The last quarter marked the end of an era. Not the end of the UK's membership of the EU, as had been expected, but the end of the roll-out of automatic enrolment. Launched in October 2012, following many years of consensus building, automatic enrolment stands as a great example of effective long-term policy making. April saw the final step-up in the phasing in of the minimum auto-enrolment contribution rates. All eyes will now be on the impact, if any, on opt-out rates before the debate about how best to build on the initial success of automatic enrolment hots up. The Brexit process trundles on with the outcome still uncertain. Alongside the now familiar pattern of deadlines being set and then passed, the words "as soon as Parliamentary time allows" have become an established feature of the post-referendum political landscape. The next Queen's speech has become the latest victim of the Brexit malaise. It is expected that a new Pensions Bill will be brought forward in the next session of Parliament. However, the timing of this and the make-up of the Government that will be bringing it forward is anybody's guess. The risks posed by climate change have also been dominating the headlines. This issue is moving up the agenda for trustee boards as they prepare for the introduction of new statutory measures in October 2019, which will require trustees to set out their policy on how they take account of financially material factors, including environmental, socia and governance (ESG) factors in setting their scheme's investment strategy. The focus on ESG factors, including climate change, in investment decision-making is increasing across the board, not just in the pensions arena, and it is an issue that is receiving increasing attention from policymakers, regulators and pressure groups alike. The impact of GMP equalisation also continues to be felt, as trustees and sponsors consider the best way to equalise benefits under their scheme. GMP conversion is seen by many as the silver bullet that could solve the equalisation conundrum. However, the DWP's recent guidance leaves a number of important questions unanswered. Most schemes are also awaiting confirmation from HMRC on the tax implications of conversion, and of GMP equalisation more broadly, before taking action. The current air of uncertainty is doing nothing to dampen innovation, however, with the Government confirming its support for: • the industry to press ahead with the development of a new online pension dashboard, and • Royal Mail's plans to establish a collective DC pension plan. The Government is also expected to back the establishment of new DB consolidator vehicles. However, we are still waiting for details of the regulatory framework for consolidators to be confirmed – something which is likely to be crucial to their success.We also continue to innovate and in April we launched our new UK pensions blog. This is a great way to keep up with our latest thinking on current developments in pensions law and practice. You can subscribe at hsfnotes.com/ pensions/subscribe/. We hope you like it!
Government confirms plans to strengthen the Regulator's powers In its response to the consultation on protecting defined benefit (DB) pension schemes and strengthening the Pensions Regulator, the Government confirmed that it plans to: • introduce a new criminal offence of wilful or reckless behaviour in relation to a DB pension scheme (aimed at company directors) • give the Regulator the power to issue fines of up to £1 million in these circumstances and for other breaches by corporate sponsors of their pensions obligations • require corporate sponsors to issue a Declaration of Intent in relation to proposed corporate transactions and re-financing to notify trustees and the Regulator about the transaction and how they plan to mitigate any detriment to their scheme, and • make changes to the Regulator’s existing anti-avoidance powers to make it easier for it to impose Contribution Notices and Financial Support Directions (FSDs) on corporate sponsors and on connected and associated parties. The response does not make clear when these changes will come into force. Some of the proposals, such as the new criminal offence and civil fines, will require primary legislation and it is anticipated that they will be included in the next Pensions Bill. This means that the new powers are unlikely to come into force until Spring 2020 at the earliest. For more on the Regulator's new powers read our blog. Comment: Although the consultation response confirms the headline changes, much of the detail is subject to further consideration. For example, the new tests for contribution notices and FSDs (to be renamed "Financial Support Notices") and the timing and content of the Declaration of Intent are still to be determined. Therefore, sponsors will need to wait for the draft legislation and Regulator guidance for confirmation of the scope of these new powers and how they may be used. TPR's annual funding statement In March, the Pensions Regulator published its 2019 annual funding statement for DB schemes. The statement: • reflects the Regulator’s tougher approach • confirms the Regulator’s focus on reducing the length of deficit recovery plans and requiring schemes to set a long term funding target, and • spells out more clearly the Regulator’s expectations regarding the balance between deficit recovery contributions and the payment of dividends in different circumstances. For many schemes, this is likely to result in the sponsor being required to put more money into their scheme more quickly. The statement is relevant to all DB schemes but it is particularly relevant to schemes preparing valuations with an effective date between 22 September 2018 and 21 September 2019. It sets out the approach that the Regulator expects to be taken in 10 different scenarios, which vary according to the financial strength of a scheme’s sponsor, a scheme’s funding position and its maturity. Read more about the annual funding statement in our blog. Comment: The latest funding statement reflects the tougher, more prescriptive approach that the Regulator is taking on funding and other matters. We can expect to see this repeated in the new funding Code of Practice for DB schemes. Consultation on the principles that will underpin the new Code are due to be consulted on in late summer. DWP's GMP conversion guidance leaves tricky questions unanswered Since the High Court confirmed the need for schemes to equalise pensions for the effect of GMPs in October last year, GMP conversion has been seen by many as the preferred option for most schemes. However, attempts to use the conversion legislation have been postponed pending guidance from the DWP
Just before Easter, the DWP published its guidance. But it leaves a lot of the tricky questions unanswered and so does not, as yet, provide the silver bullet that trustees and sponsors were hoping for. Section 4 of the guidance sets out a 10 stage process for implementing GMP conversion. It also highlights many of the legal and practical issues that will need to be considered as part of the process. This includes: • deciding whether to convert the benefits of all members at the same time • the factors that trustees should consider when setting the assumptions to value members' benefits, and • deciding how to deal with active members and members with a final salary link. Whilst it provides a helpful summary of the conversion process the guidance leaves a lot of questions unanswered, pointing trustees instead to their legal and actuarial advisers. The guidance indicates that the DWP is considering changes to the conversion legislation, but it does not identify the changes that are likely to be made or when these can be expected. There is also no clear indication of when we can expect HMRC to confirm its view on the various tax issues associated with GMP conversion (and GMP equalisation, more generally). For more on the DWP's guidance read our blog. Comment: GMP conversion offers the chance to simplify benefits and address the issue of GMP equalisation in one go, avoiding the complexity and costs associated with running dual member records. However, the process itself is far from simple and a number of issues still need to be ironed out. Therefore, most schemes thinking of pulling the trigger on GMP conversion are likely to keep the safety catch on until there is greater clarity on these points. The end of the roll out of automatic enrolment In April, the minimum automatic enrolment contribution rates increased to 8% of qualifying earnings, with at least 3% being payable by an individual's employer. This is the last scheduled step up in the minimum contribution rates and all eyes will be on the impact that this has on opt-out rates. Comment: This marks the end of the beginning for automatic enrolment. Attention will now turn to how the automatic enrolment requirements should evolve in future to maximise coverage and to ensure that individuals are saving enough. British Airways agrees settlement with trustees in pension increases case The trustees of the Airways Pension Scheme (APS) have reached an agreement with British Airways, subject to Court approval, to settle the long-running dispute over pension increases under APS. A one-day hearing to seek the High Court's approval is due to take place in the first week of July. Comment: Although this news is likely to have been well received by APS members, it means we will not benefit from the Supreme Court's analysis of the 'proper purpose' principle and the extent to which trustees have a role in shaping the benefits payable under their scheme. New single financial guidance body named On 6 April 2019, the new single financial guidance body was officially named the Money and Pensions Service (MPS). References to The Pensions Advisory Service (TPAS) in existing pensions legislation have been updated to refer instead to the MPS. Comment: Where schemes sign post members to TPAS or to the Money Advice Service they will need to update member communications to reflect this. PPF urges trustees to put contingency plans in place The Pension Protection Fund (PPF) has issued guidance for trustees which sets out contingency plans that they ought to have in place to ensure a smooth transition into a PPF assessment period and to minimise the distress for members should the need arise. The guidance focuses on the need for trustees to take action now to ensure: • that they have access to scheme documents and member data, and • that pensions can continue to be paid in the event of the sponsor’s insolvency. Comment: The guidance draws on the PPF’s experience of helping schemes in distress and highlights the need for trustees to take action in good times to ensure that they are prepared should the worst happen in order to minimise the distress for their members.
Next three months New Corporate Governance Code The 2018 UK Corporate Governance Code, which applies for financial years beginning on or after 1 January 2019, is a complete rework of the 2016 edition and contains a range of new requirements for both corporate behaviour and reporting. The revised Code is designed to help ensure the highest standards of corporate governance. It focuses on the importance of long-term success and sustainability, addresses issues of public trust in business and aims to ensure the attractiveness of the UK capital market to global investors. There are some key new requirements in the Code relating to corporate culture, director independence, remuneration, whistleblowing, workforce engagement and significant shareholder votes against a board resolution. Listed companies are required to set out how they have applied the principles set out in the Code and explain any deviations from these. The first reporting against the new Code will be required in 2020, unless companies choose to adopt it early. Action: Trustees should check how their asset managers plan to take account of the new Corporate Governance Code in their asset selection and in their engagement activities. Trustees should also monitor the extent to which scheme sponsors adopt these practices. CMA Order on fiduciary management The Competition and Market Authority (CMA) is required to implement remedies following its investigation of the investment consultancy and fiduciary management markets by 11 June 2019. The CMA has published a draft Order for consultation, which would require: • trustees to undertake a competitive tender before they award a fiduciary management mandate of 20% or more of their scheme's assets for the first time • trustees to run a competitive tender within five years of a fiduciary manager's appointment (where they have been appointed without one) or within two years of the Order being made, whichever is later • investment consultants to separate marketing of their fiduciary management service from their investment advice, and • fiduciary management firms to provide better and more comparable information on fees and performance. Most of these requirements would come into force six months after the Order is made. The Pensions Regulator is due to consult on guidance for trustees on running competitive tenders and to support the CMA's other remedies during the summer. The DWP has also confirmed that it will introduce regulations to replace the final Order in 2020. HM Treasury has also indicated that it will consult on the CMA's recommendation that the FCA's perimeter guidance is extended to cover services provided by investment consultants. However, it has not committed to a timetable for this. Action: Trustees looking to appoint a fiduciary manager should await the Regulator's guidance before proceeding. Those whose scheme already has a fiduciary manager in place will need to decide on the most suitable time to conduct a tender process. Government considers calls for shake-up of audit sector The CMA has called for a major shake-up of the audit sector. This comes hot on the heels of the damning findings of the Kingman Review and the recommendations of a major report published by the Business Select Committee. The CMA is recommending: • separation of audit from consulting services • mandatory ‘joint audits’ to enable firms outside the Big 4 to develop the capacity needed to audit the UK’s biggest companies, and • the introduction of statutory regulatory powers to increase the accountability of companies’ audit committees. The Government has committed to responding to the CMA's recommendations by mid-July. Action: The Government is under pressure to take decisive action. Trustees and sponsors should maintain a watching brief. Three to twelve months Trustees required to confirm policy on ESG considerations, stewardship and engagement A series of measures to clarify and strengthen trustees' investment duties, in particular, to require trustees to demonstrate how they take account of environmental, social and governance (ESG) considerations which may have a financially material impact on scheme investments are set to come into force later this year. By 1 October 2019, schemes that are required to produce a Statement of Investment Principles (SIP) (ie those with 100 members or more) will be required to update their SIP to set out: • how they take account of financially material considerations, including but not limited to ESG considerations, such as climate change, and • their policies in relation to the stewardship of investments, including their approach to engagement and the exercise of voting rights. Trustees of money purchase schemes will also need to update the SIP in relation to their default strategy to set out how they approach these issues in respect of their default arrangement. As well as updating their SIP, trustees should also consider how their policy on ESG considerations,
stewardship and engagement should be reflected in their mandates with asset managers and how they will monitor this. The original consultation on these new measures suggested that trustees would be required to take account of members' views on ESG considerations in future. However, in its response to the consultation, the DWP clarified that trustees will not be required to do this. Instead, they will simply be required to set out their policy on taking account of non-financial considerations, such as members' views, in their SIP, to the extent that they have one. The updated SIPs will need to be posted on a website that can be accessed by interested members of the public as well as scheme members. From 1 October 2020, trustees of money purchase schemes will also be required to publish a statement confirming the extent to which they have followed their SIP during the previous scheme year and explaining any changes made to it. Action: Trustees should revisit their policy on taking account of ESG factors and their approach to stewardship in light of these new requirements and discuss the implications of this with their investment advisers and asset managers. HMRC set to become preferential creditor on corporate insolvencies HM Treasury has confirmed that the Government intends to change the insolvency laws to make HMRC a secondary preferential creditor in respect of certain taxes payable by employees and customers. This change will apply to corporate insolvencies that occur on or after 6 April 2020 and it will mean that HMRC will move above floating charge holders and unsecured creditors (including pension schemes) in the priority order for recovering debts on insolvency. The Government is proposing that HMRC's preferential treatment should extend to the recovery of tax debts for PAYE (including student loan repayments), employee NICs, Construction Industry Scheme Deductions and VAT that are due at the commencement of the insolvency. It is estimated that this will result in HMRC recovering up to £185m per year in additional taxes. Action: Trustees should assess the impact that this may have on the amount that their scheme would stand to recover in the event of their sponsor's insolvency and on the protection afforded by any contingent assets granted to their scheme. New DB funding Code due in Spring 2020 A new Code of Practice on funding defined benefit (DB) schemes is due to be introduced in 2020, with a two stage consultation process set to begin during the course of this year. The first stage of the consultation will focus on the principles and framework that will underpin the new Code. This is due to take place in August/September 2019, with a further consultation on the draft Code itself set to follow in Spring 2020. We would expect the new Code to reflect the Regulator's tougher approach by making more explicit what the Regulator expects and providing clear grounds for regulatory intervention where these expectations are not met and the Regulator is not satisfied with the justification for this. In particular, we expect the new Code to set out more clearly what the Regulator considers to be appropriate in terms of: • the assumptions used to value a scheme's technical provisions and to underpin its recovery plan • the length of a scheme's recovery plan, and • what it means for schemes to be treated fairly compared with a company's shareholders. This is in line with the approach adopted in the Regulator's 2019 annual funding statement (see Quarter in review). That said, we expect that the Regulator will seek to maintain some flexibility by adopting a "comply or explain" approach to the expectations set out in the new Code. Action: Trustees and sponsors should keep track of the consultations on the new Code as they will reveal the Regulator's approach to funding matters and how this may impact future funding negotiations and those that are currently ongoing. Pensions Bill expected in next Queen's Speech It looks increasingly likely that the next Queen's speech may now be delayed until the autumn for reasons of political expediency (although nothing in politics can be taken for granted at present). When it is delivered, the Queen's speech is expected to include a Pensions Bill, which it is anticipated will: • include measures to strengthen the powers of the Pensions Regulator • put in place an authorisation and regulatory framework for DB consolidators • facilitate Royal Mail's plans to establish a collective DC scheme • introduce new powers to require scheme's to provide data to the pension dashboards, and • address deficiencies in the GMP conversion legislation. It is also expected that the Bill will contain measures to require trustees to set a long-term objective for their scheme. To find out more about what we can expect to be in the next Pensions Bill and the key provisions to look out for, check out our blog. Action: Trustees and sponsors should maintain a watching brief. Points to look out for are the specific terms of the Regulator's new powers, any funding requirements linked to a scheme’s long-term objective and the nature of the regulatory framework for consolidators.
Master trust authorisation process nears completion 38 master trusts have applied for authorisation from the Pensions Regulator under the new authorisation and supervision regime. A list of those schemes that have been granted authorisation can be found on the Regulator’s website. The Regulator has six months from the date of a scheme's application to grant or refuse authorisation. Therefore, by mid-November we should have a clear picture of which DC master trusts will continue to operate. 44 schemes have signalled that they intend to exit the market and they will be joined by any schemes that are not granted authorisation. The Regulator is overseeing the orderly exit of these schemes. Action: Employers that use a master trust that has not applied for, or that fails to obtain authorisation, will need to act quickly to put in place an alternative scheme for the future to ensure that they continue to comply with their automatic enrolment obligations. On the horizon Pensions dashboard given the green light The Government has signalled its support for the creation of a non-commercial online pension dashboard by the pensions industry. Development of the dashboard will be overseen by an industry steering group which is to be formed by the new Money and Pensions Service. Although it is likely to be several years before a fully-fledged dashboard is launched, the Government's consultation response indicates that work will begin on a prototype during the course of this year. The Government has also given its backing to the development of commercial dashboards which would operate alongside the industry dashboard and make use of the same data. Initially, data will be provided to the dashboards on a voluntary basis. However, the Government has said that it will legislate to require all workplace pension schemes to provide data to the dashboards. This requirement is likely to be phased in over the next three to four years with master trusts and providers of contract-based DC schemes expected to be amongst the first to be required to supply member data. It is unclear precisely what data schemes will be required to provide to the dashboards and in what format. Therefore, it is not yet possible to assess how much of an additional burden this will place on schemes. Action: Trustees should track the development of the dashboard and the legislative requirements related to it, with a particular eye on the legal requirements regarding the data that will need to be provided and who may be liable if incorrect information is provided to users. LIBOR set to be discontinued LIBOR is due to be discontinued as an interest rate benchmark by the end of 2021. This reflects the fact that LIBOR has become a less meaningful benchmark in recent years and that it is vulnerable to manipulation. In April 2017, the Working Group on Sterling Risk-Free Reference Rates, identified SONIA as the preferred sterling interest rate benchmark for use in bond, loan and derivatives markets and the transition to SONIA is underway. Action: Trustees, employers and insurers need to review existing agreements that refer to LIBOR to establish whether an alternative benchmark should be substituted. Consideration should be given to using alternative benchmarks in future agreements. Trustees should also check with their scheme's actuary whether this has implications for any assumptions used for funding purposes (eg where assumptions are derived from swap rates).