UK: What's Happening In Pensions - May 2018

Last Updated: 18 May 2018
Article by Travers Smith LLP

DB WHITE PAPER AND CONSULTATION ON CORPORATE GOVERNANCE

DB white paper

The government has published its white paper on "Protecting defined benefit pension schemes", covering its proposals for:

  • new Pensions Regulator anti-avoidance powers and a criminal offence of wilful or grossly reckless behaviour in relation to a pension scheme;
  • changes to scheme funding rules and the Pensions Regulator's code of practice; and
  • new DB scheme consolidation options.

The white paper also says that the government has for the rime being ruled out a legislative override of scheme rules to change revaluation and/or indexation measures (eg, from RPI to CPI) but that it will keep this under review.

The main programme of change is expected to take several years. Many of the changes require primary legislation, which is not expected until the 2019-2020 Parliamentary session. Until then there will be periods of consultation.

The Work and Pensions Select Committee has launched an inquiry into the white paper, with a view to informing and influencing the planned consultations. It is calling for evidence on various questions in relation to the proposals to be submitted by 18 May 2018.

Corporate governance consultation

The government has published a consultation paper on Insolvency and Corporate Governance. Its intention is to safeguard creditors, including pension schemes, of companies that are distressed or insolvent. The consultation is informed by (among other things) recent high profile insolvencies and the consequences for creditors, including DB pension schemes.

The consultation includes proposed new powers for administrators, liquidators and the Insolvency Service. It also seeks views on various issues around corporate governance, including in relation to the payment of dividends, the location of assets in a group, stewardship, and directors' awareness of their duties.

The closing date for responses is 11 June 2018.

Please see our briefing note "Protection of DB pension schemes: government plans" for details of the white paper and corporate governance consultation.

PENSIONS REGULATOR ANNUAL FUNDING STATEMENT

The Pensions Regulator has issued its latest annual funding statement, focussing even more than previously on the balance between deficit-reduction contributions and dividends. There is also a new section concerning the implications of increased DB transfer activity. This statement is primarily directed at schemes with valuation dates in the year to 21 September 2018 but will be of interest to all DB schemes.

The most interesting points are as follows.

Funding: The Regulator is concerned about the growing disparity between dividends (and other distributions such as intra-group loans) and deficit-reduction contributions and expects fair treatment between shareholders and trustees. Where dividends are disproportionate to deficit-reduction contributions (no specific ratio is mentioned) it considers that affordability is not an issue. It adds that "In some circumstances distributions may be materially detrimental to the scheme, in which case we will consider using our anti-avoidance powers".

This statement is firmer than last year's statement with schemes that have "strong" or "tending-to-strong" employers. The Regulator says that schemes with such employers should consider strengthening technical provisions (ie, actuarial assumptions), increasing contributions and/or reducing recovery plan lengths, especially if they are paying out high dividends.

Where there is a weak employer, trustees and employers should work together to give greater consideration to the needs of the scheme. Trustees should "prioritise scheme liabilities over shareholder returns".

The accompanying press release says that the Regulator "has stepped up its proactive DB funding case work by 90% to support trustees as they prepare valuations and recovery plans".

Contingency planning: Trustees are told to ensure that they consider shorter-term risks to the security of members' benefits, such as a sudden downturn in the employer's business, and also opportunities that may arise to put the scheme on a more solid footing.

Brexit: The Regulator expects employers and trustees to have open and collaborative discussions about Brexit risks and whether investment and funding strategies remain appropriate. Where sponsors hold back cash by extending the recovery plan because of Brexit uncertainty, trustees should make sure that shareholders share the burden proportionately.

Transfer activity: A new section of the statement says that "Trustees who are considering whether to make an allowance in their valuation for an increased level of transfer activity in future should consider their scheme's experience and likely trends very carefully before doing so. If they do make such an allowance and it reduces technical provisions, we expect them to quantify the effect in advance and continue to monitor it, with a contingency plan in place should this assumption not be borne out". Trustees should also take advice on liquidity management and consider the impact on investment strategy.

The Regulator also asks trustees to keep records of transfer activity, including details of the advisers and the schemes to which transfers are made, in order to help it and the FCA to conduct any investigations that may be required. If trustees have concerns over the level of transfer activity or the quality of the advice being given to members, they should contact the Regulator or the FCA.

DC INVESTMENT DISCLOSURE

The government has issued a consultation response and finalised amending regulations and statutory guidance on requirements for more detailed disclosure by trustees of investment charges, transaction costs and other investment information to DC members (and to contingent beneficiaries and trade unions).

Information will need to be included in the annual chair's governance statement and on a public website (to which benefit statements will have to refer). The main changes from the consultation proposals (see WHiP Issue 68) relate to when the obligations will first apply to a scheme, which will be 6 November 2018 at the earliest.

Costs and charges

The new regulations amend the 1996 scheme administration regulations to require trustees of schemes that provide money purchase benefits (other than very small schemes, public service schemes and schemes with no money purchase benefits other than AVCs) to:

  • include in the chair's governance statement:

    • details of the (smoothed) investment charges and transaction costs for each default investment arrangement and each other investment option that a member is able to select (rather than, as currently required when there is more than one default arrangement, just the range of charges and transaction costs); and
    • an illustration of the cumulative (ie, compounding) effect of charges and transaction costs on the value of a member's pension pot;
  • make the above information (and specified default investment strategy information) available free of charge on a publicly accessible website, the address of which must be referred to in annual benefit statements; and
  • have regard to the statutory guidance (which mainly concerns the compounding illustration that trustees will have to produce).

This aspect of the regulations came into force on 6 April 2018 but trustees do not have to comply until seven months after the first scheme year end date to fall on or after 6 April 2018. (This is the deadline for producing a chair's governance statement.) This means that no scheme has to be compliant until 6 November 2018 and for some schemes the deadline will be as late as 5 November 2019. There is no need to provide the information to a member at the point he or she joins the scheme.

Pooled funds information

The regulations will also require trustees of the same schemes as noted above to 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). A recognised trade union will also be able to make a request in respect of a member or members. This is designed to allow members to investigate underlying charges, transaction costs and shareholdings, and how a manager engages with companies in which it invests.

This aspect of the regulations will come into force on 6 April 2019. The statement must be provided within two months of the request and relate to the arrangements in which the member was invested at the time of the request. The information must be correct as at a date no more than six months previously.

Annual benefit statements will have to say how a member can request this statement.

General

The Pensions Regulator will be able to impose fines of up to £5,000 (individuals) and £50,000 (organisations) for non-compliance.

The FCA is expected to consult on corresponding rules for workplace personal pensions in the second quarter of 2018.

To read this Briefing in full, please click here.

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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