Over the past few months all talk in pension circles has been dominated by the 'B-word'. In October, it looked like progress was finally being made when, after months of dither and delay, the new Pension Schemes Bill was finally introduced. However, after less than two weeks, the Bill became a victim of the latest twist in the ongoing Brexit saga, falling as quickly as it appeared following the dissolution of Parliament ahead of this month's general election. Despite the Bill's untimely demise, it has given us a much clearer idea of the direction of travel on issues such as the new criminal offences and regulatory powers for failures in relation to DB schemes and on the new long term funding requirements. The new offences and powers were significantly wider than many in the industry had expected and it is likely that attempts will be made to narrow their scope when they are re-introduced. The new funding requirements are also likely to come under greater scrutiny as they will put increased pressure on corporate sponsors at a time of significant economic uncertainty. The approach adopted in the Bill chimes with the Regulator's mantra of tougher regulation, which is already being seen in practice. Our recent freedom of information request on the number of formal requests for information, known as "section 72 notices", issued by the Regulator showed that in the past five years the Regulator has issued 656 such requests. This represents an increase of 133% on the previous five year period. The Regulator's tougher approach was also supported by the Court of Appeal's decision to uphold the financial support direction issued against ITV as a result of the sale of Box Clever back in 2011. The focus on environmental, social and governance (ESG) considerations in investment decision-making has continued to move up the agenda with the introduction of new legal requirements for trustees in October. These issues also continue to receive increasing attention from policymakers, regulators, financial institutions, savers and pressure groups alike. Taking account of ESG risks is no longer an optional extra for trustees. Where ESG risks may materially impact the financial performance of a fund, the question is 'how' not 'if' they should be taken into account. It is essential that trustees and providers are able to demonstrate that they are taking ESG factors seriously and that they don't just treat this as a tick-box exercise, given the growing risk of legal challenge for schemes that fail to do so. The issue of GMP equalisation also rumbles on as the industry continues to digest the implications of the Lloyds Bank judgment and as it unpicks the practical, legal and actuarial challenges associated with equalising members' benefits. The recent industry guidance from the Equalisation Working Group proposes pragmatic approaches to some of the more tricky issues. However, most schemes are waiting for HMRC's guidance on the tax consequences of equalising benefits before they take firm action. Looking ahead, schemes and sponsors will be hoping to see an end to the recent political instability that has overshadowed the past few years. However, the outcome of the election cannot be predicted with any certainty and so schemes and sponsors must continue to be ready to respond to all eventualities. The new Pensions Minister will also need to be prepared to address the mounting number of issues in their inbox, which include breaking the deadlock in the debate over the regulation of DB consolidators, deciding how to build upon the initial success of automatic enrolment and solving the problems caused by the tapered annual allowance. Those issues could be dwarfed, however, if the CJEU follows the Opinion of the Advocate General in PSV v Bauer, referred to in some quarters as 'Big Bauer', a judgment which has the potential to send shockwaves through Whitehall by significantly increasing the burden on the Pension Protection Fund.
Pensions Schemes Bill The Government introduced the Pension Schemes Bill before Parliament on 15 October 2019. Amongst other things, the Bill contained provisions which would: • introduce new criminal offences and regulatory sanctions (including fines of up to £1 million) – these sanctions could be imposed, broadly, where directors or other parties take action which is materially detrimental to a defined benefit (DB) scheme or which breaches key legislative requirements • introduce two new contribution notices triggers – these will apply where, broadly, a party engages in an act or course of conduct which reduces the amount that may be available on the insolvency of a scheme sponsor or which reduces the value of a scheme sponsor to a material extent, and • introduce new scheme funding requirements for DB schemes – this includes requirements for trustees to put in place a long-term funding and investment strategy for their scheme and to set their scheme's technical provisions by reference to this strategy. For more on these measures read our recent blogs on the proposed new powers and the proposed new funding requirements. Comment: Although the Bill has now fallen as a result of Parliament being dissolved ahead of the general election, it should be taken as a clear signal of the direction of travel. Corporate sponsors and trustees of DB schemes should consider the likely impact of these proposed measures on their scheme in anticipation of the Bill (or similar legislation) being reintroduced in the next Parliament. New legal requirements on Pensions and ESG come into force Trustees were required to update their scheme's Statement of Investment Principles by 1 October 2019 to set out their policies on: • how they take account of financially material factors, including ESG considerations, in their investment decision making • the extent (if at all) to which non-financial factors (such as members' views) are taken into account in the selection, retention and realisation of investments, and • undertaking engagement activities and exercising their voting rights. To help, we published a guide to 'Pensions and ESG', which we produced with asset managers, Royal London, which: • considers how trustees, providers and those who advise them can meet these requirements in practice, and • addresses some of the common myths around ESG, pensions and investing. In a year's time, trustees of money purchase schemes will be required to produce and publish an implementation report confirming how they have implemented these policies in practice. Comment: The new requirements that came into force on 1 October signal the start of a journey. Trustees and providers should consider how they can demonstrate that they are taking ESG risks seriously when they produce their first implementation statements, particularly as the legal and reputational risks associated with paying lip service to ESG risks are increasing. PASA issues guidance on how to implement GMP equalisation The guidance, produced by the Equalisation Working Group (EWG): • considers various methods that schemes could use to implement GMP equalisation, and • addresses some tricky issues that are likely to arise on most GMP equalisation projects. The intention is to update the guidance from time to time to reflect material developments and industry practice as it evolves in this area. We sit on the EWG, so please let us know if you have any comments on the guidance and we will ensure that these are fed in when it is updated. PASA is due to issue further guidance in the coming months covering data, impacted transactions (including lump sum payments and other settlements) and tax. HMRC is also due to issue guidance on some of the tax issues associated with implementing GMP equalisation in December. Comment: Whilst the EWG's guidance is useful, most schemes are waiting for guidance from HMRC before they embark on implementing GMP equalisation. In the meantime, schemes can consider the options for equalising benefits and take steps to identify any gaps in member data. Parties reveal pension plans in manifestos The manifestos published by the three UK-wide parties give some insights into what we might expect when it comes to future pensions policy. The Conservatives have said they will: • urgently review the impact of the tapered annual allowance on the NHS • conduct a comprehensive review to look at how to address the issue of workers who are auto-enrolled into net pay schemes missing out on tax relief • reintroduce the Pension Schemes Bill, and • better inform savers about pension dashboards. Labour also supports the introduction of a pensions dashboard and, it too, would legislate to enable the establishment of Collective DC schemes. Labour also plans to: Quarter in review HERBERT SMITH FREEHILLS PENSIONS PLANNER NOVEMBER 2019 05 • freeze future rises to the state pension age • replace the DWP with a Department for Social Security • extend auto-enrolment to the self-employed, and • establish an Independent Pensions Commission to recommend target levels for workplace pensions. The Liberal Democrats have also committed to address the NHS pension crisis and to review the rules on pensions for gig economy workers. All three parties have committed to retain the triple lock for state pensions. Both Labour and Liberal Democrats have stated they will take steps to redress the effect of historic inequalities in state pension age between men and women (in as much as this has reduced women’s state pensions). The three parties also set out commitments which may impact pension fund investments. The Liberal Democrats will require pension funds and managers to show that their investments are consistent with the Paris Agreement. Labour intends to amend the Companies Act 2006 to require companies to prioritise long-term growth, while strengthening protection for pension funds. The Conservatives plan to unlock long-term capital in pension funds to invest in and commercialise UK scientific discoveries. Comment: In this election it certainly cannot be said that all of the parties are the same. On the big issues of the day the main parties offer very different outcomes. However, when it comes to pensions there is still a lot of common ground. 2019 general election manifestos Pension pledges Conservatives Labour Lib Dems Reintroduce Pension Schemes Bill Retain triple lock Freeze state pension age at age 66 Compensate WASPI women Support creation of pension dashboard(s) Enable establishment of CDC schemes Address net pay anomaly Key Specific pledge made No pledge included Complaints to the Pensions Ombudsman rise as Government confirms plans to extend its role The Ombudsman's annual report for 2018/19 shows that the number of pension related complaints continues to rise, with 1,538 new investigations opened by the Ombudsman in the past year (a 5% increase on the previous year). The top 5 reasons for new complaints remained the same as in 2017/18, although the order has changed. However, transfers continued to be the most common cause of complaints. At the same time, the Government has confirmed that it supports the Ombudsman providing an early resolution function to help resolve complaints at the earliest juncture. This is likely to involve the Ombudsman Service: • giving a steer on the parties' positions at an early stage in the process • facilitating the parties engaging in meaningful discussions regarding a settlement, and • assisting the applicant in making a complaint through the IDRP process, if necessary. Comment: We hope that the Ombudsman will outline how this early resolution service will operate in practice and how it will sit alongside the Ombudsman Service's other functions (ie guidance, investigation and adjudication). Guidance is also needed on how this will fit in with a scheme's IDRP process and how the Ombudsman's Service intends to manage conflicts of interest. Transfers 7.1% Misquote/ misinformation 6.6% Ill health 6.2% Failure to provide information/act on instructions 5.7% Benefits: incorrect calculation/ overpayments 4.6% for new Ombudsman complaints in 5 2018/19 REASONS TOP 06 PENSIONS PLANNER NOVEMBER 2019 HERBERT SMITH FREEHILLS Box Clever: Court of Appeal holds that it was reasonable to issue an FSD on ITV despite events taking place before legislation was contemplated The Court of Appeal dismissed ITV's appeal in Granada UK Rental & Retail Limited and others v The Pensions Regulator and confirmed that the financial support directions (FSDs) issued by the Pensions Regulator to companies within the ITV group were valid. The Court of Appeal agreed with the Upper Tribunal holding that section 43 Pensions Act 2004 allows the Regulator to consider events that occurred prior to the date on which that section came into force. The Court also held that the fact that the legislation applies retrospectively in this way does not breach Article 1 of the First Protocol of the European Convention of Human Rights or the Human Rights Act 1998. Comment: This decision is significant as it clarifies the scope of the Regulator's power to issue FSDs. It aligns with the continuing efforts to increase the Regulator's powers and its ambition to be "clearer, quicker and tougher". Key principles on imposition of FSDs In Granada v The Pensions Regulator, the Court of Appeal confirmed that: The question of whether it is reasonable to issue an FSD is, in the first instance, a judgment for the Regulator The matters to which the Regulator may have regard are not limited to those specified in section 43 Pensions Act 2004 The weight to be given to each factor is for the Regulator to decide and they do not have to be given equal weight If an FSD is challenged, the burden is on the Regulator to demonstrate that the criteria for the imposition of the FSD are satisfied, including whether this is reasonable The Upper Tribunal is not simply a review body and it will consider the matter afresh where a reference is made to it An appeal from the Upper Tribunal to the Court of Appeal can only be made on a point of law The Upper Tribunal will be treated as a specialist tribunal and, within its field of expertise, the Court of Appeal will presume the Tribunal has got the law right, and As well as the imposition of an FSD itself having to be reasonable, separate consideration must be given to the reasonableness of any financial support that is required to be put in place. HERBERT SMITH FREEHILLS PENSIONS PLANNER NOVEMBER 2019 07 133% increase in number of formal requests for information from the Pensions Regulator Almost 1,000 requests for information about pension schemes administration, funding and legislative compliance have been made by the Pensions Regulator over the past 10 years, according to data that we obtained from the Regulator following a recent Freedom of Information request. The data shows that in the past five years the Regulator has issued 656 formal requests for information, known as "Section 72 notices". This represents an increase of 133% on the previous five year period. Our practical guide to responding to requests for information from the Regulator sets out: • the immediate steps that trustees, sponsors and other potential recipients should take if they receive a request for information from the Pensions Regulator • the grounds on which an information request may be challenged, and • the scope for securing an extension to the deadline for providing information. Failure to comply with a section 72 request, without reasonable excuse, is a criminal offence which may result in an unlimited fine – something already seen with successful prosecutions. Comment: Requests for information can be wide ranging and require documents and information to be provided at very short notice. The cost of complying can run to tens or even hundreds of thousands of pounds. Therefore, trustees and sponsors should consider how they would respond if they receive one and how the costs would be met. FCA proposes ban on contingent charging for DB transfer advice The FCA has proposed a ban on contingent charging for DB transfer advice (with limited exceptions). The FCA has also proposed allowing firms to provide abridged advice to customers for whom a transfer is unlikely to be suitable, thereby avoiding the need for them to pay for full advice and reducing potential conflicts of interest. The consultation forms part of a package of measures proposed by the FCA to combat poor transfer advice. The FCA recently wrote to around 1,600 advice firms, calling for them to address risks which the FCA has identified with their transfer advice. The FCA plans to publish its final rules and guidance in the first quarter of 2020.