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The Month In Pensions – December 2020 – What to
look out for in pensions in 2021
Hello, and welcome to the Month In Pensions for December 2020,
brought to you by the pensions team at Gowling
WLG.
I'm Ian Chapman-Curry and, in a bit of a different format
for the podcast, we'll be using the December episode to look
forward to what we can expect in the world of pensions in 2021.
Before we start, just a quick reminder that you can find out
more about the pensions team at Gowling WLG and get all of our
pension Insights at www.gowlingwlg.com/pensions-uk .
Brexit and COVID-19 have meant that 'business as usual'
has been delayed in the world of pensions legislation, regulation
and policy. As a result, 2021 looks set to be a very busy year,
with projects held over from 2018, 2019 and 2020 set to launch. To
put all of these developments into context, we've grouped these
highlights into ten key developments that will have the most impact
on the pensions industry in 2021.
1. Getting to grips with the Pension Schemes Act 2021
The Pension Schemes Bill is likely to receive Royal Assent early
in 2021 and become the Pension Schemes Act 2021. It promises to be
a key legislative foundation underpinning many of the developments
in pensions in 2021 and beyond. The Bill sets out:
strengthened powers for The Pensions
Regulator (TPR)
changes to the funding regime for
defined benefit (DB) pension schemes
new requirements for climate
responsible investing; and
the statutory framework that will
underpin the development of:
collective defined contribution (or
CDC) schemes; and
pension dashboards
In addition, the Bill will tighten the rules on DB pension
transfers and put in place statutory amendments for the PPF to take
account of the ruling in Hughes and others.
A stronger regulator
Strengthening the powers of The Pensions Regulator is one of the
key aspects of the Pension Schemes Bill. These include measures
to:
strengthen the contribution notice
regime;
extend the notifiable events regime
by creating a secondary notifiable events regime targeting certain
employer-related notifiable events in relation to a DB scheme;
provide for new criminal sanctions,
including three new offences:
avoidance of an employer
debt;
conduct risking accrued scheme
benefits; and
failing to comply with a contribution
notice;
extend TPR's powers to impose
fines (and increasing the maximum amount of fines for certain
offences and breaches); and
extend TPR's
information-gathering powers.
Extending the contributions notice regime
The precise nature of the additional notifiable events will be
prescribed in regulations, but government consultation documents
indicate that they will initially focus on corporate transactions,
including:
the sale of controlling interest in a
sponsoring employer;
the sale of the business or assets of
a sponsoring employer; and
the granting of security in priority
to the scheme on a debt to give it priority over debt to the
scheme.
The first of the notifiable events mentioned are already set out
in regulations. The subsequent two will be introduced for the first
time in forthcoming regulations. In addition to making a report to
TPR, employers will need to:
make a declaration of intent
(referred to in legislation as an 'accompanying statement')
to TPR; and
copy the declaration of intent to the
trustees.
The declaration of intent will require the employer to set out
information on the notifiable event and to explain how any
detriment to the pension scheme is to be mitigated.
All of these additional powers will enable The Pensions
Regulator to continue its development as a more visible and
proactive regulator. With the prospect of economic difficulties
lasting throughout 2021, this year will be a test of its pledge to
be 'clearer, quicker and tougher'.
A new funding regime for defined benefit pension schemes
The Bill provides the legislative foundation for a change to the
statutory DB funding regime. This will be augmented by TPR's
revised code of practice on DB funding. The Bill will require the
trustees of DB schemes to:
to produce and maintain a funding and
investment strategy. This is to be set out in a written statement
signed by the trustee chair (referred to as a 'statement of
strategy' in the Bill). The statement of strategy will also be
required to cover items such as:
whether, in the opinion of the
trustees, the scheme's funding and investment strategy is being
successfully implemented; and
the main implementation risks faced
by the scheme.
appoint a chair (if they do not
already have one); and
consult the employer when preparing
or revising their funding and investment strategy statement.
In addition, the Bill lays the groundwork for TPR to issue
revised guidance on DB funding. This will focus on setting clearer
funding standards, with key principles covering:
scheme-specific funding and
investment risks – trustees and employers will be expected to
understand these risks and evidence how the risks have been
assessed and managed;
long-term objectives – mature
schemes will be expected to have a low level of dependency on their
sponsoring employer and have investments that provide a high
resilience to risk;
journey plans and technical
provisions – trustees will be required to develop a journey
plan that will help them to achieve their long-term objectives. The
scheme's technical provisions should have a clear and explicit
link to the long-term objectives;
scheme investments – the
scheme's actual investment strategy and asset allocation over
time should be broadly aligned with the scheme's funding
strategy. Trustees will be required to ensure their investment
strategy has sufficient security, sufficient quality, and can
satisfy liquidity requirements based on expected cash flows as well
as a reasonable allowance for unexpected cash flows;
reliance on the employer covenant
– schemes with stronger employer covenants will be able take
on more risk and assume higher returns. Trustees should, however,
also assume a reducing level of reliance on the covenant over
time;
reliance on additional support -
schemes will be able to account for additional support when
carrying out their valuations provided that the additional support
meets the standards set out in the code; and
appropriate recovery plans –
deficits should be recovered as soon as affordability allows while
minimising any adverse impact on the sustainable growth of the
employer.
At this stage, it is envisaged that a second consultation on the
revised code will be issued in the first quarter of 2021 and the
revised code will come into force at the end of 2021.
One code to rule them all
TPR currently maintains 15 codes of practice, covering
everything from reporting breaches of the law to the authorisation
of master trusts. TPR's codes of practice aim to provide:
practical guidance on how to comply
with pensions legislation; and
examples of the standard of conduct
that is expected by TPR.
In July 2019, TPR announced that it was reviewing its codes of
practice. As a result, the codes of practice will be:
updated, to reflect the requirements
set out in the Occupational Pension Schemes (Governance)
(Amendment) Regulations 2018 (the Governance Regulations); and
combined into a 'single, shorter
code' (the Single Code).
TPR intends to make the Single Code "quicker to find, use
and update, so that trustees and managers of all types of scheme
can be more responsive to changes in regulation". As well as
revising the DB funding code of practice (see Section 3 –
A new funding regime for defined benefit pension schemes
above), TPR will focus initially on updating the codes most
affected by the Governance Regulations (i.e. code of practice 9 (on
internal controls) and code of practice 13 (the defined
contribution code)). Formal consultation is now expected early in
2021, with the aim of a completely updated Single Code going into
force at the end of 2021 / beginning of 2022.
Trustees will need to stay on top of the developing Single Code.
In particular, TPR's guidance and examples on effective systems
of governance will build on the requirements set out in the
Governance Regulations. Once again, governance will be top of the
agenda for trustee boards in the coming year.
Interest in climate responsible investing heats up
2020 was the year that environmental, social and governance
(ESG) issues rose to the top of many trustee agendas. 2021 will see
this interest develop, with an increasing focus on climate
responsible investing.
The Bill gives the government the power to introduce secondary
legislation requiring disclosures based on the Taskforce on
Climate-related Disclosures (TCFD). The DWP has issued draft
regulations for consultation. The proposed regulations cover:
governance, strategy and risk
management, along with metrics and targets, for the assessment and
management of climate risks and opportunities (the Climate
Governance Requirements); and
publication of climate risk
disclosures that are aligned with the TCFD recommendations (the
TCFD Disclosure Requirements).
The Climate Governance Requirements will apply to the largest
occupational pension schemes first:
on and from 1 October 2021 for
schemes with over £5 billion in assets; and
on and from 1 October 2022 for
schemes with over £1 billion in assets.
The TCFD Disclosure Requirements will also apply to the largest
occupational pension schemes first, applying by the earliest
of:
within seven months of their first
scheme year that ends after 1 October 2021 or by 31 December 2022
for schemes with over £5 billion in assets; and
within seven months of their first
scheme year that ends after 1 October 2022 or by 31 December 2023
for schemes with over £1 billion in assets.
Both the Climate Governance Requirements and the TCFD Disclosure
Requirements will apply to all authorised master trusts and
authorised CDC schemes in line with the dates set out above for
schemes with over £5 billion in assets.
In addition to these reporting requirements, the Pensions
Climate Risk Industry Group has issued non-statutory guidance for
the trustees of occupational pension schemes on assessing, managing
and reporting climate-related risks. This guidance is likely to go
into force in the first quarter of 2021.
Finally, the FCA has announced that it intends to consult on
implementing TCFD Disclosure Requirements for asset managers and
contract-based schemes in the first half of 2021. The rules are
expected to be finalised by the end of 2021 and go into force at
the beginning of 2022.
The year of superfunds?
There have been developments that make it seem likely that 2021
will see superfunds make their mark. In October 2020, TPR published
new guidance for trustees and employers considering a transaction
with a superfund. This was preceded by comments made by the
pensions minister that new primary legislation focusing on
superfunds should be expected after the Bill has received Royal
Assent.
As a result, 2021 will see a legislative and regulatory
framework develop to govern the operation of superfunds, which will
increase confidence on the part of trustees. The weakening of many
sponsors' covenants will also make the superfund option look
more attractive, relative to the status quo, for the trustees of
their pension schemes. So, will 2021 be the year of the first
successful superfund transaction?
Brexit becomes a reality
The UK withdrew from membership of the European Union (EU) at
11pm on 31 January 2020. Brexit was not, however, achieved in
practice because of the transitional period under which the UK and
EU's legal relationship was maintained as if the UK remained a
member state of the EU. Brexit becomes a day to day reality for
2021 and beyond, when the transitional period came to an end at
11pm on 31 December 2020.
UK and EU negotiators agreed the EU-UK Trade and Cooperation
Agreement, a free trade agreement that went into force following
the end of the transitional period. It is, however, likely to take
many more years before all of the issues are ironed out. In the
meantime, trustees of DB and DC pension schemes had to get ready to
deal with the consequences of the change in the UK's
relationship with the EU without knowing exactly what that change
will be.
Now that a cliff edge 'no deal' scenario has been
averted, some of the key considerations for trustees include:
assessing and monitoring whether the
strength of the employer covenant (both in financial and legal
terms) has been negatively impacted;
considering any direct impacts of
Brexit on the sponsoring employer (e.g. if they operate in sectors
or markets that are particularly exposed to the adverse impact of
Brexit or if the sponsoring employer is based in a member state of
the EU);
watching and taking advice on the
scheme's investments and funding position;
practical issues such as the payment
of pensions to members who live in a member state of the EU (e.g. a
number of UK-based banks have decided to close bank accounts which
can impact on payments to members) and any flow of personal data to
and from the EU.
Ensuring better outcomes for DC savers
Ensuring better outcomes for people saving in DC schemes has
been a theme of government action over the past decade. This has
become even more important with:
automatic enrolment resulting in
millions of additional DC savers; and
flexible access to pensions giving
members more choice over what to do with their pension
savings.
The latest policy push has come in the form of a consultation
entitled 'Improving outcomes for members of defined
contribution pension schemes' (the DC Consultation). Changes
resulting from the DC Consultation are expected to come into force
in 2021. The DC Consultation sets out:
measures aimed at encouraging DC
pension schemes to invest in a more diverse range of long-term
assets (including so-called "illiquid" investments, such
as venture capital and green infrastructure);
changes to the way compliance with
the default fund charge cap is measured to give trustees more
flexibility around performance fees;
proposals to require the
consolidation of smaller DC pension schemes into larger ones;
and
a series of smaller changes to
legislation and statutory guidance for DC schemes (e.g. the minimum
expectations on both the production and publication of costs and
charges information for the purposes of chair's statements,
extending the existing costs disclosure requirements to those funds
that are no longer available for members to choose and extending
the requirement to produce a default Statement of Investment
Principles (SIP) to 'with profits' schemes.
The amendments to bring in the changes set out above are
scheduled to come into effect on 5 October 2021. For more
information on this, click here for our Insight 'Improving member outcomes: what next for Defined
Contribution pension schemes? '.
In addition, it is likely that next year will continue the trend
of occupational DC schemes transferring to master trusts. This is
another form of consolidation, with master trusts having a tighter
regulatory framework and often having greater resources to focus on
governance and improving member outcomes.
Dealing with discrimination in public sector pension
schemes
2021 looks set to be the year that the government finalises its
plans to deal with discrimination in public sector pension schemes
ready for implementation in 2022.
This issue arose out of the 2014/15 reforms to public sector
pension schemes. Members who were within 10 years of retirement
were given transitional protection against the introduction of the
new benefit structure.
These transitional protections were the subject of legal
challenges by some members of the judges' and firefighters'
pension schemes (the 'McCloud' and 'Sergeant' cases
respectively). In December 2018, the Court of Appeal ruled that the
transitional protection arrangements unlawfully discriminated
against the younger members of these schemes.
The government announced that it would remedy the discrimination
arising from the transitional protections in respect of all public
service pension schemes, with consultations issued in mid-June
2020.
Public sector employers and certain private sector contractors
providing outsourced services to the public sector will have to
grapple with issues such as:
understanding how the proposals will
impact their pension arrangements;
implementation costs, which are
likely to result in higher employer contributions;
communicating the changes to the
membership and running member choice exercises; and
dealing with an increase in member
queries and complaints.
Private sector contractors may, where possible, look to exit the
public sector schemes. This could trigger financial liabilities
which will need careful management. Contractors who operate their
own 'broadly comparable schemes' will also need to consider
what steps they need to take to remove any discrimination issues
which arise from having 'mirrored' the public sector
schemes.
Pensions dashboards and the data revolution
Pensions dashboards are the public facing user interfaces that
will enable individuals to:
access all of their pensions
information online, securely and in a single place;
obtain clear, simple and up to date
information about all of their pension savings; and
find and reconnect lost pension
pots.
The Bill sets out the primary legislative framework for pensions
dashboards. The government hasn't, however, been waiting for
the Bill to become an Act of Parliament to get started on
delivering pensions dashboards. In 2020, the Pensions Dashboards
Programme (part of the Money and Pensions Service) was made
responsible for:
the technical architecture; and
standards and services based on the
needs of users.
The Pensions Dashboards Programme is also responsible for
delivering:
the Pension Finder Service;
the Identity Service (i.e. the
service that will enable individuals to prove who they are in order
to ensure that the right people have access to the right
information); and
governance registers.
The Money and Pensions Service will be responsible for building
a pension dashboard based on the digital architecture set up by the
Pensions Dashboards Programme. In 2021, the Pensions Dashboards
Programme will:
Once this is done, the Pensions Dashboards Programme will be
able to work with their commercial and industry partners to build,
integrate and test the digital architecture.
Legal duties to participate in pensions dashboards will be
staged, applying to the largest pension schemes first. It is
currently envisaged that this will start in 2023, with a period of
voluntary participation starting in 2022. Schemes should, however,
start to think about the steps they can take now to ensure that
their data is ready for pensions dashboards.
Subscribing to The Month In Pensions
And that is nearly all from The Month In Pensions for December
2020. We always finish off with a non-pensions recommendation -
something a little lighter than reading the predictions for the
year to come from every professional services firm.
Before we get to that, just a reminder that you can get in touch
if there are any items you'd like to see covered in future
episodes of The Month In Pensions - just contact me, Ian
Chapman-Curry - my contact details are at tinyurl.com/GWLGICC and you can get more
from the pensions team at Gowlingwlg.com/Pensions-UK .
If you liked this podcast, please rate or review it and, if you
hit the subscribe button, The Month In Pensions will appear in your
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