Pensions snapshot - May 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:
- Updates and supplements to The Pensions Regulator's COVID-19 guidance
- Pension scams
- Pension scheme investment: How far can non-financial considerations be taken into account?
- Mr Y (PO-27002) - Member entitled to full deferred pension despite lack of evidence about scheme membership
- Mr N (PO-22730): Employer had a duty of care to notify member of change to late retirement factors
Updates and supplements to The Pensions Regulator's COVID-19 guidance
The Pensions Regulator (TPR) has updated and supplemented its guidance found in the Covid-19 section of its website. The key points to note from the new additions are set out below.
Communicating to members during COVID-19
TPR has provided guidance on its expectations of trustees and scheme administrators in relation to member communication during the COVID epidemic. Key takeaways from the guidance are set out below.
For the time being, TPR is requiring defined benefit scheme trustees and administrators to issue a template letter to all members requesting a transfer quote to a DC scheme. The letter is a joint communication from TPR, the FCA and MAPS explaining the heightened risk of scams during times of uncertainty and that, in most cases, a transfer from a DB scheme is unlikely to be a an individuals’ best long-term interests.
Continuing on scam-related matters, the guidance explains that trustees are the first line of defence in protecting members against scams. They should look out for warning signs, always carry out due diligence and direct members to tPAS’ website for further guidance.
Scheme business continuity
The guidance places a strong emphasis on the need for members to have continued access to member services and the ability to contact the scheme if they have queries. It explains that members should be kept informed and be provided with information including:
- the steps being taken to continue the running of the scheme;
- any changes, delays or disruption to member services (including the reasons, what steps are being taken to restore normal services and timescales);
- any temporary changes to service levels for processing member requests and timescales involved; and
- delays to annual publications and/or member communications with a timescale of when these are expected to be published/issued.
Where members make a request to cease membership, TPR states they should be informed that they:
- will lose future employer contributions;
- may lose other benefits such as death in service and survivor benefits; and
- can contact the Pensions Advisory Service for guidance.
DC scheme communications
In relation to DC schemes, members are likely to be concerned about the fall in the market and individual fund values. Where trustees or administrators are communicating with members over the next few months, particularly when sending any benefit statementa or money purchase illustrationa, the guidance states that the following information should be provided:
- what current market volatility might mean to members retiring over different future time periods;
- the need to think carefully and consider getting investment advice before switching funds in the current market (to avoid crystallising losses);
- the danger of scam activity in the current climate; and
- free impartial guidance available from tPAS.
Guidance covering the interaction of salary sacrifice, furlough, auto-enrolment and DC contributions
TPR released updates to its general guidance for employers who contribute to DC pension schemes and issued new technical guidance focussing on the interaction between pension contributions, salary sacrifice and the Coronavirus Job Retention Scheme (CJRS).
The technical guidance is orientated toward larger employers and sets out how:
- an employer's pension contribution is to be determined in relation to a furloughed employee who participates in the employer's salary sacrifice arrangement; and
- an employer's claim for AE statutory minimum employer contributions against the CJRS should be determined in respect of each of its applicable employees.
One key point to note from the guidance is that the CJRS grant must be paid to the employee as money and should be treated as post-sacrifice pay so that no further sacrifice is made on that amount. Therefore, to work out the employer's pension contribution, it will probably need to determine the notional amount of the employee's pre-sacrifice pensionable pay.
The guidance is much needed but some aspects are difficult to navigate, even for the hardened in-house benefits expert (hence, TPR's suggestion that smaller employers who operate salary sacrifice turn to their payroll advisers or pension providers for help).
Refinement and clarification of the examples in TPR's technical guidance would assist all employers. In the meantime, we have the expertise to help any employer grappling with how the CJRS, workplace pensions and salary sacrifice arrangements interact.
TPR's easements on reporting duties and enforcement activity
TPR has helpfully collated various easements it has put in place as part of its COVID-19 response - see: https://www.thepensionsregulator.gov.uk/en/covid-19-coronavirus-what-you-need-to-consider/covid-19-an-update-on-reporting-duties-and-enforcement-activity
Highlights for all occupational pension schemes
- Delays in completing a review of a statement of investment principles for COVID-related reasons should not result in enforcement action provided the review is not delayed beyond 30 June 2020.
- Any requirement to complete a set of audited scheme accounts at this time will be extended to 30 June 2020.
- The requirement to report late payment of contributions has been extended from 90 days to 150 days.
Highlights for defined benefit schemes
- Trustees should be alert to the higher risk of scam activity, particularly in the context of transfer requests. TPR suggests that Trustees may wish to consider suspending CETV quotations.
- TPR will not take enforcement action where a valuation submission is delayed for up to three months after the 15 month statutory deadline and such a delay need not be reported to TPR.
Key points for DC pension schemes
- Employers wishing to reduce contributions to a DC pension scheme to the statutory minimum will, among other things, need to consider compliance with the consultation requirements. Ordinarily, this would involve a 60 day consultation. However, TPR has confirmed it will not take enforcement action where the 60 day consultation requirement is breached provided certain conditions are met.
- Fines for any Chair's statement failure will continue to be imposed but no new penalty notices will be issued before 30 June 2020.
- Master Trusts can submit informal reports of triggering events or significant events under the Master Trust legislation.
In a recent webinar for the PLSA, David Fairs (TPR's Executive Director of Regulatory Policy), stated that these easements will be reviewed in late May/early June to determine whether they will be withdrawn or maintained for any further period after 30 June 2020.
Other helpful resources
Visit the COVID-19 section on our pensions hub https://www.pensionshub.com/knowhow/covid-19-pensions
See our April edition of Snapshot https://www.shlegal.com/insights/pensions-snapshot---april-2020
Stephenson Harwood's collated COVID-19 related guidance notes https://www.shlegal.com/insights/coronavirus-guidance
In these turbulent economic times, COVID-19 has and continues to have a real impact on all kinds of companies. Markets have been volatile and with that volatility comes an even greater risk of pension scam activity.
Unscrupulous fraudsters work in sophisticated ways to lure vulnerable people in with ‘early access’ pension offers. Scams are becoming increasingly common on the back of mass unemployment and the immediate pressure placed on household incomes and fraudsters are not missing the opportunity to prey on the anxiety and fear of savers and investors alike.
The Financial Conduct Authority (FCA), The Pensions Regulator (TPR) and Money and Pensions Service (MPS) have teamed up to warn savers against the very real risk of being targeted by pension scammers. Collectively, the recommendations for savers and investors are to reject all unexpected and unsolicited offers, get to know the warning signs (e.g. a high rate of return which sounds too good to be true) and, crucially, not to make any impromptu decisions about pensions.
What can trustees and administrators do?
Trustees and administrators play an important role in educating and protecting members and can help savers keep their retirement savings away from scammers. Practical things that can/should be done include:
- having a scam prevention page on the scheme website;
- printing and including TPR’s pension scams guide in the annual member statements and transfer packs; and
- conducting thorough due diligence when a member asks to transfer TPR’s pension using the checklist and using the combating pension scams code of good practice.
So what is being done?
The ScamSmart website directly assists in providing know-how from pension scams and the legislation offers some protection (for example, Section 48 of the Pension Schemes Act 2015 which requires trustees or scheme managers to check that advice has been taken before allowing a transfer to proceed, where the proposed transfer involves a DB pension or other safeguarded benefits worth more than £30,000). Advice must be provided by a firm with the FCA permission to advise on pension transfers.
In a major report on the functioning of the UK pensions industry on 5 August 2019, the Work and Pensions Committee commented that the FCA’s dedicated scammers team only consisted of approximately 10 staff (out of 3,700 FCA staff) and that more needed to be done. Clearly, even with a modest increase in that number, there is a big question as to whether enough is being done at present and we should expect to see more in the pipeline to guard against pension scams.
Pension scheme investment: How far can non-financial considerations be taken into account?
A recent appeal to the Supreme Court concerned the powers of the government to limit the factors which are to be taken into account by authorities (as “quasi-pension trustees”) when investing pension scheme assets on behalf of a local government pension scheme (the Scheme).
The respondent Secretary of State had the power, conferred onto it by The Public Service Pensions Act 2013 (the 2013 Act), to issue guidance to authorities on the administration and management of the Scheme. The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 (the 2016 Regulations) required an authority to produce an investment strategy in accordance with the guidance. Regulation 7(2)(e) required the authority’s investment strategy to include how “social, environmental and corporate governance considerations” are taken into account.
The guidance adopted two tests commended by the Law Commission for taking non-financial considerations into account: first, did the proposed step involve significant risk of financial detriment to the Scheme and, second, was there good reason to think that members would support taking it?
Two passages of the guidance were the subject of the review. The first stated that “the Government has made clear that using pension policies to pursue boycotts, divestment and sanctions against foreign nations and UK defence industries are inappropriate, other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government”. The second stated that authorities “should not pursue policies that are contrary to UK foreign policy or UK defence policy”.
The Supreme Court upheld the High Court’s order that both passages were unlawful. It held that the Secretary of State acted outside of his powers by attempting to enforce the government’s foreign and defence policies by providing that, even where both elements of the test had been met, the scheme administrator was prohibited from making an investment if it was contrary to such policies. In short, the power to direct how administrators should consider the making of investment decisions did not include the power to direct what investments should be made.
The judgment supports the Law Commission’s position that trustees may take non-financial considerations into account when making scheme investment decisions. Trustees need to be satisfied that such considerations do not pose significant risk of financial detriment to the scheme and there is good reason to think that members would support the taking of that decision. Although trustees must comply with their fiduciary duty to act in the best interests of the beneficiaries and so financial returns for members will remain a priority, this decision could pave the way for trustees to strengthen their approach towards ESG geared investments.
Mr Y (PO-27002) – Member entitled to full deferred pension despite lack of evidence about scheme membership
The Deputy Pensions Ombudsman (DPO) considered a complaint from Mr Y that he was entitled to a full deferred pension.
Mr Y was employed by the Royal Mail Group (RMG) during which time RMG brought charges of criminal damage and theft against him for which Mr Y was convicted. Mr Y subsequently asked the Royal Mail Group Pension Service Centre (PSC) about his pension benefits under the Royal Mail Statutory Pension Scheme (the Scheme). He was informed by the PSC that it could not find any details of his benefits but, following a GMP reconciliation exercise, Mr Y was told that he was entitled to a GMP from the Scheme but no other pension benefits. Mr Y could not produce evidence of his employment or of his pension entitlement and RMG had destroyed Mr Y’s employment records six years after he had left employment.
PSC argued that the Trust Deed and Rules of the Scheme allowed a reduction to be applied to Mr Y’s pension in excess of GMP as a result of his criminal convictions. The DPO agreed that RMG could recover financial losses as a result of Mr Y’s criminal activities but, to do so, RMG had to notify the Secretary of State and Mr Y should have been given a certificate showing the amount of reduction to his pension benefits. The Scheme could not produce the certificate or any other evidence to show that Mr Y had lost his benefits in excess of the GMP.
The DPO therefore held that, in the absence of any justified reason why Mr Y would have lost his entitlement to a deferred pension, Mr Y was, on the balance of probabilities, entitled to a deferred pension and the GMP under the Scheme.
The DPO directed that the Scheme pay Mr Y a full deferred pension based on his pensionable service and estimated final pensionable salary (deduced by his National Insurance contributions history). Mr Y was also awarded £500 for significant distress and inconvenience.
This determination highlights the importance of good record-keeping for administrators, trustees and employers – this is particularly so given the approach taken by the DPO in not putting the onus on the member to prove he was entitled to a deferred pension.
Mr N (PO-22730): Employer had a duty of care to notify member of change to late retirement factors
The Pensions Ombudsman has upheld a complaint by Mr N against Police Scotland that his employer failed to give him notice of an upcoming change to the Local Government Pension Scheme (Scotland)’s (the Scheme) late retirement factors. The change had a detrimental impact on Mr N’s late retirement pension.
Police Scotland was given prior notice of the change by the Scheme administrator in a bulletin issued in February 2017. The circular said “[t]he intention of [the delayed implementation of the change to late retirement factors] is to provide members considering late retirement with the opportunity to retire before the new factors take effect”. Mr N was classed as a late retirement member and had not yet drawn his pension. Mr N did not find out about the change to late retirement factors, and the fact that Police Scotland had prior notice of the proposed change, until after the changes had taken effect. Mr N complained that Police Scotland had failed to pass this relevant information on to him.
The Ombudsman found that Police Scotland did not have a statutory duty to inform Mr N of changes to late retirement factors. However, Police Scotland had a duty of care as a reasonable employer to notify Mr N of the change and the potential impact on his pension benefits. Police Scotland were therefore directed to ask the Scheme administrator to re-calculate Mr N’s late retirement benefits on the basis that Mr N took his pension on the day before the change took effect. Mr N was entitled to arrears of pension including any tax-free cash, plus interest, and £2,000 for the severe distress and inconvenience he experienced.