As part of the Year in Review, Year to Come series, our UK Pensions team has contributed a UK Pensions Year in Review and Year to Come publication. In this publication we have summarised the key legal developments in the Pensions space for 2019 and looked forward in predicting likely themes for 2020.
Find out more about our Pensions advice, or read below for the top developments last year and what we expect to see in the year ahead.
UK Pensions in 2019
The most significant pensions development in 2019 was the publication of the long-awaited Pension Schemes Bill, but that wasn’t the only change pension scheme trustees and sponsoring employers had to get to grips with in the ever-shifting world of pensions. The snapshots below provide a summary of the most important developments in UK pensions law over the year, with links to further information where available.
Stronger Pensions Regulator powers
The long-awaited Pension Schemes Bill was published in October. It included a package of measures aimed at strengthening the powers of the Pensions Regulator, as well as some fundamental changes to the scheme funding regime. Read more here.
Scope of existing Regulator powers
In June, the Court of Appeal handed down its judgment in the long-running Box Clever case. The decision clarified the scope of the Pensions Regulator’s existing anti-avoidance powers and will therefore be of interest to sponsoring employers of defined benefit (DB) pension schemes and those connected or associated with such employers. Read more here.
Opposite sex civil partnerships
The Civil Partnership (Opposite-sex Couples) Regulations 2019 came into force on 2 December 2019. The Regulations amend the definition of civil partnership in the Civil Partnership Act 2004 so that two people of the opposite sex may become civil partners. Scheme rules may need to be amended in some cases to ensure death benefits can be paid to opposite sex civil partners. Read more here.
Investment consultants and fiduciary managers
The Investment Consultancy and Fiduciary Management Market Investigation Order 2019 came into force on 10 June 2019. It requires trustees to set objectives for their investment consultants and carry out a tender process for fiduciary management services. Read more here.
From 1 October 2019, trustees became subject to a requirement to consider the impact on their investments of environmental, social and governance (ESG) factors, explain the extent to which they take account of members’ views and set out their policies on stewardship. In addition, trustees of defined contribution (DC) schemes are subject to new reporting and disclosure obligations. Read more here.
Annual benefit statements
The government consulted in November on its proposed approach to achieving simpler annual benefit statements for workplace pensions, as well as requiring schemes to include member level charges and transaction costs in pounds and pence on the annual benefit statement. Read more here.
DC master trusts
The Regulator confirmed in November that the final DC master trust had been authorised, concluding the process for existing schemes. As a result of the new authorisation regime, the market has reduced in size by nearly 60%, from 90 schemes to 37 authorised master trusts. The 37 authorised master trusts will be subject to ongoing supervision. Read more here.
In July, the Regulator published a statement on climate change, highlighting the financial risks presented by climate change, from both physical factors (such as extreme weather events) and transition risks (that can arise from the process of adjustment to a carbon-neutral economy). It said trustees need to consider climate change when setting and implementing their investment strategy. It also noted that many schemes are supported by employers whose financial positions and prospects for growth are dependent on current and future policies and developments in relation to climate change. Read more here.
Future of trusteeship and governance
The Regulator published a consultation on the future of trusteeship and governance in July. The proposals included changes to the trustee knowledge and understanding regime, requirements in relation to diversity and a requirement for every board to include a professional trustee. Read more here.
The European Court of Justice handed down its decision in Safeway v Newton in October. The case related to the equalisation of normal pension ages (NPAs) for men and women. The ECJ ruled that schemes cannot retrospectively equalise benefits on the less favourable basis, even where this is allowed by UK law and the scheme rules. This decision will be of interest to trustees of schemes which purported to equalise NPAs by way of an announcement to members and only made a formal amendment to the scheme rules at a later date. Read more here.
UK Pensions in 2020
The pace of change is unlikely to slow down in 2020, with new powers for the Pensions Regulator, a revised scheme funding code of practice and further developments in relation to GMP equalisation all on the horizon. Our top predictions for UK pensions law in 2020 are below, with links to further information where available.
Stronger Pensions Regulator powers
We expect the Pension Schemes Bill (see above) to be re-introduced following the Conservative’s general election win. It includes significant changes which, if enacted, could have far-reaching consequences for sponsoring employers and trustees of DB pension schemes.
Further developments in relation to GMP equalisation are expected in 2020, including guidance from HMRC and another Court hearing in the Lloyds case, this time looking at the extent of trustees’ obligations to revisit past transfers-out. For many trustees, GMP equalisation projects are likely to start in earnest in 2020.
Two Regulator consultations on scheme funding are expected in 2020: the first consultation is expected early in 2020 and will focus on options for a clearer framework for DB funding. Later in 2020, a second consultation is expected on a draft code of practice.
From 1 October 2020, trustees will be required to update their statement of investment principles (SIP) to include their policy on arrangements with asset managers and their policies in relation to capital structure, conflicts of interest and other stakeholders. Trustees of DB schemes will also need to publish their SIP and produce an implementation statement. Read more here. Further changes could be introduced following a consultation in 2019 on proposals which aim to encourage DC schemes to consider a wider range of investments. The proposals included a requirement for larger DC schemes to explain their policy in relation to investment in illiquid assets in their SIP and for smaller DC schemes to explain their assessment of whether it would be in members’ interests to be transferred into another scheme with significantly more scale. Read more here.
Future of RPI
The government has said it intends to consult in January 2020 on whether RPI should be aligned with CPI including owner occupiers' housing costs (CPIH) at a date other than 2030 (when the Chancellor's consent to this change will no longer be required) and, if so, when between 2025 and 2030. If this change is made, it will have an impact on the level of increases received by members of schemes which continue to use RPI – and, consequently, on the funding position of such schemes. Read more here.
In October, the government published a consultation on proposed changes to the rate of the general levy payable by occupational and personal pension schemes. The consultation sets out a range of options, with schemes likely to face an increase of at least 10% of 2019/20 rates on 1 April 2020. Read more here.
In August, the government responded to its consultation on changes to the Pensions Ombudsman's processes and jurisdiction. This confirmed that an early resolution function within the Ombudsman’s remit would be introduced. We expect this to be progressed in 2020. Read more here.
Pension costs and transparency
In November, the government responded to the Work and Pensions Committee's inquiry into pension costs and transparency. Amongst other things, it confirmed that the government will review the level and scope of the charge cap in 2020, as well as consulting on whether, and if so how, investment pathways should be applied to trust-based DC schemes. Read more here.
DB consolidation / superfunds
Although DB consolidation / superfunds were a notable omission from the Pension Schemes Bill, we are expecting a new legislative framework for the regulation of DB superfund / consolidation schemes at some point following a consultation which closed in February 2019.
Single code of practice
The Regulator has said it is planning to combine the content of its 15 current codes of practice to form a single, shorter code. Its intention is to develop the new code in phases, with its early focus being on the codes most affected by the regulations that implement the EU pensions directive (known as IORP II).
Professional trustee standards
In February, the Association of Professional Pension Trustees published standards for professional trustees of occupational pension schemes. The standards apply to anyone falling within the Regulator's description of a professional trustee. An accreditation framework is expected to be launched in 2020. Read more here.