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Article | Corporate and Trustee Briefing

UK pensions news headlines – July 2019

Our monthly round-up of the latest developments in pensions

Retirement
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By Paul Barton and Janine Bennett | July 25, 2019

Our regular round-up of recent developments in pensions covers changes to the Statement of Investment Principles, some striking figures on DB transfers from the FCA and changes to the requirements concerning fiduciary management. In our TPR round-up we have details of the consultation on the future of trusteeship and governance, an independent trustee appointment, measures to review the default investment option, a Court of Appeal ruling on financial support directions and a summary of the latest tranche of valuations. We then have a case where the Court of Appeal reinstated a member’s tax protections where they were inadvertently lost and updates to HMRC’s reduced annual allowance calculator, a Government statement on the Walker case, new cyber security guidance for trustees, new cost transparency templates, the Office for National Statistics 2018 pensions survey and the Financial Reporting Council’s plans to change and its revisions to FRS102.

Further changes to SIP and investment disclosure

Both defined benefit (DB) and defined contribution (DC) pension schemes will be affected by the latest round of changes in disclosure and investment legislation. The changes implement the EU’s revised Shareholder Rights Directive, as it applies to occupational pension schemes. The aim of the Directive is to encourage investors to adopt a longer-term focus in their investment strategies. In brief:

  • By 1 October 2020, trustees of both DB and DC schemes will be required to update their Statement of Investment Principles (SIPs) to include a policy on how their fund managers’ interests align with theirs. Furthermore, the range of engagement activities in the SIP must be extended to include the capital structure of issuers of debt or equity and how they manage actual or potential conflicts of interest.

    Trustees of DB schemes must make their SIP available on a public website. This mirrors a requirement that is already due to come into force on 1 October 2019 for ‘relevant schemes’, ie those that are required to produce a Chair’s statement.
  • From 1 October 2020, trustees of DB schemes will be required to produce an implementation statement about their SIP policies and include this in their annual report and accounts. Under changes introduced in 2018, trustees of relevant schemes are already required to include an implementation statement (about their SIP policies and any reviews and changes to those policies) in their annual report and accounts and make it available on a public website with effect from this date.
  • By 1 October 2021, trustees of DB schemes will be required to publish their implementation statement on a public website. By this date, relevant schemes must also ensure that they have published online their voting behaviour policies which must be covered in their implementation statement.

Many trustees are already in the process of reviewing their SIPs to incorporate changes that are due to come into force on 1 October 2019. They need to consider whether they wish to future-proof their SIP by incorporating these additional changes at the same time. TPR has issued a short statement, encouraging trustees to start the process of meeting these new requirements now. It has also updated its guidance on DC investment governance, which supports the Code of Practice No. 13, to incorporate these changes.

FCA plans further crackdown on pensions transfer advice

Data from the Financial Conduct Authority (FCA) reveals that 234,951 individuals received advice on transferring out of a defined benefit (DB) pension scheme between April 2015 and September 2018. Their transfer values totalled £82.8 billion – an average of £352,303, and 2,426 different firms supplied advice.

69% of individuals who received advice had been recommended to transfer out, with 31% receiving a recommendation to stay in the DB scheme. However, some clients did not proceed to advice following a triage process – if these are included, the proportion receiving a recommendation to transfer falls to 55% (or potentially a little less, as not all firms recorded the total number of clients turned away following triage).

The FCA did not assess the suitability of this advice, but says “it is deeply concerning and disappointing to see that transfers are being recommended at the levels we have seen.” It says the data provides the information it needs to "focus its supervision work to drive up the quality of advice". The FCA will be visiting and writing to IFA firms setting out its expectations and the actions they should take.

The data provides the FCA with the information it needs to "focus its supervision work to drive up the quality of advice". The FCA will be visiting and writing to IFA firms setting out its expectations and the actions they should take.

CMA reforms for investment consultants

The Competition and Markets Authority (CMA) has issued “The Investment Consultancy and Fiduciary Management Market Investigation Order 2019”, a legally-binding order that imposes a duty on trustees to set their investment consultants strategic objectives by 10 December 2019 and a requirement to submit an annual compliance report to the CMA. Most new fiduciary management appointments will be subject to mandatory tendering, with trustees having five years from the initial appointment (or until 10 June 2021 if later) to retender existing appointments. The Order also requires investment consultants and fiduciary managers to provide clearer information to pension scheme trustees on “what [they] are getting for their money”.

The Order is accompanied by a Notice, the Explanatory Note, a summary of responses and individual responses.

TPR round-up

Future of Trusteeship and Governance

The Pensions Regulator (TPR) published a consultation document on the “future of trusteeship and governance” in occupational pension schemes. The document builds on the 21st Century Trusteeship exercise initiated in 2016 and repeats the central themes of driving up trustee knowledge and understanding (TKU), professionalism and developing greater diversity in board composition. In line with its “clearer, quicker, tougher” mantra, TPR considers greater consolidation to be part of the answer to current shortcomings of a “subset of disengaged trustees” and predicts the number of schemes to reduce from 9,000 to 6,500 over the next five years. Our e-alert carried more details.

Independent trustee appointment

For the first time, TPR has appointed an independent trustee because the existing trustee board lacked competence. The employer-nominated trustees failed to engage properly with TPR and persistently failed to address a number of governance concerns raised by TPR, despite assurances that they would do so.

Default investment governance

As part of a pilot, TPR has contacted smaller DC schemes (with between 2 and 999 members) asking them to confirm that they have reviewed the default arrangement. A review is required every three years or when there is a significant change in a scheme’s investment policy or membership profile. Where trustees have not carried out such a review, TPR has been walking them through the steps that they need to take to comply “… including, reviewing the current strategy, taking members’ needs into account as well as the performance of the default arrangement”.

Financial Support Direction (FSD)

In the long-running Box Clever case the Court of Appeal has found that TPR can take into account events occurring before 6 April 2005 (which is the date on which TPR’s anti-avoidance powers came into force) when deciding whether it is reasonable to issue a FSD. The Court said it is “unlikely that Parliament intended in effect to limit the scope of the power to issue an FSD to future circumstances rather than to give it a wide and immediate effect”. ITV’s appeal on this (and other matters) was dismissed.

Scheme Funding Analysis 2019

TPR’s annual funding statistics for DB schemes, based on tranche 12 (valuation effective dates between 22 Sept 2016 and 21 Sept 2017), show that 23% of schemes were in surplus. Of those in deficit, the median recovery plan length was 6.5 years, but around 16% of all schemes had recovery plans of 10 years or more. On average (and without weighting by scheme size) technical provisional were 97.1% of s179 (PPF) liabilities and 68.7% of the scheme actuary’s solvency estimate.

HMRC- Court case on protections and AA Guidance

HMRC has confirmed that it will not appeal the ruling in the Tax Tribunal case, Hymanson v Revenue and Customs Commissioners, where the tribunal overturned the loss of fixed protection by a person who had continued to make contributions by direct debit in complicated circumstances.

Judgements and rulings normally turn on the specifics of the case and the fact pattern of this particular case is likely to have been key in HMRC deciding not to appeal the ruling. However, it does raise the possibility – even if remote – that individuals who have made genuine errors and suffered adverse and disproportionate tax consequences may be able to undo the errors. Individuals would, of course, need to seek legal advice if they were minded to take a case to Tribunal, but given how complicated the protection rules are and how easy it is to breach them, it holds out the prospect of individuals who have tax protections rescinded taking their cases to the Tax Tribunals.

Elsewhere in the tax sphere HMRC has updated its guidance for individuals trying to work out their reduced (tapered) annual allowance. The guidance clarifies the types of income that may be included in taxable income. The sections on working out threshold income, pension savings and the amount of pension savings made by an employer on an individual’s behalf have also been updated.

PASA Trustee Cyber Security Guidance

The Pensions Administration Standards Association (PASA) has published guidance outlining how trustees can formulate a “robust and effective review” of their cyber security protocols. There are five main sections covering Risk Assessment, Governance, Risk Management, Controls and Incident Management.

The guidance contains a number of organisational controls which can mitigate cyber security risks such as monitoring and logging digital processing activity, penetration testing, having business continuity or disaster recovery plans, data protection policies, reviewing infrastructure to ensure its fit for purpose and regularly reviewing the suitability of access rights.

Cost transparency templates

On 21 May 2019, the Cost Transparency Initiative released its templates and guidance for fund managers to enable them to report costs and charges information to trustees and Independent Governance Committees in a standardised format. The CTI came into being in November 2018 and evolved from the Financial Conduct Authority’s Institutional Disclosure Working Group. The CTI is a partnership between the Pensions & Lifetime Savings Association (PLSA), the Local Government Pension Scheme and the Investment Association.

The templates are available to download for free from the PLSA website and the CTI expects fund managers to be in a position to report against December 2019 and April 2020 year-ends using the new templates.

Survivor benefits and Walker v Innospec Limited

Nearly two years after the Walker Judgment, the Government has confirmed that public sector schemes will provide survivors of registered same sex civil partnerships/marriages with the same benefits as those provided to widows of opposite sex marriages. The statement emphasises that this is not meant to set a minimum requirement for private pension schemes who "will need to take their own legal advice to ensure they are legally compliant with the judgment going forward". The statement also confirms that unequal benefits for widows and widowers of opposite sex marriages will not be equalised.

ONS Pensions Survey

The Office for National Statistics has published the Occupational Pension Schemes Survey , UK 2018 which estimates total membership of occupational schemes at 45.6 million. This includes 17.3 million active members people split between 11m in the private sector and 6.3m in the public sector – the survey doesn’t cover workplace personal pension arrangements.

Within that 11m, the number of defined contribution (DC) memberships rose from around 1m in 2008 to 9.9m in 2018, while the active DB memberships dropped from 2.6m to 1.1m over the same period. The number of preserved pension entitlements in private sector DC schemes rose from 1.3m million before automatic enrolment was introduced in 2012 to 7.5m in 2018.

FRC’s transition into ARGA and amendments to FRS102

The Financial Reporting Council has published its Plan and Budget setting out the steps it will take to transition to the new regulator, the Audit, Reporting and Governance Authority (ARGA), “an enhanced authority with stronger powers and greater resources” according to its Chief Executive Officer Stephen Haddrill. The Plan contains a section outlining its intentions with respect to actuarial standards and oversight in 2019/20 – including a review of Actuarial Standard Technical Memorandum 1: Statutory Money Purchase Illustrations (ASTM1), which it has already completed and concluded that no changes are required.

The FRC has also issued Amendments to FRS 102 – Multi-employer defined benefit plans which makes narrow-scope amendments regarding where to present the impact of an employer’s transition from DC accounting to DB accounting; it will be presented in other comprehensive income. The transition is required by FRS 102 when sufficient information about the multi-employer DB plan becomes available for the employer to apply DB accounting for the first time. The amendments do not affect the requirement to recognise the relevant liability (or asset) in relation to the plan. The amendments are effective for accounting periods beginning on or after 1 January 2020, with early application permitted.

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Authors

Paul Barton
Consultant
Willis Towers Watson
Janine Bennett
Consultant

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