2019 promises plenty of developments that will keep trustees, employers and advisers busy. From Brexit to superfunds, pension professionals will have to grapple with new legislation, consultations and revised guidance. In this update, we outline nine key pension issues that are likely to dominate the pensions landscape this year, plus some other developments to look out for.
Nine key pension issues for 2019
1. Brexit means Brexit, but what will it mean for pensions?
At 11pm on 29 March 2019, the UK will leave the European Union. At the time of publication, this was the position under UK law and in line with the UK's notice to leave under Article 50 of the Treaty on the Functioning of the European Union.
Pensions is somewhat insulated from the most immediate impacts of Brexit. Most of the relevant EU legislation has already been transposed into UK law. Pensions in the UK are regulated by The Pensions Regulator (TPR) with relatively little direct involvement from the European Insurance and Occupational Pensions Authority (EIOPA) (the European pensions regulator).
Two sets of regulations relevant to pensions have been published by the Department for Work and Pensions (DWP) and are scheduled to come into force on 'exit day'. The regulations make minor technical changes to the UK's pensions legislation to ensure it operates effectively once the UK has left the EU. The regulations may be amended or revoked if a deal is agreed between the UK and the EU.
We start 2019 unclear on how or even whether Brexit will be delivered. With so much uncertainty, what should trustees and employers do to prepare themselves for Brexit? Trustees should consider the issues that could become relevant to their schemes (e.g. are there investments in EU-domiciled pooled funds? Does the scheme pay benefits to non-UK bank accounts for overseas members? Are there any cross-border issues?) and be ready to act quickly if required. Employers should monitor those issues too, as they may have a cost impact on their scheme's benefit accrual and administration.
2. A "very substantial" Pensions Bill 2019-20
In October 2018, Guy Opperman MP, the government minister responsible for pensions, stated his intention to deliver a "very substantial" bill addressing multiple areas of pensions regulation in the summer of 2019. This will be in the next parliamentary session (the first available window for non-urgent primary legislation), which is expected to begin in May 2019.
What is on the agenda for the DWP? The pensions minister is on record as supporting:
- collective defined contribution;
- defined benefit consolidation and superfunds;
- mid-life financial MOTs; and
- simplified annual benefit statements.
Other areas that might be facilitated by the Pensions Bill 2019 - 20 are pension dashboards, improving transfers and facilitating greater investment in alternative assets.Although we expect the Pensions Bill to be introduced in 2019, it is likely to be 2020 before it receives Royal Assent.
3. TPR to revise its code of practice on funding for defined benefit schemes
In March 2018, the DWP's White Paper (Protecting Defined Benefit Pension Schemes) set out proposals for strengthening TPR. This was followed in June by a consultation whose title (Protecting Defined Benefit Pension Schemes - A Stronger Pensions Regulator) demonstrated that the government was moving forward with its policy.
But TPR is not sitting back and waiting for new statutory powers. In Spring 2019, we expect TPR to launch a formal consultation on revising its Code of Practice Number 3 on funding defined benefits. Areas of focus for TPR are likely to be:
- the length of recovery plans;
- whether to incorporate appropriate ratios of dividend payments to scheme contributions; and
- how trustees should approach quantifying the strength of sponsoring employers' covenants.
It is likely that the timetable for the updated Code of Practice going into force will be shaped by the Pensions Bill 2019 - 20. On this basis, employers and trustees will be subject to the new rules in the first half of 2020.
4. Launch of the Single Financial Guidance Body
In September 2018, the pensions minister confirmed that the Single Financial Guidance Body (SFGB) will be launched in January 2019. The SFGB will replace the three existing providers of government-sponsored financial guidance (the Money Advice Service, the Pensions Advisory Service and Pension Wise).
The SFGB will deliver free and impartial financial guidance to members of the public. Bringing together the existing providers into a single body is intended to enable easier access to that information and guidance.
Trustees will eventually need to update their communications in order to signpost the availability of the SFGB, but they will be able to wait until the body reveals its public-facing name and contact details.
5. IORP II amending regulations come into force
In October 2018, the DWP published two sets of regulations designed to implement the second European Pensions Directive (IORP II):
These regulations will come into force on 13 January 2019.
The Governance Regulations amend section 249A of the Pensions Act 2004. Currently, that section requires trustees to establish and operate internal controls which are adequate for the purpose of securing that a scheme is administered and managed in accordance with its rules and legal requirements. Following the amendment, trustees of occupational pension schemes will be required to "establish and operate an effective system of governance including internal controls". The system of governance must be "proportionate to the size, nature, scale and complexity of the activities of the occupational pension scheme".
TPR is required to set out the detail of the new requirements in its codes of practice. It is expected that TPR will update its Code of Practice on Internal Controls early this year.
TPR has already promoted greater focus on governance (for example, in its 21st Century Trusteeship programme). Trustees of schemes that already have a sound system of governance should not have to make too many changes. Whilst the requirements of the Governance Regulations do not seem to be a significant departure from the current duty on trustees, the devil is in the detail, so we must wait to see what TPR's new or revised code says.
6. New provisions come into force on SIPs, stewardship and financially material considerations
The DWP has made changes to regulations governing investment and disclosure of information by pension trustees. These are intended to better reflect concerns relating to:
- environmental, social and corporate governance (ESG); and
- stewardship (including voting, engagement and monitoring).
The new regulations make changes to what must be included in an affected scheme's statement of investment principles (SIP) from 1 October 2019. The SIP (including SIPs for default arrangements) will have to include the trustees' policy on:
- financially material considerations;
- stewardship policies; and
- non-financial matters.
In addition, new disclosure requirements will apply from 1 October 2019 so those policies must be provided within two months of a request.
Some schemes (mostly defined contribution schemes) will also need to:
- publish the SIP on a freely-available website; and
- signpost the information available on the website via annual benefit statements.
This is consistent with the requirements for the publication and signposting of statements on member-borne costs and charges (and other elements of the Chair's Statement).
We have published a more detailed Insight on these developments - Trustee investment duties: All change or more of the same.
7. Will 2019 be the year that guaranteed minimum pensions (GMPs) are equalised?
The High Court's landmark judgment in Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank plc (Lloyds) provided the go-ahead for many in the pensions industry to begin the long-delayed process of equalising GMPs.
Although Lloyds answered the big questions about whether and how to equalise GMPs, there are still a number of questions to be answered and challenges to be faced before the issue can be completely resolved.
One important question that has been put off for another day is what duties trustees have in respect of GMPs that accrued in their schemes but have been transferred out. The case also raised - but did not answer - the question of whether a different method can be adopted where the costs of implementing one of the methods considered is greater than the additional benefits that would be conferred as a result.
There are also practical challenges that many trustees are likely to face. These include the quality of member data, what to do in respect of the payment of arrears to members who no longer have an interest in the scheme and how Lloyds will impact on current valuation discussions with scheme employers.
What can we expect on these in 2019? The DWP has said it plans to issue guidance on GMP equalisation. There is also likely to be clarification on specific points from the courts.
We have published more detailed Insights on GMP equalisation:
8. Going Dutch with collective defined contribution schemes
Collective defined contribution (CDC) schemes are a popular feature of pension provision in the Netherlands. They are also popular with pension policy experts looking to find a middle way between defined benefit and defined contribution.
CDC pension schemes allow contributions to be pooled and invested to give members a target benefit level. The latest push on CDC has come from the Royal Mail and the CWU (the trade union for postal staff). Now the government has set out its proposals for CDC schemes in an open consultation, Delivering collective defined contribution pension schemes (14 November 2018).
So, could 2019 be the year that CDC finally breaks through in the UK? Or will the latest push face the same fate as the coalition government's plans for defined ambition schemes?
9. TPR announces authorised master trusts - how many will be left in the market?
There are two key dates for those running master trusts to be aware of in 2019. Applications for authorisation need to be submitted to TPR by 31 March 2019. TPR then has until 30 September 2019 to make its final decisions.
The first authorisations should be announced by TPR in Q2 2019 as TPR has six months from the date of application to make its decision. Decisions will be announced by TPR in monthly batches. By mid-December 2018, only one application had been submitted out of 90 identified master trusts, but 35 master trusts had already either exited or triggered their exit from the market.
In the meantime, TPR has issued warnings to pension scheme trustees to check if their scheme falls under the master trust legislation. It is possible that some schemes may trigger the need for authorisation accidentally if they allow the participation of non-associated employers.
What else to look out for in 2019
- Investment consultant reforms - the Competition and Markets Authority (CMA) published a final report on its investigation into the market for investment consultants in December 2018. Amongst its findings, the CMA has recommended that pension trustees who wish to delegate investment decisions for more than 20% of their scheme assets to a fiduciary manager must run a competitive tender with at least three firms. Regulations giving effect to the CMA's recommendations are expected early in 2019.
- Steady state for automatic enrolment - Seven and half years after the first employer staging dates, workplace pension reform reaches steady state with final phased increase of minimum contributions. With effect on and from 6 April 2019, the minimum level of employer and total contributions in a qualifying scheme will increase. For example, using the quality test set out in the Pensions Act 2008, minimum employer contributions will increase to 3% of a worker's qualifying earnings and minimum total contributions will increase to 8% of a worker's qualifying earnings. Similar increases will apply to the other quality tests under the certification regime.
- Ban on pensions cold calling - the Privacy and Electronic Communications (Amendment) (No. 2) Regulations 2018 prohibiting direct marketing (cold calling) in relation to occupational and personal pension schemes come into force on 9 January 2019. The ban will be accompanied by a public awareness campaign.
- Launch of the first pension dashboard - in December 2018, the government unveiled proposals that will see the launch of the first pension dashboard in 2019. While the government have left room for multiple pension dashboards to be launched, the first will be hosted by the SFGB. It is likely that pension dashboards will develop over the coming years rather than being launched, fully-formed, in a single step.