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Pensions Bulletin 2021/23

Our viewpoint

Pensions dashboard – staging timetable proposed

The Pensions Dashboard Programme has published a call for input on its proposals concerning the order and timing under which pension providers will be required to connect into the pensions dashboard ecosystem and make pension information available to savers through the dashboard.  This call for input is accompanied by a blog.

This requirement is to be “staged” in three waves, with the largest schemes going first (1,000+ memberships), then the medium schemes (100 to 999 memberships) and finally the small and micro schemes (99 or less memberships).  “Memberships” refers to the total number of the pension provider’s members (active, deferred and pensioner).

The first wave will start in April 2023 and run for up to two years.  In this wave, three distinct cohorts are suggested:

  • Master trusts and FCA-regulated providers of personal pensions, starting April 2023
  • DC schemes used for automatic enrolment, during 2023
  • All remaining occupational schemes (in order of size) with the very largest DB schemes to begin staging from autumn 2023. This will include public sector schemes although the challenge this will represent whilst they are also implementing the McCloud remedy is acknowledged

Wave two will not commence until the bulk of large schemes have successfully connected (this would be unlikely to be before 2024).  Timing for the third wave will be determined in line with the integrated service provider (ISP) market emerging.

The PDP believes that this approach will deliver 99% coverage of pensions in scope for dashboards within two years from the first staging date.

The PDP intends that when a scheme or provider is staged it will also be able to return value information about pension entitlements.  However, the consultation asks whether what can be found is also phased, with simply the existence of a pension being returned first (‘find-only’ service) and then value information about the pension (‘find-and-view’ service) later.

The PDP also proposes that early staging should be encouraged, but subject to the PDP’s control.

Insofar as State pension information is concerned the PDP expects this to be available alongside the first staging cohort (ie of the first wave).

Consultation closes on 9 July 2021.  The staging will then be mandated for occupational pension schemes through DWP regulations, expected to be consulted on by the end of 2021 and to be laid before Parliament in summer 2022, and for personal and stakeholder pension schemes through FCA rules, which will have regard to the DWP regulations, but on which no timescale is available.

Comment

The staging approach with its initial focus on the very large DC offerings makes sense, but it is unlikely that the PDP can turn on its dashboard to the public on the strength of these and other mega schemes alone.  Getting the largest of the DB schemes on board will also be vital, suggesting that the critical point is only likely to be reached towards the end of 2025 – assuming all goes well.  The dashboard is still coming, but it now seems that we may be some four years away from it being switched on.

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Pensions Regulator expands Contribution Notice Code of Practice

The Pensions Regulator has launched a consultation on changes to Code of Practice 12 in order to accommodate the two new ‘snapshot’ contribution notice tests being introduced by the Pension Schemes Act 2021 – the employer insolvency test and the employer resources test.

The proposed revised Code explains what these new tests are and sets out some circumstances in which the Regulator may expect to issue a Contribution Notice as a result of one or more of these tests being met (including the pre-existing material detriment test).  These are as follows:

  • Sponsor support is removed, substantially reduced or becomes nominal (any of the tests)
  • Weakening of the scheme’s creditor position (material detriment and/or employer insolvency)
  • Some instances of paying a dividend or a return of capital by the sponsoring employer (any of the tests)
  • Payments favouring other creditors of the employer over the scheme where no such sums are then due to those creditors (any of the tests)

The code-related guidance has also been re-worked and expanded.  It now sets out how these three tests might be considered in practice with illustrative examples given firstly of three situations where none of the tests might be passed and then nine situations where at least one of them might be passed.  The first five of the latter relate to the sponsor support issue, the next two illustrate creditor weakening and the last two are the  payment of unusual dividends and unscheduled repayment of an intercompany loan.

The Regulator says that these new contribution-notice powers “are expected to take effect from this autumn and, as already confirmed by the Government, will not be applicable to acts taking place before then”.

Consultation closes on 7 July 2021.  It is not clear when the updated Code will be laid before Parliament, but hopefully this will happen before the new provisions in the Act are activated.

Comment

This package is more useful than the mini-Code it replaces which had never been updated and so unsurprisingly had become very out of date.  The proposals also speak to the fact that the three tests could be employed in similar circumstances, making it more likely that the Regulator will give itself a ‘pass’ than at present.

The nine situations illustrated, where one or more of the tests might be passed, are all cases where the scheme has been put at risk of detriment as a result of corporate activity without any or adequate mitigation provided.  However, it is not possible to judge which of these situations would be given a pass under the new but fail under the current legislation – and so be able to gauge the impact of the new law.  The proposed Code and guidance also gives no insight into how the Regulator will judge that the ‘material reductions’ thresholds have been met on either of the new tests.

Clearly, whilst meeting the requirement to provide an updated Code and related guidance, the Regulator wishes to keep its cards close to its chest.  But it has signalled that the new tests should not significantly shift its current approach.  It therefore seems that normal corporate activity, resulting in minor and possibly temporary potential detriment to the scheme, should not be drawn into scope.

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Scams – Ombudsman decides that schemes had only a month to operate new transfer requirements in 2013

On 14 February 2013 the Pensions Regulator issued its “Scorpion” guidance (see Pensions Bulletin 2013/07).  The day after, Aegon, a personal pension scheme provider, confirmed that it had transferred £21,461.92 to a one-person small self-administered scheme run by Greenchurch Capital Limited which had been set up for Mr R.

In 2017 the Pensions Ombudsman received a complaint about the transfer to the effect that Aegon did not carry out appropriate due diligence.  On 11 March 2021 the Pensions Ombudsman made his Determination.  The complaint was not upheld.  This was for a number of reasons but one of these concerned the timing of the transfer and its proximity to the issue of the Scorpion guidance which “marked a point of greater vigilance and checks to be carried out by pension providers and … that … required a significant change in procedure and literature”.  Furthermore “…new regulatory obligations were brought in to protect against a known and pressing problem and no lead-in time or introduction date was given by the Regulator so urgency was clearly required and expected.  I consider that an appropriate timeframe of one month, rather than three months is generally appropriate …” [our emphasis].

Despite there being a complication about the timing of the transfer (there was an error involving banking arrangements meaning that the transfer had to be re-done), in the circumstances of this case the Ombudsman held that Aegon was not required to carry out the enhanced due diligence Scorpion brought in.

Comment

The significance of this is twofold.  First historical.  Ombudsman claims regarding transfers paid to pension liberation schemes just after 14 February 2013 look more likely to succeed as the Ombudsman is now of the view that providers should have been applying the new requirements within a month.

Secondly, we have significant new requirements coming in aimed at stopping pension scams (see Pensions Bulletin 2021/21).  The DWP aims to introduce the regulations in the autumn, but it is not yet clear how much, if any, lead time there will be and it would probably be unwise to expect any, even the month suggested in this case.  Trustees and administrators should plan to be operating the new requirements from day 1.

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Should there be a defined upper limit on unregulated investments?

Regulations require that the assets of an occupational pension scheme “… must consist predominantly of investments admitted to trading on regulated markets”.  When the Pensions Regulator consulted on its new code of practice in March (see Pensions Bulletin 2021/12) it included an expectation that, unless there are exceptional circumstances, no more than a fifth of scheme assets should be held in assets not traded on regulated markets.

This generated some concern, particularly regarding schemes which quite legitimately invest in unregulated assets.  David Fairs, the Pensions Regulator’s Executive Director for Regulatory Policy has now blogged about liquidity risk and addressed these concerns.  He states that the Regulator believes that it would be helpful to set out an appropriate maximum allocation but that it does not want this expectation to limit the ability of trustees to invest in assets which may be illiquid and which may offer the opportunity of improved scheme outcomes, once they have taken appropriate advice and understand their scheme’s liquidity risks.

The Regulator is considering what adjustments, particularly around the level of the limit, might be appropriate.

Comment

We think the Regulator is right to be focussed on ensuring that pension scheme liquidity is appropriately managed, and support the ideas raised to help with this.

However, we think the introduction of a specific limit on unregulated investments is a step too far.  Trustees are already required to consider many factors and take qualified advice prior to making any investment.  If that process concludes that a 25% allocation to unregulated investments (supported by robust liquidity management) is in the best interests of their members, why should an arbitrary limit set for all pension schemes stop them?  In particular we note that many assets under the "unregulated" banner (eg property, infrastructure and private credit) are very useful to help cashflow planning for a maturing pension scheme.

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Pension Schemes Act 2021 starts to come into force

When the Pension Schemes Act completed its passage through Parliament in February none of it came into force.  This is now beginning to change.

On 28 May 2021 the first Commencement Order was laid before Parliament bringing into force, on 31 May 2021 the following:

  • The requirement for the Pensions Regulator to issue a Code of Practice relating to the new “employer insolvency test” and “employer resources test” – on which the Regulator has launched a consultation (see article above)
  • The requirement for regulations to set out new provisions in relation to climate change risk – on which the DWP’s consultation closed on 20 March 2021 (see Pensions Bulletin 2021/04)
  • Modification of PPF compensation provisions in order to validate the PPF practice of adding fixed pensions granted by the scheme on transfer-in to those that have accrued whilst the member has been in pensionable service when testing against the PPF compensation cap. This brings to an end the challenge presented by the Beaton case, where the High Court found in October 2017 that such fixed pensions should be tested against the PPF compensation cap separately to other scheme benefits, as they were not attributable to pensionable service within the scheme

In addition, the Order brings into force the following, but only for the purpose of making regulations:

  • The meaning of the “employer resources test” – on which DWP’s consultation closed on 29 April 2021 (see Pensions Bulletin 2021/13)
  • The extension to the notifiable events law – on which we have yet to see proposed regulations
  • The notification required to be given by the Pensions Regulator when requesting attendance for an interview – on which DWP’s consultation closed on 29 April 2021 (see Pensions Bulletin 2021/13)
  • The provisions covering fixed penalty notices and escalating penalty notices – on which DWP’s consultation closed on 29 April 2021 (see Pensions Bulletin 2021/13)
  • The provisions that will restrict the statutory right to a cash equivalent – on which DWP launched a consultation on 14 May 2021 (see Pensions Bulletin 2021/21)

Comment

Although much of this Commencement Order is about DWP clearing the way for it to lay regulations, we now have good sight of what parts of the Act are going to be brought into force this year.  Unsurprisingly, the resolution of the Beaton challenge has come first.  Will the climate change regulations be next?

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Annual funding statement for DB schemes issued

On 26 May 2021 the Pensions Regulator issued its statement designed to assist DB schemes carrying out valuations at the current time.  This important development is covered in our News Alert that was published the following day.

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HMRC streamlines pension statistics reporting

Following a consultation on the reduction and consolidation of HMRC statistics publications carried out earlier this year, HMRC has confirmed that some pensions tax statistics will now be issued less frequently than before and some will be discontinued.

The quarterly reporting of flexible payments from pensions will now become annual and be issued in the same release of the current annual reporting of pension contributions by contribution type and personal and stakeholder pension statistics.

The separate publication of QROPS statistics will end, with the annual reporting appearing instead in HMRC’s pension schemes newsletters.

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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.