Pensions Regulator asks more of trustees in DB funding valuations

This year’s DB funding statement from the Pensions Regulator is markedly different to previous years with firmer expectations of trustees and the promise of greater intervention by the Regulator.

Significant changes of emphasis include that trustees should:

• Seek higher contributions from employers who can afford it
• Agree a legally enforceable contingency plan with the employer in advance of any downside risks materialising in relation to funding; and
• Put in place an appropriate cash flow management policy

For its part the Regulator promises to be more interventionist than before where it believes that schemes are not being treated fairly – particularly where recovery plans are being extended unnecessarily and where the employer covenant is constrained and payments to shareholders are being prioritised over payments to the scheme.

For our summary and commentary on the 2017 funding statement see our News Alert.

Comment

This is a significant break with the past.  What everyone will now be looking out for is whether the Regulator is able to drive through these changes, not only by trustees, but also in the way that it regulates.

Public service pension schemes need to do better

The Pensions Regulator has also published a report summarising its latest survey of governance and administration in public service pension schemes (ie schemes providing pensions for civil servants, the judiciary, local government, teachers, health service workers, emergency service employees and members of the armed forces).

The Regulator’s robust tone here is similar to that in its DB funding statement and is further evidence that it is intending to get tough with poorly administered schemes.  The Regulator says that the top risks in the public service pension scheme landscape are around scheme governance, record-keeping, internal controls and member communication.  The report covers each of these areas in detail and makes the following points:

• Governance: the Regulator is “concerned that a significant minority of scheme managers and pension board members may not be effective in, or even fully aware of, their governance duties”. Over the coming year it intends to improve standards through education and by reaching out to disengaged scheme managers
• Record-keeping: over a third of respondents to the survey identified record-keeping as a top risk to their scheme. The Regulator expects all schemes to do an annual data review and put a plan in place to put things right if required.  It intends to provide additional education in 2017 to ensure record-keeping failures are identified and tackled effectively.  It will consider enforcement action where scheme managers fail to demonstrate that they are taking appropriate steps to improve their records.  From 2018 scheme managers will have to report on their record-keeping standards in the scheme return
• Internal controls: the Regulator notes that this is an area where public service schemes are improving overall. Some gaps remain, mainly in locally-administered firefighters’ and police pension schemes, and it is here that it will be trying to drive real improvements in the coming year
• Member communications: the Regulator states that the majority of breaches of law reports relating to public service pension schemes in 2016 were to do with the failure to issue annual benefit statements on time. Overall 21% of members received their benefit statements late.  It expects member outcomes, in particular the proportion of members who receive their statements on time, to improve dramatically and notes that “Our tolerance for schemes’ shortcomings, particularly in the areas identified in this report, is reducing”

Finally, the Regulator warns scheme managers that “we are more likely to move to use of our enforcement powers this year”.

Comment

Public service pension schemes cover 16.5 million members and 24,000 employers.  They can be hugely complex with very varied benefit structures for historical reasons.  However, none of this matters to an individual member who just wants reassurance that their pension is being well managed.  The Regulator clearly agrees with this and the report gives fair warning to managers and administrators of public service schemes that it expects standards to improve quickly.

Auto-enrolment – staging draws to an end

The gradual roll out of auto-enrolment to existing employers is coming to an end, with all those businesses with PAYE schemes that existed before April 2012 now having passed their “staging date” when the employer duty to enrol certain employees into a pension scheme operates.  In fact, the last such employer had to stage by 1 April 2017.

Employers with PAYE schemes set up after 1 April 2012 but before 1 October 2017 have staging dates between 1 May 2017 and 1 February 2018, but, as the Pensions Regulator made clear last week, for new businesses which start up from 1 October 2017, the employer duty will be instant (with the ability to postpone, subject to certain conditions, for three months).

To assist such new businesses, the Regulator is to write to employers to tell them what they need to do and by when, and has also launched a new online suite of information and tools for new businesses and their advisers.

Comment

Providing pensions for employees is now part of “business as normal”, but ensuring that they are of sufficient quantum for all is a topic that will need to be addressed by the next Government.

Auto-enrolment – Regulator names and shames

Employers taken to court by the Pensions Regulator for failing to pay fines for non-compliance with the auto-enrolment legislation have been “named and shamed” in a new list published last week.

The list is in two parts – the first setting out those who have received an Escalating Penalty Notice, the amount they have paid and who are subject to some further (unspecified) action.  The second sets out those whose Escalating Penalty Notice remains unpaid.

The Regulator promises to update this list every quarter.

Comment

This list is just the tip of the iceberg.  The Regulator says that it issued more than 4,673 fixed penalty notices of £400 for automatic enrolment non-compliance to employers in the first three months of 2017, up from 2,919 such notices the previous quarter – the largest total issued to date.  A total of 1,043 escalating penalty notices were issued in the quarter, up from 870 in the last three months of 2016. This was also the highest quarterly total.

British Steel heads towards a regulated apportionment arrangement

The Pensions Regulator has issued a statement in which it appears that it is getting close to an agreement with Tata Steel UK and scheme trustees about the future of the British Steel Pension Scheme (BSPS).  A regulated apportionment arrangement is to be entered into following which a new scheme will be set up by Tata to which members of BSPS will be given an option to transfer.

It appears that those members that remain in BSPS will potentially enter the PPF whilst the new, and almost certainly less generous, scheme will be one of the new breed of DB schemes without a substantive employer on which the PPF consulted in relation to levy terms earlier this year (see Pensions Bulletin 2017/08).

The PPF has also issued a statement that confirms that agreement is close.

Comment

Although the Government has yet to respond formally to last May’s consultation on options for potentially helping BSPS and Tata Steel UK to separate (see Pensions Bulletin 2016/22) it now seems clear that it will not proceed with any of the options that it floated then.  However, the broad effect of what was being proposed then will be delivered through existing legislation – something that a number of respondents pointed out to the Government was feasible.

Retail Acquisitions to be wound up

The High Court has given its consent to the winding up of Retail Acquisitions Limited, the special purpose vehicle that was set up in November 2014 to purchase BHS.  The Court agreed with the administrators of BHS that RAL was insolvent.

Comment

This would seem to bring to an end the prospect of the Pensions Regulator receiving any recovery from RAL in relation to the BHS pension schemes (see Pensions Bulletin 2017/09).  As for the BHS schemes, they seem to be going down a road not dissimilar to BSPS.

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.