ii) good and best practice guidance on board composition and how boards can make the most of the pool of potential trustees they have available to them; (iii) practical tools and case studies to promote the recruitment of diverse trustees; (iv) inclusive material that can help to promote the benefits of becoming a trustee; and (v) engagement with employers to recognise the benefits of the trustee role in personal development of employees. The Regulator does not currently intend to pursue the introduction of a requirement for schemes to report on the steps they are taking to increase diversity on their boards but does not rule out revisiting this idea if the evidence suggests a firmer approach needs to be taken in the future.
The consultation also considered the issue of accredited professional trustees. Whilst it acknowledged that the number of schemes relative to the number of professional trustees means that it would not currently be feasible to require a professional trustee to sit on every board, it noted that the number of schemes is expected to be much smaller in five years’ time and asked whether, in due course, it should be mandatory for schemes to engage a professional
trustee. The Regulator reports that a large majority of responses were against this proposal. Noting that the Regulator recognises this is not currently feasible and that it hopes that the Association of Professional Pension Trustees (APPT) standards for professional trustees and the accompanying accreditation process will help to bring greater consistency in quality and, in turn, provide greater confidence that accredited professional trustees meet the standards the Regulator expects, the response states that it does not propose to take further action yet but may well revisit this idea in the future.
Another issue considered by the consultation was sole trusteeship, with the response stating that the Regulator still has concerns about some aspects of sole trusteeship, particularly around how effective some of the models are at dealing with conflicts of interest and ensuring saver engagement. It therefore intends to commission research on the scale and reach of sole trusteeship in occupational pension schemes in order to gain a better understanding of the landscape and identify any patterns or trends related to their use. The Regulator also states that it welcomes and supports the APPT in the development of an industry code for sole trusteeship.
DC CONSOLIDATIONThe response reports that the Regulator will continue to monitor DC consolidation activity and work with the industry and the DWP to find solutions to overcome barriers to consolidation.
Other points of note in to the section on DC consolidation include the following.
• The Regulator states that it would like to assure those who expressed concerns regarding a possible ‘blanket approach’ that this is not its intention. It states that if a scheme is well-run and can demonstrate that it is offering value for members, the Regulator would not push the trustees to consider consolidation.
• One of the consultation questions was whether it would be helpful for the Regulator to provide guidance in relation to the factors to be considered when winding up schemes with guarantees. The response states that the Regulator does not propose to provide guidance in the immediate future for a number of reasons including that responses in relation to solutions for this issue give it confidence that there are viable solutions for winding up such schemes while preserving any guarantees. The Regulator also notes that the DWP is currently considering the response to its February 2019 consultation on investment innovation and consolidation for DC schemes (reported on page 5 of that month’s edition of Pensions Round-Up). It states that, in support of regulations to encourage further consolidation, the DWP intends to produce statutory guidance to help trustees establish whether their scheme is offering value for members and whether they should consider improvements or consolidation and that this guidance is likely to make specific reference to schemes with guarantees and how trustees might value the benefits they offer.
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• This section also notes that the Regulator is working with the Financial Conduct Authority to help independent governance committees and trustees of DC schemes carry out more effective ‘value for members’ assessments.
Compliance and enforcement bulletinOn 20 February the Regulator published its latest quarterly compliance and enforcement bulletin which covers the period from October to December 2019.
In relation to automatic enrolment, the bulletin reports that in the period October to December 2019 the Regulator used its power to demand information 339 times and its power of inspection 60 times. It also issued 9,981 compliance notices, 10,842 unpaid contributions notices, 11,490 fixed penalty notices and 5,218 escalating penalty notices.
The Regulator’s last two compliance and enforcement bulletins reported on two of the three areas of supervision – relationship supervision and event supervision. This latest edition looks at regulatory initiatives which involve the Regulator “communicating directly with anything from tens to hundreds of schemes, regardless of size, zeroing in on areas of risk we’ve identified through our intelligence teams, data analysis and learnings from schemes in relationship or event supervision and thematic reviews”. The Regulator states that it contacts schemes in writing, making clear what its expectations are (whether it is to comply with the law or to raise standards) and that it gives schemes a reasonable amount of time to take action, and provides guidance and support
to help them collate the information the Regulator needs. The bulletin explains that the Regulator has already launched four regulatory initiatives – covering fair treatment (pension scheme contributions versus dividends), lengthy recovery plans, investment governance and record-keeping – and the Regulator has seen very encouraging results from them all so far. A case study is also noted which relates to a scheme where, as a result of the Regulator’s communications regarding fair treatment, the trustees and employer agreed an additional £15 million lump sum payment to the scheme, front-end loading their recovery plan.
The bulletin also reports on powers not relating to automatic enrolment used between October and December 2019 which include that the Regulator issued a mandatory penalty in relation to the failure to comply with the requirement for a chair’s annual statement 17 times and issued financial penalties 8 times in relation to failure to complete a scheme return or keep registrable information up to date.
Pension scamsOn 6 February a blog by the Chair of the Pension Scams Industry Group (PSIG) was added to the Regulator’s website. The blog reports on two major initiatives that PSIG is working on. The first is a comprehensive survey (which closed on 14 February) which looks at the action industry is taking to protect pension scheme members and will also provide views on where resources should be focused in future. The second is an initiative on sharing intelligence with the aim of building “a system where PSIG members can see intelligence from other members without having to
reinvent the same wheel time and again”. PSIG believes that a private industry scams intelligence tool will help: (i) better protect members; (ii) reduce the cost of checking whether something that appears suspicious is likely to be a scam; and (iii) streamline reporting of suspicious players to Action Fraud.
Climate changeIn February an exchange of correspondence between the DWP and the Regulator was published. The DWP’s letter follows on from the publication of the Government’s Green Finance Strategy in July 2019 and sets out its views on integrating climate change risks and opportunities into the Regulator’s activities. The response from the Regulator includes information about some of the actions that it is taking including its focus on master trusts, raising questions with all schemes that come within its relationship supervision approach and questions on climate change in the annual governance survey of DC schemes. The response also includes that the Regulator: (i) is working on its strategy for dealing with the financial risks arising from climate change which will set out what it will do and how it will resource this area; (ii) is working alongside the DWP and industry bodies on guidance that will help trustees identify, assess and disclose their scheme’s exposure to climate risk (a consultation on this guidance was published in March and we will report on it in the March/April edition of Pensions Round-Up); and (iii) will be reporting on climate change adaptation in the occupational pensions sector by December 2021 and will incorporate into its work the DWP’s suggestions about what the report should cover.
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DB landscapeIn January the Regulator published the fourth edition of “The DB Landscape” which is an annual report on the DB pension schemes that it regulates. The information is taken from the pension schemes register on 31 March 2019 and includes DB and hybrid occupational schemes with more than one member. The Regulator notes that its publication differs from the PPF’s Purple Book as the data for the Purple Book includes only those DB schemes eligible for the PPF. The Regulator’s DB landscape publication includes information on scheme status and membership, scheme funding, indexation and public service schemes. Findings include that: (i) 13% of DB/hybrid schemes remain open to new members, 43% are closed to new members, 40% are closed to future accrual and 3% are winding up; (ii) 52% of memberships are in schemes which are closed to new members; and (iii) 10% of private sector memberships are active compared with 37% of those in public service schemes.
DC statisticsOn 6 February the Regulator published its annual DC trust report which includes that: (i) since the beginning of 2010, the total number of schemes with 12 or more DC members, including hybrids, has declined by 62% from 4,560 to 1,740; (ii) membership in schemes with 12 or more members increased by 17% over the past year and has increased by 723% since the beginning of 2010; (iii) the total amount transferred in to DC
schemes (which includes transfers from DB schemes and from other DC schemes) has decreased by 27% since last year from £5.5 billion to £4 billion; and (iv) average assets per member have declined every year since 2013 although the rate of decrease is slowing with a decrease of 2% since last year compared to 6% the year before.
DB schemesThe Regulator published a blog post on 10 February reporting on some of the work that it will be involved in going forward including that it plans to consult on a revised DB funding code proposing that employers will be able to follow a ‘fast track’ route or a more ‘bespoke’ approach. The bespoke approach will be subject to greater regulatory scrutiny and fast track will be a more prescribed route but with less regulatory scrutiny. The Regulator published the first of two consultations on this subject in March which focuses on funding principles (the second consultation will look at the detail of the code). We will provide further information on the consultation in the March/April edition of Pensions Round-Up.
A blog post published on 27 February entitled “A maturing and innovating landscape for defined benefit pensions” includes that the Regulator knows that advisory firms and providers are beginning to explore and promote novel business models including: (i) various structures to consolidate benefits including superfunds; (ii) increasing scale and sharing risk; and (iii) solutions for schemes where
there is no substantive business attached or there is a risk of insolvency. The Regulator states that it encourages all industry innovators to get in touch so that the Regulator can understand these models and support innovation in the market where it can improve outcomes for savers.
AdministratorsIn February the Regulator published the text of a speech given by its Executive Director of Regulatory Policy, Analysis and Advice at the Pensions Administration Standards Association annual conference. The speech includes some information about the Regulator’s plans over the next couple of years to build strong relationships with a handful of strategically important administrators in the way that it has built relationships with strategically important schemes in relationship supervision. This includes that: (i) the Regulator will risk assess the top 75 administrators in the UK to identify strategically important administrators with whom it wants to build one-to-one relationships; (ii) by engaging directly with administrators, it feels that it can better understand the issues facing them and identify risks which impact multiple schemes; (iii) engagement will be focused on particular areas depending on risk and priority but could include issues such as the transition of schemes into and out of the administrator, data quality controls and scams due diligence; and (v) the Regulator would look to feed back any lessons learnt from its engagement to the industry.
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PPF and DWPLevy ceiling and PPF compensationThe Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling and Compensation Cap) Order 2020 was made on 30 January 2020. The Order increases the following amounts from April 2020 to ensure that rises in average earnings are taken into account so that they maintain their value: (i) the levy ceiling which controls the maximum amount of levy that the PPF can charge schemes; and (ii) the cap on PPF compensation.
The Explanatory Memorandum also refers to the CJEU judgment in the case of Bauer. In summary, as we reported in the December 2019 edition of Pensions Round-Up (page 8), the CJEU concluded that the relevant Directive on protection of employees in the event of the insolvency of their employer must be interpreted as meaning that even if a reduction in benefits is such that the member receives at least half of their accrued benefits, the reduction may still be regarded as manifestly disproportionate where, as a result, the former employee would be below the at-risk-of-poverty threshold determined by Eurostat for the Member State concerned. A footnote in the Explanatory Memorandum states that the threshold is set at “60 per cent of the national median equivalised disposable income” and that the “most recent figure published for the UK is £11,142 for 2018”. It also notes that the PPF and the DWP are carefully considering the implications of the Bauer judgment and will respond in due course.
Purple Book On 17 January the PPF published the fourteenth edition of the Pensions Universe Risk Profile (The Purple Book) which provides data on DB pension schemes eligible for the PPF. The main analysis in the Purple Book 2019 is based on the most recent scheme returns submitted to the Regulator by 31 March 2019 which covered a dataset of 5,422 schemes which the PPF states represents virtually all PPF-eligible schemes and PPF universe liabilities. The Purple Book looks at scheme demographics, scheme funding, funding sensitivities, insolvency risk, asset allocation, risk reduction, the PPF levy 2018/19, claims and schemes in assessment, PPF compensation 2018/19 and PPF risk developments.
Findings reported in the Purple Book 2019 include that: (i) there are estimated to be 5,436 schemes in the PPF eligible universe as at 31 March 2019, a reduction from 5,524 as at 31 March 2018; (ii) the proportion of schemes open to new members decreased slightly to 11% from 12% in the Purple Book 2018; (iii) the proportion of schemes closed to future accrual increased to 44% from 41% in 2018; (iv) on a section 179 basis, the aggregate funding ratio increased to 99.2% from 95.7% and, on an estimated full buy-out basis to 77.3% from 72.9%; and (v) the total number of contingent assets submitted to the PPF for the 2019/20 levy year was 419, which was 100 fewer than in 2018/19 largely due to fewer type A contingent assets being certified for PPF levy purposes.
Automatic enrolmentIn February the DWP announced the outcome of the annual review of the automatic enrolment earnings trigger and qualifying earnings band. The review concluded that the earnings trigger will remain unchanged and the lower and upper earnings limits will continue to be aligned to the National Insurance Contribution thresholds which means the following figures apply from 6 April 2020.
• The qualifying earnings trigger which jobholders have to exceed in order to qualify for automatic enrolment will remain at £10,000.
• The lower limit of the qualifying earnings band on which the minimum contribution requirements are measured will increase to £6,240 (from £6,136 in 2019/20). This is also the earnings threshold which workers who are eligible to opt in rather than be automatically enrolled must exceed if they are to be entitled to an employer contribution under the legislation.
• The upper limit of the qualifying earnings band on which the minimum contribution requirements are measured will remain at £50,000.
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Case lawPensions increases – employer powerIn January the High Court gave its judgment in a case concerning the construction of a rule in the Britvic Pension Plan on increases to pensions in payment and a subsidiary question about a rule on revaluation of deferred pensions. The scheme in this case was set up as a result of a corporate demerger and the only members were those who transferred in.
The relevant rule on pension increases is rule C10(2) which states that: “The part of a pension which exceeds any guaranteed minimum pension in payment is increased on 1st October in each year. The rate of increase is the percentage increase in the retail prices index during the year ending the previous 31 May but subject to a maximum of 5 per cent in relation to Pensionable Employment up to and including 30 June 2008 and a maximum of 2.5 per cent in relation to Pensionable Employment on and from 1 July 2008 (or any other rate decided by the Principal Employer)”. The central question in the case is whether the words “(or any other rate decided by the Principal Employer)”: (i) allow the principal employer to substitute a rate that is higher or lower than would otherwise apply; or (ii) only allow the principal employer to substitute a higher rate. The employer argued that (i) is the correct construction and the representative beneficiary argued that (ii) is correct.
The judgment includes comment on the relevant principles of construction. The background on this point includes that a 2018 Supreme Court judgment, which looked at whether a pension scheme’s rules permitted a change
of index, set out several distinctive characteristics of pension schemes which are relevant to the court’s selection of the appropriate interpretative tools and make it appropriate to give weight to textual analysis. However, the High Court noted that there are certain features peculiar to the present case, in particular that no new members have been able to join the scheme since its inception with the membership consisting only of those who transferred in at the scheme’s inception and who had the benefit of explanatory documents. The High Court therefore thought that in this current case “the need to construe the provisions of a pension scheme so as to give a reasonable and practical effect to the scheme, and the preference for a purposive construction, where appropriate, as opposed to a literalistic one has rather more force than in the general run of pension cases” where certain characteristics of pension schemes set out in the Supreme Court’s judgment will have more relevance and application.
The High Court accepted the employer’s submission that the words “any other rate” apply to the rate of increase and not to the five per cent and two and a half per cent caps. In relation to the central question in this case, the employer’s submissions included that the natural reading of the words “any other rate” encompasses any other rate, whether higher or lower, and that it would change their meaning to restrict them to any other higher rate.
However, the High Court accepted the representative beneficiary’s submission that, both conceptually
and procedurally, the provision creates a two stage mechanism. Firstly, the trustee is required to calculate and then apply guaranteed increases based on the capped percentage increase in the retail prices index over a one year period up to the end of May each year. Secondly, the employer then has a discretion to direct that a higher, but not a lower, rate of increase is to be applied. The High Court also accepted the submission that the employer’s construction involves an excessively literal reading and that this is at odds with the contextual purpose of the provision. Even without considering the admissible background, including the legislative context, the High Court was satisfied that something had clearly gone wrong with the language of the phrase “(or any other rate decided by the Principal Employer)”.
However, the judge thought that the position becomes even clearer when regard is had to the legislative background and the documentary background. In relation to the legislative background, the High Court was satisfied that, unless and until some other rate is decided on, the rule meets the requirements of section 51(3) of the Pensions Act 1995. In summary, section 51(3) states that if a scheme’s rules provide for increases of a certain level, the statutory provisions on increases in section 51(2) do not apply and the High Court thought that the draftsperson would have wished to create a provision which complied with section 51(3). In relation to the documentary background, the High Court noted that the transfer invitations sent to members included a benefit
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summary which set out information referring to guaranteed increases and discretionary increases. Whilst the benefit summary made it clear that it could not include every detail and the trust deed and rules were to take precedence, the High Court noted that the document was said to have been approved by the employer and trustees, and it was intended to give a fair summary of the benefits and conditions applicable to pensions under the scheme. It therefore concluded that the document provided powerful evidence of what the draftsperson of the summary and of the scheme intended that the scheme should provide. It is also worth noting that the High Court stated that its decision is highly sensitive to the facts of the present case where the scheme was not addressed to future new members but was directed to those who had consented to the transfer of their existing pensions in accordance with the documentation that had been provided to them.
The relevant rule on revaluation included that the deferred pension “… is equal to the Scale Pension increased as from the date Pensionable Employment ends as referred to in … Rule C10(2) and (4) …”. The question here was whether the principal employer may set a different rate for the purposes of revaluation under this rule than for the purposes of increases to pensions in payment under rule C10(2). The High Court preferred the representative beneficiary’s construction of this rule, concluding that it provides for the increase of deferred pensions on 1 October in each year by the same percentage, and subject to the same cap, as is applied to pensions in payment
liable to increase on the same date as a result of rule C10(2) on the construction set out above.
Change of indexOn 27 January the High Court issued a judgment concerning the Atos UK 2011 pension scheme which considered whether the rules permit an index other than RPI to be used for the purposes of calculating pension increases. The scheme actuary had estimated that if the scheme had switched from RPI to CPI as at 31 December 2018 there would have been a reduction in the scheme’s liabilities valued on a technical provisions basis of some £65 million, although the options which had been canvassed in this case included not only CPI but also RPIJ and CPIH. The relevant definition (which applies for calculating annual pension increases for some of the benefits payable under the rules) was that “Retail Prices Index means the general index of retail prices (all items) published by the Office for National Statistics, or, where that index is not published, any substituted index published by that Office (or its successor) as the Principal Employer and the Trustees may agree. Where the retail prices index ceases to exist, the Principal Employer and the Trustees may agree any substituted index published by that Office (or its successor)”.
The first question for the High Court concerned the meaning of the phrase “the general index of retail prices (all items) published by the Office for National Statistics” with it concluding that this means RPI. It rejected an argument that because the draftsperson can be assumed to have initially selected RPI as an accurate measure of
price inflation, once it had become apparent that it was no longer regarded as such, the language of the definition must be regarded as referring to some other index. The High Court’s conclusions on this point included that the words in the definition mean the same today as what they meant in 2011 when the deed governing the scheme was executed.
The second question concerned the meaning of the words “where that index is not published”. Several possible interpretations were included in the question for the High Court but it saw no reason why “published” should not mean published in the ordinary sense of being made public and therefore concluded that it means “where that index is not published for any purpose”. One of the other suggested interpretations was where the index is not published in any given month or at any time required for its use under the scheme’s deed and rules. The High Court stated that it saw no good reason to adopt this interpretation as it would lead to conflict with other provisions in the scheme rules which expressly addressed the situation of the Retail Prices Index not being published in respect of the relevant period. The High Court also noted that whatever meaning is given to “published” in the first sentence, the final sentence is otiose because if RPI ceases to exist, it will cease to be published. It therefore concluded that the final sentence of the definition does not shed any light on the meaning of “published” nor requires it to be given anything other than its ordinary meaning.
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LegislationPension Schemes BillFollowing the Queen’s Speech on 19 December 2019, the Pension Schemes Bill was re-introduced to Parliament in January 2020. The Bill was first published and had its first reading in the House of Lords in October 2019 but the progress of the Bill was halted when Parliament was dissolved in November 2019 in advance of the general election. The re-introduced version of the Bill is in substantially the same form as the version that was published in October with provisions covering the following issues:
• scheme funding, including a requirement for trustees to determine a “funding and investment strategy” and produce a written statement setting out that strategy and reporting on a number of supplementary matters;
• the Pensions Regulator’s powers, including amendments to the legislation on Contribution Notices, the introduction of two new criminal offences (avoidance of employer debt and conduct risking accrued scheme benefits) and the introduction of a power to impose a new civil penalty of up to £1 million in certain circumstances;
• a framework for Collective Defined Contribution (CDC) schemes;
• pensions dashboards, including a power to make regulations imposing requirements on trustees of occupational pension schemes to provide information; and
• in order to tackle pension scams, a power for regulations to be made prescribing additional conditions (which could,
for example, include conditions about the member’s employment or place of residence) that must be met in order for there to be a statutory right to transfer.
You can read more about the Pension Schemes Bill in the October 2019 edition of Pensions Round-Up (pages 6 and 7). The limited changes made between the version published in October 2019 and the version that was published in January 2020 relate to issues including: (i) the new employer resources test for issuing a Contribution Notice, with changes to the wording on the timing for assessing the estimated section 75 debt and part of the statutory defence; and (ii) the provision of information to the pensions dashboard and data protection.
The Bill had its first reading in the House of Lords on 7 January and its second reading on 28 January, with the Committee stage taking place between 24 February and 4 March. During the Committee stage some amendments, which had been proposed by the Government, were made to the Bill.
A new clause was added which will insert new provisions into the Pensions Act 1995 in relation to climate change risk. These provisions contain powers to make regulations:
• imposing requirements on trustees of occupational pension schemes of a prescribed description with a view to securing that there is effective governance of the scheme with respect to the effects of climate change – the clause sets out a list of what these requirements
may cover which includes reviewing the exposure of the scheme to risks of a prescribed description, assessing the assets of the scheme in a prescribed manner, and determining and reviewing a strategy for managing the scheme’s exposure to risks of a prescribed description (a supplementary memorandum published in February contains information about these provisions including that it is anticipated that the requirements will initially be limited to larger schemes); and
• requiring the trustees of occupational pension schemes of a prescribed description to publish information relating to the effects of climate change on the scheme.
The supplementary memorandum referred to above also states that the Government will consult on content and timing of the regulations.
The power in the Bill for regulations to be made prescribing additional conditions that must be met in order for there to be a statutory right to transfer was amended during the Committee stage so that it also applies to transfers from unfunded public service defined benefit schemes.
An amendment was also made to make it clear that an existing power in the Pensions Act 2014 to make regulations to restrict charges can be used in relation to CDC schemes.
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Local Government Pension SchemeIn the May 2019 edition of Pensions Round-Up (page 9) we reported on a consultation setting out policy proposals to amend the rules of the Local Government Pension Scheme (LGPS) in England and Wales. On 27 February the Ministry of Housing, Communities and Local Government published a partial response to the consultation which addresses the issue of exit credits.
The regulations governing the scheme were amended in 2018 to allow exit credits to be paid where an employer leaves the scheme and their pension liabilities have been overfunded at the date of exit. The consultation set out proposals to amend these provisions to address concerns about unforeseen consequential impacts where scheme employers had outsourced services or functions to service providers. These issues tended to arise where the parties had entered into side agreements based on the 2013 scheme rules, with the rule change in 2018 resulting in service providers becoming entitled to exit credits which would not have been the intention when the side agreement was made. Following responses to the consultation the Government amended its proposal for dealing with this issue, with the final form of the regulations (which were also laid before Parliament on 27 February) providing that administering authorities may determine, at their discretion, the amount of any exit credit payment due, having regard to any relevant considerations. The regulations came into force on 20 March 2020 but have effect from 14 May 2018 (subject to a transitional provision).
A number of other issues were raised in the May 2019 consultation and a further response will be published in relation to those proposals in due course.
Trust Registration ServiceIn the December 2019 edition of Pensions Round-Up (page 5) we reported that regulations had been made to amend the anti-money laundering legislation to implement the Fifth Money Laundering Directive and that a technical consultation would follow in relation to changes on trust registration. That consultation was published on 24 January.
The following points are worth noting by way of background: (i) anti-money laundering regulations introduced in 2017 require trustees of “taxable relevant trusts” to register certain information with HMRC; (ii) whether a trust falls within the definition of a “taxable relevant trust” for a tax year depends on whether particular taxes are payable; (iii) HMRC introduced the Trust Registration Service (TRS) for trustees to use to comply with the registration requirements; and (iv) HMRC subsequently issued guidance stating that if a pension scheme is registered on its Manage and Register Pension Schemes service or Pension Schemes Online service, it does not need to register on the TRS.
The consultation published on 24 January explains that the Fifth Money Laundering Directive removes the link between registration and taxation,
widening the definition of those trusts required to register and changing the registration deadline requirements. It goes on to state that the existing TRS will therefore be expanded to include UK express trusts and some non-EU resident express trusts irrespective of whether the trust has incurred a tax liability. However, it also notes that the Government proposes to define the scope in a way that is proportionate to the risk and therefore not to bring into scope trusts where: (i) their purpose and structure mean payments to beneficiaries are predetermined and highly controlled; (ii) they are already supervised by HMRC or other regulatory bodies.
Noting that registered pension schemes held in trust are already subject to regulation by either the Financial Conduct Authority or the Pensions Regulator and that there are income tax controls on sums going into and out of the funds and the benefits that can be provided by them, the consultation proposes that they will not be in scope for registration. However, it states that pension scheme trusts that are not registered with HMRC on Pension Schemes Online or Manage and Register Pension Schemes will be required to register on the TRS. The consultation closed on 21 February 2020. It states that the Government will publish its response and will use the responses to finalise the policy and write the guidance accompanying these changes.
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HMRCPension schemes newslettersOn 28 January HMRC published pension schemes newsletter 116 which notes the consultation on the expansion of the Trust Registration Service that was issued in January 2020 (reported above) and states that, in the meantime, schemes should follow the current registration guidance regarding taxable activity and not register any other pension scheme on the Trust Registration Service.
On 28 February HMRC published pension schemes newsletter 117 which includes a section on pension scams which flags: information on the Pensions Regulator’s website about pension scams including a scheme transfer checklist; and the section of the Pensions Tax Manual containing information about the tax rules on transfers. It also provides information for schemes operating relief at source about Scottish income tax rates and Welsh income tax rates for 2020/21, members’ residency status for relief at source and submitting the annual return of information for 2019/20.
Also in January HMRC published a newsletter providing information about its plans for delivering phase two of the Managing Pension Schemes service. This includes that, for the quarter beginning 1 April 2020, schemes registered using this service will compile and submit the Accounting for Tax (AFT) return through the service. Schemes registered on the Pension Schemes Online service will continue to submit the AFT return through that service, with no changes to this process.
Countdown bulletinsIn January HMRC published two countdown bulletins in relation to the end of contracting-out which contain information about a revised solution for allocating payments received from pension schemes for individual members of their scheme. HMRC explains that a number of pension schemes have made part payments against the debt it had previously told them about but HMRC cannot identify the individual members that the part payments were made for. HMRC therefore asked pension scheme administrators that decide to part pay to tell HMRC the individual members that the part payment should be allocated to. The countdown bulletin issued on 16 January provided information on the process that schemes need to follow and stated that the deadline for action was 13 March 2020.
GMP equalisationOn 20 February HMRC published a newsletter about GMP equalisation which provides guidance to supplement existing guidance in the Pensions Tax Manual relating to benefit adjustments. The guidance relates to adjustments to benefits solely for the purpose of GMP equalisation. The guidance concerns equalisation methods whereby a dual record keeping approach is used and does not apply where a conversion method is applied. However, it is worth noting that the guidance states that it is for the trustees and employers of each scheme to decide which method of equalisation is most appropriate for their scheme, and HMRC cannot comment on the choice of methodology.
GENERAL POINTSHMRC states that GMP equalisation may mean an increase to the amount of pension due at retirement but states that any such increase is not a new entitlement because it results from membership in the period between 17 May 1990 and 5 April 1997. It goes on to state that therefore, in the main, such GMP equalisation benefit adjustments on their own would not constitute new accrual of benefit that should be tested for annual allowance purposes or that would prejudice applicable lifetime allowance protections. However, it notes that the adjustments might have an impact on the amount of any previous and future benefit crystallisation events.
ANNUAL ALLOWANCEPoints in the guidance in relation to the annual allowance include that: (i) an individual who became a deferred member before 6 April 2006 and has since remained outside of the annual allowance provisions in relation to the arrangement should still remain outside of the provisions for that arrangement; (ii) an individual who is otherwise within the annual allowance deferred member carve out in relation to an arrangement should remain within that carve out for that arrangement; and (iii) for other deferred members and active members, HMRC considers that there is no need to revisit pension input amount calculations done in the past but calculations in the tax year of implementing GMP equalisation and tax years thereafter will need to take the revised amount into account.
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LIFETIME ALLOWANCE PROTECTIONSHMRC states that GMP equalisation benefit adjustments should simply reflect the benefit the member had accrued before 6 April 2006 and, on its own, this would not result in any benefit accrual after 5 April 2006. The guidance goes on to provide further specific information in relation to fixed protection, primary and individual protections and enhanced protection. HMRC also states that where an increase in the value of a member’s benefits as result of a GMP equalisation benefit adjustment means that an individual would qualify for protection from the lifetime allowance charge, the individual can approach HMRC with evidence to support their late notification. However, it also notes that the criteria to be considered in respect of whether or not HMRC may accept a late notification for protection differ depending on the relevant protection, and provides a link to further information in the Pensions Tax Manual.
LIFETIME ALLOWANCE AND BCE CALCULATIONSWhere GMP equalisation is implemented before a BCE, the guidance states that adjustments that increase the
starting amount of the pension will increase the BCE2 (that is, benefit crystallisation event 2 – the individual becoming entitled to a scheme pension) amount when the individual becomes entitled to the payment of the pension.
In relation to those who are pensioner members when GMP equalisation is implemented, the newsletter includes that: (i) where GMP equalisation results in an increase to what should have been the individual’s starting pension at retirement, the original BCE2 that occurred at retirement will need to be corrected by reference to the revised starting pension; (ii) where a recalculated BCE results in a member exceeding their remaining lifetime allowance, a lifetime allowance charge will be due; (iii) scheme administrators should “consider what process is appropriate to adopt to identify whether any GMP equalisation adjustment to the member’s benefit in their scheme is likely to have resulted in an lifetime allowance charge”; (iv) members will need to consider the tax effects of the recalculated BCE2 on later benefit crystallisations; and (v) BCE statements will need to be updated going forward with correct information.
PAYING THE LIFETIME ALLOWANCE CHARGEPoints in this section of the newsletter include that scheme administrators can apply to HMRC to have all or part of their liability to the lifetime allowance charge discharged (and the Pensions Tax Manual provides further information about the conditions for doing so) and whether HMRC will agree to this depends on the particular circumstances. It also notes that the Accounting for Tax return in which the original BCE was reported should be amended to reflect the updated amount and the Event Report will also need to be amended in certain circumstances.
NEXT STEPSHMRC continues to explore pensions taxation issues not included in this guidance with its GMP equalisation working group including the treatment of lump sum and death benefit payments. It aims to give guidance on these issues as soon as possible as well as continuing to explore the tax implications for schemes choosing to use conversion to equalise benefits.
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Other newsPASA – DB transfersOn 11 February the Pensions Administration Standards Association (PASA) published a consultation on its draft “Defined Benefit Transfers: Code of Good Practice”. In July 2019 PASA’s DB Transfers Working Group published part one of a guide to good practice on DB transfers which looked at processing standard cases and had intended that part two of the guidance would follow covering non-standard cases. However, PASA reports that it was subsequently agreed that, rather than produce part two of the guidance, a Code of Good Practice would be created to cover all DB transfers and the code would be subject to consultation before being finalised.
PASA states that the time taken to process DB transfers varies hugely and that delays damage relationships with scheme members which can result in members making decisions which are not in their best interest or increase the risk of them becoming victims of pension scams. The draft code includes that: priority must be given to effective safety checks protecting members from those transactions showing red flags on due diligence; however, transactions which do not cause the scheme administrator or trustees to flag concerns should be processed as speedily as possible.
The objectives of the Code are to improve: the overall member experience through faster, safer transfers; communications and transparency in the processing of transfers; and efficiency for administrators. The draft Code identifies five principles:
(i) member communications should be fair, clear, unbiased and straightforward; (ii) members should be kept informed of any delays in processing; (iii) administrators should work with other stakeholders to encourage adherence to the objectives of the code; (iv) communications should be designed to reflect best practice, adhering to template documents where possible; and (v) working practices and processes should be designed to comply with the Code including the target timescales listed.
The draft Code includes processes for cases calculated by the administration team (in which some of the target timescales vary depending on whether the case is a standard case or a non-standard case), cases calculated by the actuary and settlement. PASA seeks views on a draft definition for a non-standard case which covers cases requiring significant manual intervention, partial transfers, overseas transfers, where further due diligence is expected by the Pension Scams Industry Group’s Code of Good Practice and transfers which require specific trustee/employer consent.
The draft Code also states that PASA expects all parties involved in the transfer process to aim to meet the timescales set out in the Code and that they should monitor their success in doing so. Whilst the Code is voluntary, PASA states that it anticipates that the Pensions Ombudsman will reference it when reviewing complaint cases, as a source of what good industry practice looks like.
Financial Conduct AuthorityIn February 2019 the Financial Conduct Authority (FCA) published a consultation on proposed rules to require scheme governance bodies to publish and disclose information about administration charges and transaction costs to members of workplace pension schemes. The rules were being made in order to meet a duty imposed on the FCA by the Pensions Act 2014 which also required the FCA to have regard to the corresponding DWP regulations in relation to occupational pension schemes (which came into force in April 2018) when making its rules.
In February 2020 the FCA published a Policy Statement setting out its response to the consultation and its final rules and guidance. Following responses to the consultation the Policy Statement includes that the FCA will: (i) clarify that the first scheme governance year should run from 1 January 2020 to 31 December 2020 with a deadline for publication of the information by 31 July 2021; (ii) phase the introduction of the rules so that for the first scheme governance year, scheme governance bodies will only have to report costs and charges information in respect of default options/funds; (iii) allow scheme governance bodies only to include costs and charges for default options/funds in the chair’s report if they provide a link to a publicly available website containing the information for all the fund options available to the member; and (iv) clarify that information should be communicated in a way that considers how members might reasonably use it.
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DATE DEVELOPMENT
Unknown In October 2015 it was announced that the reforms in relation to automatic transfers of small DC pots would be revisited once the market has had time and space to adjust to other reforms. In a response to a parliamentary question in April 2018 it was stated that it is not the right time to implement automatic transfers.
A DWP consultation on DC investment and consolidation closed on 1 April 2019 which looks at proposals to facilitate investment by DC schemes in less liquid assets.
In March 2017 the Government published a response to its consultation on equalisation for the effect of GMPs. In April 2019 the DWP published guidance on how the GMP conversion legislation could be used to achieve equality going forwards. The guidance notes that the Government is considering changes to the GMP conversion legislation to clarify certain issues. HMRC published a newsletter on GMP equalisation in February 2020 and aims to publish further guidance. Further guidance is also expected from the cross-industry GMP Equalisation Working Group.
Regulations to implement provisions of IORP II in relation to governance came into force on 13 January 2019 with the detail of the new requirements to be set out in a code of practice to be published by the Regulator. The Regulator will be reviewing its codes to reflect these regulations and plans to combine the content of its 15 current codes to form a single, shorter code and will consult on this code.
In February 2020 the Regulator published the response to its July 2019 consultation on the future of trusteeship and governance. Action points that the response identifies include that the Regulator will review and update its code of practice on Trustee Knowledge and Understanding (the planned single code of practice will form the foundation for this), review the Trustee Toolkit and establish and lead an industry working group to find ways of supporting schemes to take steps to improve trustee diversity.
In April 2019 the DWP published the Government response to the December 2018 consultation in relation to pensions dashboards and provisions in relation to dashboards are included in the Pension Schemes Bill.
The Government response to its consultation on Collective DC schemes was published in March 2019. A framework for CDC schemes is included in the Pension Schemes Bill.
In August 2017 the Government confirmed that it will proceed with proposals to limit the statutory right to transfer in order to tackle pension scams. Regulation-making powers are included in the Pension Schemes Bill.
2020 Following the DWP's 2018 DB White Paper, a consultation on the Regulator's powers was published in 2018 and the response was published in February 2019, and a consultation in relation to consolidation was published in December 2018. Provision on the Regulator’s powers is included in the Pension Schemes Bill. The Regulator plans to hold two consultations on its funding code – the first consultation published in March 2020 focuses on funding principles, and a consultation on the detail of the new code will follow.
April 2020 Provisions of the Competition and Markets Authority's Order implementing remedies set out in the final report of its investment consultants market investigation came into force in December 2019. In July 2019 the DWP published a consultation on draft regulations to integrate certain remedies into pensions legislation which it proposed would come into force on 6 April 2020.
October 2020 – October 2021
Requirements for relevant schemes to produce and publish an implementation statement on certain issues relating to their Statement of Investment Principles (SIP) come into force on 1 October 2020. Further regulations made in June 2019: require further information to be included in the SIP by 1 October 2020; require DB schemes to publish their SIP by 1 October 2020; include provisions which come into force on 1 October 2020 requiring DB schemes to report on how they have addressed certain issues; and include disclosure obligations with a deadline of 1 October 2021.
On the horizon
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Contact detailsCathryn EverestSenior Professional Support Lawyer, London+44 (0)20 7153 [email protected]
Megan SumpsterProfessionalSupport Lawyer, London+44 (0)20 7153 [email protected]
Ben MillerHead of Pensions+44 (0)151 237 [email protected]
Claire BellPartner, Manchester+44 (0)161 235 [email protected]
Tamara CalvertPartner, London+44 (0)20 7796 [email protected]
Andrew McIlhinneyPartner, Leeds+44 (0)113 369 [email protected]
Matthew SwynnertonPartner, London+44 (0)20 7796 [email protected]
Amrit McleanHead of Pensions De-risking+44 (0)20 7796 [email protected]
DLA Piper is a global law firm operating through various separate and distinct legal entities. Further details of these entities can be found at dlapiper.com.This publication is intended as a general overview and discussion of the subjects dealt with, and does not create a lawyer-client relationship. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or not taken on the basis of this publication. This may qualify as “Lawyer Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.Copyright © 2020 DLA Piper. All rights reserved. | MAY20 | A05788
