Europe latest – Will DB schemes have to disclose their financial position on a “risk free” basis?

This is one of the key questions posed through the publication last week of an Opinion by the European pensions authority, EIOPA.

The Opinion given to the EU institutions completes the “own initiative” work that EIOPA has been conducting (see Pensions Bulletin 2016/07).  Also included are the results of the quantitative impact study conducted last year (see Pensions Bulletin 2015/21), an impact assessment and a technical document.

EIOPA recommends that a European framework for risk assessment and transparency for DB schemes should be adopted.  Under this, schemes would have to value assets and liabilities on a “market-consistent basis”, with liabilities discounted at a “risk free” interest rate (as insurance liabilities are required to be) as well as a risk margin.  Pension protection mechanisms, the employer covenant and ability to reduce benefits (which we don’t have in the UK) are also included in the calculations.  This is the “holistic balance sheet” re-branded.  DB schemes would then use this as the baseline from which to go on to carry out a standardised risk assessment to calculate the impact of common pre-defined stress scenarios.

EIOPA envisages that such a framework would have guidance set, as far as possible, at the European level, with the results publicly disclosed and for national supervisory authorities to be provided with sufficient powers to take supervisory action.  Simplified methods of calculation would be permissible if this would be proportionate.  Member states could reduce the frequency of calculation and reporting from annually to once every three years and could also exempt small schemes from the requirements.

Following blocks from the European Parliament and the European Council (see Pensions Bulletin 2016/04), EIOPA states that it is refraining “from suggesting to harmonise capital or funding requirements for IORPs at this point in time” and also that the Opinion is “expressly not intended to amend the existing Commission’s proposal for the revision of the IORP directive … which is currently being negotiated in trilogue”.

Comment

EIOPA is, in effect, seeking to keep its much-criticised and politically defeated proposals for stringent funding requirements in play, but through a disclosure requirement for the time being.  But even this will impose significant compliance costs on DB schemes (with EIOPA estimating that it will cost around £165m pa for UK DB schemes alone).

The next immediate step will be for the European Commission to respond and despite the protestations to the contrary, the IORP II directive could yet emerge from trilogue with some words to enable the common framework.  We are not out of the woods yet.

The Pensions Regulator’s plans for 2016-19

The Pensions Regulator has published its corporate plan 2016-19, setting out its business plan for the forthcoming year and its strategic plan for the next three years (see Pensions Bulletin 2015/14 for the previous one).

For the first time master trusts have become one of the Regulator’s priorities, as it has become concerned with the risk of a major failure of a large trust (given they have no sponsoring employer to support it) and sustainability of small trusts.  The Regulator will work with the Government and other regulators to develop safeguards to member benefits, and where there are specific concerns, engage directly with the master trusts.

Auto-enrolment continues to be a priority and as small and micro employers reach their staging date the Regulator aims to focus on the quality of educational materials and enablement tools.  A large proportion of the Regulator’s budget is given to auto-enrolment and as a result of the influx of newly auto-enrolled employers, the Regulator’s overall budget increases by one-third, from the 2015/16 forecast of £64m, to over £85m by 2017/18.  However, compared to the budget set out last year, the Regulator states that it has identified a significant reduction for auto-enrolment activities which leads to a substantial reduction of the 2017/18 budget by some 40%.  The budget for 2018/19 drops sharply as the auto-enrolment roll-out comes to an end.

The Regulator has identified cybercrime as an emerging risk, but has not prioritised it for immediate action, instead continuing to focus on pension scams.  Work includes “Project Bloom”, a taskforce including the Government, other regulators, financial services bodies and criminal justice agencies to combat scams; and the ongoing “scorpion” campaign.

Other priorities for the next three years include the continuation of its work on effectively regulating DB and public service pension schemes, improving the quality of scheme governance, extending its regulatory influence, increasing member engagement with pensions, developing its staff and being an effective and efficient regulator.

Comment

For the first time, the Plan sets out numerically how each of the Regulator’s ten priorities is to be measured.  Together with its internal restructuring, redistribution of resources, and sharp decrease in budget, the corporate plan is a clear signal of the Regulator’s change of focus.

TPAS publishes research on behaviours and attitudes towards pensions

If anyone should know how the great British public interacts with pension savings it is the Pensions Advisory Service, which ever since its inception has been in daily contact with individuals, seeking to answer their questions and mediate in relation to their concerns.

TPAS has now published some research that contains some useful insights into current consumer behaviour, before going on to make some suggestions for industry action in a new world where individuals need to take far more responsibility for their retirement savings and decisions.

TPAS finds that there are three barriers that stop people from saving into a pension – confidence, complexity and trust.  43% of those surveyed didn’t feel confident in making pension decisions, 73% of respondents must surely be confused if they feel that they can live comfortably on the State Pension and only 4.5% described pensions as trustworthy products.

TPAS concludes that there is a need for government and industry to build consumer understanding in pensions and insofar as the industry is concerned the following positive actions would be most welcome:

• Targeted and concise communication that empowers people to make informed decisions
• Easy access for people to find information and to set up and save regularly into their pensions
• Help to navigate the pensions landscape so that if an organisation is unable to help, they signpost them to someone who can

Comment

“Realising the Pension Revolution” is a good read for those concerned with improving pension communications.  We can expect to see a number of initiatives in this area as the auto-enrolment net widens to most corners of the workforce and as DC provision continues to grow.

Pensions Regulator wants more information and greater DC scheme return compliance

From July this year, scheme returns for DC schemes will include extra questions to aid the Pensions Regulator’s priority of improving the quality of scheme governance (see above article).  This coincides with the expected publication of the updated DC code of practice and accompanying guides (see Pensions Bulletin 2016/15).

Schemes will now be required to identify the chair of trustees, declare whether they have produced a chair’s statement, and whether they have been compliant with the charge cap, all of which came into force on 6 April 2015 (see Pensions Bulletin 2015/14).  Extra information is also required for small schemes with fewer than 12 members.

The Regulator has produced a checklist guide and sample returns for trustees about the new scheme return and warns trustees that they risk being fined if they do not complete the return.

Comment

DC trustees have of late been less diligent in completing their annual scheme return.  This is a clear concern for the Regulator; not only in terms of pure compliance and trustees’ willingness to meet their duties, but also because as pension policy continues to focus on DC the Regulator needs to know whether individual schemes are meeting their latest new responsibilities as well as appreciate how the DC market is evolving.

Judges propose complete rethink on compensation for loss of pension rights guidance

A working group of employment judges is proposing a significant overhaul of the 2003 guidance and accompanying actuarial tables produced for employment tribunals that sets out various ways in which compensation can be determined for loss of pension rights upon a finding of unfair dismissal.  This follows a Court of Appeal judgment in 2014 (Griffin v Plymouth Hospital NHS Trust) in which the Court asked for a review in order that reference to guidance could remain appropriate.

Unlike previous iterations of the guidance, this time (due to lack of funding) there has been no involvement by the Government Actuary’s Department.  The working group has also taken a fresh look at differentiating between simple and complex cases.  It is proposed that the loss in simple cases is always quantified by reference to the employer contributions that would have been made, even if the benefits that would have otherwise accrued were not money purchase.

And as for the complex cases (which are expected to be rare) the working group proposes a two-stage process once the need to quantify the loss has arisen.  At the first stage, findings on areas relevant to the calculation of pension loss would be agreed, following which the parties would be given a time-limited opportunity to agree the quantum of loss.  If the parties could not agree, then the second stage would kick in during which the tribunal would quantify the loss – either using currently available actuarial tables, or more rarely, via an actuarial expert approach.

The working group proposes that the 2003 guidance be formally abandoned and replaced with its proposals.  The closing date for the consultation is 20 May 2016.

Comment

There is a certain logic to the proposed new approach.  Where pension loss needs to be quantified it is increasingly likely that the employer “contributions method” will suffice.  And where a non-money purchase approach is appropriate, the ability for the tribunal to call on actuarial tables (the “Ogden tables” used to quantify loss of earnings in relation to personal injury and fatal accident cases – and which remain supported), means that an actuarial scientific approach is not lost.

HMRC withdraws the Registered Pension Schemes Manual

On 15 April the curtain came down on the Registered Pension Schemes Manual as it was withdrawn from public access.  Its successor, the Pensions Tax Manual was first launched in 2015 so the removal of the RPSM is not surprising.  However, the RPSM is still useful to refer to (indeed the Pensions Tax Manual does so itself).  The RPSM is still available on the National Archives (in a series of snapshots from 2006 to 2015), but some of our clients have found this difficult to locate so we are publicising the link here.

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.