Pensions Planner - June 2021

PENSIONS PLANNER YOUR GUIDE TO FUTURE DEVELOPMENTS JUNE 2021 02 PENSIONS PLANNER JUNE 2021 HERBERT SMITH FREEHILLS Contents 03 Foreword 04 Quarter in review 12 Timeline 14 In the spotlight • Next 3 months • Next 3 to 12 months • On the horizon Contacts Alison Brown Executive Partner (West) Pensions T +44 20 7466 2427 [email protected] Samantha Brown EPI Regional Head of Practice Head of Pensions T +44 20 7466 2249 [email protected] Rachel Pinto Partner Pensions T +44 20 7466 2638 [email protected] Michael Aherne Partner Pensions T +44 20 7466 7527 [email protected] Tim Smith Professional Support Consultant Pensions T +44 20 7466 2542 [email protected] HERBERT SMITH FREEHILLS PENSIONS PLANNER JUNE 2021 03 As we emerge from the latest lockdown the experience of pension schemes and sponsors will no doubt vary considerable. For some schemes and sponsors the lifting of restrictions will see a return to 'business as usual', for others the withdrawal of Government support may signal the end of the road. This variance is reflected in the Regulator's recent annual funding statement which makes clear that recovery plans should not be extended nor deficit recovery contributions reduced without justification. The funding statement also highlights the uncertainty that surrounds the impact of Covid-19 on future mortality rates and emphasises the need for trustees to exercise care when reviewing their scheme's mortality assumptions. Trustees and sponsors are also encouraged to keep their eye on the long-term objectives for their scheme in spite of any short term challenges they may be facing. As we move towards Autumn schemes must also prepare for the introduction of a raft of new legislation, including: ••new criminal offences and financial penalties for serious failings by directors and others in relation to defined benefit (DB) schemes ••new contribution notice triggers, and ••extended investigatory and information gathering powers for the Pensions Regulator. The Regulator is due to publish its final policy on policing the new criminal offences before they come into force. While it sought to provide reassurance in its draft policy that the offences are aimed at the most egregious conduct, the failure to rule out prosecutions where employers fully mitigate any detriment to their scheme or obtain clearance risks sending mixed messages which creates unhelpful uncertainty as businesses and advisers adjust to the new regulatory environment. It is hoped that this will be addressed when the policy is finalised. It is also likely that the Government will introduce new statutory conditions that must be satisfied before statutory transfers can take place to help reduce the number of people falling victim to pension scams. This will place the onus on trustees and pension providers to determine whether the relevant conditions are satisfied and whether any red flags exist which would prevent a transfer from going ahead. In some instances difficult judgment calls will need to be made exposing schemes to a greater risk of complaints from disgruntled members. In the run up to COP26 there will inevitably be an increased focus on the issue of climate change and we can expect a number of new initiatives to be launched and pledges made by policymakers, regulators, businesses and schemes. This will include new climate related risk management, reporting and governance obligations for the largest UK pension schemes which are due to come into force on 1 October. Before the year is out the DWP is also expected to publish draft regulations which will underpin the new statutory funding requirements for DB schemes, contained in the Pension Schemes Act 2021. This will pave the way for the Regulator to launch a consultation on the contents of its new funding Code of Practice. This will inevitably emphasise the need for schemes to identify a clear end game and focus on their long-term goals. However, it will be interesting to see to what extent the Regulator will adjust the proposals contained in its initial consultation to reflect the short term financial realities that many schemes and sponsors may face. So, while uncertainty remains over the course of the pandemic and the speed of the recovery one thing that is clear is that the pace of change in pensions is about to accelerate. Foreword Recent blogs posts ••Annual funding statement 2021 – Key messages ••DWP Proposes New Transfer Conditions to Combat Pension Scams ••Ombudsman expects providers to update processes within “approximately one month” of new scams guidance Subscribe Recent podcasts ••Workplace mental wellness ••Perspectives: Diversity in pensions Ep4 – In conversation with Caroline Escott, Trustee ••Pensions and ESG Ep3 – Responsible investment in practice 04 PENSIONS PLANNER JUNE 2021 HERBERT SMITH FREEHILLS Pensions Regulator issues draft policy on policing new criminal offences The Pension Regulator has published for consultation its much anticipated draft policy on how it intends to police the new pensions criminal offences due to come into force this Autumn (likely 1 October 2021). The draft policy attempts to provide reassurance over the scope of the new criminal offences of avoiding a section 75 debt and causing a material detriment to a DB scheme and the frequency with which prosecutions are likely to occur. The policy suggests that the Regulator will use these new powers sparingly. It also reiterates that the new offences are aimed at “the more serious intentional or reckless conduct” and that they are not intended to “achieve a fundamental change in commercial norms or accepted standards of commercial behaviour in the UK”. However at the same time, the policy contains mixed messages as it: ••fails to provide unequivocal assurance that an entity that has “fully mitigated” the detriment to its scheme will not be prosecuted, and ••provides no comfort to employers that have obtained clearance in respect of a transaction or particular corporate activity that they will not be prosecuted. The policy outlines the factors that the Regulator will take into account in assessing whether a person has a “reasonable excuse” for their actions, such that an offence has not been committed. It also highlights the need for corporate decision-makers to be able to demonstrate how they have taken account of the interests of their defined benefit (DB) scheme (where relevant) and what, if any, mitigation has been put in place to protect the interests of the scheme where corporate actions have a materially detrimental impact on it. While the draft policy provides some helpful insights into the factors the Regulator will take into account before deciding whether to prosecute an individual or company for one or other of the new offences, it is important to note that the policy: ••does not set out how the Regulator intends to use its new power to issue financial penalties of up to £1 million or the two new contribution notice triggers, even though the Regulator is more likely to use these given the lower standard of proof associated with them, and ••will not apply to other authorities with the power to prosecute individuals or companies for these offences (namely, the Secretary of State and Department of Public Prosecutions in England, the Crown Office and Procurator Fiscal Service in Scotland and the Public Prosecution Service in Northern Ireland). For more analysis of the draft policy, see our blog. Comment: The draft policy highlights the importance of considering the impact of corporate activity on a DB scheme and the steps that could be taken to mitigate this. It also makes clear the need to maintain contemporaneous written records of these deliberations as part of the corporate decision-making process. We hope the final policy will provide more unequivocal assurance that employers will be 'in the clear' where they fully mitigate the risk to their scheme or obtain clearance otherwise it risks undermining the message that these offences behaviour. Pensions Regulator issues Annual Funding Statement 2021 The Pension Regulator’s latest Annual Funding Statement covers a lot of ground, emphasising the need for trustees to determine how their covenant has been impacted by Covid-19 and Brexit and to assess whether they are on track to reach their long-term funding target. Where a recovery plan is needed, affordability remains a key consideration and, where this is constrained, the Regulator expects trustees to seek appropriate mitigation, such as contributions increasing in future by reference to well-defined triggers and contingent security being put in place. Conversely, the Regulator expects a ‘business as usual’ approach where the employer covenant remains strong and, where employers have prospered, it expects recovery periods to be cut rather than deficit recovery contributions (DRCs) reduced. The statement also: ••emphasises the need for trustees to take care when reviewing their mortality assumptions given the uncertainty over how Covid-19 will impact future mortality rates ••makes clear that where schemes take account of post-valuation experience this should include negative as well as positive events ••encourages trustees to develop a long-term funding target, and agree it with their employer. The statement is particularly relevant to schemes with valuation dates between 22 September 2020 and 21 September 2021 (known as Tranche 16, or T16, valuations). It is also relevant to schemes undergoing significant changes that require a review of their funding and risk strategies. For more analysis read our recent blog. Comment: The latest Annual Funding Statement addresses the key issues that trustees of T16 schemes will need to consider when preparing their valuation, recognising the impact of these factors will differ depending on the particular experience of a scheme and sponsor since the last valuation. As ever, trustees and employers should be fully prepared to justify and explain the approach they take (in light of the Regulator’s statement) with suitable supporting evidence. Quarter in review HERBERT SMITH FREEHILLS PENSIONS PLANNER JUNE 2021 05 Covid-19 and Brexit - Trustees should take account of the impact of Covid-19 and Brexit on their employer covenant and scheme but this should not be used as a reason to weaken existing recovery plans where this is not justified. Protecting the scheme - Where affordability is constrained, trustees seek appropriate mitigation and ensure their scheme is treated equitably compared with other creditors and shareholders. Mortality - Trustees should take care when reviewing mortality assumptions, recognising there is a great deal of uncertainty over the impact of Covid-19 on future mortality rates. Post valuation experience - Where schemes take account of post valuation experience this should include negative as well as positive events. Focus on long-term - Although it is not yet a legal requirement, trustees are encouraged to develop a long-term funding target, and agree it with their employer, if they do not already have one. Annual Funding Statement 2021 - Key takeaways £ Ombudsman expects providers to update processes within “approximately one month” of new scams guidance In a recent determination (PO-24554), the Pensions Ombudsman indicated that it would generally expect pension providers to update their transfer processes and checks within “approximately one month” of new regulatory guidance being issued. This is significantly less than the three month period the Ombudsman has previously indicated would be acceptable. Facts In short, the claimant, Mr R, complained that Aegon did not carry out the appropriate due diligence when transferring his pension fund into a small self-administered scheme (SSAS) in March 2012, particularly in light of the red flags set out in the scorpion leaflet which was published a month and five days before the transfer took place. He also claimed that Aegon failed to inform him of the potential consequences of transferring his pension benefits to the SASS. He maintained that had he received proper information and been made aware of the risks, he would not have proceeded with the transfer. Aegon disputed Mr R’s complaint and contended that it acted appropriately and conducted adequate due diligence (taking account of market practice at the relevant time). Aegon pointed to previous determinations in which the Ombudsman has held that providers should be given up to three months to update their transfer processes following publication of the scorpion guidance in February 2013. 06 PENSIONS PLANNER JUNE 2021 HERBERT SMITH FREEHILLS Decision The Ombudsman did not uphold Mr R’s complaint finding that Aegon had acted appropriately and that it would not have been reasonable to expect it to have updated its transfer processes before the transfer was ultimately made. Significantly, however, the Ombudsman took the opportunity to review the complaints he has previously determined on this issue. Having done so and in light of the evolving regulatory position, he said that he considers that “a period of approximately one month would generally be sufficient for a provider to put in place any procedures necessary as a result of the Regulator’s new guidance”. Where a provider is unable to meet this timeframe, the Ombudsman said that he expects them to consider suspending transfers until the relevant changes to their processes can be made. Read our recent blog for more analysis of this determination. Comment: This decision signals a significant tightening of the timeframe within which pension providers, schemes and administrators might be expected to update their processes in response to new regulatory guidance relating to scams and transfers. Although this was not significant in the context of this complaint, given that the transfer was made just over one month after the scorpion literature was published, it may be significant in the context of other complaints relating to transfers made shortly after February 2013. It also means that pension providers, schemes and administrators should ensure they are able to identify, review and respond quickly to future regulatory guidance in this context. Supreme Court judgment may restrict extra-territorial reach of Regulator’s information gathering powers The Serious Fraud Office (SFO) conducted an investigation into the potential bribery by Unaoil, a Monaco-based oil company, in relation to international projects involving (among other parties) KBR’s UK subsidiary, Kellogg Brown and Root Ltd (KBR UK). As part of this, the SFO issued a section 2(3) notice on KBR, which is based in the United States. KBR sought an order to quash the notice on multiple grounds. The Administrative Court (a division of the High Court) found against them on all grounds, and KBR subsequently appealed this decision up to the Supreme Court. The key question which the court had to answer was whether the SFO’s statutory power to compel the production of documents could be exercised against an overseas company in respect of documents held outside the UK. Supreme Court Decision The Supreme Court noted the presumption against extraterritorial effect in legislation, and considered whether this was rebutted by the language of the Criminal Justice Act 1987. Even when legislation does not expressly have extraterritorial effect, this can be implied into the legislation by the public interest, but this turns on: ••the legislative history of the particular statute; and ••whether Parliament intended that the purpose of the legislation be achieved by means other than an extraterritorial effect. On both of these points, the Court found that there is nothing that might give extraterritorial effect to section 2(3). The judgment notes that the number of sophisticated agreements for international co-operation in criminal matters meant that it was “inherently improbable” that Parliament intended the SFO to have the ability to issue its demands to foreign companies directly without the protection afforded by the safeguards put in place under these schemes of mutual legal assistance. Consequently, the Court unanimously held that section 2(3) does not have extraterritorial effect. Comment: This judgment is likely to have implications for the extraterritorial use of TPR’s information gathering powers; for example, its powers under section 72 of the Pensions Act 2004. Given the lack of express extraterritorial reach for section 72 notices, we would expect the Regulator, like the FCA in this case, to be required to make use of the existing international co-operation agreements that are in place, where these apply. Pensions Regulator puts Silentnight case to bed for £25m In February 2021, the Pensions Regulator settled its enforcement action against certain individuals associated with and entities in the HIG Group, a US private equity group. The Regulator began an investigation after the Silentnight Group’s DB scheme (the Scheme) was severed from its sponsoring employers’ business via a pre-pack administration. The Regulator’s case was that the targets acquired the employer’s bank debt and used their position as lender to bring about the unnecessary insolvency of the group. It alleged that the targets then took steps to buy the employers’ business at an undervalue as part of the pre-pack administration process that followed. HERBERT SMITH FREEHILLS PENSIONS PLANNER JUNE 2021 07 Following its investigation, the Regulator took the unusual step of issuing two separate warning notices on the targets, threatening to impose contribution notices (CNs) seeking contributions to the Scheme of up to £96.4m. Judicial review HIG applied for judicial review of WN2 in September 2016 on the grounds that it was unlawful for the Regulator to issue multiple warning notices against the same target on the same facts. This application was refused by the Administrative Court as HIG had an alternative remedy: it was able to make these submissions before the Determinations Panel. Given that the matter settled before reaching the Determinations Panel, the merits of this argument were not tested. Unsurprisingly, the Regulator continues to assert that it is entitled to issue multiple warning notices on the same persons in respect of the same set of facts. Association and connection In seeking to impose the CNs, the Regulator sought to use what it called “novel and untested” arguments to establish the required association or connection of the targets with the Scheme’s sponsoring employers. Unfortunately, these arguments have also gone untested. Settlement Shortly before the scheduled Determinations Panel hearing, the Regulator accepted an offer from the targets to settle in return for HIG paying £25m to the Scheme. This and the liquidation proceeds from the insolvency process will lead to the Scheme receiving around £35m. However, it is expected that this will still be insufficient to eliminate the Scheme’s deficit on a PPF basis meaning the Scheme will still transfer to the PPF. The targets continued to dispute the Regulator’s findings and, in reaching the settlement, made no admission of liability. Comment: This settlement illustrates that the threat posed by the Regulator’s existing anti-avoidance powers can be enough to secure a substantial contribution to a scheme. That threat will soon be significantly stronger as it will include the prospect of financial penalties and criminal prosecution against individuals and entities. Pensions Regulator publishes new settlement policy The Pensions Regulator has recently issued a new settlement policy which sets out the approach it will take to negotiating and concluding settlements, and what they expect from parties who come forward with a proposal. The Regulator’s overarching aim for any settlement is that it should offer a fair and appropriate outcome having regard to the circumstances of the case and the Regulator’s statutory objectives. Each case is unique and will have its own personal challenges and circumstances, so the Regulator makes clear that an acceptable settlement for one case, may not be acceptable for another, even if they same regulatory power is being used. Relevant factors When making a decision on whether or not to settle, the Regulator will take account of all relevant factors, including: ••protection of member benefits and the PPF ••the nature and strength of its case ••the possible duration and costs of regulatory action, and ••whether it will secure the desired behavioural change and serve as a deterrent. Settlement offers Settlement discussions with the Regulator can take place at any time during the enforcement process. These discussions will normally be conducted on a Without Prejudice basis and would typically take place between the Regulator and the target of its enforcement action, although in some instances the Regulator may take the view that other interested or affected parties should also be involved. The target must provide the Regulator with details of any offer and proposed settlement terms in writing, together with any relevant documentation. This should be sufficiently detailed and, where necessary, be supported with evidence and analysis. Comment: This policy provides helpful guidance for parties considering making an offer to reach a settlement in respect of potential regulatory action by the Pensions Regulator. Going forwards, it will be interesting to see whether future settlements will also address the prospect of criminal prosecution, where this is relevant. Pensions Ombudsman publishes factsheet on recommending independent financial advisers to members The Pensions Ombudsman has published a brief factsheet for pension administrators, trustees and employers on recommending particular independent financial advisers (IFAs) to scheme members. The Ombudsman acknowledges that administrators, trustees and employers have historically been cautious about pointing members in the direction of particular IFAs and recognises that clarity in this area is important as regulated financial advice can play a useful role in helping members manage their retirement benefits and reduce their exposure to scams. In the factsheet, the Ombudsman explains that the FCA has expressed the view that a ‘one-off exercise’ of identifying suitable IFAs, for instance by providing a list of advisers for members to consider, is by itself unlikely to amount to a regulated activity requiring FCA authorisation. 08 PENSIONS PLANNER JUNE 2021 HERBERT SMITH FREEHILLS To help make the scope of trustees and employers duties clear, in this context the guidance sets out: ••recommended criteria to help guide administrators, trustees and employers in selecting IFA firms ••the process to be followed when selecting IFAs, and ••factual information that should be included when proposing a particular IFA firm to members. The Ombudsman also sets out the following steps that administrators and others can take to put themselves in a stronger position in relation to any complaint against them: ••check an IFA’s status with the FCA ••ensure there is no other reason within its knowledge as to why an IFA should not be able to provide competent regulated advice, and ••continue to monitor these aspects ‘at an appropriate level’. Comment: The factsheet should provide comfort to schemes and employers that, where they consider it to be appropriate, they can safely signpost their members to a particular IFA firm or panel. However, where they do so, schemes and employers should expect to be judged against the standards and processes set out the Ombudsman’s factsheet. Court of Appeal holds SIPP provider liable for execution only client’s investment losses The appeal in Adams v Options UK Personal Pensions LLP arose out of the transfer by the appellant, Mr Adams, of a pension fund into a self-invested personal pension (SIPP) and the subsequent investment of the fund in “storepods”. The investment was unsuccessful and, as a result, Mr Adams sought relief under the Financial Services and Markets Act 2000 (FSMA) against the operator of the SIPP. Mr Adams’ claim was dismissed at first instance and he subsequently appealed. The Court of Appeal unanimously accepted Mr Adam’s claim that his agreement with Carey Pensions UK LLP (renamed ‘Options UK Personal Pensions LLP’ last year) was unenforceable in accordance with section 27 of FSMA on the basis that the party which introduced Mr Adams to Carey, CLP, breached the general prohibition by carrying on the regulated activities of “arranging deals in investments” and “advising on investments” without authorisation. The Court also rejected Carey’s argument that it should exercise its discretion under section 28 of FSMA to allow Carey to enforce its agreement with Mr Adams despite the actions of CLP on the basis that it did not consider that it was just an equitable to do so. Consequently, Options is required to reimburse Mr Adams for his losses. Although it has applied for permission to appeal the decision to the Supreme Court. Comment: Subject to the outcome of any further appeal, this judgment could have significant implications for SIPP providers and will require them to pay much closer attention to the actions of unregulated third parties. Following this judgment, the Pensions Ombudsman has confirmed that it will now reopen other related complaints against Carey which had been put on hold pending the outcome of this appeal. Financial Ombudsman Service sees pension complaints increase by 91% According to its annual complaints data, the Financial Ombudsman received 278,033 new complaints between April 2020 and March 2021 – an increase of 2% on the previous year. Of these: ••170,648 related to banking and credit ••44,487 related to insurance ••20,854 related to investments and pensions (a 91% increase on 2019/20), and ••42,040 related to payment protection insurance. The Financial Ombudsman resolved 247,916 during the year upholding 40% of complaints (when PPI-related complaints are excluded). Comment: Although complaints about investments and pensions made up just 8% of the new complaints made to FOS in 2020/21 they remain among the most high-value given the nature of the products involved. Total complaints in 2020/21 = 20,854 Overall uphold rate = 22% Uphold rate for SIPP complaints = 56% complaints in 2020/21) (3,021 new Most complained about product = Self-invested personal pensions complaints in 2020/21) (8,483new Most complained about issue = administration or customer service Financial Ombudsman Service – Investment and pension complaints HERBERT SMITH FREEHILLS PENSIONS PLANNER JUNE 2021 09 High Court rules that scam arrangements can apply for compensation from Fraud Compensation Fund In Board of the Pension Protection Fund v Dalriada Trustees Ltd, the High Court held that the trustees of a scheme that has been used as scam arrangement, such as the one in question, can apply for compensation from the Fraud Compensation Fund (FCF). Trower J held that, in addition to the direct financial loss arising from the offence, the trustees could potentially also claim compensation for: ••costs and expenses incurred by trustees to investigate the prescribed offence, the history of the scheme’s administration and the making of recoveries of value in respect of the prescribed offence, ••administration costs incurred by the new trustees and managers as a result of irregular scheme administration at the time the prescribed offence was committed, ••any tax liabilities imposed on the scheme by reason of unauthorised payments made in connection with the prescribed offences, and ••costs and expenses paid from the scheme in order to investigate tax liabilities. The PPF has released a statement confirming that it will work with independent trustees appointed to scam arrangements to process the backlog of applications. Comment: While the clarification requested will be welcomed by individuals that have transferred into a scam arrangement, the impact on the FCF may be significant; indeed, it was noted in the judgment that the PPF are currently on notice for 150 applications in relation to claims of this type. This has already led to an increase in the FCF levy that occupational pension schemes are required to pay. FCA publishes final guidance for employers and trustees relating to providing support with financial matters The FCA and the Pensions Regulator have recently published final guidance, which sets out their views on the support employers and trustees can give to their employees and members on financial matters without needing to be authorised by the FCA. Following serious concerns expressed with the draft guidance which was published by the FCA for consultation last June, the final guidance makes clear that schemes can provide members with unsolicited transfer values without being authorised by the FCA provided they give members sufficient context to understand the transfer value and the relative value of their defined benefit pension. Despite this welcome change, the final guidance: ••continues to warn schemes against providing illustrations and modellers directly to their members ••suggests that due to the rules related to financial promotions, employers should be more cautious when communicating with employees about group personal pension plans compared with occupational pension schemes and, similarly, that schemes need to be more cautious when signposting members to FCA-regulated decumulation products, and ••cautions trustees and employers that arrange access to advice that they must take care not to undertake the regulated activities of giving advice or arranging transactions. It is important that employers and trustees review the information and support that they provide to individuals in respect of their pensions and their retirement options in light of this guidance to ensure that it is appropriate and does stray into advising individuals, arranging or promoting particular investments or recommending a particular course of action. For more information, please see our blog. Comment: We welcome the fact the FCA and the Pensions Regulator have adopted a less cautious view on the provision of unsolicited transfer values in the final guidance. However, in our view, the views expressed on signposting to and providing information about FCA-regulated products remain overly cautious. Pensions Ombudsman publishes factsheet on Early Resolution Service The Pensions Ombudsman has published a factsheet providing information on its Early Resolution Service (ERS). The factsheet provides guidance which seeks to explain what the ERS is, how it operates and the options for applicants that wish to utilise the service. The main aim of the ERS is to provide an ‘informal and streamlined approach to dispute resolution’ and to help individuals resolve their complaints fairly and informally at an early stage to prevent the need for formal adjudication. The Ombudsman has also published a new version of its factsheet entitled ‘How we investigate complaints’. In this it covers: ••its approach to investigations and the investigation process ••what it means by “injustice” ••how it will communicate with the parties during an investigation, and ••confidentiality during an investigation, and oral hearings. Comment: It is important that pension providers, schemes and service providers are familiar with how the Ombudsman's Early Resolution Service operates and how it interacts with the full adjudication process. 10 PENSIONS PLANNER JUNE 2021 HERBERT SMITH FREEHILLS UK National Security and Investment Act 2020 granted Royal Assent On 29 April 2021, the UK National Security and Investment (NSI) Bill received Royal Assent. The NSI Act 2021 introduces significant legislative reforms which will overhaul the review of transactions and investments on national security grounds in the UK, against a backdrop of tightening foreign direct investment (FDI) regimes globally. The new regime represents an important new execution risk factor, with a similar risk profile to merger control rules. Broadly speaking, the new regime will apply to: ••any acquisition of “material influence” in a company (which may be deemed to exist in relation to a shareholding as low as 15%), and ••the acquisition of control over assets (including land and intellectual property), which potentially gives rise to national security concerns in the UK. It will apply to both UK and non-UK investors (although UK investors will be less likely to give rise to national security concerns in practice), and may capture acquisitions of non-UK entities or assets in certain circumstances. A mandatory notification obligation (and a corresponding prohibition on completion prior to clearance) will apply to certain transactions involving target entities which carry out specified activities in the UK in 17 sectors (including energy, transport, communications, defence, artificial intelligence and other tech-related sectors). Such transactions include the acquisition of a shareholding/voting rights of more than 25% (increased from 15% or more in the original NSI Bill). This mandatory notification obligation will be combined with an extensive call-in power enabling the Government to call-in qualifying transactions for review, which extends to any sector and is not subject to any materiality thresholds in terms of target turnover or transaction value. Acquirers will also have a corresponding option to voluntarily notify a qualifying transaction to obtain clearance, which may be advisable in the interests of legal certainty where potential national security concerns arise. Formal commencement of the new regime is delayed until later this year (exact date to be confirmed). However, the Government will have retroactive powers to call in for review at the commencement date (or potentially up to five years thereafter) any qualifying transaction completed between 12 November 2020 and the commencement date. Our corporate and competition teams have produced an in depth briefing which contains detailed analysis of the key elements of the NSI regime and the key practical takeaways for investors. Comment: It is anticipated that the new NSI regime will lead to many more transactions being scrutinised and made subject to remedial measures than under the existing merger control regime. HERBERT SMITH FREEHILLS PENSIONS PLANNER JUNE 2021 11 12 PENSIONS PLANNER JUNE 2021 HERBERT SMITH FREEHILLS Timeline 2021 1 August 2021 Disputes New Pensions Ombudsman due to be appointed Autumn 2021 Scams New statutory transfer conditions expected to come into force Summer/Autumn 2021 Policy DWP due to issue further draft regulations for consultation to implement new regulatory and funding requirements contained in Pension Schemes Act 2021 Autumn 2021 Funding Pensions Regulator due to consult on contents of new DB funding Code Autumn 2021 TPR New criminal offences and financial penalties for failures in relation to DB schemes due to come into force Summer/Autumn 2021 RPI Judicial review of Government's decisions relating to the reform of RPI likely to be heard HERBERT SMITH FREEHILLS PENSIONS PLANNER JUNE 2021 13 2022 2023 1 October 2022 ESG New governance and disclosure requirements on climate-related risks extended to more schemes 2022 Dashboard Pensions dashboard to start using real data from volunteer schemes and providers 1 October 2021 ESG New governance and reporting requirements on climate-related risks due to come into force for largest UK pension schemes 2021 Climate change UK Government set to issue first sovereign green bonds subject to market conditions 2022 Scheme funding New DB funding Code and requirement for schemes to set a longterm objective expected to come into force 2023 Dashboard Phased compulsory on-boarding of schemes due to begin 1-12 November 2021 Climate change UN Climate Change Conference, COP 26, takes place in Glasgow 14 PENSIONS PLANNER JUNE 2021 HERBERT SMITH FREEHILLS New pensions offences and regulatory sanctions to come into force shortly The new pensions criminal offences and regulatory sanctions contained in the Pension Schemes Act 2021 are due to come into force in Autumn 2021 (likely 1 October 2021). This includes: ••three new criminal offences ••new financial penalties of up to £1 million for pension failures, and ••two new contribution notice triggers. The new criminal offences and financial penalties may be imposed on any person (including companies, directors, lenders, investors, trustees and advisers) who takes action, fails to act or engages in a course of conduct which (broadly speaking) is: ••materially detrimental to a defined benefit pension scheme, or ••designed to avoid a debt becoming due under section 75 Pensions Act 1995 or to reduce the amount of any such debt. The Pensions Regulator has publish its draft policy on how it will approach the investigation and prosecution of the new offences for consultation (see above). It is due to issue its final policy before the new offences come into force. For more on these measures read our blog on the new criminal offences and sanctions. Action: It is important that directors, investors, lenders, advisers and trustees are aware of these new offences and regulatory sanctions and ensure that they take account of the interests of any defined benefit schemes associated with a company or a corporate group when considering corporate activity such as the sale or acquisition of a company or group, re-financing and restructuring. It will also be important to keep contemporaneous written records of these deliberations. Covid-19: Chancellor extends CJRS until September 2021 Back in April, Rishi Sunak announced that the Coronavirus Job Retention Scheme (CJRS) or ‘furlough’ scheme, will be extended until the end of September 2021, for all parts of the UK. Until the end of June 2021 the UK Government will pay 80% of employees’ usual wages for hours not worked, up to a cap of £2,500 per month. For July, August and September the level of the Government’s grant will reduce and employers will be required to contribute towards the cost of the salaries of furloughed staff. Employers also continue to be required to pay National Insurance Contributions (NICS) and employer pension contributions for hours not worked as well as wages, NICs and employer pension contributions for hours that furloughed employees actually work. According to the Pensions Regulator, the first lockdown and the economic disruption this caused did not lead to a significant spike in missed employer automatic enrolment contributions. However, the cost of employer auto-enrolment contributions was picked up by the Government under the CJRS during the first lockdown (up until the end of July 2020). Therefore, there is a risk that the default rate may be higher this time around as businesses, some of which may already be in financial distress, are required to continue to cover this cost for furloughed employees. To find out more about the various regulatory changes due to Covid-19, see our Covid-19 hub on our pensions blog. Action: It is important that employers understand the impact of the CJRS on employer and employee pension contributions and that they prepare for those contributions to return to normal levels as furlough comes to an end. The “S” in ESG investing comes under scrutiny The Department of Work and Pensions has launched a call for evidence on the extent to which pension schemes are taking into account social factors (including risks and opportunities) as part of their investment decision-making. The call for evidence is seeking input from schemes and other stakeholders on the effectiveness of current policies, alongside assessing how trustees understand “social” factors and how they are integrating considerations of financially material social factors into their investment and stewardship activities. Responses will help inform the Government on the steps they need to take to ensure trustees are better able to meet their legal obligations. It will also help to increase policymaker and industry wide understanding of what is currently being done and what trustees could be doing more in the future to adequately consider both the risks and opportunities presented by social factors. Social factors include issues such as equality and diversity, gender, the empowerment of women, race, modern slavery, employee and community engagement, workers’ pay and conditions and health and safety. The Call for Evidence period closed on 16 June 2021. Action: When considering ESG factors schemes need to ensure they do not focus on environmental issues to the exclusion of social and governance risks and opportunities. In the spotlight Next 3 months HERBERT SMITH FREEHILLS PENSIONS PLANNER JUNE 2021 15 In the spotlight Next 3 to 12 months BT, Ford and M&S schemes to challenge Government’s decision to align RPI with CPIH The trustees of the BT Pension Scheme, Ford Pension Schemes and Marks and Spencer (M&S) Pension Scheme have filed an application to judicially review the Government’s decisions relating to the reform of the Retail Prices Index (RPI) in 2030. The schemes contend that there are major implications which haven’t been properly considered by the Government before this decision was made. In particular, they assert that “over 10 million pensioners, through no fault of their own, will be poorer in retirement either from lower payments or lower transfer values as a result of the effective replacement of RPI with CPIH”. They also claim that women will be most likely to suffer from the change as they typically live longer. If permission for a judicial review hearing is granted by the Court, it is likely the hearing will take place within the next six months or so. Action: Monitor the outcome of the judicial review and assess the potential impact on scheme investments and inflation assumptions. Pensions Regulator to publish DB funding code for consultation in late 2021 The Pensions Regulator plans to publish the second consultation on its proposed defined benefit (DB) funding code towards the end of 2021 once the DWP has published the draft regulations which will underpin this (having originally planned to launch it in Autumn 2020). It does not expect the new Code to come into force until late 2022 at the earliest. In its interim response to the first consultation, the Regulator has indicated that the second consultation will include: ••a full summary of the responses to its first consultation and the approach it has taken in light of the responses received and the final legislative package, and ••the draft code of practice for consultation and its proposed regulatory approach, including developing thinking around: • the process to review and update Fast Track guidelines • the Regulator’s approach to assessing valuations • engagement with DB schemes, and • enforcement. Separately, the Regulator has recognised that some of its proposals may need to be adjusted to reflect the current economic conditions. In particular, the Regulator is considering the different economic scenarios schemes may face post-Brexit and post-Covid, and how these may impact the parameters it sets for the new Fast Track approval route. Action: Trustees and sponsors should assess the potential impact of the new funding regime on their scheme’s funding arrangements and, in particular, the rate of deficit repair contributions and the length of their recovery plan. They should also look out for the second phase of the consultation process to see if there are any changes in approach, particularly in light of the economic fallout from Covid-19. New single Code of Practice contains new requirements for schemes The Pensions Regulator has published for consultation a new single Code of Practice, which will consolidate 10 of its 15 existing Codes into a single document. The new Code also updates the Regulator’s expectations of workplace pension schemes and is designed to make those expectations clearer and more accessible. As well as updating existing requirements, the draft Code sets out a number of new requirements, including making clear what schemes must do to put place an “effective system of governance” and to conduct a new annual “own risk assessment”. These new requirements will implement elements of the IORP II Directive not currently reflected in UK pensions regulation. The draft Code also sets out the Regulator’s expectations on issues such as: ••cybersecurity, ••stewardship, and ••climate change. It also extends the requirement for certain processes to be maintained in relation to core financial transactions (which under legislation only extends to DC schemes) to all schemes and proposes a limit of 20% on the proportion of a scheme’s assets that can be invested on unregulated markets. Status of new Code The new Code will have the same status as the existing Codes. As such, in most instances there will be no direct penalty for failing to follow the new Code or to meet the expectations set out in it. However, the Regulator may rely on the Code in legal proceedings as evidence that a requirement has not been met. Similarly, if the Regulator believes there are grounds to issue an improvement or a compliance notice, it may refer to expectations set out in the new Code. Once the new Code comes into force the existing Codes which it replaces will be revoked in their entirety. Action: When the new single Code is finalised it will be important for trustees and administrators to familiarise themselves with its content and to take steps to ensure they comply with the new regulatory expectations. 16 PENSIONS PLANNER JUNE 2021 HERBERT SMITH FREEHILLS More climate-related disclosures in the pipeline New requirements relating to the management and disclosure of climate-related risks for the largest UK pension schemes, including large occupational pension schemes and authorised master trusts, are due to come into force on 1 October 2021. As a result, trustees and providers of in scope schemes will have to: ••establish and maintain oversight of climate-related risks and opportunities, and satisfy themselves that persons managing the scheme are assessing and managing climate-related risks and opportunities ••identify and assess, on an ongoing basis, the climate-related risks and opportunities that will have an effect on their investment and, in the case of defined benefit (DB) schemes, funding strategy, over the short, medium and long term, ••conduct scenario analysis ••select metrics and set targets to monitor the performance of their scheme. In scope schemes will need to report publically on the outcome of these actions in a new TCFD-aligned annual report. They will also need to inform members and report to the Pensions Regulator. Industry guidance, produced by the Pensions Climate Risk Industry Group (PCRIG), has been published to help trustees evaluate how climate-related risks and opportunities can affect their strategies. We strongly recommend that trustees refer to this when deciding the steps they need to take to effectively manage climate-related risks and to comply with the new legislative For more information on these new requirements check out our blog. Action: Trustees of in scope schemes should start preparing now by reviewing their scheme’s approach to addressing climate-related risks and determining the steps they will need to take to comply with these new requirements. UN Climate Change Conference – UK 2021 (COP26) The UK will host the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow from 1 to 12 November 2021. At COP26, the UN wants to demonstrate the urgency and the opportunities of the journey towards a zero carbon economy and the power of international cooperation. It is hoped that the conference will aid efforts to: ••agree a negotiated package that delivers the Paris Agreement and moves the UN Climate Change process forward, and ••encourage all countries to commit to reaching net zero emissions as soon as possible and to help their societies and economies adapt to climate change. It is likely that the UK Government and many UK businesses and schemes will announce a number of climate related initiatives in the run up to COP26. Action: Trustees, providers and asset managers should monitor developments in the run-up to and the aftermath of the COP26 conference. DWP Proposes New Transfer Conditions to Combat Pension Scams The DWP is planning to introduce new measures to empower trustees and pension providers to protect their members from pension scams. Draft regulations (which are subject to consultation) would see four new statutory conditions introduced, one of which must be met before a transfer can take place. Although many will argue that such measures are long overdue, the new regime will put the onus on trustees, pension providers and scheme administrators to ensure a condition is met before they allow a transfer to proceed. In some instances this will be relatively straightforward to determine. However, in others difficult judgment calls may need to be made. Transfer Conditions Based on the proposals, before a statutory transfer can take place trustees or providers will need to be satisfied that one of four new transfer conditions is met. In particular, they will need to satisfy themselves that: i. the transfer is to a low risk scheme identified in the new regulations, such as an authorised master trust or a scheme operated by an FCA regulated insurer ii. a prescribed employment link exists iii. the member is resident in the same country as the receiving scheme (where the receiving scheme is a qualifying recognised overseas pension scheme), or iv. no prescribed red or amber flags are present or, where only amber flags are present, the member has received new scams guidance from the Money and Pensions Service. The draft regulations set out in some detail the evidence that trustees and providers will be required to obtain in order to determine whether these conditions are met. Where none of the conditions are satisfied a member will no longer have a statutory right to transfer. For more analysis of the proposed transfer conditions read our blog. For a summary of the steps schemes will need to take to determine whether a transfer can take place (based on the current proposals) see our handy flowchart. Action: Trustees, pension providers and scheme administrators will inevitably need to review and update their transfer processes and checks when these proposals are finalised. HERBERT SMITH FREEHILLS PENSIONS PLANNER JUNE 2021 17 Unregulated advice - Financial advice or recommendation given by firm or person without appropriate regulatory permissions (except where overseas adviser has advised on overseas investments). Failure to receive scams guidance - Member fails to provide evidence they have received scams guidance, where they are required to do so. Unsolicited contact - Transfer request follows unsolicited contact about making a transfer from a party previously unknown to member. Failure to provide information - Member fails or refuses to provide information which is needed to establish whether red or amber flags are present. Undue pressure - Member is pressured to complete transfer within one month. Incentive to transfer - Member is offered an incentive to make the transfer (such as free pension review, early access or cashback). Statutory transfers – Proposed red flags 18 PENSIONS PLANNER JUNE 2021 HERBERT SMITH FREEHILLS Pensions dashboard on track to launch in 2023 The latest progress report from the Pensions Dashboard Programme indicates that the development of the dashboard is on track with the published timetable, which would see compulsory scheme participation phased in from 2023. Key achievements so far include: ••publishing a set of data standards for initial dashboards ••commencing the procurement of the principal digital architecture for the pensions dashboards ecosystem (with the contract expected to be awarded by the Autumn), and ••building a team to deliver the next phase of the programme. Action: Schemes and providers need to monitor developments and ensure that their data is "dashboard ready" in time for on-boarding to begin in 2023. Government confirms plans to increase minimum pension age to 57 The Government has confirmed that it plans to increase the minimum pension age at which benefits under registered pension schemes can generally be accessed, without a tax penalty, from age 55 to age 57 from 6 April 2028. In a consultation paper which outlines how the Government intends to implement this, it has set out its plans to introduce a protection regime for members who currently have an “unqualified right” to access their benefits under a registered pension scheme before age 57 and for members in certain high risk occupations. For all other members, the age at which they can access their benefits without paying an unauthorised payments charge will increase from April 2028. Action: Trustees and providers must decide when and how to inform affected members to ensure they have sufficient notice of the increase in the age at which they can access their benefits so they can adjust any plans they may have to retire or access their benefits accordingly. Impact of Scottish independence on pensions The prospect of a second referendum on Scottish independence has increased following the election of a pro-independence majority of members of the Scottish Parliament in May. If Scotland were to separate from the rest of the United Kingdom this could have important implications for: ••pension providers and other financial services firms established in Scotland, and ••some asset-backed funding structures. It would also give the Scottish government the ability to set its own laws in relation to pensions and automatic enrolment and to determine the future levels of pensions tax relief for Scottish pension savers. To find out more about the potential impact of Scottish independence on employment and pensions matters, read our briefing. To consider the wider implications of Scottish independence check out our recent webinar and our new hub. Action: Pension providers and schemes should be alive to the potential issues that may arise if Scotland votes to leave the United Kingdom. RPI set to be reformed in 2030 The Government has confirmed that the methodology for calculating RPI will not be updated to bring the methods and data sources of CPIH into the RPI before February 2030. We anticipate that (subject to the outcome of the judicial review brought by three pension schemes (see 5.1 above)) the Authority will press ahead with its proposed reform from that time, as the Government's response confirms that it remains the Authority’s policy to address the shortcomings in RPI in full “at the earliest practical time”. The Government does not intend to compensate holders of index linked gilts for the losses they will suffer as a result of the reform of RPI. However, it is likely this decision will be challenged as part of the judicial review. For more information on the Government’s response to its consultation on the reform of RPI, see our blog. Action: If they have not already done so, trustees and sponsors should consider the impact of the proposed reform of RPI on their scheme, including their funding and investment strategy and on the actuarial factors they use to calculate transfer values. On the horizon HERBERT SMITH FREEHILLS PENSIONS PLANNER JUNE 2021 19 Notes For a full list of our global offices visit HERBERTSMITHFREEHILLS.COM © Herbert Smith Freehills LLP 2021 6050A_Pension Planner Guide_V5 /210621