Pensions snapshot - February 2021
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:
- Pensions Regulator's new powers confirmed not to be retrospective
- Pensions Regulator to consult on DB funding code of practice again in mid-2021
- DWP consultation to improve funding for pension bodies
- The impact of Brexit on pensions law
- FCA to consult on potential climate-related financial disclosures by FCA-regulated pension providers
- Placing stewardship at the heart of sustainable growth
Pensions Regulator's new powers confirmed not to be retrospective
As the new Pensions Bill awaits Royal Assent, the Pensions Regulator (TPR) is one step closer to wielding its enhanced powers which it considers essential to avoid future calls on the Pension Protection Fund. These powers have concerned some, particularly the scale of criminal sanctions and the significant discretion granted to TPR in how it uses them.
Helpfully however, in a written answer to Parliament published on 11 January, Guy Opperman, Minister for Pensions and Financial Inclusion, guaranteed that the new criminal sanctions and information gathering powers will not be applied retrospectively.
This would be a departure from TPR's previous practice as it has not considered itself fettered in this way before - most notably, in the case of Box Clever where it exercised its moral hazard powers long after the relevant events occurred and where those events occurred before TPR's regime was brought in.
Opperman also confirmed that TPR would be undertaking a consultation exercise on its new powers and producing guidance as to how they would be exercised. It is anticipated that this will provide further clarity on how the new regime will operate in practice.
Pensions Regulator to consult on DB funding code of practice again in mid-2021
TPR has published its interim response on the defined benefit (DB) funding code of practice consultation. This interim response follows one of two consultations on its revised DB funding code of practice from 3 March 2020.
As a reminder, the first consultation asked for views on a number of proposals, including:
- TPR’s proposed approach to demonstrating compliance with the Fast Track and Bespoke Track routes (the twin-track regime);
- the principles that should underpin all valuations in the revised framework; and
- ideas on how these principles could be applied in practice to provide clearer guidelines.M/li>
TPR’s interim response is brief and highlights the concerns raised on the proposed twin-track regime and how the principles would be applied in practice. In particular it mentions:
- concerns where Fast Track guidelines would result in some schemes ‘levelling down’ and the increase in the cost of DB provision for other schemes;
- the potential loss of flexibility through benchmarking the Bespoke Track route against the Fast Track route; and
- an increased evidential burden when submitting a Bespoke Track valuation.
There were also concerns about schemes’ reliance on a covenant assessment beyond the medium term.
TPR believes that some of the concerns come from misunderstandings which it will clarify in later communications and in the second consultation due to be published in the second half of 2021.
DWP consultation to improve funding for pension bodies
The Department for Work and Pensions (DWP) launched a consultation in December 2020 on proposals to restructure and increase the pension scheme 'general levy' from April 2021.
The general levy is an annual charge payable by trustees of registrable occupational and personal pension schemes which helps fund TPR, the Pensions Ombudsman and the Money and Pensions Service (the levy bodies). The levy is calculated by reference to the number of scheme members and has not increased since 2008/2009. The DWP postponed proposals to increase the levy in 2020 due to the COVID-19 pandemic, but it now intends to take action to address a deficit in funding of the levy bodies which is expected to be around £80m in 2021.
The DWP has also said it wishes to address concerns that the current levy rates are not equitable because they do not reflect that the levy bodies apply more resources to defined benefit pension schemes than other types of schemes.
The DWP has proposed three options:
- to introduce separate levy rates for defined benefit, defined contribution, master trust and personal pension schemes, and to increase rates progressively over the next three levy years;
- to increase rates but introduce a lower set of levy rates for master trusts; or
- to retain the existing levy structure but increase rates.
The DWP's preference is the first option, since this would achieve the dual aims of making the levy more equitable and increasing levy revenue. The consultation closes on 27 January 2021.
The impact of Brexit on pensions law
When the UK left the EU on 31 January 2020, a transition period started during which the relationship between the UK and the EU continued as if the UK were still a part of the EU. That Brexit transition period ended at 23:00 on 31 December 2020. The last-minute UK-EU trade agreement then took effect.
Whilst significant aspects of UK pensions law derive from the EU (for example, much of the law relating to scheme funding and discrimination), these have mostly been incorporated into UK law. UK pensions law is therefore largely unaffected by the ending of the transition period. There are, however, a number of practical considerations that both trustees and employers should bear in mind as a result of the Brexit process.
Market volatility is likely to be one of the most significant issues for pension schemes, compounded by significant economic uncertainty as a result of COVID-19. Sponsors of defined benefit pension schemes may find that their businesses are adversely affected and trustees will need to be aware of changes to employer covenant. Consideration may need to be given to whether current integrated risk management strategies, investment strategies and covenant monitoring continue to be appropriate. Trustees should also consider if there are any opportunities arising as a result of changing market conditions.
There was some concern that the UK would be deemed a 'third country' for data protection purposes following the end of the Brexit transition period. This would have had an impact on schemes where member data is transferred to or from an EEA country (for example, where a service provider is based in the EEA).
However, the UK-EU trade deal allows personal data to flow freely from the EU and the EEA to the UK for up to an additional six months in order to allow time for adequacy decisions to be adopted.
Nevertheless, the Information Commissioner's Office does recommend that, as a precaution, those who receive personal data from the EU and/or EEA should put in place alternative transfer mechanisms in order to safeguard against any future interruption of the flow of data. The Stephenson Harwood pensions law group can advise on the implementation of appropriate measures.
Annuities via EEA firms
Existing passporting rights ceased at the end of the transition period but EEA firms will be able to continue operating in the UK through a temporary permissions regime for a period of time while they get permanent FCA authorisation. The government has also established a financial services contracts regime which will enable firms that do not wish to enter the temporary permissions regime to carry on servicing customers under existing contracts while they wind down their business in the UK.
Pension scheme documentation
Trustees should check their scheme rules, service provider contracts and contingent asset documentation for any amendments that may be required as a result of the end of the transition period. The Stephenson Harwood pensions law group can help with this.
For more information, please see our briefing on this topic.
FCA to consult on potential climate-related financial disclosures by FCA-regulated pension providers
Environmental, social and governance (ESG) considerations have increasingly been on the radar when it comes to pension schemes.
The Pension Schemes Bill contains powers for regulations to be made imposing requirements on trustees regarding climate change. Last summer the DWP published a consultation suggesting that one use of this regulation-making power would be to enable recommendations set out by the Task Force on Climate-related Financial Disclosures (TCFD) to be mandated for certain occupational schemes. That would place governance and disclosure obligations in line with the recommendations made by TCFD into pensions law. The obligations largely focus upon trustees assessing and understanding climate-related risks and opportunities to pension scheme assets, liabilities, investments and, where appropriate, funding strategies.
With regards to FCA-regulated pension schemes, the FCA has announced that it is planning to consult early this year on potential client-focused TCFD-aligned disclosures by these pension schemes.
This year could therefore see both occupational and personal pension schemes (of certain sizes at least) being required to disclose against TCFD requirements.
Our dedicated ESG team are available to assist with any queries you may have. More information, including further potential developments in this area, is available in our extensive brochure on this topic.
Placing stewardship at the heart of sustainable growth
A report, “Investing with purpose: Placing stewardship at the heart of sustainable growth”, has been produced by the Asset Management Taskforce and published by the Investment Association (IA).
Stewardship is defined in the UK’s 2020 Stewardship Code as “the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society”.
The IA report sets out a number of recommendations to further improve the UK's stewardship regime. Specifically, the recommendations aim to ensure that asset managers are focused on delivering long-term, sustainable benefits for investors, the economy, the environment and society.
The proposals are intended to aid those participating in the market (for example, investment managers) to develop their stewardship activity across different asset classes. They also create a Council of UK Pensions Schemes to promote higher standards of pension stewardship. The report notes that achieving the aims it sets out will require action across three main pillars:
- strengthening stewardship behaviour, which includes practical steps for developing how stewardship works in practice;
- stewardship for clients and savers, by generating sustainable value and achieving savers' goals; and
- creating an economy-wide approach to stewardship.
It is noted in the report that the IA will take forward the report’s recommendations, working with its membership and other key stakeholders to ensure delivery, and that it will review progress with the Asset Management Taskforce.