Will the European Court re-design the PPF again?

Quite possibly, if Advocate General Hogan’s opinion in the German case of PSV v Bauer is followed by the full Court of Justice of the European Union.

Mr Bauer was retired and had three types of retirement benefit:

• A pension from PKDW, a German supplementary retirement fund financed by his former employer
• A monthly pension supplement paid by his former employer; and
• An annual Christmas bonus paid by his former employer

In 2003 PKDW experienced financial difficulties and, as is permitted under German law, reduced Mr Bauer’s pension by 1.25% to 1.4% each year.  In total, between 2003 and 2013, the amount of the supplementary pension Mr Bauer received was reduced by 13.8%, representing a loss of EUR 82.74 per month (although according to the German Government, compared to the total occupational pension, the percentage reduction of the benefits was only 7.4%).

Mr Bauer’s former employer made up the difference, but it became subject to an insolvency proceeding in 2012.  The PSV, the German equivalent of our Pension Protection Fund, took over payment of the monthly pension supplement and the Christmas bonus but declined to take over the payments to cover the PKDW shortfall, stating that under national law, it has no obligation to guarantee any payment made by an employer in compensation paid in respect of a previous pension benefit reduction.  Mr Bauer sued and the German Labour Court referred the case to the CJEU, asking whether Article 8 of the 2008 Insolvency Directive applies and if it did what the minimum compensation should be.

Article 8 provides as follows:

“Member States shall ensure that the necessary measures are taken to protect the interests of employees and of persons having already left the employer’s undertaking or business at the date of the onset of the employer’s insolvency in respect of rights conferring on them immediate or prospective entitlement to old-age benefits, including survivors’ benefits, under supplementary occupational or inter-occupational pension schemes outside the national statutory social security schemes”.

This has been the subject of lots of litigation with, we thought, the settled position that the Directive was complied with if compensation of at least half the value of the original scheme pension was provided (see for example our News Alert following last year’s Hampshire case).  But now, in the context of this German case, the Advocate General has stated that “a full re-appraisal of the case-law of the Court to date” is called for.  He then proceeds to de-bunk this case law and concludes that “Article 8 imposes an obligation on Member States to protect all of the old-age benefits affected by an employer’s insolvency and not just part or a designated percentage of these benefits”.

The Advocate General also opined that the Directive has direct effect against both member states and insolvency insurance institutions.

Comment

Unless already a pensioner, PPF compensation is cut back to 90% of the original pension, subject to a cap.  And for all, pension increases are restricted.  If the Advocate General’s opinion is upheld by the Court in this German case it seems that PPF compensation may have to be uplifted, probably with retrospective effect.  This would clearly have a very significant impact on the financing of the PPF with a potential knock-on effect on the levies which finance it.

There is also a risk that schemes in the process of wind up outside the PPF will be impacted because the PPF benefits that they must cover will be increased.

It may be a step too far for the CJEU to follow this opinion but if it does it is big news for the UK.  Brexit when/if it happens may mean that any such decision may be ignored but it would be unwise to count on this.

DWP concludes that Regulator passes muster, but could Regulator Rules be on their way?

A largely positive review of the operations of the Pensions Regulator has been released by the DWP.  This “light touch” and so-called tailored review was undertaken between August and November 2018 to check that the Regulator remains fit for purpose, well governed and properly accountable for what it does.

The review acknowledges that the Regulator has “undergone vast change in the last decade in response to significant changes in the pensions landscape” and has “recently been through a period of intense media and parliamentary scrutiny” following the high-profile collapses of BHS and Carillion and the debate surrounding the pensions offered by Tata Steel.  It has also faced calls for it to be a more active regulator.  But the review finds that considering the changing and challenging context the Regulator finds itself in, it is a well-run organisation that effectively carries out its statutory objectives.

As with any review of this nature, the report makes a series of recommendations for change, the first of which is of potential interest to those whom the Regulator regulates.  This is that the DWP should consider whether the Regulator’s powers be extended so that it can make rules in specific circumstances, if this could enable it to better achieve its goal of being clearer, quicker and tougher.

The possibility of the Regulator having a rule-making ability akin to the Financial Conduct Authority is couched in terms of assisting it with data gathering activities, and as such appears to be largely innocuous.  But the topic is not explored in any depth and the FCA’s rule-making ability is far wider.  If in future the Regulator can make formal rules on topics as diverse as data quality, trustee qualifications and scheme funding, this could have a dramatic effect on the behaviour of trustees, employers and advisers along with the management of occupational schemes.

Comment

The report acknowledges that stakeholder reaction to a rule-making ability is unknown.  Rules for proportionate data-gathering is one thing, but rules that directly impact how schemes are governed and the parameters in which trustees and employers take decisions is quite another.  Bring on the debate!

Regulator promises more of the same in its corporate plan

The Pensions Regulator has published its latest corporate plan in which it sets out how it intends to operate over the next three years – and with a particular focus on the first.  The underlying theme is one of extending and tightening its grip on the community it regulates through a series of measures, many of which are already known and which play to the Regulator’s “clearer, quicker, tougher” mantra.

Amongst measures not until now widely known are the following:

• An intention to develop a consolidation plan for DC schemes that have difficulties meeting the standards expected by the Regulator
• A second phase of the Regulator’s 21st Century Trustee programme, focussing on the make-up of trustee boards and the impact of industry-developed competency standards and accreditation for professional trustees, as well as developing a new governance code of practice; and
• To prioritise the improvement of record-keeping standards by pension schemes, which the Regulator’s research “consistently shows is often viewed as a low priority for schemes”, by tailoring communications to the right audience through thematic reviews and data from scheme returns “so trustees and administrators are in no doubt as to our expectations of them”

The corporate plan sets out some statistics demonstrating that significant consolidation is happening within the DC sector as it grows and matures.  This has also been accompanied by a reduction in the number of trustees.  The plan also reveals that the administration market is dominated by a small number of providers.  The Regulator intends to engage with them to “better understand the market and ensure higher standards of administration”.

Comment

The great surprise in this year’s corporate plan is that there is absolutely no mention of the Pensions Bill, which is essential to enable the Regulator to continue its journey to becoming a modern regulator.  It must be hugely frustrating for the Regulator to watch the continued paralysis at Westminster, not knowing when or if it will be given the powers sketched out in the March 2018 White Paper across a range of topics for which the need is most apparent.

Slowdown in DB transfer activity continues and there is evidence of declining interest from younger members

LCP continues to monitor the pattern of transfer quotations for the DB schemes we administer.  In the latest quarter, broadly 1.5% of deferred members requested a quotation compared to a high of 2.0% in Q2 2017.  Take-up rates have fallen to 26% of quotations compared to a high of 34% in Q3 2017.  There is evidence of declining interest from members under the age of 50, as a proportion of all transfers paid in Q3 2018 only 10% were paid to members under 50 compared to 20% in Q3 2017.

We have previously reported on concerns that trustees and the Financial Conduct Authority have on the quality of advice members receive before transferring their DB benefits.  More recently, there have been two developments that may provide greater assurance and protection for such members.

• Firstly, the Personal Finance Society has published the Pension Transfer Gold Standard which is a principles-based voluntary code of good practice for DB pension transfer advice. The aim of the code is to help consumers better understand what good advice relating to DB transfers looks like, as well as enhancing consumer protection.  We understand that around 500 financial advisory forms have already signed up for accreditation
• Secondly, the FCA has announced a £200,000 increase to the limit for compensation awarded by the Financial Ombudsman Service (from £150,000 to £350,000) for actions by firms on or after 1 April 2019, which will provide greater protection for members wishing to transfer out

More details of our latest survey are on our website.

Investment cost templates launched

After a period of testing (see Pensions Bulletin 2019/02), the Cost Transparency Initiative has launched its templates and associated guidance aimed at investors and their advisors, designed to enable them to request costs and charges from asset managers in a standardised format.

The industry group says that these templates will allow trustees to undertake clear costs and charges comparisons across their different investment management suppliers and asset classes – and that in turn, it will make it easier for trustees to scrutinise and challenge costs and performance, ensuring that pension savers get the best value for their investments.

The group is now to push for widespread adoption of the templates and guidance over the next 12 months and promote the benefits both savers and pension fund trustees can experience from their use.

Welcoming the launch, pensions minister Guy Opperman promises to “legislate robustly” if this voluntary initiative is not taken up by the pensions industry “at speed”.

Comment

The templates look quite straightforward as a means for investors to understand and compare costs and charges, but it is not clear how asset managers are to populate them.  Hopefully this has been covered off during the pilot phase.

Financial Ombudsman reports further rise in investment and pensions complaints

The Financial Ombudsman’s annual report reveals more bad news relating to pension freedoms, with some pension transfers putting people’s retirement savings at risk, along with poor investment advice, with people advised to invest in risky funds, or in schemes that turned out to be scams or fraudulent.  On the other hand, there were also complaints about paying to be advised not to transfer.

The Ombudsman also reports an increase in complaints about self-invested personal pensions – both about the advice to get one and the service delivered by SIPP providers.  SIPPs are the overwhelming choice of DB to DC transfers and so it is not a surprise that complaints related to them have risen.

Comment

In 2018/19 the Ombudsman received 15,600 complaints relating to investments and pensions (an increase of 24% over the previous year), but this is dwarfed by other sectors – for example, in the same year the Ombudsman received the two millionth complaint about Policyholder Protection Insurance!

HMRC needs more time to tidy up GMP records

Schemes waiting for HMRC’s “final data cut” of the GMP information it holds on members will have another few months’ wait, according to Countdown Bulletin 45.  HMRC now expects to start issuing them from mid to late November 2019.

Comment

Given the unenviable mammoth task HMRC is faced with (at the end of April 2019 some 120,000 queries were still outstanding from last October’s deadline), it is perhaps unsurprising that there are repeated delays to produce this final set of GMP data.

Many schemes will consider fully reconciled GMP data as an essential pre-requisite to the GMP equalisation exercise they will need to undertake following the Lloyds’ judgment.  This latest delay in data provision puts back when they can start in earnest, but not all the necessary planning and strategic decisions on the best way forward.