This edition of snapshot looks at the latest legal developments in pensions. The topics covered in this edition are:
- Industry Group publishes guidance on GMP equalisation
- PASA launches good practice guide to DB transfers
- New revised guide to investment governance for DC schemes
- Early 2013 a watershed point for transfer due diligence
Industry Group publishes guidance on GMP equalisation
The cross industry GMP Equalisation Working Group has produced the first in a series of guides to assist those involved in the process of adjusting scheme benefits to counter the inequalities of guaranteed minimum pensions (GMP) between male and female members earned in the period 17 May 1990 to 5 April 1997. For background on this topic please see our briefing.
The guide highlights three areas where action should be taken now:
The guide notes that schemes need to consider whether members’ benefits should be adjusted now to reflect GMP reconciliation or whether this should wait until GMP equalisation has been undertaken, meaning that an adjustment would only have to be made once. It may be more efficient and less confusing for members if the adjustments are combined. However, the guide also notes that, if reconciliation adjustments are paused until GMP equalisation is undertaken, trustees should consider the time it will take for both projects to be complete. The longer the error is left uncorrected and the pension remains in payment, the greater the impact of the error.
Schemes should consider which members are impacted by reconciliation and which will be impacted by GMP equalisation. If there is minimal overlap between the two groups, there may be a stronger case for proceeding with reconciliation now. Whatever option is chosen, clear member communication will be key.
Data capture and verification will be a key part to a successful GMP equalisation exercise. Trustees should be considering this process now.
These are any transaction which may need to be revisited as part of an equalisation project if the transaction is undertaken before scheme benefits have been amended to counter the effects of unequal GMP. Whilst the guide is at pains to point out that it is not offering advice, it notes the following:
- Transfer values –transfer-out cases could be addressed now by making an allowance for GMP equalisation in the transfer values. However, thought needs to be given to whether any calculation may need to be revisited once GMP equalisation has been achieved for the scheme. Trustees should also ensure that the approach taken to transfers-out does not fetter the choice of equalisation method for the scheme as a whole.
- Trivial commutation – the guidance notes that, in deciding whether to delay such payments or to proceed, the risk of any tax charges needs to be borne in mind if, for example, an unequalised trivial commutation payment is made followed by a top-up payment (which may give rise to an unauthorised payment). If a trivial commutation payment is made with an allowance for GMP equalisation, the same considerations discussed under ‘transfer values’ above need to be considered.
- Serious ill health lump sum payments – the guidance notes that, whilst similar issues arise here as for transfer values and trivial commutation, delaying such payments is not practicable.
- Buy-in/buy-out transactions – for past transactions, contracts should be reviewed to consider where liability for GMP equalisation sits. For current projects, urgent actuarial and legal advice should be sought with regards to how to deal with GMP equalisation.
Further information regarding the practical considerations to take into account in a number of impacted transactions can be found in our briefing. Further guidance from the working group will be issued later this year. In the meantime, we await guidance from HMRC in relation to the tax issues, in particular with regard to impacted transactions.
PASA launches good practice guide to DB transfers
The Pensions Administration Standards Association (PASA) has launched a good practice guide to defined benefit (DB) transfers. PASA hopes that its guidance will create a DB transfer framework which achieves the right balance between member protection and an individual’s statutory right to take their pension in a different shape or form via a flexible arrangement.
With this in mind, the guidance has three specific aims geared towards achieving faster, well-communicated, efficient and cost-effective DB transfer strategies which scheme administrators and the industry as a whole can execute:
- Improve the overall member experience through faster, safer transfers – the guidance sets out the maximum acceptable timescales for processing transfers and promotes the principle of administrators taking a lead on the end-to-end member experience.
- Improve efficiency for administrators – the guidance includes a Transfer Template devised by a working group including representatives from the Financial Conduct Authority and the Pensions Regulator. This is intended to standardise transfer requests, aid automation and result in improved efficiency which saves time and resources. The template includes all required scheme and member information and therefore seeks to avoid repetitive requests for further information.
- Improve communications and transparency in the processing of transfers – the guidance recognises that keeping members and stakeholders better informed and pro-actively managing expectations reduces the need for chasing and raising queries. As such, each transfer communication should add value to the member, e.g. it should keep them informed of the progress of the transfer and provide appropriate additional information to increase awareness of next steps, associated timescales and any circumstances which could affect those timescales.
The guidance is Part 1 of a series of two and relates to standard DB transfer cases. Part 2 is expected to be published towards the end of 2019 and will cover non-standard or complex cases, such as those involving partial transfers, non-statutory transfers and potential scam transfers.
Whilst the guidance is voluntary, PASA anticipates that the Pensions Ombudsman will reference it when reviewing complaint cases as a source of what good industry practice looks like.
New revised guide to investment governance for DC schemes
The Pensions Regulator has revised its guidance to defined contribution investment governance. The guidance sets out what is expected from trustees when it comes to investment governance. In particular, trustees of defined contribution schemes will be required:
- to have appropriate investment delegation structures in place such that there is an appropriate balance between speed of action and checks and balances;
- to ensure that all parties have clear roles and responsibilities so there is proper accountability and decision-making;
- to ensure their statement of investment principles (SIP) sets out policies on financially material considerations (now including environmental, social and governance considerations (ESG)) as well as non-financial matters such as ethical concerns;
- to have greater regard to member views on investments, for example by conducting surveys with members to gauge their views and concerns;
- to review their own performance (as well as the performance of their advisers) with the review focussing on value and not just cost; and
- from 1 October 2019, where the scheme has more than 100 members, to include in their default SIP a stewardship policy encompassing the trustees’ policy in relation to voting, engaging and monitoring.
The Pensions and Lifetime Savings Association has also published a practical guide to trustee duties on ESG and Stewardship setting out best practice and to make it clear that there should be a proper decision-making process in place, not simply a formal “tick box” exercise.
Early 2013 a watershed point for transfer due diligence
A recent Ombudsman determination considered a complaint from “Mr R” that his former pension plan provider failed to carry out sufficient due diligence about his transfer. In light of the receiving scheme turning out to be a scam arrangement, Mr R sought reinstatement of his pension rights with the transferring plan plus interest on those rights.
The complaint was rejected by the Ombudsman, with a key factor for that decision being the standard to be expected within the pensions industry around the time of the transfer.
The transfer process started in late 2012 and was completed on 21 February 2013. The determination noted that completion of the transfer coincided with the time that the Pensions Regulator issued guidance about pension liberation scams. While the Ombudsman’s determination noted that industry practice on transfer due diligence changed at that time in light of the Pensions Regulator’s guidance, it also stated that it was reasonable to allow a short period of time for providers to consider and implement the guidance. Therefore the Ombudsman concluded that, for this transfer at least, the due diligence checks carried out by the transferring plan were appropriate at that point in time and so the plan’s provider could not be held responsible for any loss of pension.
The transfer occurred in the short grace period after the Pension Regulator’s scam guidance was issued but before the time by which the Ombudsman expected schemes to have implemented improved due diligence processes for pension transfers. The outcome for Mr R could have been quite different had the transfer occurred a few months later, as a recent Ombudsman determination concerning a Mr N demonstrated. In that case, the transfer occurred in August 2014 and the transferring scheme was criticised for not putting in place robust and compliant procedures reflecting the Pensions Regulator’s pensions liberation guidance. As a result, the transferring scheme was required to reinstate the member’s benefits.
Whilst the precise expiry date for the grace period following the Pensions Regulator’s 2013 guidance remains unclear, this determination is a reminder that the Ombudsman now expects trustees to take account of regulatory and industry guidance when conducting transfer due diligence. With that in mind, pension scheme trustees, administrators and providers should consider the recent update to the PLSA’s voluntary code of good practice on combatting pension scams which can be found here.