Pensions snapshot - December 2020
This edition of snapshot looks at the latest legal developments in pensions.
This edition of snapshot looks at the latest legal developments in pensions. The topics covered in this edition are:
- The Pensions Regulator issues guidance for DB scheme trustees on employers in financial distress
- GMP equalisation - clarification on requirements for past transfers-out
- Taking the pledge - steps to reduce scams
- ICO publishes detailed guidance on subject access requests
- New PASA Cybercrime Guidance
The Pensions Regulator issues guidance for DB scheme trustees on employers in financial distress
In response to the impact of COVID-19 on the UK economy, the Pensions Regulator (TPR) has issued guidance designed to help trustees of defined benefit (DB) schemes protect their schemes from sponsoring employer distress. TPR observes that, when a sponsor experiences financial distress, the actions which the sponsor then takes can lead to significant pension scheme losses. TPR therefore expects DB trustees to protect members and minimise potential scheme losses by adopting risk-based principles on an ongoing basis in order to identify risks earlier and act sooner.
The guidance can be broken down into three key areas:
1. Preventing – a best practice integrated risk management (IRM) approach
The guidance highlights that taking action before a sponsor shows signs of distress increases the chances of mitigating downside risk in the future. In particular, it can help secure a positive scheme outcome before other stakeholders compete for value alongside the scheme, at which point options may be significantly reduced. To this end, trustees should already be taking a number of preventative actions as part of a robust IRM plan designed to reduce the risk of potential scheme losses due to an employer restructuring, refinancing or insolvency. For example trustees should:
- understand the sponsor’s legal obligations to the scheme and possible outcomes for the scheme in a hypothetical insolvency scenario;
- ensure effective risk management processes are in place with legally enforceable and workable contingency plans;
- monitor the covenant on an ongoing basis, providing an opportunity to regularly engage with management and understand key covenant risks; and
- seek appropriate advice which can highlight options or problems that may not be obvious and, in doing so, save money in the longer run.
2. Identifying – spotting signs of sponsor distress
The guidance states, “As a trustee, you are the first line of defence for savers and their pension schemes, and it is vital that you remain alert, prepare, plan and are ready to act as the economic impact of global events develop.” It is therefore incumbent on trustees to spot the warning signs of sponsor distress. These signs may vary according to the nature of the sponsor’s business and the industry in which it operates. Nevertheless, key warning signs may include:
- cash flow constraints;
- credit downgrades;
- removal of trade credit insurance;
- disposal of profitable business units; and
- loss of a key customer contract.
3. Responding – options for protecting members’ benefits from sponsor distress
The guidance sets out a number of actions trustees can take if they spot the warning signs, including:
- increase the frequency of covenant monitoring – don’t wait for formal confirmation of a covenant downgrade at the next valuation before taking action;
- review the scheme’s position in distress scenarios – understand the potential returns to the scheme and the position/role of other creditors in an insolvency situation;
- review the scheme’s investment strategy – sponsor insolvency can crystallise short-term investment losses, but various mitigating actions can be taken;
- carefully consider sponsor requests for scheme easements – these may include deferring deficit repair contributions or releasing scheme security;
- obtain sponsor information – information requests to the sponsor should, if possible, be aligned with the information that management is producing in response to the distress;
- monitor transaction activity – corporate transactions triggered by distress could cause material detriment to the scheme, e.g. injection of additional debt into sponsor; and
- communicate with members – the distress could be in the public domain and so it is important to make members aware of the protections in place and steps being taken by the trustees.
What the above highlights is that there a multitude of issues for DB scheme trustees to consider where the scheme sponsor is facing financial difficulties. However, trustees are unlikely to possess all the skills and know-how needed to give each of these issues due consideration. This means they will almost certainly need to seek specialist professional advice in order to deal effectively with potential or actual sponsor distress in line with TPR’s expectations.
GMP equalisation – clarification on requirements for past transfers-out
The long-awaited conclusion to the guaranteed minimum pensions (GMP) equalisation litigation, concerning the Lloyds Banking Group’s DB scheme, was handed down on Friday, 20 November 2020. It comes two years after Morgan J’s first judgement in this case, which determined that DB schemes were obliged to equalise scheme members’ GMPs (Lloyds I). In the October 2018 judgment, Morgan J left the question unanswered of whether historically transferred-out members were entitled, under the cash equivalent transfer value (CETV) regulations, to have their transfer payments topped up where those payments had not been equalised at the point of transfer.
Friday’s judgment has unequivocally answered that question. Where an individual member has transferred out of a scheme with an unequalised CETV, that member is entitled to a top-up of that payment. In other words, transferring scheme trustees are legally responsible for equalising the GMPs of members who transferred out of their DB pension scheme.
This ruling affects all GMPs accrued between 17 May 1990 and 5 April 1997 and, unlike in Lloyds I, there is no time limit. This means that trustees will not be able to rely on any scheme forfeiture rules or the terms of the Limitation Act 1980 and there is no time limit for transferred-out members to seek a top-up of their CETVs.
The steps that trustees must now take will depend on whether they are the trustees of the receiving or transferring scheme and whether the transfer in question was a statutory or a non-statutory transfer.
Trustees of transferring schemes
Trustees of DB schemes with GMP components should already be working to equalise GMPs between male and female scheme members. However, following this judgment, trustees and their advisers must now look further to equalise CETVs that have been previously paid from their scheme.
Trustees of schemes where there has been a bulk transfer
Morgan J found that, in circumstances where a scheme received a bulk transfer, the transferring scheme trustees are discharged because the obligation to equalise (by topping up scheme benefits) rests with the receiving scheme. As a result, trustees of receiving schemes may need to undertake a wider GMP equalisation effort than first thought under the Lloyds I ruling.
Trustees where non-statutory transfers have been made
In the case of individual transfers made under relevant scheme rules (as opposed to under the CETV legislation) and where those rules provide for a discharge (assuming that the discharge would be otherwise effective), a transferring member no longer has rights under the transferring scheme. This is the case unless the court sets aside the exercise of the transfer power and the transferring member can require the trustees to exercise the power again. In order to do this, the member would need a court to find that the trustees were in breach of duty when they exercised their power. A breach of duty may be found, for example, if the trustees failed to “adequately deliberate”. This will be a fact-specific exercise, dictated by specific scheme rules and based upon the circumstances at the time the scheme trustees made their decision.
For more detail on this decision, please see our briefing on the case here.
Taking the pledge – steps to reduce scams
The Pensions Regulator (TPR) is asking trustees, providers and administrators to 'make the pledge' to take steps to protect scheme members from scams. The requirements for taking the pledge are to commit to:
- warn members about pension scams regularly;
- encourage members asking for cash drawdown to get impartial guidance from The Pensions Advisory Service;
- complete the scams module in the Trustee Toolkit and use resources on the Financial Conduct Authority's ScamSmart website, TPR’s scams information and the Pension Scams Industry Group Code of Good Practice in order to understand the warning signs of a scam and best practice for transfers;
- carry out appropriate due diligence on pension transfers by undertaking checks and documenting pension transfer procedures;
- warn members if they insist on high-risk transfers being paid; and
- report concerns about a scam to the authorities and communicate this to the member.
Once steps have been taken to implement these principles, trustees can then self-certify they have met the pledge - doing so will demonstrate to members and the pensions industry that the pledge principles are being followed. TPR will then send the trustees resources that can be used to demonstrate that the trustees are using best practice. In communications with members and the public, trustees should, however, make clear that the process is one of self-certification and not certification by TPR.
Given the tough economic climate caused by COVID-19, it is no surprise that TPR is taking a closer look at pension scams. Members may also increasingly be expecting trustees to address this concern. Self-certification is one way trustees can show that they are seeking to comply with the standards expected by TPR.
ICO publishes detailed guidance on subject access requests
The Information Commissioner’s Office (ICO) published its detailed guidance on subject access requests (SARs) on 21 October 2020, following a consultation that began in December 2019. A SAR is a request from an individual for a copy of their personal data. For employers and trustees, SARs can become a time-consuming and an expensive exercise.
Under the General Data Protection Regulation, data controllers are required to respond to a SAR “without undue delay and in any event within one month of receipt of the request.” Previously, there was no provision to extend that time-frame but the clock can now be stopped where a data controller asks the data subject to clarify their request. The guidance makes clear that a data controller should only seek clarification if it is genuinely required in order to respond and if large amounts of data about the requesting individual are processed.
The new guidance has also broadened the definition of a “manifestly excessive” request. Data controllers should base their assessment of a SAR on the proportionality of the request e.g. weigh up the costs involved against the rights of the requester. The ICO emphasises the word “manifestly” and confirms that organisations must have firm justifications for concluding that a request is excessive. This presents a high bar in practice, with each case needing to be decided on its own facts.
The guidance has also been updated with regard to what organisations can take into account when charging an administrative fee. That fee can now include the costs of accessing, locating, retrieving, extracting and copying the information, as well as time taken to communicate the response.
Whilst the new guidance does not change the underlying law it does provide some useful direction for employers and trustees and should simplify how to respond to SARs.
New PASA Cybercrime Guidance
Earlier this month, PASA published new Cybercrime Guidance for Pension Administrators. The guidance was prepared by authors including Justin McClelland, partner at Stephenson Harwood LLP, with input from pensions colleagues Philip Goodchild, partner, and Katie Whitford, associate.
This publication comes at a time of heightened cybercrime and fraud activity. It aims to help administrators understand their organisation's vulnerability to cybercrime and ensure their organisation is resilient to cybercrime and able to fulfil key functions in the event of an attack. The PASA Standards will be updated in the near future to reflect cybercrime issues and the updated Standards will be incorporated into the PASA administrator accreditation process.