With the election done and dusted and a strong Conservative majority now in place in time for Christmas, what does the New Year hold for pensions?
- Pension Schemes Bill: Round two
The Government has confirmed that it intends to reintroduce the Pension Schemes Bill before Parliament. We would expect it to do this sooner rather than later in the New Year.
When the Bill was initially published, it put much of the pensions industry on high alert, with directors, banks, investors and other financial institutions potentially being in scope of the proposed new criminal offences, civil fines and regulatory powers, which were significantly wider than expected.
The new powers include new criminal and civil sanctions which could be applied to a range of stakeholders who take action which, broadly speaking, is deemed to be materially detrimental to a defined benefit (DB) pension scheme where they do not have a reasonable excuse for their actions. The criminal sanctions carry a maximum sentence of seven years imprisonment, and the civil sanctions include fines of up to £1 million.
It remains to be seen what, if any, amendments will be made to these provisions as the Bill makes its way through Parliament.
Nevertheless, it is crucial that directors, investors, banks and others who are potentially within the scope of the new criminal sanctions and regulatory powers have regard to them immediately in the context of corporate transactions, restructurings and re-financings and before paying dividends to shareholders where any such activity may prejudice a DB scheme.
- Regulator’s new Code of Practice on DB scheme funding
For scheme sponsors, the turbulent end to 2019 is set to continue into 2020, with the Pensions Regulator expected to launch its consultation on a new Code of Practice for DB scheme funding in the New Year. The Code is expected to reflect the Regulator’s promise to be “clearer, quicker and tougher” towards pensions legislation, particularly in light of several high profile corporate failures in the past few years.
The Code is due to set out a dual approach for approving a scheme’s valuation and recovery plan -fast track and bespoke. It is also expected to flesh out the expectation for trustees to set a long-term objective for their scheme. This will build on the proposed new statutory requirement for DB schemes to put in place a funding and investment strategy which is set to be introduced by the Pension Schemes Bill.
Trustees and sponsors of DB schemes should consider how the new statutory requirements and the new funding Code may impact their next valuation and their scheme’s funding arrangements, including the length of the recovery plan.
- GMP equalisation rumbles on
A further hearing is expected to take place in the High Court in April next year in the landmark legal proceedings involving Lloyds Banking Group’s schemes, regarding the need to equalise male and female member’s benefits for the effect of Guaranteed Minimum Pensions (GMPs). The next hearing should confirm the extent (if at all) to which trustees are required to revisit past transfers out of Lloyds Banking Group’s schemes. If schemes are required to equalise historic transfers out, this would result in a significant additional burden and create more practical difficulties for formerly contracted-out DB schemes.
Meanwhile, HMRC is due to issue guidance on some of the tax issues arising from GMP equalisation during the course of this month. This is still awaited. It is hoped that this will provide sufficient clarity to enable trustees to implement GMP equalisation with some certainty over the tax consequences associated with this.
- Those three important words – Environmental, Social and Governance
Meanwhile, environmental, social and governance (ESG) issues will continue to push on up the agenda for trustee boards, pension providers and asset managers. Schemes with more than 100 members will have already taken steps to comply with the new ESG requirements that came into force on 1 October 2019. Now the attention is turning to how trustees implement their policies on ESG, stewardship and engagement as, by 1 October 2020, trustees of money purchase schemes (and money purchase sections of hybrid schemes) will have to publish their first implementation statement confirming how they have followed these policies during the current scheme year.
Regulatory requirements relating to climate change are only likely to increase in the future. The Government announced its intention to create mandatory climate change disclosures for publicly listed companies and large asset owners, in its Green Finance Strategy. The Regulator has also signalled that it will launch an initiative to assess how schemes are complying with the new ESG requirements. The EU is also planning to introduce a new regulatory framework to promote sustainable investment (albeit this may not apply directly to the UK).
Legislative compliance is not the only pressure schemes will face. There is a growing risk of legal challenge in the context of ESG and climate change more generally. A complaint was made recently to the Pensions Ombudsman regarding the disclosure of climate change information and although the complaint was dismissed, Client Earth has questioned the Ombudsman’s reasoning and called on it to carry out a review of its internal processes. Meanwhile, in Australia, a similar threat has materialised. A member is taking the Retail Employees Superannuation Trust to court for failing to disclose information on the potential impact of climate change on its investments. The outcome of this case may be known in 2020.
In any event, trustees need to ensure they are effectively considering and monitoring ESG risks and should be actively considering how to invest in a way that reflects their ESG policies.
- The Big Bauer – not so scary after all
The long awaited CJEU decision in PSV v Bauer (Case C-168/18) was given on 19 December. Previously, the Advocate General had said that Article 8 of the Insolvency Directive (2008/94/EC) created an obligation for Member States to protect 100% of an individual’s pension benefits on employer insolvency. If the CJEU had followed his Opinion it is likely that this would have had significant implications for the Pension Protection Fund (PPF), the PPF levy and the funding regime for DB schemes in the UK.
However, the CJEU rejected Advocate General Hogan’s Opinion and instead concluded that Article 8 requires an employee to receive at least half of the old-age benefits arising out of the accrued pension rights under a supplementary occupational pension scheme, provided that any reduction applied to an individual’s pension benefits is not “manifestly disproportionate”.
The CJEU went on to say that any reduction which “seriously compromises” a former employee’s ability to meet his or her needs must be regarded as manifestly disproportionate. According to the CJEU, this would be the case where, even though a former employee is receiving at least half of the amount of the pension benefits to which they were entitled, the individual is already living, or would have to live, below the at-risk-of-poverty threshold determined by Eurostat for the Member State concerned, as a result of the reduction in their benefits (note: we understand that the Eurostat at-risk-of-poverty threshold for a single adult in the UK was £11,044 in 2018).
Whilst this judgment will come as a relief to the industry because it does not require the UK Government or the PPF to guarantee every members’ benefits in full, it still raises a number of issues that will now need to be considered by the PPF and the DWP. It will also be intriguing to see whether there is scope both politically and under the terms of our future relationship with the EU for the UK Government to adopt an alternative approach at the end of the Brexit transitional period if it wants to.
Other developments to look out for
And if these changes are not a big enough Christmas present, 2020 is likely to see other notable developments that will shape the future of the UK pensions industry. In particular, we can expect:
- further attempts by the Regulator to force the consolidation of smaller schemes,
- the introduction of legislation to facilitate the establishment of collective defined contribution schemes, and
- further progress on the development of an online pension dashboard.
In the not so distant future, we may also get a better idea of the timetable for and mechanics of the reform of RPI.