Pensions Bulletin 2018/50

Our viewpoint

CMA introduces mandatory tender process for fiduciary management mandate

On 12 December, the Competition and Markets Authority published its final decisions following its extensive investigation into the investment consultancy and fiduciary management markets which began in September 2017.  The report sets out the CMA’s remedies for the industry to address the competition issues it found during its investigation and builds on its provisional decisions published in July (see our News Alert in Pensions Bulletin 2018/29 for more on those).

The CMA has found competition and fee transparency problems within both the investment consultancy and, to a greater degree, the fiduciary management markets – the latter largely due to the competitive advantage held by incumbent investment consultants when it comes to awarding such a mandate.

The remedies imposed on fiduciary management providers highlight that it is distinct from providing an advisory service.  The argument used by some fiduciary managers that fiduciary management is a natural extension of an advisory service has not been accepted by the CMA.

Of the finalised proposals, most striking is the remedy that requires trustees to conduct a tender exercise when first appointing a fiduciary manager to manage assets greater than 20% of the scheme’s total, or within five years where an existing mandate has not been subject to a tender process.

Fiduciary management firms must also now provide potential clients with clear fee information and use a standard approach to show how they have performed for existing clients so that trustees can easily compare different providers.

The CMA also recommends that the Pensions Regulator produces guidance to assist trustees in this area – and that the Government broadens the regulatory scope of both the Pensions Regulator and the Financial Conduct Authority to introduce greater oversight of this sector.

The CMA will issue a draft of the Order(s), which will set out its requirements, for consultation in early 2019.  Implementation of the new requirements is expected to begin later in the year.


Although the CMA has not made it a requirement for customers to appoint separate firms for strategic advice and portfolio implementation services, which are combined under a fiduciary management arrangement, in our view the remedies are designed to encourage customers to consider very carefully the suitability of appointing a single firm for both services.  In any event, these remedies are welcome and we expect that the CMA’s extra scrutiny of this advisory sector will only benefit pension scheme trustees and members.

The PPF finalises the 2019/20 levy

On 12 December the Pension Protection Fund issued its final levy rules for 2019/20 – the second year of the new “triennium” of levy seasons running from 2018/19 to 2020/21.  There are very few changes from the draft rules issued for consultation in September (see Pensions Bulletin 2018/38).  So, as in September, the levy scaling factor remains at 0.48, the scheme-based levy multiplier is staying at £21 per £1 million of liabilities and the risk-based levy cap remains at 0.5% of smoothed liabilities.  The PPF estimates it will collect £500 million in levies for 2019/20.

The PPF has gone ahead with its proposals to introduce a new regime for commercial consolidator schemes with some adjustments, particularly in relation to the recognition of buffer funds, winding up triggers being recognised at the PPF’s discretion and adjusting for liability increases during the year (on which the PPF will now not proceed).  The PPF also acknowledges that its approach for the 2019/20 levy year is necessarily interim and is likely to need development for future levy years as the DWP’s regulations and consolidator propositions develop.

The PPF has identified some changes it will be introducing in 2019 for levy invoicing with the promise of more to come.  Amongst the short-term changes is the promise to publish the criteria the PPF uses to assess whether the PPF levy can be paid by a scheme in “easy instalments”.

As previously confirmed, any Type A (parental guarantee) or Type B (security over an asset) contingent assets with a fixed element in their liability cap will need to be re-executed on the new standard forms issued by the PPF in January 2018 (with minor updates in March 2018) and certified to be recognised in the levy.  There are some minor changes to the required lodging process, including a slight extension to 5pm on 1 April 2019 of the deadline by which hard copy documents supporting contingent assets must arrive at the PPF’s Croydon office.  There is also a reminder on what the Guarantor Strength Report, which must be submitted with parental guarantees that are expected to save £100,000 or more of levy, must contain.

The PPF has helpfully confirmed that schemes are not required to identify and exclude any contributions in respect of investment expenses from a Deficit Reduction Contribution certification.  It has not gone ahead with proposals to class member-optional pension increase exchanges at the point of retirement as augmentations.

The PPF has received requests for guidance on whether and how the outcome of some significant court cases (Hampshire, Beaton and Lloyds) should be reflected in section 179 valuations.  It has published some initial FAQs on these cases, with the main messages being that there is no need to allow for these cases in valuations currently underway and there will be no adjustment made in the 2019/20 levy season in respect of them – and that it is considering when to issue further guidance.

In supporting documentation, the PPF has published its conclusions on the consultation in the form of a policy statement, the final determination that sets out the 2019/20 levy calculation, together with a number of appendices, guidance materials on a variety of topics, and related forms and documents.

Deadlines for the 2019/20 levy season

The key deadlines for providing information to the PPF are as follows:

  • Midnight at the end of 31 March 2019 for the compulsory submission of scheme returns (including any voluntary section 179 valuations), and certification/re-certification of asset-backed contributions, mortgage exclusions (to Experian), contingent assets (which includes, where a parental guarantee is expected to save £100,000 or more of levy, a guarantor strength report), and special category employer applications. Hard copy documents supporting contingent asset submissions need to be received by the PPF by 5pm on 1 April 2019
  • 5pm on 30 April 2019 for certification of deficit-reduction contributions and applications for exempt transfers
  • 5pm on 28 June 2019 for certification of full block transfers that have taken place before 1 April 2019


Now that the PPF levy materials are in final form pension schemes and their employers can consider their levy-saving measures with a degree of certainty.

DWP launches its DB consolidation proposals

On 7 December the DWP issued its much-anticipated consultation paper covering defined benefit pension scheme consolidation – the bulk of which discusses consolidating DB schemes into superfund entities.  On the same day the Pensions Regulator issued separate guidance for three parties – for trustees and companies looking to transfer to a DB consolidator before the DWP’s framework is in place, and for the vehicles themselves on the Regulator’s expectations.  Both the DWP’s proposals and the Regulator’s guidance are examined further in our News Alert.

There are also two issues covered in the consultation paper that do not directly relate to such consolidation – an update on the DWP’s work on GMP inequalities and some discussion around proposals for an industry-led accreditation scheme for DB master trusts, along with confirmation that an industry working group is being set up to take this forward.


This latest consultation is a key development from the White Paper in March, but there will be little time for the DWP to deliver the necessary regulatory architecture into next year’s Pensions Bill.

Appeal Court rejects BT’s RPI/CPI appeal

Following on from Barnardo’s last month (see Pensions Bulletin 2018/46) there has been another court case about whether or not scheme rules permit a scheme to change the inflation index in line with which it increases pensions in payment.

Section C of the BT Pension Scheme currently increases pensions in payment in line with the Retail Prices Index.  Earlier this year the High Court decided that it is currently not possible for Section C to change from RPI to another index.  On 4 December the Court of Appeal confirmed the High Court judgment.

The scheme rules in this case are written so that there are two “gateways” which, if passed, would give the sponsor, in consultation with the trustees, the power to decide on a different index.  These gateways are that the RPI ceases to be published, or it “becomes inappropriate”.  The true construction of these two words is at the centre of the litigation.

The High Court judge had held that the decision was binary.  Becoming less appropriate did not get through the gateway.  It is either appropriate or inappropriate. The Court of Appeal upheld this finding.  It also found that the original ruling, that RPI had not yet become inappropriate, was not unreasonable based on the evidence presented.  It remains to be seen whether BT will appeal the judgment.


This is the latest case to demonstrate that the ability to change the indexation rate depends entirely on the words in the rules and the correct textual analysis of them.

In many instances it will be easy to reach the correct conclusion, but where there is a degree of ambiguity it will not be so straightforward.  In such cases, the disposition of very large sums of money may depend on marginal differences in judges’ interpretations.

FCA is disappointed by its findings on pension transfer advice work

Sharing its key findings on the information it has collected in the course of its supervisory work on pension transfer advice this year, the Financial Conduct Authority makes it clear that it is very concerned that financial advisers are failing to give consistently suitable advice under the pre-2018 rules.

Although acknowledging that its results are based on a small sample size of targeted work (154 cases were examined from 18 firms out of the 45 from which information was collected) and therefore not representative of the whole market – the FCA is clearly outraged that, despite feedback already given to the sector, less than 50% of the pension transfer advice reviewed could be considered to be suitable and less than 30% of associated disclosures and communications with clients were compliant.

The various misdemeanours are set out at length in the statement and illustrated with examples.  They include:

  • Using generic objectives in fact finds without fully exploring what these mean to the specific client
  • Using generic objectives to justify a transfer without obtaining the necessary information about those objectives
  • Failing to adequately manage situations where the client had multiple competing objectives; and
  • Writing long suitability reports with unclear recommendations

The FCA has recently requested data from every firm with permission to advise on DB pension transfers and in a clear warning to advisers says that “we will not hesitate to use our investigatory powers where we identify evidence of serious misconduct which could have caused harm to consumers”.  Following an analysis of this information, the FCA will next year start a wide-ranging programme of activity with firms, but in the meantime it warns that firms should ensure they take on board the issues it has identified, both here and in its new rules and guidance issued in 2018 (see Pensions Bulletins 2018/13 and 2018/40).


This is an interesting read, with the FCA making its disappointment and disapproval very clear through both words and tone.  We must hope that the stronger line it intends to take with reviewing information from all firms operating in this space encourages the latter to improve their practices and thus reduce the potential for harm caused by unsuitable pension transfer advice.

GMP conversion – Lloyds judge confirms that schemes don’t need to equalise benefits first

A useful clarification was delivered by the High Court on 3 December in the Lloyds Banking Group GMP inequalities case (see our News Alert on the original judgment).

In the latest ruling, Justice Morgan confirmed that it is not necessary to equalise benefits ahead of applying the GMP conversion legislation – and so the “D2 method” proceeds having regard to the greater of the actuarial value of the member’s benefits and that of their opposite sex comparator – as had been put forward by the DWP in its consultation over two years ago (see our 2016 News Alert).  But he also made clear that D methods can only operate for the future, and so for pensions already in payment, one must adopt a different method for past payments, which for his purposes is C2.

In a separate development, the DWP says in its consultation paper on DB consolidation that it is working with HMRC to investigate whether changes might be necessary to pensions tax legislation for those potentially negatively affected by GMP conversion as a result of benefit changes, but that the Department’s own work on GMP conversion, whilst ongoing, should be finalised in the near future.


This latest judgment is useful because it lays to rest concerns expressed by some lawyers that the opposite held – which would seem to have been partly driven by the imprecise language used in the original judgment.  However, this is not the end of the road when it comes to the Lloyds case.  A number of legal uncertainties remain and as such it would be a brave set of trustees who move to equalise benefits in their scheme any time soon.

Pension Schemes Newsletter – Relief at Source

HMRC’s latest pension schemes newsletter again focusses entirely on those schemes where member contributions are subject to income tax relief at source – ie primarily personal pension schemes.

Following on from the previous newsletter in September (see Pensions Bulletin 2018/37) it reminds the administrators of such schemes that the notification of residency status reports that will be sent to them in January 2019 will for the first time include a residency status (‘C’) indicating who are Welsh residents and that for 2019/20 only, they can default to the rest of UK residency status if they are not able to accept and operate the C status from the notification of residency status report in January 2019.

The newsletter also reminds administrators that from 2018/19 the annual return form must be submitted electronically and details some transitional processes for the benefit of administrators who may not be able to make changes to their systems to incorporate some changes that are also being introduced at the same time.

Corporate Governance Code for large private companies finalised

The “apply and explain” code, prepared by the Financial Reporting Council, for large private companies, and whose purpose is to assist such companies meet their obligations under The Companies (Miscellaneous Reporting) Regulations 2018, has now been finalised.

The six principles within the code are little changed from those consulted on in June (see Pensions Bulletin 2018/25), as made clear by the feedback statement that has also been published.  However, there have been some adjustments to the guidance that forms part of the code.

The Wates Corporate Governance Principles for Large Private Companies comes into force for financial years starting on or after 1 January 2019.


With the publication of this new Code, the FRC’s focus must now turn to ensuring that appropriate monitoring for compliance with this Code now takes place, but at this stage it is not clear how this will take place.

Regulator launches first fraud prosecution

The Pensions Regulator has announced that a director of a professional pension scheme trustee firm is to appear in court charged with fraud and making employer-related investments.

The alleged offences relate to the transfer of more than £200,000 of pension scheme funds into the individual’s bank account and those of companies that he controls.


Once more the Regulator is showing form in prosecuting for offences beyond pension legislation – in this case for fraud by abuse of position under Section 1(2)(c) of the Fraud Act 2006.

HMRC shares news on its “manage and register” service

HMRC has issued a newsletter which provides an update on its manage and register pension schemes online service, across a number of topics that may be of interest to pension scheme administrators.

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.

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