PENSIONS PLANNER
YOUR GUIDE TO FUTURE DEVELOPMENTS JANUARY 2022
02 PENSIONS PLANNER JANUARY 2022
Contents
03Foreword 04Quarter in review 10Timeline 12Next 3 months 13Next 3 to 12 months 16On the horizon
HERBERT SMITH FREEHILLS
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
Foreword
PENSIONS PLANNER JANUARY 2022
03
At first blush 2022 looked like it might spell a return to another severe lockdown with the ensuing economic and social damage that that would bring. However, with Omicron proving to be less severe than feared, it may be that this latest wave actually signals a shift from the pandemic to Covid-19 becoming endemic within the UK and more widely. If that is the case, 2022 could see a more permanent recovery take hold.
That said, some businesses and sectors are still reeling from the impact of previous lockdowns and restrictions and many could still face turbulence, particularly as Covid recovery loans begin to fall due. Against this backdrop, the Pensions Regulator is taking its time to prepare its new DB funding Code with the second stage of its consultation pushed back to late Summer of this year. All eyes will be on the proposed content of the new Code (and the underlying regulations which are due to be published for consultation in the Spring) to see how quickly schemes will be required to hit their new long term objectives and how high the bar will be set.
As DB schemes increasingly focus on their long term objective, the news that Clara-Pensions is now open for business (having become the first DB superfund to be 'assessed' by the Pensions Regulator), may offer a potential alternative end game solution for some. But will we see the first transaction in 2022?
The Pensions Regulator's new powers are now in force and it will be fascinating to see how and when the Regulator chooses to exercise them. Alongside this, the pension notifiable events regime is due to be extended in April to give the Regulator and trustees of DB schemes earlier notice of material corporate transactions and financing arrangements. It is likely this will result in trustees (encouraged by a more powerful Regulator) seeking to negotiate a better deal for their scheme.
Directors of companies and groups with DB schemes need to be switched on to these changes, particularly as any failure to comply now carries a penalty of up to 1million.
DB and DC schemes are both affected by the new statutory transfer conditions which came into force at the end of last year. Designed to reduce the incidences of pension scams, the new conditions place the onus on trustees, providers and administrators to protect scheme members. Schemes have had to adapt quickly to implement the new requirements and it is important they keep their approach under review as best practice emerges and evolves.
Schemes also need to keep their approach to managing climate related-risks and other ESG risks under review. Although COP26 has passed, the focus on ESG risks is here to stay. Additional requirements for the largest occupational pension schemes and master trusts are due to come into force on 1 October 2022, including a requirement for trustees to assess the extent to which their scheme's portfolio is aligned with the goals of the 2015 Paris Agreement. Although the new climate related risk management and disclosure requirements do not apply directly to smaller schemes, it is important trustees of such schemes take steps to identify and manage these risks to avoid being left behind.
1 October will also mark the 10th anniversary of the introduction of automatic enrolment. This grand social experiment has proved to be a great success in solving the pension 'participation problem', but it has not yet solved the 'adequacy problem'. A Private Member's Bill is currently before Parliament which would extend the auto-enrolment franchise to workers over 18 years of age and to lower earners. It would also see things move to a position where contributions are paid from the first pound of earnings. Although these measures are in line with the Government's commitment to implement the recommendations of the 2017 Auto-enrolment Review, it is unclear if the Bill will receive Government support at this time.
As well as building on past innovations, 2022 will also see new initiatives introduced and developed. This includes the introduction of simpler benefit statements, 'stronger nudge' requirements and the development of the digital architecture to enable pension dashboards to become a reality. From August, UK employers will also be able to offer their staff a completely new type of pension scheme Collective DC (CDC). With Royal Mail all set to launch their new CDC scheme, time will tell whether this proves to be the new first class form of pension provision or whether the concept gets marked 'Return to sender'.
Recent podcasts
Directors beware Dividend payments and the Pensions Regulator's new powers!
Restructuring and insolvency and the Pensions Regulator's new powers
Pensions and ESG Ep4 Greening Finance and Investment
R ecent blogs posts
Pensions cases and litigation risks to look out for in 2022
How are schemes and administrators implementing the new transfer conditions?
Pensions Disputes Bulletin November 2021
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04 PENSIONS PLANNER JANUARY 2022
Quarter in review
HERBERT SMITH FREEHILLS
New pensions criminal offences and regulatory sanctions now in force
The new pensions criminal offences and other regulatory sanctions came into force on 1 October 2021. The offences and sanctions are broadly drafted and are likely to impact how corporates and other parties approach M&A transactions, restructurings, intra-group finance arrangements, lending and security arrangements and other activity which may negatively impact a DB scheme.
Criminal offences
The new pensions criminal offences form the most high profile part of the new regulatory powers and sanctions designed to strengthen the existing pensions regulatory regime and afford greater protection to DB schemes. The offences include, broadly, actions that are:
materially detrimental to a DB scheme, or
intended to avoid or reduce an employer debt to a DB scheme
where the relevant person does not have a reasonable excuse for their conduct. They carry a maximum penalty of up to seven years imprisonment and/or an unlimited fine.
Unlike the Regulator's powers to issue contribution notices and financial support directions, which can only be used against sponsoring employers and "connected" or "associated" persons, these new offences can be committed by any person who is party to a relevant act, failure to act or course of conduct (other than an insolvency practitioner
acting in their capacity as such). This includes sponsors of DB schemes, directors of scheme sponsors, other group companies and the directors of those companies as well as investors, lenders, trustees and advisers.
A criminal prosecution could also be brought against any person who assists with the commission of a relevant act or course of conduct. There is no time limit on when the Regulator can bring a prosecution for these new offences, unlike its power to issue contribution notices which it can only exercise for up to six years after a relevant act or failure.
Regulatory sanctions
Alongside the new offences, the Pensions Regulator has also been given:
the power to impose fines of up to 1 million in a range of circumstances
enhanced powers to require DB sponsors and related parties to make immediate payments into their scheme, and
extended information gathering powers.
The government is also planning to introduce new reporting requirements in relation to certain material corporate transactions and the granting of security which will rank ahead of a DB scheme, in April 2022. This is likely to mean corporates will be required to notify the Regulator (and their scheme's trustees) about such transactions at a much earlier stage.
To find out more about the new offences and sanctions read our blog and check out our recent
podcasts on the practical impact of the Regulator's new powers.
Comment: Parties to transactions and arrangements which may detrimentally impact a DB scheme need to ensure they have fully considered whether these new offences and sanctions will be engaged. To do so, they need to assess the potential impact of the transaction or arrangement on the scheme, how any detrimental impact can be avoided or mitigated and whether they have a reasonable basis for their actions. They will also need to consider when and how to engage with their scheme's trustees and the Pensions Regulator.
New contribution notice Code come into force
An updated Code of Practice which sets out the circumstances in which the Pensions Regulator expects to issue a contribution notice (CN) where it believes that the material detriment test or the new employer insolvency or employer resources tests have been met, came into force on 25 November 2021.
The new Code is accompanied by guidance which provides examples of circumstances in which one or more of the contribution notice tests are likely to be met. These include:
the substitution of a scheme sponsor which results in the employer covenant becoming nominal
the sale of a profitable part of a business to another group company outside the employer covenant, resulting in a loss of employer covenant that is material to the selling entities ability to support its DB scheme
the leveraged acquisition of a company, which substantially reduces its ability to stand behind a guarantee which it has given to a DB scheme
a scheme sponsor granting a new first-ranking charge over each of its main assets as part of a group restructure which has a material impact on the scheme's expected recovery on the hypothetical insolvency of the group
a sponsor being acquired by new owners, which subsequently raise a substantial amount of debt secured on its business and assets to finance a dividend to the new owners
a scheme sponsor paying a significant dividend to its parent company, and
the unscheduled repayment of a loan.
Comment: All things being equal, the Pensions Regulator's extended powers to issue contribution notices are the most likely to be used of all the new sanctions which it now has at its disposal. Therefore, it is crucial that directors of companies and groups with DB schemes and related parties are aware of the circumstances in which these new powers may be engaged.
HERBERT SMITH FREEHILLS
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New transfer conditions now in force
New statutory transfer conditions came into force on 30 November 2021, one of which must be satisfied before a pension scheme can make a statutory transfer on behalf of a member. As a result, trustees, providers and administrators are required to carry out new checks before a transfer takes place. Failure to do so could expose them to potential liability should a transfer be allowed to take place to what turns out to be a scam arrangement.
Under the first condition a transfer can proceed with minimal checks where it is to:
a public service pension scheme
an authorised master trust, or
a collective money purchase scheme authorised by the Pensions Regulator.
Employment or residency link
Where a transfer is to an occupational pension scheme which does not fall into one of the categories above, the transferring scheme is required to request information from the member to demonstrate an 'employment link'. A transfer to a qualifying recognised overseas pension scheme (QROPS) can also take place if a `residency link' is satisfied. In both scenarios the transferring scheme must also check whether red or amber flags are present.
Any red or amber flags?
Where a transfer is being made to any type of pension scheme not covered by the first condition, including most occupational pension schemes, personal pension plans, group personal pension plans, self-invested personal pension plan and a QROPS, the transferring scheme is required to request sufficient information from the member to
establish whether any red or amber flags are present in addition to any information that is needed to establish an employment or residency link, where this applies.
Where one or more red flags is present, a transfer should not take place (even if an employment or residency link exists) and the individual loses their right to take a statutory transfer in relation to that request.
Where one or more amber flags is present, the member is required to receive specialist scams guidance from the Money and Pensions Service before the transfer can take place (even if an employment or residency link exists).
To find out more about how these new conditions are being applied in practice, check out our recent blog.
Comment: Although steps needed to be taken to protect scheme members, these new requirements do expose transferring schemes to new risks. Schemes were given very little time to implement the new transfer conditions and judgment calls have needed to be made in several areas. Therefore, it is important schemes and administrators keep their approach under review and ensure they keep pace with industry best practice. In particular, they ought to compare their approach with the recommendations contained in the updated Pensions Scams Industry Group Code of Practice which is due to be published shortly.
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Incentive to transfer Member is offered an incentive to make the transfer (such as free pension review, early access or cashback).
Undue pressure Member has been or feels they have been pressured to complete transfer.
Unsolicited contact Transfer request made following unsolicited contact for purpose of direct marketing about the transfer.
Regulated activity performed by unregulated person or firm Person without appropriate regulatory status has carried out regulated activity for member.
Red flags
Failure to provide information Member fails to provide information to transferring scheme following request (and reminder) to do so.
Failure to receive scams guidance Member fails to provide evidence they have received scams guidance, when required to do so.
HERBERT SMITH FREEHILLS
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07
Consultation on changes to Fraud Compensation Fund levy framework
The DWP has launched a consultation on proposals to update the levy framework for the Fraud Compensation Fund (FCF). The FCF provides compensation to occupational pension schemes where scheme assets have been reduced as a result of an offence involving dishonesty, and where the employer has become insolvent or is unlikely to continue as a going concern. This includes both defined benefit and defined contribution pension schemes. The Fraud Compensation Levy, payable by eligible occupational pension schemes, is designed to cover the costs of compensation paid from the FCF.
In November 2020, the High Court confirmed that pension schemes that have previously been used as scam arrangements were eligible to make a claim on the FCF, if they satisfied specified criteria. However, the FCF does not have sufficient assets to be able to cover the anticipated costs of meeting such claims. Therefore, the Government is planning to increase the levy ceiling to enable it to collect more from eligible schemes. The consultation also considers how the levy should be allocated between master trusts and other eligible schemes.
Comment: Eligible schemes should expect to see the cost of their Fraud Compensation Levy rise from 2022/23 onwards in order to meet the additional costs associated with paying compensation to schemes that have been used as vehicles for pension scams.
USS litigation could impact protection afforded to directors of corporate trustees
Two university lecturers have issued legal proceedings against the trustee directors of the Universities Superannuation Scheme (USS) and against the USS chief executive Bill Galvin.
They contend that the USS directors acted in breach of their duties:
in relation to the preparation of the scheme's 2020 valuation
by proposing reductions to members' future benefits that will disproportionately impact women, minorities and young people, and
by overseeing a significant increase in the scheme's operating costs between 2008 and 2020.
The claimants also allege the trustee directors' failure to divest from fossil fuels will cause "significant financial detriment to the fund and the planet, against the interests of the company and scheme members".
The claim is novel in that it has been brought as a "derivative claim" on behalf of the trustee company against the trustee directors in their personal capacity.
Comment: If these claims are allowed to proceed (even if they are ultimately unsuccessful) this could open up a new avenue for members to pierce the 'corporate veil' and make claims directly against trustee directors, significantly eroding the protection individual trustee directors thought they enjoyed. The judgment could also have implications for how trustees approach valuations more generally, particularly in times of market turbulence.
Clara becomes first DB superfund to be 'assessed' by TPR
On 30 November, it was confirmed that Clara-Pensions has become the first DB superfund to be assessed by the Pensions Regulator. DB superfunds offer a potential alternative to an insured buy-out for some DB schemes. As part of the assessment, the Pensions Regulator scrutinised Clara's model, its governance structure, its key personnel, and its financial sustainability among other criteria.
Comment: This is a significant development in the de-risking space as it paves the way for Clara to start transacting, although it is still not clear when the first transaction will take place.
Court grants rectification of 3 successive definitive deeds
In a recent judgment, the High Court ordered the rectification of the pension increase rule contained
in 3 successive sets of rules of the Mitchells & Butlers Pension Plan. Mitchells & Butlers Pensions Limited, the sole corporate trustee of the Plan, brought the claim on behalf of members who stood to lose out as a result of unintended changes to the Plan's pension increase rule that were first made when a Plain English, consolidated version of the trust deed and rules was produced in 1996.
The decision to grant rectification in this case was uncontroversial in light of the evidence. However, the judgment is significant as:
the judge rejected Mitchells & Butlers' argument that when it became Principal Employer of the Plan in November 2003 it did so as a bona fide purchaser for value without notice of and thus free from any equitable claim for rectification this was a novel argument not previously pleaded in a pensions rectification case
the judge held that although the actuary was sent copies of the draft consolidating deeds, the Plan actuary had not been "consulted" about the relevant changes for the purposes of the Plan's amendment power. As such, the alterations to the pension increase provisions purported to be made by the 1996, 2002 and 2006 Deeds were held to be invalid, and
the judge also held that the changes contained in the 2002 Deed were void as they did not satisfy the requirements of section 67 Pensions Act 1995, on the basis that the Plan actuary's section 67 certificate did not apply to the changes to the Plan's pension increase rule as the actuary did not have these changes in mind when signing the certificate.
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Find out more about the implications of this judgment in our recent blog.
Comment: Where a scheme's amendment power requires trustees to consult with the scheme actuary (or another third party) it is clear that going forwards they (or, more likely, their legal advisers) will need to ensure they draw all substantive changes (and their effect) to the actuary's (or third party's) attention, particularly where there are a large number and/or complex changes being made to a scheme's rules. This will also be important where an actuarial certificate is required.
Treasury publishes roadmap on new sustainability disclosures
Ahead of the COP26 summit in Glasgow, HM Treasury (HMT) published 'Greening Finance: A Roadmap to Sustainable Investing'. The Roadmap outlines the actions the UK government and regulators are taking, in partnership with the private sector, to close the information gap for market participants on sustainability by:
implementing new Sustainability Disclosure Requirements across the economy
delivering a UK Green Taxonomy and ensuring it has been road-tested in the market as a useful investment tool
lowering the barriers to investors acting as effective and responsible stewards of capital and
leading international efforts to bring about global and systemic change in the financial system.
As part of the Government's efforts to move to a greener economy, the DWP launched a consultation in October on its plans to require large occupational pension schemes, authorised master trusts and Collective DC schemes to monitor and disclose the extent to which their investment portfolios are aligned with the climate goals set out in the Paris Agreement. The consultation also contains new guidance to improve disclosures related to scheme's stewardship activities. These new requirements are expected to apply from 1 October 2022.
Comment: Even though COP26 has now passed, the UK is at the beginning of its journey towards a green economy. Therefore, we can expect many more legal, regulatory and policy initiatives to support and drive this change in the months and years ahead.
PPI launches The UK Pensions Framework
In December, the Pension Policy Institute launched the PPI UK Pensions Framework, a tool designed to support long-term analysis of how changes in the UK State and private pension system are impacting the experiences people have in later life. The tool can be used to assess the impact of changes and policy proposals on the grounds of adequacy, sustainability and fairness.
The first full analysis of the system is due to be published in Q4 2022 and annually thereafter.
Comment: This tool will provide a useful benchmark by which future changes and pension policy proposals can be judged.
Second review of State Pension age launched
The Government has launched the latest regular review of State Pension age, as required by the Pensions Act 2014. The review will consider whether the current rules are appropriate, based on the latest life expectancy data and other evidence.
State Pension age is currently 66 but two further increases are set out in legislation: a gradual rise to 67 for those born on or after April 1960; and a gradual rise to 68 between 2044 and 2046 for those born on or after April 1977. The first Review of State Pension age was undertaken in 2017 and concluded that the next Review should consider whether the increase to age 68 should be brought forward to 2037-39 before tabling any changes to legislation.
The outcome of this latest Review must be published by 7 May 2023.
Comment: The outcome of this Review will be watched closely particularly by those who have called for the planned increases to the State Pension age to be delayed given that the latest evidence indicates that people are not living as long as previously expected.
Government paves way for creation of Collective DC schemes
Legislation to enable the creation of Collective Defined Contribution (DC) schemes is due to come into force on 1 August 2022. Collective DC schemes are new to the UK and they offer the opportunity for employers and members to pay a fixed rate of contributions into a scheme with the aim of 'targeting' a particular level of pension income in retirement. Significantly, however, pension increases are variable and, in extremis, members' benefits can be cut to ensure that a deficit does not arise.
Comment: This will open up a third option for employers which sits between defined benefit (DB) pension schemes and individual defined contribution (DC) pensions. To date, only the Royal Mail has signalled its intention to establish a Collective DC scheme for its employees, although more employers may follow suit if the model proves to be successful. Collective DC schemes may also have a potential use as a decumulation vehicle for members of traditional DC schemes.
Private Member's Bill tabled to extend auto-enrolment
A Private Member's Bill has been introduced in Parliament which would set out a roadmap for the extension of auto-enrolment to the lower paid, those with multiple jobs and workers between 18 and 22 years of age.
HERBERT SMITH FREEHILLS
The Bill proposes that the auto-enrolment earnings trigger (currently set at 10,000) be abolished and the minimum age limit lowered in 2023 to ensure that every employee over the age of 18 is eligible, but contributions would still only be paid on earnings above 6,240. This 'qualifying earnings' limit would then be reduced to 100 a week in 2024, 60 a week by 2025 and be abolished fully in 2026 so that ultimately contributions would be payable from the first pound of earnings.
Comment: The measures contained in the Bill are in line with the recommendations made following the 2017 review of automatic enrolment, which the Government has repeatedly pledged to implement in the "mid-2020s". However, it is unclear whether they will receive Government support at this time.
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Timeline
HERBERT SMITH FREEHILLS
Spring 2022
Scams PSIG due to publish updated Code on Combatting Pension Scams
Spring 2022
Funding DWP due to consult on draft funding and investment regulations which will underpin new DB funding Code
Spring 2022
Dashboards DWP due to consult on pension dashboards regulations on phasing and data
6 April 2022
Notifiable events New notification requirements for corporates with DB schemes due to come into force
1 June 2002 Engagement Stronger nudge rules come into force
July 2022 FCA 9 month period for implementing new Consumer Duty due to start
2022
HERBERT SMITH FREEHILLS
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Summer 2022
RPI Judicial review of decisions relating to reform of RPI in 2030 due to be heard
1 October 2022
ESG New climate-related governance and disclosure requirements to be extended to 1 billion+ schemes and new Paris alignment assessment and reporting obligations come into force
1 October 2022
Engagement Money purchase auto-enrolment schemes required to issue new simpler benefit statements
1 August 2022
CDC Legislation enabling creation of Collective DC schemes comes into force
Late Summer 2022
Funding Pensions Regulator due to consult on content of new DB funding Code
2023 Dashboards Phased compulsory on-boarding of schemes and providers due to begin
Late 2022 Governance New single Code of Practice due to be introduced
2023
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Next 3 months
HERBERT SMITH FREEHILLS
Updated Code on Combatting Pension Scams expected shortly
The Pension Scams Industry Group (PSIG) is due to publish an updated version of its Code of Practice on Combatting Pension Scams shortly. The updated Code will reflect how the industry is implementing the new transfer conditions which came into force last November, which are designed to empower trustees and providers to help reduce the incidences of pension scams.
Although the new Code is not binding, it is likely that the Pensions Ombudsman and the Courts would expect schemes to adopt the approach recommended in the Code (or be in a position to explain why they have not) within a short period (typically, less than one month) of the updated Code being published.
Action: Trustees, providers and administrators will need to review their approach to implementing the new transfer conditions when the updated Code is published in light of current industry best practice and implement any changes promptly.
New notification requirements for corporates with DB schemes in force from 6 April
The Government is planning to extend the UK's pensions notifiable events regime from 6 April 2022. The changes will mean that corporates will be required to give the Pensions Regulator and trustees of defined benefit (DB) pension schemes much
earlier notice of material corporate transactions and finance arrangements. Multiple notifications will likely need to be made in relation to the same transaction.
Proposed changes
The Government's proposals include:
introducing two new notifiable events where there is a "decision in principle" by an employer with a DB scheme to:
i. sell a material part of its business or assets, or
ii. grant or extend a relevant security over its assets, where this would result in the secured creditor being ranked above the scheme in the debt priority order
amending the existing notifiable event relating to the relinquishing of control of a DB sponsor to bring forward the timing of the notification requirement so that, in future, it will arise when there is:
i. a decision in principle by a controlling company to relinquish control of the sponsor company, or
ii. an offer to acquire control of the sponsor company, where a decision in principle to relinquish such control has not been made
introducing new notification requirements which will apply when the "main terms" have been proposed (or where material changes are made to them) on material corporate transactions and on the granting of relevant security, and
withdrawing the existing notification requirement related to wrongful trading (on the basis that no director is likely to admit to this).
Depending on the circumstances, as drafted, these triggers could create significant uncertainty about whether and, if so, when a duty to notify arises. It is anticipated the Pensions Regulator will issue guidance to clarify such points. However, it is unlikely this will provide clear answers in every scenario (as is the case with the guidance on the new criminal offences). This means, in some circumstances, difficult judgment calls may need to be made about when a duty to notify arises. This is of particular concern given that a failure to notify by an individual or company without a reasonable excuse, could attract a fine of up to 1 million.
Accompanying statement
The draft Regulations provide that a so-called "accompanying statement" will need to be provided to the Regulator and a scheme's trustees as part of a notification once the main terms of a transaction have been proposed (and alongside any subsequent material change notification). This will need to provide background information about the transaction and the likely effects on the DB scheme. Confidentiality concerns and compliance with market abuse requirements will need to be considered as part of any such disclosure.
Impact in practice
A lot has been said about the new pensions criminal offences and financial penalties that came into force last November. Arguably, these new notification requirements will have an even more
significant impact, in practice, on corporate activity in the UK as they will force corporates with DB schemes to notify the Regulator and their scheme's trustees at a much earlier stage about material transactions. This, in turn, is likely to require them to have to go further to address any potential detriment to their scheme.
Read more about the proposed new pension notification requirements for corporates in our blog.
Action: Directors of companies and groups with DB schemes need to familiarise themselves with the new notification triggers, particularly as a failure to comply could result in a fine of up to 1 million. Lenders and investors should also consider the impact on corporate transactions and finance arrangements.
HERBERT SMITH FREEHILLS
Next 3 to 12 months
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Stronger nudge towards pension guidance required from 1 June 2022
The DWP and FCA have introduced new rules, that come into force on 1 June 2022, which are designed to increase the take-up of Pension Wise guidance at the point individuals access their DC savings, with the latest retirement income data showing that only 14% of consumers who are accessing their DC pension pot for the first time currently make use of this service.
Under the new rules, trustees of occupational pension schemes that provide flexible benefits and FCA authorised pension providers, including operators of self-invested personal pensions (SIPPs), will be required to give members a 'stronger nudge' to make use of the free guidance service. In particular, when a consumer takes steps to access their pension savings, or transfer rights accrued under their existing pension to another scheme or provider for the purpose of accessing their pension savings, trustees and pension providers will be required to:
refer the consumer to Pension Wise guidance
explain the nature and purpose of Pension Wise guidance, and
offer to book a Pension Wise guidance appointment and, where the consumer accepts that offer, take reasonable steps to book the appointment or, where this cannot be done, provide the consumer with sufficient information to book their own appointment.
In addition to the existing requirements that schemes confirm and record whether the consumer has received Pension Wise guidance or
regulated advice, they will also be required to confirm whether the consumer declined the offer to receive guidance.
It is hoped the new rules will increase consumer awareness of Pension Wise guidance and help to protect consumers from poor outcomes in retirement by helping them make informed decisions.
On top of this, the FCA is planning to start work shortly to explore additional ways to support consumers when it comes to decisions regarding their pension savings. This will consider the pensions guidance needs of consumers from a more holistic view at different points in their pensions journey.
Action: Trustees and pension providers need to update their processes and member communications to reflect the stronger nudge requirements.
BT, Ford and M&S schemes challenge plans reform RPI
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.
The judicial review hearing is due to take place this Summer.
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 Summer 2022
The Pensions Regulator plans to launch the second consultation on its proposed defined benefit (DB) funding code in late Summer, once the DWP has consulted on the draft regulations which will underpin the new Code this Spring. This means the new Code is now not due to come into force until late 2022 at the earliest.
The second consultation is due to include the draft code of practice which will set out:
i. the parameters schemes will need to meet to go down the Fast Track approval route
ii. the process for reviewing and updating those parameters
iii. the Regulator's approach to assessing
valuations and engaging with schemes, and
iv. the Regulator's approach to enforcement.
In a recent blog, the Regulator recognises the need to balance security for members with affordability efocroAdenecmvoteimpololniocp:ymTeernreuvsns,irttpoesanearmstniadcenunadltsa.ssrlepysoisnntslhiogerhsptsoohtfeotnuhtlediaclmuimorrnpeinatoct rt
of the new funding requirements on their scheme. They should look out for the second stage of the consultation process to see if there are any changes in the Regulator's proposed approach.
New simpler benefits statements required from 1 October 2022
From 1 October 2022, automatic enrolment schemes that provide money purchase benefits only will be required to issue new simpler annual benefit statements to their members.
The new statements will need to be in a format that does not exceed one double sided sheet of A4 paper when issuing a paper statement and the equivalent length when the information is printed, where a scheme issues an email or online statement.
The simpler statement is divided into 5 sections. The information presented should enable the member to easily understand:
how much money the member has in their pension plan and what has been saved in the statement year;
how much money they could have when they retire; and
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HERBERT SMITH FREEHILLS
what they could do to give themselves more money at retirement.
Pension schemes are able to use their own branding and colour schemes but this should not obscure the flow of information, nor should it increase the length of the annual statement beyond the permitted length. The language used should be simple, accessible, and avoid use of jargon or complex terminology.
When designing their statements, trustees and providers must have regard to the DWP's statutory guidance, which is designed to help them understand how to present the information and meet the new requirements.
Action: Trustees and providers of in scope schemes must ensure they are ready to produce the new simpler statements in time for their first annual benefit statements that need to be issued on or after 1 October 2022.
Your Allied Widgets Pension Plan annual statement
Your name Your membership number Your address Statement date
Jo Bloggs 01234 567890 1 Smith Street, Smithtown SM1 2SM 3 May 2022
Your 2022 statement
Your annual statement shows you 3 things:
1. How much money you already have in your Pension Plan 2. How much money you could have on your 67th birthday (8 March 2044), when you told us you plan
to retire 3. What you could do to give yourself more money
1. How much money you already have in your Pension Plan
14,004
Money you've saved
into your
Pension Plan since
you started
21,223
Money added by
Allied Widgets, the
government and from
investments
3,000
Money you've
transferred in from
other pension schemes
38,227
Total amount of
money in your
Pension Plan on
5 April 2022
Last year Total amount of money in your Pension Plan on 5 April 2021
This year You have saved into your Plan Allied Widgets has added The government has added through tax relief After charges, the value of the investments in your Plan has gone up You've transferred money in from another pension scheme
Total amount of money in your Pension Plan on 5 April 2022
Money out
30,595
Money in 1,24 9 1,56 1 312 1,51 0 3,00 0
38,2 2 7
If you had asked us to transfer your money to another pension scheme on 5 April 2022, we would have transferred
38,1 3 6
Find out about the costs and charges that apply to the Allied Widgets Pension Plan, whether we think they're good value for money, and how they might affect the value of your Plan over time at alliedwidgetpension.co.uk/costs
If you visit the website, you can also find out: how money goes in and out of your Pension Plan alliedwidgetpension.co.uk/my-account how to transfer money in from another pension scheme alliedwidgetpension.co.uk/transfers how we invest your money if you don't choose the investments alliedwidgetpension.co.uk/investments how the pooled funds that your money is invested in work alliedwidgetpension.co.uk/pooled-funds
2. How much money you could have on your 67th birthday (8 March 2044), when you told us you plan to retire
Your Pension Plan could be worth
180,000
You can use the money in your Pension Plan in lots of ways
We're only showing you what you might get if you turned it into an
income for life an annuity.
That income
could be worth
752
a month
Why do we talk about what your Pension Plan and income could be `worth'? The answer is because of inflation. We've shown you what we think the money in your Plan might buy you when you're 67. We think it will buy you what 180,000 would buy you today. We think you could turn it into an income that would be like having a monthly income of about 752 today.
We worked these figures out on 5 April 2022. Lots can happen between then and when you use your money. So to work these figures out, we had to make some assumptions. We assumed that: you and Allied Widgets keep putting the same percentage of your salary into your Plan every year your investments grow by an average of 6% a year when you turn your Plan into an income, you do not take a lump sum, you do not want your income to go up each year
to help it keep up with inflation, and you do not want an income for anyone else after you die
We also made some other assumptions, for example about the types of investment you have, how inflation affects what your Plan is worth, and how you turn your Plan into an income in 2044. What actually happens may be different from what we've assumed. So these figures do not come with a guarantee. We cannot promise this is the actual amount of money you, or anyone else who benefits from your Plan, will get. You could get more or less than this amount. These figures are a guide to help you plan.
Find out about the assumptions we use at alliedwidgetspension.co.uk/assumptions
3. What you could do to give yourself more money Before you do anything, it's worth thinking about how much money you're likely to need when you retire. You'll find information to help you do this at retirementlivingstandards.org.uk. And remember, you may get an income from other places, for example most people get the State Pension.
Save more money into your Pension Plan so it's worth more when you come to use it.
If an extra
50
went in every
month
Your Pension Plan could be
worth an extra
22,000
by the time you're 67
Which would make it worth
202,000
Give your money more time to grow. You do not have to use your money when you're 67. Leaving it to grow for longer could mean you have more money when you do use it.
Increase the amount you save or change when you plan to retire at alliedwidgetspension.co.uk/my-account
Find out more about your Pension Plan and how you can use your money at alliedwidgetspension.co.uk.
You can also get free and impartial guidance from MoneyHelper, a government service. Visit moneyhelper.org.uk and select `Pensions & retirement'.
This statement points you to information on our website. If you visit the website, you'll be shown how to get the information you need. If you cannot access the website, or would like some of this information in writing, get in touch, and we'll post it to you.
email [email protected] phone 01234 567 890
write to Allied Widgets Pensions 1 Widget Street
Widgetville WW1 1WW
This sample statement has been produced by Quietroom and has been reproduced with their permission. It is available at https://www.annualstatement.co.uk/statement-text.
HERBERT SMITH FREEHILLS
PENSIONS PLANNER JANUARY 2022
15
New climate-related governance and disclosure requirements to be extended to 1 billion+ schemes
New governance and disclosure requirements relating to climate related risks came into force for occupational pension schemes with 5 billion or more in assets and authorised master trusts on 1 October last year. The scope of these requirements will be extended to cover occupational pension schemes with 1 billion or more worth of assets from 1 October this year.
At the same time, the Government is planning to extend the requirements (from 1 October) to require in scope schemes to measure and report on the extent to which their investment portfolios are aligned with the goals set out in the Paris Agreement on climate change.
Trustees of all schemes in scope will have to report against this new metric within 7 months of end of the first scheme year which ends on or after 1 October 2022.
The Government is also seeking to address deficiencies in scheme governance in relation to stewardship and voting by issuing new guidance setting out what it expects a scheme's Statement of Investment Principles and Implementation Statement to say about these matters. In particular, the guidance aims to:
clarify that boilerplate statements in the SIP (for example, "we delegate ESG/voting/engagement to our asset managers") are insufficient instead, trustees need to explain what consideration they give to these matters and explain how the policies in the SIP are in savers' interests
develop best practice for implementation statements the guidance is intended to help trustees understand what good practice looks like in relation to reporting engagement activities, voting behaviour and most significant votes, and
improve consistency across schemes for example, by clarifying what is meant by key terms such as "most significant vote" and indicating which information Government anticipates being most useful for members.
Draft guidance has been published for consultation.
Action: Trustees of 1 billion 5 billion schemes should start preparing now to comply with the new requirements that will apply to them from 1 October. Trustees of all in scope schemes must also consider how they will meet the new requirements regarding alignment with the Paris Agreement.
New single Code of Practice contains new requirements for schemes
It is expected that the Pensions Regulator new single Code of Practice will come into force during the course of this year. The new Code will ultimately consolidate all of the Regulator's existing Codes into a single document. It will also update 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 in 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 set out the Regulator's expectations on issues such as:
cybersecurity
stewardship, and
climate change.
It also indicates that the requirement for certain processes to be maintained in relation to core financial transactions (which under legislation only extends to DC schemes) will be extended to all schemes.
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HERBERT SMITH FREEHILLS
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.
with specific rules, to focus on delivering good outcomes for consumers competition is effective in driving market-wide benefits, with firms competing to attract and retain customers based on high standards and innovate in pursuit of good consumer outcomes, and
consumers get products and services which are fit for purpose, provide fair value, that they understand how to use and are supported in doing so.
The latest consultation sets out responses the FCA received in relation to its first consultation on the Consumer Duty (CP21/13) published in May 2021 together with the FCA's revised proposals, including draft Handbook rules and guidance.
need to take steps to implement any changes required to comply with the new duty.
The FCA is proposing that firms should fully implement the Consumer Duty by 30 April 2023.
Action: Financial services firms need to be prepared to review their products and services and implement changes to comply with the new Consumer Duty once the new rules are finalised.
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 and updated regulatory expectations.
In its first consultation paper it proposed 2 options for the wording of the Consumer Principle, which will reflect the overall standards of behaviour expected from firms:
Option 1 A firm must act to deliver good outcomes for retail clients
New Consumer Duty due to come into force by April 2023
The FCA has published revised proposals for a new Consumer Duty in Consultation Paper 21/36. By introducing the new duty the FCA aims to bring about a fairer, more consumer-focused and level playing field in which:
firms are consistently placing consumers' interests at the centre of their businesses and extending their focus beyond ensuring narrow compliance
Option 2 A firm must act in the best interests of retail clients
In its latest consultation, the FCA has identified Option 1 as the preferred Consumer Principle.
The FCA expects to publish a Policy Statement summarising responses to its latest consultation and to make any new rules by 31 July 2022. When the new rules are published this will kick off an implementation period during which firms will
New Consumer Duty
A Consumer Principle this will reflect the overall standards of behaviour we want from firms and which is developed by the other elements of the Consumer Duty.
Cross-cutting rules these will develop our overarching expectations that apply across all areas of firm conduct.
Four outcomes these will give more detailed expectations for the key elements of the firm-consumer relationship
HERBERT SMITH FREEHILLS
On the horizon
PENSIONS PLANNER JANUARY 2022
17
Pension dashboards on track to launch in 2023
Work has begun on developing the digital architecture that will underpin the pension dashboards. The Pensions Dashboards Programme (PDP) has selected Aviva, Bud and Moneyhub as the three commercial dashboard providers it will work with during its initial testing phase. The programme will work with these organisations, as well as the Money and Pension Service's non-commercial dashboard, to support the early work on design standards and technology.
Government confirms plans to increase minimum pension age to 57
The Government has included legislation in the Finance Bill (No.2) 2021-22 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. The legislation includes 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.
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. However, 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 response confirms that it remains the Authority's policy to address the shortcomings in RPI in full "at the earliest practical time".
The initial alpha test phase will run for six months from December 2021. The selected providers will then help refine the on boarding process, as well as taking part in end-to-end testing of the system, which will help improve its functionality.
Alongside this, the DWP is due to consult this Spring on draft regulations that will set out the timetable for compulsory scheme participation which is due to be phased in from 2023. The regulations will also provide more detail on the data that schemes and providers will be required to submit to the dashboards.
For all other members, the age at which they can access their benefits without paying an unauthorised payments charge will increase from April 2028. Trustees and providers need to review the rules of their schemes to see how their members will be affected.
The proposed protection regime has received criticism because, as drafted, it will create significant administrative headaches for schemes and providers, particularly where a member transfers protected benefits into a scheme with a minimum pension age of 57.
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, this decision is being challenged as part of the judicial review.
Action: If they have not already done so, trustees and sponsors should consider the impact of the proposed reform of RPI on their scheme's funding position and investment strategy. They should also monitor the outcome of the judicial review hearing.
Action: Schemes and providers need to review the dashboards data standards and take steps to ensure their data is "dashboard ready" in time for on-boarding to begin in 2023.
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.
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HERBERT SMITH FREEHILLS
HERBERT SMITH FREEHILLS
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Herbert Smith Freehills LLP 2022 7113C_/1P8en0s1i2o2n Planner Guide
