22 December 2016
The PPF almost finalises the 2017/18 levy
On 15 December, the Pension Protection Fund issued its final levy rules for 2017/18. Well, nearly final, as in a break from tradition these documents have been issued on a provisional basis whilst a special rule for eligible schemes that cease to have a substantive sponsoring employer is considered (apparently driven by the British Steel Pension Scheme – see News Alert 2016/01).
The PPF has given a firm intention that there will be no other changes to these provisional rules. It intends to issue a complete set of final rules by 31 March 2017.
There are very few changes from the draft rules issued in the September consultation (see Pensions Bulletin 2016/39).
- The levy estimate remains at £615m, the levy scaling factor stays at 0.65 and the scheme-based levy multiplier is unchanged at £21 per £1 million of liability
- The opportunity to certify the effect of the change in FRS 101/102 on the company’s insolvency score is extended to the “trend variables” on all scorecards (trend variables are those that look at the difference between figures in the latest accounts and those three years ago). Originally the certificates were only to be made available to companies on the “Large and Complex” and “Not-for-Profit” scorecards – the scorecards expected to be most impacted by the change
The consultation on the next levy triennium (2018/19 to 2020/21) has been put back slightly to spring 2017. We are expecting more significant proposals for change, particularly to insolvency risk scores, at that point.
In supporting documentation the PPF has published:
- Its conclusions on the consultation in the form of a policy statement
- The provisional determination that sets out the 2017/18 levy calculation, together with a number of appendices; and
- Guidance materials on asset-backed contributions, the bespoke investment stress calculation, block transfers, contingent assets, deficit-reduction contributions, insolvency risk and exclusion of mortgages
The PPF has also confirmed that the levy data correction principles published in August remain effective.
Deadlines for the 2017/18 levy season
The deadlines for providing information to the PPF are as proposed in September – namely:
- Midnight at the end of 31 March 2017 for the compulsory submission of scheme returns (including any voluntary section 179 valuations), and certification/re-certification of asset-backed contributions, mortgages (to Experian), contingent assets and the new accounting standard change
- 5pm on 28 April 2017 for certification of deficit-reduction contributions; and
- 5pm on 30 June 2017 for certification of full block transfers that have taken place before 1 April 2017
It seems that the PPF has been concerned for some while that the risk presented to it by schemes that lose their employer is not adequately reflected in the current levy methodology. Recent events have brought into focus the need to develop a special rule for such cases that may have more regard to investment risks than the standard methodology.
For normal levy payers, the provisional rules now mean that all companies should consider whether the accounting standard change certification would improve their Experian score (although in practice we expect few companies other than those on the “Large and Complex” and “Not-for-Profit” scorecards will benefit). Otherwise it is very much business as usual, with the standard levy mitigating actions available.
Whilst the focus is currently on minimising the 2017/18 levy we await with interest the forthcoming consultation on the next levy triennium. Schemes should keep one eye on how the proposals, when they emerge, will affect them.
DWP proposes easements to law governing without consent bulk transfer of DC pensions
In a welcome development, the DWP has launched a call for evidence on how the current provisions on DC bulk transfers without member consent could be improved. The DWP suggests that reform in this area will remove a potential barrier to allowing scale to develop in the DC landscape – such as through a company wishing to consolidate its pension assets from two or more schemes, or where a single employer scheme wishes to exit pension provision and transfer members into a master trust.
Recognising that the current law governing occupational pension scheme transfers without member consent was designed with DB schemes in mind, the DWP asks whether, for DC transfers only:
- The “broadly no less favourable” actuarial certificate should be revisited – perhaps with trustees relying instead on the judgment of another appropriately qualified independent person when assessing the merits of the transfer (or even whether it would be possible to leave the judgment entirely up to the trustees (armed with some technical guidance). The DWP would also like to hear what factors any assessment should, or should not take into account
- The permitted relationship between the transferring and receiving schemes should be expanded to address two specific issues – consolidation of small pots and orphaned schemes – which may be preventing the efficient consolidation of DC rights
Bulk transfers without consent between stakeholder pension schemes are also covered. The DWP appears to accept that the pre-requisites that govern such transfers are now outdated (such as the need to have started to wind up) and suggests that it may be possible to allow without consent transfers to group personal pension policies and also to remove the winding up condition.
This call for evidence closes on 21 February 2017. The DWP intends to use the information gathered to inform a consultation and more industry engagement on firmed up policy proposals during 2017. Should secondary legislation be required, the current intention is for it to be in place by April 2018.
This is a long overdue reform. We hope that the DWP will be able to quickly establish a consensus for a new protective regime to govern DC to DC bulk transfers without consent as there is little doubt that the current one is not fit for purpose.
MPs propose giving Pensions Regulator ability to level punitive fines for anti-avoidance
In yet another report from the Work and Pensions Select Committee, its MPs suggest that the Government should consult on new enforcement powers for the Pensions Regulator in which it could impose fines of three times the amount that might otherwise become payable as a result of anti-avoidance activity by employers in relation to their DB schemes. The MPs suggest that such a “nuclear deterrent” would stop some employers who otherwise “may well take a punt” on risking enforcement action.
Other suggestions include:
- Trustees to have powers to demand timely information from scheme sponsors
- Trustees to be able, subject to Regulator approval, to consolidate small schemes in an aggregator fund to be managed by the PPF; and agree changes to the indexation of pension benefits in instances where such changes are needed to make a scheme sustainable, including conditional arrangements that will revert to original uprating when good times return
- Scheme members to be given greater flexibility to take small pensions as lump sums
- Introducing more flexibility around the frequency of valuations, with more regular valuations for higher-risk schemes, whilst allowing a longer period between formal valuations for well-run, well-funded ones
- A nimbler Regulator, particularly in relation to scheme funding processes (which should be tightened – specifically to reduce the statutory timescale for completion to nine months and to provide that recovery plans of more than ten years be exceptional), that would be able to “nip potential problems in the bud”
- A streamlining of the regulatory apportionment arrangement process, with the Regulator taking a more active approach earlier in the process; and
- Mandatory clearance when there is the greatest risk of material detriment to a pension scheme as a result of a proposed corporate transaction
The MPs suggest that had the pensions regulatory regime contained their recommendations then the pensions aspects of the BHS story would have played out in a very different manner.
The timing of this report is clearly intended to influence the contents of the Government’s promised Green Paper. It seems likely that many of the report’s themes will be addressed here, but whether the Government will go as far as the MPs remains to be seen.
The Pensions Regulator reports back on its 21st century trusteeship consultation
The Pensions Regulator, in the response to its consultation on modern day trusteeship, says that it will continue to seek to improve standards of pension trusteeship through a targeted education and enforcement drive starting in spring 2017.
It will also seek to make its expectations clearer about what “good looks like” and make better use of its data so that it can target its efforts and resources on higher risk schemes and those that require more support.
Whilst acknowledging that there are many highly experienced and skilled trustees, and that some schemes are managed very effectively, the Regulator remains concerned that too many occupational pension scheme members and sponsors are suffering financial detriment from poor stewardship.
The responses received were apparently generally supportive of the Regulator’s stance, but few thought that minimum or mandatory qualifications or membership of a professional body for the chair of trustees or lay trustees would be helpful – with more support for focusing on the competence of the board as a whole. There was support for professional trustees being able to demonstrate their expertise and uphold higher standards. Respondents also thought a targeted approach by the Regulator towards particular schemes would be better than placing additional burdens across all schemes.
We can expect more in the coming period than “educate and enforce” as the Regulator clearly has some real concerns about the quality of trusteeship and scheme governance. There may yet be a “fit and proper” regime imposed on trustees, strong encouragement for failing schemes to consolidate and a new framework for DB schemes to report on their governance. But all this will depend, in no small measure, on what appetite the pensions minister has for this.
Settlement reached in Guinness Peat anti-avoidance case
The Pensions Regulator has announced that a settlement has been reached in respect of two of three DB schemes sponsored by companies within the Coats corporate group (formerly known as Guinness Peat).
The Regulator has also confirmed that in 2013 and 2014 it issued Warning Notices setting out the case for exercising its Financial Support Direction powers in relation to the three schemes.
Details are sketchy, but it appears that in around 2012 Coats intended to make large payments to shareholders from the proceeds of the sale of many of its operating businesses whilst the three schemes were in substantial deficit. The settlement reached appears to comprise an upfront payment to the two schemes of £255.5m (inclusive of amounts due under the previously agreed recovery plan since January 2016) and an improvement in employer covenant through changing the schemes’ statutory employer. The Regulator also mentions a “full guarantee” from Coats of the liabilities of the two schemes, although quite what this means is not clear.
The schemes covered by the settlement are the Coats Pension Plan and the Brunel Holdings Pension Scheme and cover approximately 90% of the three schemes’ membership. The Regulator reports that a comparable offer has been made to the third scheme (Staveley Industries Retirement Benefits Scheme) on which discussions are ongoing.
It would seem that the “insufficiently resourced” FSD criterion was achieved, so enabling the Regulator to act and in so doing look across the whole corporate group. Although the strength of its case is not made clear, by reaching an agreement with a solvent company, it may have made it more difficult for other solvent companies to walk away from the DB promises made elsewhere within their corporate structure.
Treasury consults on new financial guidance body
The promised consultation on a single financial guidance body has now emerged, courtesy of HM Treasury.
In March this year, the Government intended to create a combined pensions guidance body and was going to work up the necessary legislation in the Pensions Bill that is currently going through Parliament. But in a late change of heart, it decided that the better way forward would be to create a new financial guidance body that would range across pensions guidance, money guidance and debt advice (see Pensions Bulletin 2016/41).
The consultation document sets out the Government’s thoughts on how to structure this new body and also delivers the Government’s formal response to its March consultation.
Five key areas are proposed on which the new body will focus:
- Debt advice for those in debt problems
- Guidance and information on matters relating to occupational or personal pensions, accessing DC pots, and planning for retirement
- Providing information to help consumers avoid financial fraud and scams
- Guidance on wider money matters and co-ordinating and influencing efforts to improve financial capability; and
- Co-ordination of non-governmental financial education programmes for children and young people
The Government also believes that the new body should have a strategic role to ensure that funding is delivered to high-quality programmes that have been proven to work and to help consumers in most need.
Consultation closes on 13 February 2017 and the Government intends that the new body will be up and running no earlier than autumn 2018. Until then the existing bodies – the Money Advice Service, the Pensions Advisory Service and Pension Wise – will continue to operate as normal.
The material within the consultation document is set out at a high level and so it is not clear at this stage what it will mean for the pension guidance currently delivered through the Pensions Advisory Service and Pension Wise. Hopefully the consultation and the discussions to come will tease this out. At least this reform, which may be more about long-standing concerns regarding the Money Advice Service, is not going to be rushed through to implementation.
FRC issues its draft Plan and Budget for 2017/18
The Financial Reporting Council has published a consultation paper setting out its draft plan, budget and levy proposals for 2017/18.
A key focus next year will be on its monitoring and enforcement activities. Promotion of clear and concise corporate reporting is also mentioned. Governance is another concern, with the consultation paper saying that “the reputation of business as a whole has been damaged by the behaviour of a few”. The FRC is to update the Corporate Governance Code and associated guidance and promote effective investor stewardship.
The FRC will also be “responding to the challenges and opportunities” of Brexit.
As a result, the FRC’s proposed budget for 2017/18 will require a 4% increase in the FRC’s overall funding requirement, principally through an increase in the levies on professional bodies of 2.5% and an overall 5% increase in the preparers’ levy (ranging from 2.5% to 9.5% depending on market capitalisation). The pension levy is also to be adjusted. Currently it applies to all occupational pension schemes with 1,000 or more members. The FRC is proposing to exempt schemes with fewer than 5,000 members, but then increase the levy rate from £2.95 per 100 members to £3.12 per 100 members for the remaining schemes. These large schemes will therefore see their levy increase by more than 20% in two years (see Pensions Bulletin 2015/54).
Consultation closes on 17 February 2017.
More stirrings that the UK’s corporate governance regime may be modified in the light of BHS, but it will be for the Government to take the lead on this and its Green Paper on Reforming Corporate Governance published last month was a damp squib.
FRC to look into company pension disclosures
The Financial Reporting Council is to conduct a review of pension disclosures in company accounts, as reported under IAS 19. The FRC states that continued low interest rates and the economics of DB pension arrangements have increased the need for companies to improve the transparency of their pension arrangements.
The review is one of three “thematic reviews” into specific areas of company accounts, the other two being performance measures, and significant assumptions and sources of estimation uncertainty.
The FRC has identified the following specific areas where improvements can be made in current pensions reporting. It expects:
- Quantified information about the level of funding of the pension scheme expected in future years
- The risks inherent in the investment strategy to be clearly identified and explained, such as when this involves the use of complex financial instruments
- Where net pension assets have to be considered, the basis on which the company expects to benefit, including the judgments made when assessing trustee rights; and
- An explanation of how fair value has been determined for assets such as insurance contracts or longevity derivatives
The FRC notes that when the risks and uncertainties are significant, the Companies Act 2006 requires these to be described in the strategic report, as well as making reference to and giving additional explanations of amounts included in the company’s annual accounts.
Over recent years, the FRC has repeatedly highlighted pensions disclosures as a key area for improvement in company annual reports. The latest review continues this trend, and suggests that companies can expect even more scrutiny of their pensions disclosures at this year end.
FCA reviews the funding of the Financial Services Compensation Scheme
The Financial Conduct Authority is proposing a fundamental review of the levy that finances the Financial Services Compensation Scheme, driven in part by the fact that the pension freedoms are resulting in consumers taking greater responsibility for saving for a pension and using their pension savings in new ways to fund their retirement.
In a 185-page document, the FCA suggests (amongst other things) that the FSCS compensation limits and activities need updating in light of the pension freedoms. For example, lower compensation limits currently apply to non-insured retirement savings vehicles such as SIPPs, DC occupational pension schemes and some drawdown policies, compared to insured vehicles such as annuities. The concern is that with increasing use of the former, consumers could be placed in financial difficulty with little or no chance to replenish their savings should things go wrong. But any increase in the compensation limits implies a potential increase in levies. The FCA would like to know where to strike the balance.
Responses to this paper are sought by 31 March 2017, with the FCA intending to then publish some rules in a policy statement next year and also consult further on specific proposals in those areas where this paper sets out a range of options.
Various straw men are proffered in the investment area, with the FCA having no particular preference as to what to do. But it does seem clear that the £50,000 compensation limit that currently applies to investment products will need to rise – perhaps just for those claims that are pensions-related.
EMIR pension exemption extended again
The European Market Infrastructure Regulation requires certain types of “over-the-counter” derivative contracts to be “centrally cleared”. OTC derivative contracts such as interest rate and inflation swaps are commonly used by pension schemes employing liability-driven investment strategies.
In recognition of the adverse effect that central clearing may have on members’ retirement income, Article 89 of the Regulations provides that OTC derivative contracts “that are objectively measurable as reducing investment risks directly relating to the financial solvency of pension scheme arrangements” are temporarily exempted from the clearing obligation. This exemption was previously extended to 16 August 2017 (see Pensions Bulletin 2015/25) and has now been further extended, by a “delegated act” of the European Commission, to 16 August 2018.
EMIR itself is due to be reviewed as part of the Commission’s 2017 work programme. Given this, along with the latest extension now taking us quite near to the UK’s potential departure date from the EU, we now wonder whether British pension schemes will ever be subject to this clearing obligation.
Spring Budget date confirmed
Christmas and New Year break
This is the last edition of the Pensions Bulletin for 2016. It will return after the Christmas and New Year break. May we wish readers a merry Christmas and a prosperous New Year!
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.