• Regulator’s powers to come – no retrospection promise made
• Dormant Assets Scheme set to include some DC pension funds
• Select Committee quizzes agency bosses on pension scams – and finds a very worrying situation
• Actuaries explore which end-state DB scheme issues trustees should target
• Covenant practitioners examine sponsor longevity
• Pensions Regulator suggests transfer in stages solution to the gated DC funds issue
• Matt Rodda assumes the shadow pensions brief

Regulator’s powers to come – no retrospection promise made

On 19 January the House of Lords is due to consider amendments made in the Commons to the Pension Schemes Bill (see Pensions Bulletin 2020/51).  Ahead of ‘ping-pong’ the pensions minister Guy Opperman has said, in a written answer to a question posed by Labour MP Angela Eagle, that “none of the provisions in Part 3 of the Bill will be retrospective”.  Part 3 covers new powers for the Regulator in a number of areas.

This commitment is important because there had been concern, ever since the Bill was published, that the two new and widely drawn tests enabling the Pensions Regulator to issue Contribution Notices to corporate targets and individuals could have been operated in a retrospective manner as soon as this part of the Bill was activated.

This is because the new powers slot into the existing contribution notice law and as a result enable the Regulator to look at actions taken up to six years before it gives a warning notice of its intention to issue the contribution notice.  Without this ministerial assurance there was a risk that this part of the Bill could enable the Regulator to initially look to events that happened in say late 2015 – years before the Bill was introduced to Parliament and well before the Government set out its proposals in this area.

Part 3 of the Bill also covers the ability of the Regulator to bring criminal proceedings and an extension to its information gathering powers.  The promised consultation on the Regulator guidance on the use of the new criminal sanction powers is also mentioned as is the need to deliver implementing regulations across Part 3 – and there is an aim that all these new powers will be available to the Regulator by autumn 2021.

Comment

The ministerial statement is very welcome news and is consistent with how the current law on Contribution Notices was introduced.  Corporate decision-makers should not be in a position of facing new penalties for actions taken in the past.  However, what is disappointing is that there is no undertaking that the Regulator will provide guidance on the new Contribution Notice tests.  But it will surely need to, in order to explain when certain ‘materiality’ provisions of the legislation are likely to operate.

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Dormant Assets Scheme set to include some DC pension funds

Responding to a consultation launched last February (see Pensions Bulletin 2020/08), the Government has announced that further dormant assets across the insurance and pensions, investment, wealth management, and securities sectors will be included in the scope of the Dormant Assets Scheme.  The Government states that this could mean more than £800 million will be made available to support the UK as it recovers from the coronavirus pandemic.  Funding raised through the expansion of the Scheme will enable continued support of good causes, social investments and environmental initiatives.

As far as pensions goes, the consultation response states that the Government “will reconsider whether contract-based defined contribution pensions should be included in an expanded Scheme”.  This is a change from the Government’s view when the consultation was launched.  This has apparently been driven by the responses received by the Government with many asserting that the Scheme would interact positively with the Pensions Dashboard project – both of which have the primary aim of reuniting owners with their assets.

The consultation response goes on to list those pension products that are now potentially in scope.  They include proceeds of annuities with a guaranteed payment term, income drawdown and deferred annuities.  The products will need to have reached a point whereby they ‘crystallise to cash’ and to meet a dormancy definition which is being worked on, but with a preference for the provider to have received a death notification.  The consultation response continues, but it is not clear whether the Government has in mind that any other dormant contract-based DC pensions should be included and if so how.

Based on industry estimates the Government believes that up to £2.1bn of dormant insurance and pensions sector assets could be included in the Scheme, of which £1.17bn could be reunited to rightful owners and leading to £575m being released to social and environmental initiatives.

The timetable for these proposals is not clear with the Government simply stating that it intends to legislate for the Scheme expansion “when parliamentary time allows”.

Comment

As is so often the case, more details are needed since the consultation response is somewhat vague as to what pension assets will actually be in scope.  But the Government is stressing that rigorous safeguards will be in place for pension assets within the Scheme.  This should lead to a win-win situation, where either lost pension funds are reunited with their owners or unclaimed assets are used to help society.

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Select Committee quizzes agency bosses on pension scams – and finds a very worrying situation

On 6 January, the Work and Pensions Committee, as part of its inquiry into protecting pension savers, held a formal meeting with representatives of the agencies involved in combatting pension fraud.  Nicola Parish, Executive Director of Frontline Regulation at the Pensions Regulator, Commander Clinton Blackburn, National Coordinator for Economic Crime at City of London Police, Mark Steward, Executive Director of Enforcement and Market Oversight at the Financial Conduct Authority and Graeme Biggar, Director General at the National Economic Crime Centre were quizzed by the Committee.

And a revealing session it was:

• Still no one knows the true scale of the problem.  Nicola Parish cited reports from Action Fraud indicating that £30m has been scammed from individuals over the last three years.  Everyone seems to agree that this is now an underestimate – Mark Steward cited a single case the FCA are investigating involving £90m.  And the suggestion from the Pension Scams Industry Group that billions were being lost was described as being plausible
• Pension fraud has evolved since the days of “liberation” so that it is now a subset of investment fraud.  Commander Blackburn said that 637 pension frauds were reported to Action Fraud in 2020 and overall nearly 19,000 investment frauds.  For further context last year there were a total of 822,000 reported frauds of all types with a loss of about £2.3bn
• There is a huge problem with resources in policing pension fraud because there is in policing fraud in general.  35% of reported crime (now the largest single category) is fraud.  Less than 1% of police resources are dedicated to looking at it.  Pension fraud has to compete with courier fraud, romance fraud and all the other types of fraud for very scarce police resources
• Social media currently occupies an unregulated space for scammers to exploit.  This makes life a lot easier for the scammers who have anonymity in the process, automated straight-through processing of the advert so that it can be industrialised with multiple ads offering different things daily.  To add insult to injury social media companies get paid twice for fraud.  First, by the fraudsters who advertise their scams and secondly by the FCA which pays for warnings to be advertised.  There seems to be some pressure developing for the Government to include financial harm in the Online Harms Bill
• In terms of what can be done there does seem to be a significant increase in police activity to take down scam websites and after its well-reported difficulties Action Fraud is hopefully more effective
• On the regulatory front Nicola Parish’s remarks indicated that the pensions industry should take more responsibility for reporting scams and that schemes should sign up to the Pension Scams Industry Group Code.  After the Pension Schemes Bill goes through the statutory right to transfer will be limited, so people will only be able to transfer into an authorised master trust, an FCA authorised scheme or an occupational pension scheme with a demonstrable employment link

Comment

Whilst the cold-calling ban was welcome when eventually it was legislated, inevitably scamming methods have evolved – and as such the issue of pension scams is not a problem that is not going to go away any time soon.

Pension trustees should remain alert for fraud red flags when transfer requests are received.  The limitation of the statutory right, when it finally arrives, should be welcome but it is vital that the Government gets the regulations right.

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Actuaries explore which end-state DB scheme issues trustees should target

The Institute and Faculty of Actuaries has published a paper that sets out the issues that trustees, employers and their advisers can consider when addressing what the desired long-term outcome should be when running off a closed DB scheme – whether it is ‘low dependency’ on the employer, buyout to an insurer or transfer to a superfund.  It follows on from earlier work in this area undertaken by the Institute and Faculty.

The paper, which weighs in at over 70 sides, is designed to assist actuaries advising on such end-state options and was put together by a working party that included practitioners from outside the actuarial profession.

Amongst its conclusions are that the role of the actuary should change from technical specialist to one of a strategic advisor with the ability to facilitate multi-disciplinary thinking and that when deciding between which end-state option to pursue the focus should be on what each means for member outcomes.

Also considered are the specific factors impacting stressed schemes, highlighting the importance to trustees when considering a fallback plan should their employer or scheme become stressed.

Comment

Although two years in the making this paper is timely as pensions actuaries are increasingly being called upon to advise on these end-state options – something that will only accelerate once the Regulator firms up on its DB funding code.

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Covenant practitioners examine sponsor longevity

The importance of understanding employer longevity as part of the evaluation of the employer covenant for DB schemes closed to new members or closed to the future accrual of benefits is the topic being examined in the latest paper published by the Employer Covenant Practitioners Association.

After the necessary introductions and scene setting this interesting and accessible paper considers how employer longevity can be evaluated and then monitored dynamically in order to assist DB trustees with their Integrated Risk Management approach to scheme funding.

The paper suggests that evaluation may draw on multiple techniques from the formulaic to the strategic as using one particular approach in isolation is unlikely to provide a robust conclusion.  On dynamic monitoring of corporate longevity (and other risks) the paper promotes the potential value of such an approach to trustees given that changes can occur rapidly and have permanent effects on the employer’s ability to meet its obligations to the scheme.  It suggests that such monitoring should be part of a package of measures agreed with the employer with pre-agreed triggers where possible to protect the pension scheme.

Comment

A key theme coming through in the paper is that evaluation and monitoring cannot be undertaken formulaically and are dependent on the expertise, tools and processes that can be brought to bear by covenant advisers.  We agree.

This is another timely paper, not only given the economic circumstances we are in, but because covenant is likely to feature strongly in the Regulator’s approach to scheme funding when it consults on its final proposals later this year.

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Pensions Regulator suggests transfer in stages solution to the gated DC funds issue

The Pensions Regulator has updated its DC scheme management and investment Covid 19 guidance for trustees to cover transfer requests where all or part of the member’s DC fund is gated.  Gating, mainly of property funds, has been a continuing issue during and indeed before the pandemic struck.

The inability of trustees to disinvest a member’s DC funds ahead of transfer is not envisaged by the cash equivalent legislation and so it is not surprising to see the Regulator state that it doesn’t believe it is able to agree to requests to extend the six month statutory timeframe for payment of transfer values in this situation.

The Regulator suggests that the transferring scheme should see whether a partial transfer would be acceptable to the receiving scheme, with the gated funds to follow on as soon as the fund re-opens.  However, the Regulator warns that any significant failure to pay transfer values within the statutory period should be reported, outlining the reasons why and the steps being taken towards compliance.

Comment

Although the Regulator warns of fines if all reasonable steps have not been taken to pay the transfer value within six months of the member’s application, being gated is surely a reasonable excuse – at least in relation to not being able to disinvest the funds affected?

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Matt Rodda takes on the shadow pensions brief

Jack Dromey MP, the shadow pensions minister since January 2018, has moved to the shadow Cabinet Office team under Rachel Reeves as part of a New Year mini reshuffle of Labour’s shadow ministerial team.  In his place, Matt Rodda assumes the shadow pensions brief.

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