16 November 2017
DB scheme return – the Regulator focuses on scheme data presence and quality
The Pensions Regulator has published a checklist setting out the new information that will need to be submitted in the DB scheme return for 2017/18.
Of particular note are the new questions about scheme data. The Regulator is asking schemes when they last reviewed their common and scheme-specific (conditional) data and how much of this data is complete and accurate. The Regulator says that it won’t take enforcement action on the basis of scores alone, but if it has concerns that its standards are not being met it might engage with individual schemes. This may result in it taking action where trustees fail to demonstrate they are taking appropriate steps to improve their records.
To assist schemes the checklist concludes with a Q&A on measuring data along with a mention of the Regulator’s “quick guide to measuring your data”, which has also just been published.
Data quality within occupational schemes has been a recurring theme of the Pensions Regulator for a number of years. This latest guidance was expected, along with data scores forming part of the 2017/18 scheme return. What happens next will be interesting.
A Guide to the Chair’s Statement from the Pensions Regulator
Linked into its latest compliance and enforcement quarterly bulletin (covering July to September 2017) the Pensions Regulator has published a Quick Guide to the Chair’s Statement which most DC schemes must now include in their annual report and accounts. The guide sets out the legal requirements in relation to the Chair’s Statement and the Regulator’s expectations as to how trustees should meet them. The guide also addresses some common misunderstandings and omissions seen in statements submitted so far, along with examples of what would be considered to be a “good” or “poor” chair’s statement.
The bulletin also continues to emphasis the tougher stance that the Regulator is now taking towards pension schemes and employers that are in breach of their duties as it continues to “name and shame” trustees and employers who have incurred fines for non-compliance (see Pensions Bulletin 2017/34). Much of the focus in this edition is on employers who have failed to comply with their automatic enrolment responsibilities – indeed this quarter these are estimated to have accounted for roughly 25% of all the auto-enrolment enforcement actions that the Regulator has ever taken. Illustrating this point further, we have also just seen the successful prosecution of a bus company and boss who have been convicted of deliberately failing to give their staff workplace pensions (see also Pensions Bulletin 2017/38).
The contents of this compliance bulletin are no surprise in view of the Pensions Regulator’s clear intention to be more forceful in cracking down on breaches. However, whether this will result in better and timelier compliance by employers and trustees remains to be seen.
FRC shares better practice pension disclosures
The Financial Reporting Council has published three thematic reports to help companies improve the quality of their corporate reporting in these acknowledged areas of difficulty. One of these concerns pension disclosures.
60 companies were informed, before their year-end, that the FRC would review one of the three themes in their next reports and accounts. Many companies responded by improving the quality of their reporting in the selected area.
In relation to pension disclosures, the FRC acknowledges that low interest rates and the economics of DB pension arrangements have increased the need for transparency of pension reporting. The improvements that were observed across 20 companies were as follows:
- Many companies provided more information about the risks and uncertainties arising from their pension schemes; and
- There was a better explanation of why there was a marked increase in companies’ pension deficits and the actions being taken to address the issue
The FRC says that it will continue to challenge and expect change by those who do not disclose the information needed to support an understanding of how pension-related risk may affect the amount, timing or uncertainty of future cash flows, or clearly explain the basis on which different plan assets have been valued.
We are not surprised that the FRC has chosen to focus on pension disclosures and in particular DB deficits and how they are being addressed. The report is also deliberately timed to coincide with the run up to the reporting season for many large corporates, as the FRC clearly intends that the better practice revealed by the targeted companies will be taken up more widely.
FRC finalises Practice Note 15
The Financial Reporting Council has issued an updated version of the Practice Note used by auditors of occupational pension schemes. This follows a consultation earlier this year (see Pensions Bulletin 2017/17) as a result of which relatively minor changes were made to the draft.
The refreshed Practice Note 15 has been necessitated by revisions to UK auditing standards (ISAs), changes to UK accounting standards (FRS 102) and the revision of the pension SORP, continuing developments in regulatory codes and guidance issued by the Pensions Regulator, changes in relevant legislation and the increase in master trusts in the pension sector. The previous edition was issued in January 2011.
As before, the Practice Note sets out the special considerations relating to the audit of occupational pension schemes which arise from the individual ISAs, but is not intended to provide detailed guidance for auditors.
Practice Note 22 – the Auditors’ Consideration of FRS17 – Retirement Benefits – Defined Benefit Schemes has now been withdrawn.
Towards the end of the Practice Note is some information about the auditor’s role when it comes to the statement that must be given regarding contributions that have been made to the DB or DC scheme during the scheme year in question. This will be of interest to a wider audience when there are unusual situations within a scheme that may give rise to a concern that the auditor may qualify his or her opinion on the scheme accounts.
Government promises sight of cold call ban legislation in early 2018
In an answer to a Parliamentary Question, the Government has promised to bring forward draft legislation to ban pensions cold-calling, including texts and emails, in early 2018. This is slightly firmer than when the Government responded to the consultation on pension scams in August (see Pensions Bulletin 2017/35).
Although this sounds promising, the Government has yet to find a legislative vehicle in which to insert the ban, or give a definitive timescale by when the ban will come into force.
DWP issues guidance on new legislation impacting safeguarded-flexible benefits
The DWP has issued non-mandatory guidance whose purpose is to assist those who will have to operate the new requirements for the valuation of and provision of personalised risk warnings in relation to “safeguarded-flexible benefits”. This follows the finalisation of two sets of regulations last July (see Pensions Bulletin 2017/29).
To recap, safeguarded-flexible benefits are defined contribution in nature but offer some form of guarantee in relation to the pension income that will be available to the member such as a guaranteed annuity rate.
The Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) (Amendment) Regulations 2017 (SI 2017/717) have completed their passage through Parliament, whilst the Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) (Amendment No.2) Regulations 2017 have yet to do so. Both are due to come into force on 6 April 2018.
These regulations require trustees and scheme managers to:
- Send tailored communications (“personalised risk warnings”) to members with safeguarded-flexible benefits
- Use the “transfer value” of members’ safeguarded benefits when assessing whether the value of their pension pots is above the threshold at which they are required to take financial advice; and
- Make transitional arrangements to inform members who are affected by the change in valuation methodology
The guidance further explains the information requirements where members hold rights to safeguarded-flexible benefits and suggests best practice for those charged with delivering them.
The guidance provides a clear exposition of the new requirements along with some useful best practice suggestions. Very few occupational pension schemes are likely to provide such benefits, but where they do, this guidance should assist.
NEST consults on making death benefit destination discretionary
The National Employment Savings Trust is consulting on changing its rules for paying death benefits. Currently, NEST members complete a binding nomination form which the Trustee of NEST has no discretion about. This means NEST death benefits form part of a person’s estate and are potentially subject to inheritance tax, unlike most pension death benefits which are payable at trustee discretion and therefore not liable to IHT.
NEST is proposing to give members the option going forward of completing a discretionary form or a binding form. The reason behind this decision is acknowledgement that NEST has evolved since it started in business in 2012 and that member funds are getting bigger, with the possibility of IHT having more impact, and that the introduction of “freedom and choice” has changed the pensions landscape. NEST acknowledges its proposal is a “novel approach” (although it is not unique) but believes it will give its members the choice of mitigating their IHT liability or else having certainty about where the death benefits will be paid.
The consultation also proposes to:
- Streamline NEST’s different rules for death benefits pre and post age 75
- Enable contractual enrolment (as set out in Pensions Bulletin 2017/46); and
- Permit joining NEST via a bulk transfer with consent
Consultation closes on 29 December 2017. If NEST decides to go ahead with the discretionary approach it intends to bring it in probably towards the end of 2018. The other changes are intended to take effect in April 2018.
The decision to allow members to decide whether their death benefits are to be paid on a discretionary basis seems sensible. However, other master trusts may be further irked that another differentiating factor between themselves and NEST (which is the beneficiary of a massive Government loan – see Pensions Bulletin 2017/30) will be removed.
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.