2 July 2020
- DWP publishes call for evidence on the effectiveness of costs, charges and transparency measures
- FCA starts the debate on what “value for money” means in DC schemes
- Regulator adjusts its priorities in the light of Covid-19
- Pension scams – Pensions Ombudsman throws the book at Norton Motorcycle trustee
- Government suffers defeats at Report stage for the Pension Schemes Bill in the House of Lords
- Royal Assent for the Corporate Insolvency and Governance Bill
- Royal Assent for the Divorce, Dissolution and Separation Bill
- Opposite-sex civil partnerships – Scottish Parliament passes Bill
- HMRC delivers more Covid-19 easements
- Covid-19 pension-related announcements
- Auto-enrolment – the sun will not set for seafarers and offshore workers
The DWP has launched a call for evidence in which it is seeking views on the effectiveness of costs, charges and transparency measures in protecting member outcomes, primarily in DC schemes.
The call for evidence seeks views and evidence on the following:
- The level and scope of the charge cap applicable to the default arrangement within DC schemes that qualify as auto-enrolment vehicles, and whether transaction costs should be brought into the charge cap
- The appropriateness of permitted charging structures and the extent to which they should be limited
- Options to assess take-up and widen the use of standardised cost disclosure templates – in DC schemes and possibly DB schemes too
The last review of the 0.75% charge cap took place in 2017, with the Government then concluding that it was operating as intended and so there was no need to adjust its scope or level. A survey will now be undertaken to capture the full range of charges that are applied to qualifying schemes, including transaction costs, costs of any life insurance products or charges paid by employers. The survey will also include decumulation charges.
To date transaction costs have been kept out of the scope of the charge cap. The DWP intends now to assess the effectiveness of any measures designed to improve disclosure of transaction costs before deciding whether a cap on these costs would be appropriate, and if so, at which level it should be set. The DWP notes that in 2014 and 2017 it decided not to include transaction costs in the cap. Further, the DWP also notes the difficulties in calculating implicit transaction costs and that subjecting transaction costs to the cap could limit innovation in default investment strategies, but also recognises concerns that whilst transaction costs remain outside of the cap they could be used to inflate costs for members; although the DWP has seen no evidence of this.
The DWP is proposing to bring charges associated with non-standard add-ons such as life assurance products into the scope of the cap in limited circumstances. These are where a scheme member is defaulted into paying for additional services and is unable to opt-out. The DWP states that such arrangements are rare but that it has concerns that some schemes are taking advantage of members in this area.
The DWP is neutral when it comes to lowering the charge cap – it can see the case for a lowering but also recognises the challenges it would bring. The paper points to the February 2019 consultation on Investment Innovation and Future Consolidation (see Pensions Bulletin 2019/05) which touched on the charge cap and promises to bring forward its response to that consultation in the autumn. Possibly related to this, the DWP says that it is planning to consult on regulations to encourage smaller schemes to consider consolidation where this would offer better value to their members.
The paper references the two permissible combination charging structures available in respect of the default arrangements of DC schemes used for auto-enrolment. It acknowledges that the flat fee structure in its present form does not provide adequate protection, particularly for low earners and other groups who have traditionally been excluded from pension saving. It goes on to propose setting a minimum pot-size before a flat fee can be charged.
Costs and charges templates
The DWP picks up on the work of the Cost Transparency Initiative (see Pensions Bulletin 2020/26) and asks for views on the relative merits and potential issues of mandating the use of CTI templates by trustees. The paper expresses concern that the current voluntary approach will not improve standardised disclosure of all costs across the whole occupational scheme sector. However, any compulsion at this stage would appear to be limited to schemes telling the Pensions Regulator whether they have obtained cost and charge information using the CTI templates. One of the questions asks if DB schemes should be required to adhere to the same standards in this area.
Consultation ends on 20 August 2020 with responses requested in an online form. The DWP aims to bring forward proposals in response to this call for evidence later this year.
This is a thought-provoking consultation that will certainly generate lots of debate in the industry. The possibility of including transaction costs within the charge cap will be met with caution by many commentators due to the likelihood of this further restricting innovative approaches to investment strategies which ought to deliver better net long-term returns for members. There is a danger of a further race to the bottom if the charge cap is either reduced further and/or transaction costs are brought into it, although one of DWP’s proposals to have a separate cap for transaction costs may find favour.
The Financial Conduct Authority is setting out proposals in a consultation paper designed to assist those responsible for the oversight of workplace personal pension schemes assess whether members are receiving “value for money” (VfM) from the product provider. This follows from its previous proposals in this area in April 2019 (see Pensions Bulletin 2019/15). The FCA is also exploring this topic with the Pensions Regulator, with the FCA intending to publish a Discussion Paper reviewing possible options for metrics to measure and benchmark VfM in pension schemes.
The consultation paper is accompanied by the publication of a thematic review examining how Independent Governance Committees (IGCs) and Governance Advisory Arrangements (GAAs) currently ensure that their members receive VfM. The review evidence suggests some IGCs have more robust arrangements than others in providing independent challenge to pension providers, and some weakness in the practices of GAAs, and this has been reflected in the consultation paper.
VfM definition and approach to assessment
Each year, providers must publish on their website their IGC’s assessment. These reports include the IGC’s opinion on the VfM of the provider’s workplace personal pensions or pathway solutions (as applicable) and how the IGC has considered the interests of scheme members or pathway investors. Since IGCs were introduced, there has been a growing demand for the FCA to be clearer about its expectations for how VfM should be assessed.
Therefore, the FCA now proposes a common definition of VfM and three elements that IGCs must take into account in an assessment – charges and transaction costs, investment performance and customer service. This approach is intended to be consistent with that of the Pensions Regulator. The proposals apply to IGCs’ assessment of investment pathways as well as DC workplace pensions in accumulation.
The FCA wants its definition to be specific to the role of the IGC whilst in alignment with the Regulator’s DC code. However, the FCA thinks it is difficult to conduct a meaningful assessment of VfM when an individual provider’s schemes are reviewed in isolation. A review of other options available on the market can provide a point of reference and may provide better value for scheme members, but this should not form the sole basis of an assessment.
The FCA expects an IGC to pick a small number of reasonably comparable schemes or investment pathways (taking into account the size and demographics of the membership) including those that could potentially offer better VfM (against the factors set out in the rules).
Charges and transaction costs
The FCA proposes that for workplace pension schemes firms require their IGCs to consider whether any of the comparable schemes offer lower administration charges and transaction costs. If any do, the IGC should bring this matter, together with an explanation and relevant evidence to the attention of the firm’s governing body and, if the IGC is not satisfied with the response of the firm's governing body, inform the relevant employer directly.
Investment performance can have a significant impact on a scheme’s value and so is an important part of the provider’s overall VfM. The FCA expects the IGC to include analysis of investment performance in its annual report and to include all default arrangements in its assessment. This includes those designed by employee benefit consultants and financial advisers for employers.
For both workplace pension schemes and pathway solutions IGCs must assess whether core financial transactions are processed promptly and accurately. If the IGC concludes that this is not the case it should be mentioned in the annual report.
The consultation also asks whether pension providers should have direct responsibility for providing VfM to customers, alongside the IGC. If so, the FCA could set a VfM regulatory expectation, based on key factors such as costs and charges, investment performance and service. Under this approach, VfM would not be made a ‘prescribed responsibility’ under the Senior Managers & Certification Regime, but the provider would need to delegate this responsibility to an individual within the firm.
Consultation closes on 24 September and the FCA intends to publish a Policy Statement by the end of 2020 with a six-month lead time before its proposed rules and guidance come into force.
This is clearly a wide-ranging and important consultation for the DC sector. We expect similar proposals to follow for trust-based DC schemes although it is not clear if this will come from the Pensions Regulator or perhaps statutory guidance from DWP.
The Pensions Regulator’s latest corporate plan limits itself to looking over just one year rather than three (see Pensions Bulletin 2019/20) and focuses, inevitably, on the support it has had to give to workplace pension schemes to enable them to deliver benefits through significant change driven by the global pandemic.
The Regulator will continue to focus on the risks to pensions as the impact of the pandemic over the medium and longer term becomes clearer, with every possibility that more Covid-19 related material will be published as events and changes in the pensions landscape unfold.
The Regulator’s other five priorities for the year are as follows:
- Protect pension savers across all scheme types through proactive and targeted regulatory interventions
- Provide clarity to and promote the high standards of trusteeship, governance and administration the Regulator expects – a number of specifics are mentioned including an intention to consult on the implementation of a single code of practice towards the end of the year
- Intervene where appropriate so that DB schemes achieve their long-term funding strategy and deliver on pension promises
- Ensure jobholders have an opportunity to save into a qualifying workplace pension through automatic enrolment
- Continue to build a Regulator capable of meeting the future challenges it faces
The plan concludes with a financial summary revealing an underspend in 2019/20 and a significant step up in both the spend forecast for 2020/21 and staff numbers.
Challenging times indeed for the Regulator, but with some success in the early months of the pandemic. The real test may be yet to come.
The sorry tale of the Norton pension schemes has been laid bare in the Pensions Ombudsman’s 96 page Determination of the complaints made against Stuart Garner, who was the sole trustee of the three schemes as well as the owner of the Norton motorcycle business.
The schemes were set up in 2011/12. Over £10m was transferred into them and was invested in preference shares in the employer. Some of the people involved in setting up these arrangements have been convicted and jailed for tax fraud. When Norton failed the investments became worthless. The problems for the members were made worse because over the years requests to transfer out of the Norton schemes were disregarded.
The Determination reads like a manual of how not to run a pension scheme. The Ombudsman upheld the complaints. In summary.
- The trustee acted dishonestly and in breach of his duties of no conflict, not to profit and to act with prudence
- The preference share investments were made in breach of the trustee’s statutory, investment and trust law duties
- The trustee breached his statutory duties to have adequate controls to manage conflicts of interest, to ensure effective administration of the schemes, and to acquire the knowledge and experience required of a trustee
- The trustee failed to manage conflicts of interest, have regard to the schemes’ statements of investment principles, and ensure that the investments were and remained appropriate
The Ombudsman also found that the trustee was not exonerated from personal liability because of the effect of Section 33 of the Pensions Act 1995 and accordingly directed that the trustee pay the cost of purchasing the preference shares, plus interest. It has been widely reported that this amounts to £14m. He was also directed to pay each member £6,000 for the exceptional maladministration.
It is hard to look at cases like this without a sense of despair. How was such obvious malpractice allowed to mature in plain sight over years? One of the individuals involved in persuading people to transfer has since been convicted of fraud while two others were jailed for a separate pension fraud, some of the proceeds of which were allegedly loaned to Mr Garner to enable him to buy Norton in the first place!
The Pension Schemes Bill had its Report Stage on 30 June where (unsurprisingly) all the Government amendments (see Pensions Bulletin 2020/26) were accepted. However, no less than four Opposition-sponsored amendments were also carried.
These successful amendments arose as follows:
- Concern about the possibility that collective money purchase schemes may not treat all members fairly, resulting in an amendment being carried requiring trustees to report on the fairness to members of the operation of the scheme
- Worries that pension dashboards could be utilised by those providing such a service to entice individuals to transfer out their benefits, potentially to a scam. This resulted in an amendment being carried requiring that any pensions dashboard service does not include a provision for financial transaction activities
- A desire that the pensions dashboard service being constructed by MaPS has a clear run before other providers can launch their service, resulting in an amendment being carried ensuring that the MaPS service operates for a year and the Government reports to Parliament on its operation and effectiveness before commercial dashboards can open shop
- A clearly expressed desire across the House for the Pensions Regulator to treat open defined benefit schemes differently to closed schemes in relation to funding and investment. An amendment was carried setting out a number of principles that any regulation of such schemes should follow, including that their closure is not accelerated
Amongst the other matters discussed were the following:
- A clear Government intention to enable collective money purchase scheme designs to extend to non-employer established schemes and other non-connected multi-employer schemes with potentially different authorisation and supervisory regimes to that envisaged for the proposed Royal Mail (single employer) scheme
- Clear worries across the House about the wide scope of the new moral hazard powers being granted to the Pensions Regulator. Earl Howe, speaking for the Government, acknowledged these concerns and offered some comfort that they would be used proportionately, and should not frustrate legitimate business activities where they are conducted in good faith. Moreover, he stated that the Pensions Regulator will consult on guidance explaining its approach to prosecuting these new offences and such guidance will be finalised before the provisions are commenced
The Bill now moves to Third Reading and should then cross Parliament to the House of Commons, but it is not clear whether any progress will be made here before Parliament breaks for the summer recess.
All the Opposition-sponsored amendments may well be reversed later in the Bill’s journey through Parliament. Perhaps the most troubling of these amendments for the Government’s legislative programme is the last where there were clearly expressed views that open DB schemes should be regulated differently to those that are closed. On this one maybe the Government will need to pass the baton to Brighton to ask them to think again?
The Corporate Insolvency and Governance Bill received Royal Assent on 25 June shortly after returning to the House of Commons. All of the amendments made at the House of Lords’ Report stage (see Pensions Bulletin 2020/26) were accepted and no further ones were added by the Commons.
Announcing the passing of this Bill the Government notes that some of the measures in the Act came into effect on 26 June whilst other measures came into effect on 27 June when certain secondary legislation came into force. This secondary legislation includes regulations that temporarily extend filing deadlines which must be met by various business entities and regulations that provide that the new moratorium does not apply to companies which are private registered providers of social housing.
Noting the passing of this Act, the Pensions Regulator states that the monitor of such moratoriums must notify the Regulator if a company entering a moratorium is or has been a DB scheme sponsor. The monitor must also notify the Regulator when a moratorium is extended and when it is brought to an end. The Regulator also says that where the Act requires, the monitor should also notify scheme trustees and the PPF.
Now that the Bill has become law and is largely in force it is important for DB trustees and their advisers to get to grips with the new insolvency provisions as they could impact Covid-19-related decisions that trustees are asked to take now on matters such as contribution deferral. These factsheets, produced by the Government when the Bill was going through Parliament, might be a useful starting point.
Also, the prospect of deficit repair contributions coming to a complete halt during any moratorium might challenge a scheme’s ability to continue to pay benefits without disinvesting – with a further risk that the liquidity of the scheme’s assets may turn out to be insufficient in such a situation. Separately, the Pensions Regulator and the PPF may have to come to terms with having less leverage in business restructuring situations than envisaged by the Pensions Act 2004. And it will be some time yet before the Regulator receives its expanded “moral hazard” powers via the Pension Schemes Bill.
Over a year after first being introduced to Parliament (see Pensions Bulletin 2019/24), the Divorce, Dissolution and Separation Bill has completed its Parliamentary stages and on 25 June received Royal Assent.
The Bill, introduced when Theresa May was Prime Minister, was lost on two occasions last year, but each time was subsequently resurrected. The passing of the Bill marks an important chapter in the development of divorce law in England & Wales, making it easier for couples to bring the legal aspect of their relationship to an end once their relationship has irretrievably broken down.
Announcing Royal Assent the Government has stated that the changes will not come into effect until later next year to allow careful implementation of the necessary changes to court, online and paper processes.
Although the Act contains some consequential changes to the divorce law, including the terminology employed and in relation to pension sharing and pension compensation sharing orders, it is not yet clear whether any processes involving pensions will be altered, such as the provision of information to the Court and the implementation of pension sharing orders.
The Scottish Parliament has passed the Civil Partnership (Scotland) Bill that will allow opposite-sex couples in Scotland to form a civil partnership. This follows regulations laid before the UK Parliament allowing such partnerships in England & Wales from 2 December 2019 and similar regulations effective in Northern Ireland from 13 January 2020.
Pension schemes with Scottish members should ensure that their rules for the provision of survivors’ pension cater for this potential new category of beneficiary.
HMRC’s latest pension schemes newsletter reports on a number of matters, starting with more temporary changes to registered pension scheme processes because of Covid-19.
Of particular note is that if the filing and payment deadlines for the accounting for tax (AFT) returns for the quarters ending 30 June 2020 and 30 September 2020 are missed HMRC promises to cancel any penalties and interest if contacted. This follows on from the same promise made in respect of the quarter ending 31 March 2020.
In addition, most of the temporary changes to pension processes HMRC has previously communicated by way of its newsletters will be extended until the end of October.
The newsletter concludes with some further news on the Managing Pension Schemes Service and the Real Time Information (RTI) Full Payment Submission (FPS).
Since last week’s Pensions Bulletin, announcements and posts influenced by the Covid-19 health emergency in the world of pensions include the following:
- On 24 June the Institute and Faculty of Actuaries launched the first in series of papers on saving for retirement, with this one exploring the risks to younger DC savers in staying on track particularly in the context of the Covid-19 pandemic. The paper introduces a simple rule of thumb to assess whether the individual has sufficient DC savings to be on track for the retirement living standard they are targeting
- On 25 June explanatory and other notes were published in respect of a number of Government amendments for consideration at Report Stage of the Finance Bill. Amongst these is a new clause 20 to ensure that those who have retired but return to employment to support the coronavirus response do not suffer adverse tax impacts by losing their ability to receive pension benefits at an age below the current normal minimum pension age. The changes have effect from 1 March 2020
- On 26 June, John Glen MP, the Economic Secretary to the Treasury, was unable to give a date for the publication of the call for evidence on the pensions “net pay anomaly”. In the March Budget publication was promised “shortly” (see Pensions Bulletin 2020/11), but Mr Glen now states that in the light of the pandemic the Government will provide more information on the timeframe for publication of this call for evidence “in due course”
- On 26 June HM Treasury issued its latest Direction in relation to the Coronavirus Job Retention Scheme. The Direction sets out the provisions announced by the Chancellor on 29 May (see Pensions Bulletin 2020/23) under which the Scheme will steadily be phased out
Two sets of regulations removing a sunset clause which would have taken seafarers and offshore workers out of scope of the auto-enrolment legislation on 1 July 2020 have been approved by Parliament in the nick of time. The Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2020 (SI 2020/630) and the Automatic Enrolment (Offshore Employment) (Amendment) Order 2020 (SI 2020/634) came into force on 30 June 2020.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.