UK: Pensions Radar - April 2018

Last Updated: 2 May 2018
Article by Travers Smith LLP

Pensions Radar is a quarterly listing of expected future changes in UK law affecting work-based pension schemes. Please speak to your usual Travers Smith contact if you would like to know more about any topics.

Data protection reform The EU's new General Data Protection Regulation is more onerous than the existing legislation, with much higher penalties for breaches. See our briefing note here for details. Effect of Brexit: see note 1 on page 5. 25 May 2018
European Markets Infrastructure Regulation (EMIR): mandatory clearing of over the counter (OTC) derivatives transactions The exemption for pension schemes from the mandatory central clearing requirements of EMIR currently expires on 16 August 2018. The exemption applies to certain OTC derivatives transactions used to reduce investment risks and liabilities. It is proposed that the exemption be extended until at least 2021 but the current exemption may expire before the extension comes into force. There is, however, an expectation that a solution will be found. The FCA continues to encourage all market participants, including pension schemes, to prepare for mandatory central clearing as early as practicable. See our briefing note EMIR reporting: are you ready? and WHiP Issue 62 for details. Effect of Brexit: see note 1 on page 5. 16 August 2018
Master trust authorisation regime The Pension Schemes Act 2017 includes provisions for the authorisation and regulation of master trusts. Trustees of existing master trusts have six months from when the authorisation provisions are commenced to apply for authorisation or to decide to wind up the scheme. However, the Act already imposes some notification and funding obligations on discontinuance of a master trust. See WHiP Issues 64, 68 and the next issue for details. 1 October 2018
Reconciliation of contracting-out records HMRC will no longer accept contracting-out reconciliation queries after October 2018. October 2018
DC investment disclosure Information on DC investment charges and transaction costs will need to be disclosed by trustees in the annual chair's governance statement and on a public website, to which benefit statements will have to refer. Trustees have to comply by a date seven months after the first scheme year end date to fall on or after 6 April 2018 (corresponding with the deadline for producing the governance statement). Trustees must also provide to DC members on request a statement containing, in relation to a pooled fund (i.e. collective investment scheme or unit-linked contract), the name and international securities identification number (ISIN) of each underlying collective investment scheme (at the top level only). Annual benefit statements must say how a member can request the statement. See the next issue of WHiP for details. By 6 November 2018 onwards From 6 April 2019
Combatting pension scams: restriction of statutory transfer right The government proposes to limit the schemes to which a statutory cash equivalent transfer value can be taken. There will only be a statutory right to a transfer to a personal pension operated by an FCA authorised firm; to an occupational pension scheme where there is evidence of genuine earnings from an employment to which the scheme relates; or to an authorised master trust. See WHiP Issue 66 for details. Late 2018/early 2019
State pension ages raised Women's state pension age will be 65 by November 2018 and state pension age for men and women will thereafter start to increase, currently up to age 68 by 2046. The increase from 66 to 67 has been brought forward by eight years, to take place between 2026 and 2028. The government proposes that the increase from 67 to 68 now be made between 2037 and 2039. See our briefing note Bridging pensions – state pension age issues, on the issues that rising state pension ages can cause for schemes that attempt to integrate with the state pension. 2018 to 2046 or perhaps 2039 (with implications already for schemes with bridging pensions or state pension offsets)
IORP II directive The new EU IORP directive replaces the existing one and must be implemented by 13 January 2019. Whilst it contains no new funding requirements, and relaxes the funding requirements for cross-border schemes, it does include provisions on matters such as investment, scheme governance and disclosure of information that will require new UK legislation. See WHiP Issue 62 for details. Effect of Brexit: see note 2 on page 5. 13 January 2019
Securities Financing Transactions (SFT) Regulation This EU Regulation, which includes obligations in connection with SFTs (such as repo/reverse repo and securities lending transactions) regarding record-keeping that were already in force, imposes requirements around collateral reuse and, later, reporting. Trustees who are party to arrangements including receipt and reuse of collateral (for example, in connection with over the counter derivatives transactions) may be required to issue prescribed risk warnings to their counterparties. See WHiP Issue 57 for details. Effect of Brexit: see note 1 on page 5. Since 13 July 2016 and from early 2019
Brexit The UK's notice under Article 50 of the Treaty on European Union started a two year period for the UK and EU to agree exit terms and their post-Brexit relationship, before the UK leaves the EU. The European Union (Withdrawal) Bill has been published. See our briefing note Leaving the EU: the legal implications for an outline of the potential impact in various areas. 29 March 2019 (unless all EU member states agree an extension)
End of second automatic enrolment DC transitional period The second transitional period for phasing in automatic enrolment DC contribution rates will end: full rates will then apply. See our briefing note Automatic enrolment: minimum DC contribution rates. 5 April 2019
DC scheme charges The government will again review the DC charges cap. For more details, see our briefing note DC charges and governance and WHiP Issue 68. 2020
Expiry of statutory power to amend contracted-out DB scheme rules The unilateral employer power to amend formerly contracted-out scheme rules to reduce future benefit accrual and/or increase member contributions will expire. See our briefing note State pension reform and the end of contracting-out for details. 5 April 2021
Automatic enrolment changes The government has proposed significant changes to the scope of the automatic enrolment duties, including extending automatic enrolment to 18 to 21 year olds and removal of the lower pensionable pay threshold, subject to finding ways to make these changes affordable. See WHiP Issue 68 for details. Mid-2020s
Normal minimum pension age to be raised to 57 The government intends to raise normal minimum pension age from 55 to 57 and thereafter to maintain a ten year gap with state pension age. From 2026 to 2028
Automatic re-enrolment Every three years, an employer must carry out an exercise to re-enrol, into an automatic enrolment scheme, eligible jobholders who opted out after they were automatically enrolled. This duty first arises three years from the employer's staging date, when automatic enrolment was first required, and there is a six month window around that anniversary during which the exercise must be carried out. For the very largest employers, which had a staging date of 1 October 2012, the process therefore began from 1 July 2015. Other employers become subject to the requirement later. See our briefing note Automatic re-enrolment for details. Every three years
The following are expected developments for which there is no confirmed date:
Pensions Regulator powers In its March 2018 white paper, the government proposed to extend the Pensions Regulator's contribution notice powers to allow it to penalise those who deliberately put their pension scheme at risk. There will also be a criminal offence and civil penalties for directors or connected persons found to have committed wilful or grossly reckless behaviour in relation to a pension scheme. The "notifiable events" framework will be improved and the Regulator's information gathering powers will be extended. There will be a requirement that employers or parent companies produce a "declaration of impacts" or "statement of intent" in advance of the riskiest transactions (including sales and takeovers of employers), having consulted trustees on the assessment of detriment and mitigation. Clearance will continue to be voluntary but the Regulator's guidance will be reviewed. See our briefing note Protection of DB pension schemes: government plans for details.
DB scheme funding The government proposes changes to the Pensions Regulator's Code of Practice on Funding Defined
Benefits (with new accompanying guidance), to define "prudent" (in relation to technical provisions) and "appropriate" (in relation to recovery plans) and to ensure that long-term objectives for the scheme are considered when setting funding objectives. The government intends to make compliance with at least part of the Code a statutory requirement. DB schemes will be required to have chairs, who must produce statements on key funding decisions (as well as consideration of key risks, value for money and long-term plans for the scheme). These are to be submitted to the Regulator with triennial valuations, with power for the Regulator to request an out-of-cycle statement. See the next issue of WHiP for details.
GMPs and sex discrimination The government previously stated its intention to legislate further in this area, to remove the need for a claimant to point to a comparator of the other sex in order to establish unlawful discrimination. Such a change would be expected to increase the pressure on trustees to equalise benefits accrued between 17 May 1990 (the Barber v GRE judgment) and 5 April 1997 (when GMPs stopped accruing). Implementation has been delayed, pending consideration of whether a combined value-equalisation and GMP-conversion process can be used to eliminate inequalities. The government has consulted on such a process but the implementation timescale is unclear. The Lloyds Banking Group case (see below) is also relevant. For more details, see our Equalisation of benefits that include GMPs briefing note and WHiP Issues 32, 38, 61 and 63.
Survivors' pensions for same sex spouses, civil partners and widowers The Supreme Court's decision in Walker v Innospec Limited (see WHiP Issue 65) requires pensions for surviving same sex spouses and civil partners to be provided on the same basis as for opposite sex spouses. It also raises difficult questions, not considered by the Supreme Court, about survivors' GMPs and benefits for widowers in respect of pre-April 1988 service. The government is reviewing the position.
Shared parental leave for grandparents The government may extend rights to shared parental leave and pay to working grandparents.
The following pending cases may result in judgments that affect schemes other than just those involved:
GMPs and sex discrimination Lloyds Banking Group and the trustees of three group pension schemes will ask the High Court to consider the trustees' duties in respect of equal pension claims by female members. They complain that their pensions are smaller than comparable men's, with the discrepancies due to unequal GMPs. See WHiP Issue 65 for details.
Discrimination against part-time workers In O'Brien v Ministry of Justice, the European Court will decide on the retrospective effect or otherwise of the European law requirement introduced in 2000 to provide pro rata pensions for part-time workers. See WHiP Issue 65.
Retrospective equalisation of pension ages In Safeway v Newton, the European Court will consider whether European law prevented a scheme's retrospective amendment power from being used to 'level down' benefits accrued in a Barber window period. See WHiP Issue 67 for details.
Switching from RPI to CPI: Barnardo's The Supreme Court will hear an appeal in the Barnardo's case. The Court of Appeal held that a DB scheme's definition of "Retail Prices Index" (RPI), which includes "any replacement adopted by the Trustees without prejudicing Approval", does not permit the trustees to switch to the Consumer Prices Index (CPI) while RPI remains an officially published index. (See WHiP Issue 61 for more detail.)
The Court of Appeal also (but without setting a binding precedent because it did not need to be decided) confirmed the decisions in Danks v QinetiQ and Arcadia (see WHiP Issues 33 and 48 respectively). In those cases, the High Court held that, where under scheme rules the trustees have a choice of index, until that choice is made it is not possible to say that a member has a subsisting right to an increase based on any particular index. Accordingly, section 67 of the Pensions Act 1995 – which restricts amendments that affect or could affect subsisting rights - would not prohibit the switch.
The BA case Aspects of the High Court's decision on the lawfulness of steps taken by the trustees of one of British Airways' pension schemes to exercise their unilateral amendment power to allow them to grant discretionary pension increases above the CPI annual increase (following an automatic switch from RPI) and the use of that power to grant such increases are expected to be appealed to the Court of Appeal. See WHiP Issue 65 for details.
PPF compensation levels In Hampshire v Board of the Pension Protection Fund, the European Court will consider whether the PPF compensation cap is permitted under the EU Insolvency Directive. The Advocate General's opinion (which may or may not be followed by the Court) was that the PPF does not provide adequate protection in cases such as Mr Hampshire's. See the next issue of WHiP for details. Effect of Brexit: see note 2 below.

Effect of Brexit Note 1: EU regulations (as distinct from directives) apply in member states without the need for domestic implementing legislation. Under the European Union (Withdrawal) Bill, they will continue to apply in the UK until domestic law changes to give effect to Brexit.

Effect of Brexit Note 2: Strictly speaking, obligations on the UK to implement EU directives by applicable deadlines that pre-date the UK leaving the EU should be complied with. It remains to be seen whether this will occur in practice. Some Brexit models would require the UK to continue to implement many directive requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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