Welcome to your weekly update from the Allen & Overy Pensions team, bringing you up to speed on all the latest legal and regulatory developments in the world of occupational pensions.
Last week’s Budget contained relatively few pensions-related items, and there were no significant changes to pensions tax relief. The key headlines are:
● The lifetime allowance will rise to £1,055,000 as expected (the cap is now inflation-linked).
● The government will shortly implement its ban on pensions cold-calling. Draft regulations have now been published – more details below.
● There will shortly be a consultation on the detailed design for pensions dashboards, and funds have been committed to develop this next year.
● The government wants to encourage DC arrangements to invest in ‘patient capital’ as a way of unlocking finance for innovative high-growth firms. The Pensions Regulator (TPR) has recently updated its guidance on investment governance to include sections on patient capital and social impact investment (more details below). The government will consult next year on the default fund charge cap to ensure that it does not unduly restrict the use of performance fees, and the Financial Conduct Authority (FCA) will consult on investment by unit-linked pension funds in patient capital assets.
If the UK leaves the EU without agreeing a withdrawal arrangement, a further emergency Budget may be announced next year.
Investment: updated guidance for DB and DC schemes
As mentioned above, TPR has updated its investment guidance to address social impact investment and patient capital. Although the Budget refers only to DC arrangements, both DC and DB guidance have been updated – both sets of guidance contain the same text on social impact investment and patient capital. The list of areas to consider for the monitoring dashboard in the DB guidance has also been updated to include a manager report on the social impact of investments.
TPR states that when selecting investments for social impact, trustees need to have good reason to think that scheme members share their view and that there is no risk of significant financial detriment to the scheme.
Although patient capital investment has been promoted in the Budget, TPR has taken a more muted approach. In particular, it notes that patient capital would only represent a small proportion of the overall asset allocation. In addition, it notes that trustees would need to complete appropriate due diligence before investing, including:
● understanding the main drivers of the expected return and the management and mitigation of risks; and
● considering the suitability of the scale, expected time horizon and illiquidity of the investment in the context of the scheme’s objectives and member profile.
Pensions cold-calling: draft regulations
The government has published draft regulations to implement the ban on pensions cold-calling (together with its consultation response). The regulations will be laid before Parliament shortly. The aim is to ban unsolicited direct marketing calls in relation to pensions products and services. Changes since the consultation draft (see WNTW, 23 July 2018) include the following:
● Trustees and managers of occupational and personal pension schemes are exempted, provided that the recipient consents to the call, or there is an existing client relationship such that the recipient might reasonably expect to receive cold calls. This seems unlikely to be relevant for most trust schemes. Some concerns were raised about the risk of scammers claiming to be a person authorised by trustees, but the government suggests that the core message should simply be that ‘all pensions cold calling is illegal’.
● The definition of direct marketing has been amended from products or services to be purchased to products or services to be acquired – this was to clarify that it includes the marketing of products or services to undertake transfers to other schemes.
Third-party administrators are not included within the exemption on the basis that administrators do not generally undertake cold calls and that an exemption might create a loophole for scammers.
The consultation response also contains an update on other actions on pension scams:
- The government continues to work on the proposal to restrict statutory transfer rights but very few details have been given andthere is no timeline for the changes.
- The government does not support the introduction of an advice requirement for all pension transfers – it believes that this would be disproportionate, considering the value of savings and ‘the relatively lower risk of a DC transfer’.
- The FCA does not support a ban on unregulated investments (as the risk of harm to consumers can be managed through suitable financial advice and sufficient due diligence checks by pension providers/operators).
Auto-enrolment: updated guidance on opt-outs
TPR has provided useful clarification in relation to the ban on inducing opt-outs from auto-enrolment, by way of an updated example in its guidance note no.8 for employers.
The example is of an employer offering staff the option of making lower pension contributions by moving to a non-qualifying scheme or non-qualifying section of the same scheme. It states that because the jobholders would be giving up membership of a qualifying scheme, the employer must still be confident that they can demonstrate that, in offering membership of the different scheme or section as part of the overall package, their sole or main purpose is not to induce individuals to leave the qualifying scheme or section of the scheme. You can read more about the ‘sole or main purpose’ test on our PensionsTalk blog.
Latest HMRC newsletter
HMRC has published Pension Schemes Newsletter no.104, which covers a range of issues including non-statutory clearance applications and contacting HMRC to confirm registration status in relation to transfers. For overseas transfers, some schemes are completing paperwork incorrectly when reporting the overseas transfer charge – HMRC has provided advice and a list of common mistakes. HMRC also notes that it has resolved a long-standing issue affecting the reporting of non-taxable death benefits through the Real Time Information online service.
New ICO guidance on data security
The Information Commissioner’s Office (ICO) has published new guidance on encryption and passwords in online services in relation to data security under the General Data Protection Regulation (GDPR).
The encryption guidance reiterates the importance of using encryption where appropriate, but not as the sole security measure – note that where data has been lost or destroyed, the ICO may pursue regulatory action if encryption software has not been used. The guidance now states that, as well as having a policy on encryption, organisations should also provide appropriate staff education. There is also a short checklist to assist organisations with the use of encryption.