9 August 2018
IORP II update – No January 2019 deadline for schemes
The “IORP II” Directive became European Union law at the beginning of 2017 (see Pensions Bulletin 2017/01).
IORP II, as an EU directive, does not apply directly to UK pension schemes. The UK Government has to implement it into UK law. The department responsible for this is the DWP which has been considering the approach to take to implementation.
In discussions with industry representatives the DWP has recently indicated its currently proposed approach, which we outline below. However, government business is currently subject to unusually high levels of uncertainty, particularly where it concerns Europe, and there is greater potential for unpredictable and sudden changes in the current political context.
So while what follows is our understanding of how the DWP currently intends to proceed, we do not have a firm policy statement to go on and it cannot be guaranteed that implementation will take place in this way.
The UK had a big say in the framing of the Directive, the text of which largely supports the UK’s direction of travel on pensions policy. The UK already complies with much of it and it can therefore be implemented without extensive new legislation.
But some changes to UK legislation and regulatory framework will be needed. The two main areas where this is the case are scheme governance and member communications.
The legal deadline for the UK to implement any necessary changes is 13 January 2019. This had left many trustees and sponsors worried that a whole new raft of requirements could come in overnight. We understand that the DWP’s view is that pension schemes will not be expected to action any changes by January 2019 and that any changes to pension law and regulation will be implemented with phasing or implementation periods which will allow sufficient time for familiarisation and planning.
Scheme governance legislation
IORP II imposes various governance requirements, for example for pension schemes to have risk management and internal audit functions. We understand that the DWP intends to lay regulations to legislate for the Directive’s governance requirements. These regulations will replace the existing provisions regarding internal controls under the Pensions Act 2004 and will require the Pensions Regulator to publish an updated Code of Practice to explain what is expected of trustees.
We believe that these pension scheme governance regulations would come into force in December 2018. The Pensions Regulator will then publish an updated Code of Practice within the following year that sets out how schemes can proportionately comply with the new legislation. This Code of Practice will have the same “comply or explain” status as existing Codes of Practice and will be subject to formal consultation.
The DWP has not yet decided on the precise timing of the implementation period. Options under consideration may include allowing 12 months from the first scheme year end date after publication of the Code of Practice, with the option for trustees to move this to align with existing systems and document production cycles if preferred, even if this extends past 12 months.
The Directive contains a lot of detailed prescription on the information that pension scheme members should be given. Most notably it sets out detailed requirements for a “Pension Benefit Statement” to be provided to all members annually.
We do not yet know what these requirements will look like when written into the already extensive UK pension disclosure law. Our understanding is that this will be largely implemented either by Regulations or Codes of Practice, probably involving formal consultation, which we will start to see perhaps in the middle of next year. So – and this is guesswork – it currently seems unlikely that the detail of any new disclosure requirements will be known until then.
The DWP has a difficult job to do here. It needs to deliver workable changes to pension law amidst the most uncertain political environment in living memory.
It is really helpful to know that there will be no regulatory cliff edge come next January. The Directive imposes obligations on the UK Government. There are no obligations on UK pension schemes until domestic law so provides, which will not be for some time.
We do expect the Directive to have a significant impact in due course. But exactly how remains to be seen.
Pension fraud – pension scheme has to pay out twice
In the first of its kind, the Pensions Ombudsman has determined that a pension scheme must reinstate a member, who fell victim to a scam, to his original position in the scheme, as well as paying £1,000 to reflect the materially significant distress and inconvenience caused.
Mr N, a police officer with Northumbria Police and a member of the Police Pension Scheme, opted out of the scheme in December 2012. He hoped to retire at age 55 but was worried that he might not be able to access his pension under the Scheme rules then applicable, some 16 years in the future. He therefore sought advice from a company called Pension Transfer UK in August 2013, and a chain of firms followed: Viva Costa International (introducer), Gerard Associates Limited (financial advisers), and finally London Quantum Retirement Benefit Scheme, an occupational pension scheme. In April 2014 Mr N authorised Gerard to request a cash equivalent transfer value from the Police Pension Scheme, and by August of that year the transfer of £112,077.66 was complete.
Mr N became concerned in 2015 when he revisited the documents and noted that he had signed up to a high risk investment as a sophisticated investor. He brought a complaint against Gerard to the Financial Ombudsman Service, but this was rejected on the basis that no regulated activity had been carried out by Gerard, as it did not provide any advice to Mr N. Mr N then, in March 2016, brought an internal complaint against Northumbria Police and when that failed, contacted the Pensions Ombudsman.
The Pensions Ombudsman found against Northumbria Police because it did not provide the member with appropriate scam warnings and did not perform sufficient due diligence, which amounted to maladministration. In particular:
- Northumbria Police should have sent Mr N a copy of the Pensions Regulator’s “scorpion” warning, despite at that time it was not a requirement to do so. Providing this information on the police intranet was not sufficient; nor was it acceptable to justify the assumption that Mr N would not have read the leaflet, even though he signed up to a high risk investment as a sophisticated investor without being aware that he had done so
- Northumbria Police should have had concerns about London Quantum: it was aware Mr N was not employed by its sponsoring employer, which was “based at the other end of the country”. It also failed to make sufficient enquiries into London Quantum, which should have included obtaining a copy of its trust deed and rules
- Although Northumbria Police followed the “things to look out for” guidance within the Pensions Regulator’s action pack on pension liberation fraud, the Ombudsman disagreed with all its conclusions
- The Ombudsman is of the view that because Northumbria Police receives very few transfer enquiries, it would have been straightforward and appropriate to focus on the requests made
- Finally and crucially the Ombudsman decided that the “statutory discharge” in Section 99 of the Pension Schemes Act 1993 did not operate to protect the scheme. “What is needed to be done” to carry out the member’s transfer request included carrying out due diligence on the receiving scheme. As this was not adequately done Northumbria Police cannot rely on the statutory discharge
One crumb of comfort for Northumbria Police is that the Ombudsman has also ruled that if Dalriada Trustees (who were appointed in June 2015 by the Pensions Regulator as an independent trustee to London Quantum) can recover any of Mr N’s pension then Northumbria Police shall be entitled to recover that amount from Mr N. But in practice the likelihood of significant recoveries is extremely small.
This is the first case that we are aware of where the Ombudsman has decided that a member’s benefits must be reinstated. The conventional view until now has been that even if a ceding scheme failed to carry out due diligence a scammed member would have no redress because of the statutory discharge. This orthodoxy has now been demolished.
This case may set a precedent for victims of such scams to claim against trustees of their originating schemes, who continue to have no power to stop fraudulent transfers (see Pensions Bulletin 2016/13). In particular, the 100 or so individuals who transferred to London Quantum between 2012 and 2015 may well seek redress from their trustees.
Ultimately, we hope that a sensible balance is struck. Where ceding schemes have paid out without having made proper checks redress may be appropriate. But this determination has the potential to put diligent trustees in a horrible position: the law says that they have to pay transfers if the member requests (see Pensions Bulletin 2016/07) but now there is a risk that they will be made to provide redress if it all goes wrong.
Work and Pensions Committee launches inquiry into pension costs and transparency
Following on from its inquiry into Pension Freedom and Choice (see Pensions Bulletin 2018/15) and the FCA’s new consultation on improving the quality of pensions transfer advice (see Pensions Bulletin 2018/13) a new inquiry launched by the Work and Pensions Select Committee is to focus on whether the pensions industry provides sufficient transparency around charges, investment strategy and performance to consumers.
The terms of reference of the inquiry include examining whether enough is being done to ensure individuals get value for money for their pension savings, understand the short- and long-term impact of costs on retirement outcomes, and are engaged enough to use information about costs and investments to make informed choices about their pension savings.
The inquiry looks to address concerns – exacerbated by the rapid rise in numbers of new retirement savers as a result of auto-enrolment, and a surge in demand for drawdown products and transfers out of defined benefit schemes spurred on by the pension freedoms - that low levels of customer engagement and understanding, coupled with costly and opaque intermediation, risk leading to poor outcomes for pensioners.
The Committee is hoping that all interested parties will provide evidence on eight questions around pensions costs and investment transparency including exploring the relative importance of empowering consumers or regulating providers and whether pensions customers get value for money from financial advisers.
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.