Halcrow - Regulator issues intervention report

Following its recent approval of a regulated apportionment arrangement, the Pensions Regulator has issued a comprehensive report setting out the challenges facing the Halcrow Pension Scheme and how they have been overcome whilst keeping the scheme outside the Pension Protection Fund for now.

There were two separate attempts to resolve the pensions issue to the satisfaction of all parties.  The first failed after the High Court turned down the trustees’ proposals (see Pensions Bulletin 2016/23), but the second succeeded.

In the later proposal members were offered the chance to transfer to a new scheme that provided benefits above the PPF, but lower than they would have received from their current scheme.  Those who chose to stay would end up in the PPF via a regulated apportionment arrangement.

The Regulator needed to approve the proposal and the PPF needed not to object.  The report sets out the tests that the Regulator applies when assessing such arrangements and how they were met in this situation.

Comment

What makes this case of note is the relatively novel way in which the regulatory apportionment arrangement was used.  As the Regulator says, such arrangements are extremely uncommon and the continuation of a scheme following the conclusion of such an arrangement is even rarer.  In this particular case, the Regulator concluded that, as a result of a number of protections being agreed in respect of the new scheme, the risk of it falling into the PPF was being appropriately mitigated.

Many may now be asking whether the Halcrow solution could become a template for employers who are in a similar situation – ie with a business capable of being turned around, but only if the DB scheme is restructured.  However, the regulatory apportionment arrangement was not designed for the purpose to which it has now been used.  Given this, we suggest that the Government should now look to design easier, or at least more clearly defined, processes by which struggling companies can, subject to strict controls, reduce their pension liabilities to a manageable level.

Pension scams – Regulator vindicated in its removal of trustee from evolving London Quantum scheme

Details have now emerged of the evolution of the London Quantum Retirement Benefit Scheme from a small self-administered occupational pension scheme to a riskily-invested pension scheme for all-comers which led to the Pensions Regulator replacing the trustee in June 2015.  This is as a result of the Regulator’s Determinations Panel reviewing its original (unpublished) determination and establishing that, on the basis of the facts known at the time of review, its decision to replace the trustee was correct.

The scheme was originally set up by Quantum Investment Management Solutions LLP in April 2012, apparently to enable three individuals to invest just over £600,000 in a company called London Quantum One Limited.  The money was transferred from existing pension schemes, but in the following seven months a total of £600,000 was paid to its members.  The Regulator was concerned that the scheme was a plan for pension liberation fraud, but the actions that caused the trustee to be removed occurred in the next stage of the scheme’s existence.

From around April 2014 Dorrixo Alliance (UK) Ltd became trustee and the scheme was promoted to new members by a number of introducers, some of whom had agents working on their behalf.  Potential new entrants were offered a total of nine risky scheme investments, of which most were highly illiquid and two had been served an Action Fraud notice.  By the time the Regulator replaced Dorrixo with Dalriada Trustees Limited in June 2015 the scheme had almost 100 members.  Dalriada subsequently discovered around 600 files for potential new members at various stages of progression.

In its February 2016 review, which has only just been published, the Determinations Panel found that Dorrixo was:

• In breach of its duty to invest scheme assets in a prudent manner
• Not taking proper investment advice, and so was in breach of its duty to do so
• Would have breached the investment regulation requirement to be properly diversified once the scheme reached 100 members; and
• Lacking competence and capability as a trustee, as evidenced by several failings including not appointing an auditor, failing to inform members about the nature of and risks associated with the scheme investments and failing to keep proper investment records

Comment

This case illustrates how the problem of pension scams has evolved.  In the initial stage of the scheme’s lifecycle it looked like a vehicle for “liberation” – the unauthorised early access to substantial amounts of pension cash for a small group of pension savers.  But moving with the times it then evolved into a vehicle for marketing risky investment “opportunities” to large numbers of pension savers with much more modest pots.

Whilst it is pleasing the Regulator stepped in to potentially prevent hundreds of members losing their pensions, there may be disappointment that this pension scam has not yet led to further action.  And the 90-100 pension savers who did transfer in before the Regulator pulled the plug are nervously awaiting information from the new trustee as to what their investments may actually now be worth.

It is ironic that we report this case during scam awareness month.  We remain disappointed at the absence of meaningful Government action to address the problem of pension scams at source.

DWP calls for evidence to support extending the NEST offering

As the pensions landscape is evolving and auto-enrolment staging dates are coming to an end, the DWP is now consulting on whether NEST should make changes to cater for the needs of the wider public.

Currently NEST is restricted to operate as a simple auto-enrolment vehicle, targeting low to medium earners, small employers and employers with a high labour turnover.  However, evolution is necessary given its growth, as evident in its annual report 2015/16.  Over the past year alone the number of members increased from 2 million to 3 million, the number of employers from 14,000 to 86,000, and assets under management from £420m to £827m.  Changes to the rules on contribution levels and transferring in and out of NEST are already in place to come into force in April 2017.

Further areas for potential change being explored by the DWP consultation include whether NEST should:

• Offer a full range of decumulation services for its members to enable fully flexible access to benefits
• Be able to accept employees who are not eligible jobholders under auto-enrolment, but are contractually enrolled into their employer’s designated scheme
• Open up access to individuals who don’t have either a direct employment relationship with an employer choosing to use NEST, or are self-employed; and
• Accept transfers from non-members, including bulk transfers from other schemes, and individuals close to retirement who may wish to take advantage of the new decumulation services

Consultation closes on 28 September 2016 and the DWP expects to publish a summary of the results before the end of the year.

Comment

Although in themselves these proposals seem to be entirely reasonable, the DWP will need to square the necessary evolution of NEST – invented because of market failure at the accumulation stage and subsidised at least initially by the taxpayer – with the impact that these proposals could have on the arguably well-served decumulation market.  In the end, the decision whether to extend NEST’s scope will be politically driven.

DWP legislates to put back auto-enrolment DC phasing

Regulations have been laid before Parliament that put back by six months the dates when the minimum contribution rate to money purchase schemes used for auto-enrolment were due to rise.  This follows the announcement made in last year’s Autumn Statement (see Pensions Bulletin 2015/50).

The minimum contribution rate is currently at or equivalent to 2% of qualifying earnings (of which at least 1% must be paid by the employer).  This is due to rise to 5% in October 2017 (with a minimum employer contribution of 2%) and to 8% in October 2018 (with a minimum employer contribution of 3%).

However, under The Employers’ Duties (Implementation)(Amendment) Regulations 2016 (SI 2016/719) the first increase will now take place on 6 April 2018 and the second on 6 April 2019.

Pensions Ombudsman reports further rise in referrals

A significant increase in the number of pension complaints with the prospect of more to come is one of the themes running through this year’s report from the Pensions Ombudsman Service.  The other is changes to working practices in order to rise to the challenge.

After Anthony Arter’s first full year as Pensions Ombudsman he reports that there has been a marked increase in complaints relating to personal pension schemes – now forming 46% of completed investigations – with the largest increase being SIPPs.  He also says that more cases have been resolved informally, provisional decisions followed by a formal determination will now only be rarely used and all future published decisions will normally be anonymised in respect of the complainant.

There are also plans to allow potential complainants to make an online application via the website using an “intelligent form” – ultimately moving to a self-service approach where complainants and respondents will be able to track the progress of the complaint.

Pension liberation cases accounted for 20% of all completed investigations.  In relation to the Royal London case (see Pensions Bulletin 2016/07), the Ombudsman has decided that going forward he will be more robust in participating in appeals if he considers that to do so would be beneficial to the pensions industry at large.

Comment

As the pensions landscape changes so does the nature of the referrals received by the Pensions Ombudsman.  Gone are the days when much of the activity related to disputes centred round the benefits being provided to a member of a DB scheme.  The focus is increasingly on DC including personal pensions and auto-enrolment, along with pension liberation.

Regulator meets ambitious goals, amid changing environment

This is the strapline to the publication of the Pensions Regulator’s annual report.

On the regulatory front, the Regulator reports developments on fighting pension scams, in collaboration with other public bodies (see Pensions Bulletin 2016/16), new guidance including Integrated Risk Management (see Pensions Bulletin 2015/52) and employer covenant (see Pensions Bulletin 2015/35)and the independent assurance scheme for master trusts (see Pensions Bulletin 2015/32).

Ongoing regulatory enforcement activities have included interventions in the Desmond and Sons (see Pensions Bulletin 2015/22), Carrington Wire (see Pensions Bulletin 2015/24) and the Docklands Light Railway (see Pensions Bulletin 2015/39) pension schemes.  The Regulator also reports that overall compliance in relation to auto-enrolment is better than predicted, despite a large number of fixed penalties having been issued.  £1.1m in penalty notices (of all types) have been issued.

The report sets out where the Regulator met or failed to meet performance targets.  Under its performance measures, employee engagement has improved considerably compared to the previous year.  Although the Regulator failed to meet performance targets in areas such as the funding of DB schemes, quality of DC schemes, and DB employers’ perceptions of sustainable growth, it also considers these as positive results as improvements have often been made compared to the previous year.

The Pensions Advisory Service has a busy year

The Pensions Advisory Service experienced a huge increase in its overall business according to its annual report and accounts which have just been published.  Volumes grew by 72% (including its “core business” and the new Pensions Wise telephone appointments), whilst website visits nearly doubled.  Despite this huge growth, the Service’s performance metrics also improved.

EIOPA passes the ball on pan-European personal pension schemes to the EU Commission

EIOPA, the European pensions regulator, has concluded two years of research and published its advice to the European Commission on how to bring about a single market for personal pension schemes.

Its final advice is substantially the same as the draft contained in its February consultation (see Pensions Bulletin 2016/05).  As before, it recommends that the single market is best empowered through a “second regime” under which a Pan-European Personal Pension Product (PEPP) would operate with standardised and flexible elements.  The standardised element (on information provision and investment options) will need to be imposed on domestic markets.

Comment

It is possible that there will be a proposal for legislation later this year, but if so, it is likely to be quite some while before we have a new Directive.  How relevant the Directive will be to the UK domestic market will depend on the conclusions of the post-Brexit vote negotiations.

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.