17 September 2020
- Government pushes on with DC consolidation and investment plans
- “Back to 60” appeal fails
- Pensions Regulator Covid-19 easements ending
- Disturbing MaPS research about over 50s retirement planning
- PPF creditor rights amending regulations corrected
The Government has responded to the February 2019 consultation on investment innovation and future consolidation (see Pensions Bulletin 2019/05). The response also introduces further proposals to improve DC scheme governance, promote the diversification of investment portfolios and signal the Government’s commitment to transparent disclosure to scheme members.
Guy Opperman’s foreword sets the tone stating that “… there remain large numbers of smaller DC schemes many of which are poorly governed, have on average higher charges and do not have the scale to bring the benefits of investing across a broad range of asset classes ... I am therefore bringing forward measures that will ensure that we tackle persistent underperformance and poor governance by accelerating the pace with which the market is consolidating”.
There may also be a new buzzword acronym to become familiar with, namely “TSEI” meaning “technological, social and environmental infrastructure”, the Government’s “aspirational” focus for future DC scheme investments.
The consultation response is long and detailed. The following is a summary of the proposals. All are intended to take effect from 5 October 2021.
We note at this point that most of these proposals will affect “relevant schemes”. Broadly speaking, these are occupational pension schemes which have non-AVC DC assets. Therefore, they are likely to apply to schemes which are mainly DB but also have some DC benefit provision.
New reporting requirements to drive consolidation
The Government believes that consolidation is the most effective way to ensure that all DC savers receive the best value from well-governed schemes that can achieve economies of scale. The Government’s proposals, taking account of the feedback it has received, will:
- Require all relevant schemes to publicly report on the net return on investments of default and member selected funds in the annual Chair’s Statement
- Require relevant schemes with assets below £100 million (and that have been operating for at least three years) to undertake an updated value for members assessment, which additionally includes a requirement to compare the scheme to three larger arrangements (including one that would be expected to accept their scheme on wind-up). Note that the threshold is a ten-fold increase of the £10m in the February 2019 consultation, so many more schemes will be affected. As currently, the outcome of the review is to be reported in the annual Chair’s Statement. It is also to be reported to the Pensions Regulator in the annual scheme return
- Require schemes with assets below £100 million to report to the Pensions Regulator what action they plan to take or are already taking in the event that the scheme does not represent good value for members as part of the annual Chair’s Statement
- Require all relevant schemes to report to the Regulator the total amount of assets held in the scheme in their annual scheme return
Diversification, performance fees and the default fund charge cap
The Government remains keen to find solutions to enable DC schemes to make investments more easily into illiquid assets. The Government’s proposals are to:
- Enable schemes to pay performance fees by allowing schemes to prorate them (which can significantly vary throughout a year) when assessing compliance with the charge cap or to effectively ignore the performance fee for scheme members who were only in the scheme for part of the charges year
- Confirm that the costs of holding ‘physical assets’, such as real estate or infrastructure, are not included within the charge cap. This is already set out in guidance, but the Government intends to finally put the exclusion on a statutory footing
- Update charge cap guidance to clarify treatment of underlying costs in investment trusts
Additionally, the Government is not now planning to continue with the requirement for larger schemes to state their policy in relation to illiquid investments in their Statement of Investment Principles and the percentage holdings via the implementation statement.
The Government’s proposals will introduce:
- An amendment to extend the requirement to produce a default Statement of Investment Principles to ‘with profits’ default arrangements
- An amendment to extend the costs disclosure requirements to funds which are no longer available for members to choose, ie those that are closed to future contributions
- Amendments to exclude wholly insured schemes from some requirements of the Statement of Investment Principles to do with the trustees’ policies regarding asset managers. This is to correct an oversight when new requirements were introduced last year; and
- Amendments to statutory guidance to provide additional clarity on how costs and charges information should be set out in the Chair’s Statement. This is intended to make it easier for schemes to comply with the requirements
An extensive draft set of regulations which will implement these proposals via amendments to a range of the core pensions regulations is annexed to the consultation.
Consultation runs until 30 October 2020.
This is an important consultation, the nuances of which will take time to work through. Overall, there is much to welcome in it but there are also challenges to raise. Guy Opperman has made it clear that he believes consolidation is fundamental to achieving better outcomes for members with DC benefits and therefore he is unlikely to be persuaded by arguments that these proposals are too onerous and/or expensive for small schemes – the response will most likely be “well, in that case, you should consolidate your scheme!”.
The Court of Appeal has dismissed the appeal against last year’s Divisional Court judgment which denied the application for judicial review of increases to State Pension Age (see Pensions Bulletin 2019/38).
There were four grounds of appeal:
- The changes are unlawful age discrimination contrary to Article 14 of the European Convention on Human Rights
- The changes are indirect sex discrimination, or a combination of age and sex discrimination also contrary to EU law and Article 14
- A duty arose on the government to notify the affected cohort of women about the changes which was not fulfilled
- There had been undue delay in bringing a challenge to the allegedly unlawful legislation
Whilst once again expressing sympathy with the plight of the women bringing the appeal and many others like them, the Court unanimously rejected all of the arguments put forward in support of these claims.
It is unclear whether the case will be appealed to the Supreme Court.
If the legal avenues are all closed off then attention will turn to the Parliamentary Ombudsman’s investigation as the only other avenue for recourse for the affected women.
Exactly three months since the previous update, the Pensions Regulator announced yesterday that now is the right time to return to the pre-Covid reporting and enforcement requirements.
Most reporting easements came to an end at the beginning of July (see Pensions Bulletin 2020/25); the Regulator has now confirmed that the remaining reporting requirements will resume as normal:
- Late payment of DC contributions - the 150-day backstop to reporting of late employer contributions will revert to 90 days. Contributions that are outstanding for over 90 days must be reported to the Regulator from 1 April 2021, and schemes are asked to do so from 1 January 2021
- Chair’s Statements and failure to prepare audited accounts – the Regulator will review Chair’s Statements received from 1 October 2020. The Regulator is required to impose fines if it has been made aware of non-compliant statements; as such it will not publish these details in the penalties section of the next Compliance and Enforcement bulletin. The Regulator will resume its normal enforcement approach to late preparation of audited accounts from 1 October
- Investment governance – From 1 October the Regulator will resume normal regulatory action if a review of a statement of investment principles (or statement in relation to any default arrangement) is delayed
We welcome the Regulator’s extension of three further months on the reporting of late payment of contributions, making reporting compulsory from April 2021. If mandatory reporting was resumed in January trustees would have been required to report any late contributions due from the end of this month. This would have been unfortunate timing as the Government’s Coronavirus Job Retention Scheme also comes to an end in October, bringing with it further cashflow and staffing challenges.
The Money & Pensions Service (MaPS) has reported some research that it has commissioned among people aged 50-70 with some pension savings besides the state pension. The results make disturbing reading:
- 37% of over 50s are leaving their retirement financial planning until their final two years before retirement or won’t prepare at all
- 35% of retirees said they left financial planning to the last two years or didn’t plan at all
- 69% of the unretired have done either no or very little planning around retirement finance
- 27% (equating to more than 3 million over 50s if the sample is representative) say that they will only start financial planning with two years or less to go before retirement
- 10% won’t plan their retirement finances at all
- Just 7% feel fully prepared
The research goes on to reveal that the top two tips that recent retirees would give the unretired in urging them to be better prepared for retirement would be to save more towards retirement and start planning sooner.
These results highlight a big worry. Namely that a generation (or sizeable proportion thereof) of impoverished pensioners, especially some of that 10% who may have given up on any sort of prosperity in retirement completely, is being created, with no DB pension; no or trivial DC pension; and potentially many renting into old age. It is hard to see an answer for this group.
The regulations extending the Pension Protection Fund’s creditor rights in relation to the moratorium and restructuring plans introduced by the Corporate Insolvency and Governance Act to cover co-operative societies and community benefit societies have been revoked and recast.
The original amending regulations laid in July (see Pensions Bulletin 2020/31) were found to be defective, so they are being replaced by The Pension Protection Fund (Moratorium and Arrangements and Reconstructions for Companies in Financial Difficulty) (Amendment and Revocation) Regulations 2020. The intention appears to be the same as for the previous regulations.
We noted that the previous regulations were an illustration of the catch-up necessary when an Act is rushed through Parliament, and this follow-up is further evidence of that.
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.