Pensions Bulletin 2018/51

Our viewpoint

FRC “should be replaced as soon as possible”

This is the first of 83 recommendations made by Sir John Kingman in his report, published on 18 December.  The eight-month “root and branch” review, commissioned by the Department for Business, Energy and Industrial Strategy, uncovers some undesirable practices within UK corporate reporting, governance and audit, and finds the Financial Reporting Council to be “an institution constructed in a different era – a rather ramshackle house, cobbled together with all sorts of extensions … it leaks and creaks, sometimes badly”.

Sir John points to the FRC’s lack of statutory status, regulatory power, and funding and resources, as the main constraints on its effectiveness.  The report goes on to criticise the FRC with a further 13 “significant concerns”, including its effectiveness in shaping the debate on major issues related to its work, the credibility in its work on audit quality, its relationships with the investment community and other regulators, and its approach to recruitment of board and council members.  The report recommends it should be replaced by a new independent regulator, the “Audit, Reporting and Governance Authority”, which should have the following set up:

  • It should have clear statutory powers and objectives
  • It should be accountable to Parliament, with the Chair and Chief Executive subject to a pre-approval hearing with the BEIS Select Committee and appearing annually in front of the Select Committee. The Government should issue a remit letter to the regulator, as it does for the other two financial regulators, the FCA and the PRA
  • A new board should be appointed, which should have limited continuity with the existing board. The structure should be simplified, all appointments to the board should be public appointments, and the board should cease to be “representative” of stakeholder interests
  • The new regulator should be funded by a statutory levy

Much of the report is taken up with recommendations on the objectives and duties of the new regulator.  Headlines include:

  • An overarching duty to promote the interests of consumers of financial information, not producers. It should also have a duty to promote competition, innovation, and to apply proportionality to all its work
  • A fundamental shift in approach to the Stewardship Code, to focus on outcomes and effectiveness, not on policy statements or boilerplate reporting
  • Extension of its corporate reporting work to include regulation of the entire annual report
  • A set of measures, including a robust market intelligence function, new strengthened regulatory power, a wider range of responses, auditor alerts, and internal controls, to help prevent major corporate failures

Alongside this review report, Sir John also published his letter to BEIS giving his opinion on whether there is a case for a fundamental change to who appoints company auditors, and how their fees are set.


The sweeping changes recommended in the report will no doubt solve the FRC’s primary stumbling block that it has to regulate without the relevant powers.  However, finding parliamentary time to put in place these changes, and giving space for corporations, audit firms, and investors to get used to such fundamental cultural changes, will take time.

CMA calls for audit reform

On the same day as the Kingman report was published, the Competition and Markets Authority published a paper that outlines serious competition concerns with regard to the audit of company accounts and proposes changes to legislation to improve the audit sector.  The CMA says that there are a number of reasons why audit quality is falling short, such as companies choosing their own auditors, choice being too limited and dilution of audit quality due to other services being provided to the audit client.

The CMA proposes legislation to separate audit from consulting services, introduce measures to substantially increase the accountability of those chairing audit committees in firms and impose a “joint audit” regime giving firms outside the Big Four a role in auditing the UK’s biggest companies.

Consultation on the CMA paper closes on 21 January 2019.  The CMA hopes to conclude its work as soon as possible in 2019.

In a related development and on the same day, the Department for Business, Energy & Industrial Strategy announced the appointment of Donald Brydon, outgoing Chair of the London Stock Exchange Group, to lead a new independent review of the quality and effectiveness of the UK audit market.

The Brydon Review into UK Audit Standards will build on the findings set out in the Kingman report and that of the CMA.  It will consider what the future standards and requirements should be for audits, covering matters such as:

  • How far audit can and should evolve to meet the needs of investors and other stakeholders
  • How auditors verify information they are signing off
  • How to manage any residual gap between what audit can and should deliver; and
  • What are the public’s expectations from audit

The Review will also ask whether the current audit model can be made more effective and look at how audit should be developed to better serve the public interest in the future, taking account of changing business models and new technology.


It will be interesting to see, if the CMA’s proposals are implemented, how the big four audit firms evolve in the provision of their pension services in response over the coming years.

Pensions Regulator warns schemes to check whether they are master trusts

The Pensions Regulator has issued a warning for pension scheme trustees to check if they fall within the new statutory definition of a master trust and has produced a single-page step-by-step flowchart to help trustees decide if they are in fact master trusts.

Master trusts have until 31 March 2019 to either apply for authorisation or trigger their exit from the market (see Pensions Bulletin 2018/39).  After that date, master trusts which have failed to do this will be breaking the law and could be forced to wind-up.

The flowchart makes clear that the starting point is that a master trust is:

  • An occupational pension scheme providing money purchase benefits (either alone or alongside other benefits)
  • Which is used, or intended to be used, by two or more employers that are not in the same corporate group; and
  • Which is not a public service pension scheme

However, it goes on to illustrate that there are then some important exemptions, such as where the scheme provides mixed benefits and the only money purchase benefits are AVCs made by the non-money purchase members.


The consequences of being a master trust are serious – with such schemes having to start an expensive and extremely lengthy authorisation process before 31 March 2019.  Therefore, we urge trustees of all schemes with any DC benefits, other than solely AVCs, to be on the safe side and double check if their scheme is a master trust.

Auto-enrolment – the next step up in DC contributions is just around the corner

From 6 April 2019, the minimum contributions payable to money purchase qualifying pension schemes will increase under the phasing rules that have been in place since 2015.  This increase follows on from that which took place earlier this year (see Pensions Bulletin 2018/14) and for many will mean that from next April total contributions rise from 5% to 8% of earnings between the lower and upper earnings limits for national insurance purposes (with the employer paying at least 3% of the 8%).


As for the April 2018 increase, in most cases employers should not need to consult with their employees, but there could be circumstances when an increase in member contributions will fall within scope of the “listed” changes under the Pensions Act 2004.  So legal advice will usually be required before deciding not to consult (although any advice covering the 2018 increases may also have addressed the 2019 increases at the same time).

As was the case for the 2018 increases there will be considerable interest in whether opt-out rates go up.  A DWP report, published on 18 December, provides evidence showing that the rate of people stopping saving into a workplace pension for 2017 to 2018 was just 0.7% and this has not changed in the vital April to June 2018 period following the first increase in minimum contributions.  So maybe the 2019 increase will also be greeted with a shrug of the shoulders?

In April 2019 the auto-enrolment structure will reach a “steady state” with no further rate changes legislated for.  However, there will be further change in due course with last year’s auto-enrolment review promising changes in the “mid-2020s” (see Pensions Bulletin 2017/53) and there could well be further pressure from some quarters to raise minimum contribution rates further.

Pensions and the self-employed – trials to begin

The DWP has published a report setting out how it intends to carry out trials and research on a number of different ways that might be used to help self-employed workers make retirement savings.  This follows the automatic enrolment review, published a year ago (see Pensions Bulletin 2017/53), in which the Government announced that it would carry out such work.

Features of the “trials” (which appear to be testing which communication channels work best) include:

  • Encouraging employees who become self-employed to keep making regular, affordable, contributions to a pension or other long-term savings product
  • Better use of financial technology to help the self-employed overcome barriers to saving; and
  • Making the most of communication points of contact used by self-employed people – such as online accounting systems – to promote saving for retirement in an easily understood way

More information on these trials is set out in an accompanying document, with a request for organisations who wish to engage with DWP to get in touch by 15 March 2019.

On the same day as this report was published HMRC published research that explores the long-term saving behaviours of the self-employed population and the drivers and barriers influencing saving for retirement.  NEST has also announced that it will be leading several of the DWP’s projects and sets out what it intends to do.


After a long delay it is good to see that the Government is to start the necessary groundwork that may presage some form of intervention in this increasingly important sector of the economy – but it will surely take more than messaging and tech tools if the self-employed are to get into the pension savings habit?

FCA looks to enable retail investors to invest in “patient capital”

Following the announcement in the Budget (see Pensions Bulletin 2018/43) that the Financial Conduct Authority was consulting on amending areas of its rules to allow further unit-linked investment in a broad range of capital assets, the FCA has on 12 December, published the actual consultation paper.

The FCA’s technical proposals on its “permitted links” rules are intended to enable retail investors to invest in a broader range of long-term assets, such as infrastructure, real estate, private equity/debt, and venture capital, through unit-linked funds, while continuing to maintain an appropriate level of protection.  Such retail investors include those who invest via DC pension schemes that are regulated by the FCA.

The proposals seek to clarify existing FCA requirements, broaden the existing investment range that insurers can provide, set a new 50% limit on the overall investments that can be made in illiquid assets, introduce appropriate risk warnings to help consumers understand the investment and liquidity risks involved, and place a requirement on advisory firms to ensure that investments in more illiquid or risky assets are only offered/taken up where it is suitable and appropriate.

The FCA has also published a discussion paper that explores whether retail investors have sufficient opportunities and safeguards to invest in patient capital within the current regulatory framework for UK authorised funds.

The deadline to respond to either document is 28 February 2019 and the FCA intends to publish a policy statement and, where relevant, make its final rules and guidance later in 2019.


This is predominantly a technical consultation that is concerned with relaxing current FCA rules so as to facilitate new investment opportunities for retail investors, but it is not clear to what extent there is a demand for such investments by individuals, nor the willingness of providers to make them available.  However, having an opportunity to invest collectively more widely than at present is to be welcomed.

No deal Brexit – could the expatriate state pension problem become more widespread?

The Department for Exiting the European Union has stated in a policy paper published on 6 December that the UK Government intends to continue to increase state pensions to eligible UK nationals living in the EU in the event of a no deal Brexit, but this is dependent on the EU agreeing to a reciprocal arrangement.

Such reciprocity exists in the Withdrawal Agreement, but if this is voted down by the UK Parliament it is not clear what happens next.

In follow-up guidance published on 19 December, the DWP has separately explained the rights of EU citizens in the UK to benefits and pensions in the event of no deal, and of the rights of UK nationals in the EU to benefits and pensions in the event of no deal.


In the current climate this news will be most unwelcome to the hundreds of thousands of UK nationals who have chosen to retire to countries in the EU27 – such as Spain and France – and will add to fears that they may be forced to return to the UK post Brexit.  If it comes to pass that their UK state pensions will be frozen, they will be joining their counterparts in mainly Commonwealth countries such as Australia and Canada, who have experienced frozen pensions since they left the UK.

Scottish income tax continues to diverge from the rest of the UK

The Scottish Budget, delivered on 12 December, has made clear that the Scottish Government is set to continue on its path of income tax divergence from the rest of the UK, first set this time last year (see Pensions Bulletin 2017/53).

Whilst the income tax rates associated with new tax bands, first introduced in 2018/19, are to remain unchanged, the point at which the Scottish higher rate of tax (41%) starts is not to follow the jump to £50,000 announced for the rest of the UK at Westminster, but instead is to remain frozen (again) at £43,430.

Separately, we understand that the Welsh Government is not intending to set income tax rates that differ from those set by Westminster for the first year of operation of the Assembly’s new powers (see Pensions Bulletin 2018/42).


Whilst this is clearly bad news for higher rate Scottish taxpayers, the silver lining is that their personal contributions to registered pension schemes may receive greater tax relief – unless, of course, they are constrained by the UK-wide annual allowance.

GMP inequalities in the public sector

The extension of the temporary fix (see Pensions Bulletin 2018/04) to the Government’s problem with GMP-sourced sex-based differences within public sector pensions due to the introduction of the new State Pension in April 2016 has now been legislated for, by means of a Ministerial Direction under Section 59A of the Social Security Pensions Act 1975.

Amongst other things, this confirms that a new tranche of public service pensioners (those reaching State Pension Age between 6 December 2018 and 5 April 2021) will have the GMPs earned in public service fully indexed by their public service pension schemes – instead of no indexation for the pre-1988 GMP and 3% LPI indexation for the post-1988 GMP.

There remains no news on the Government’s intention to investigate the possibility of using a conversion approach in which the GMP is turned into a scheme benefit on a £1 for £1 basis.


Not only will this Direction load additional costs onto public sector pensions; it will also do the same for certain private sector schemes whose pension promises originated from a time when the individuals concerned were in the public sector.  Indeed, only recently, BT sought (and lost) a judicial review of the Government’s decision to extend the temporary fix, as it impacted BT – a decision which added around £120 million of liabilities to one of the sections of the BT Pension Scheme.

New Chief Executive at the Pensions Regulator announced

The Pensions Regulator has announced the appointment of Charles Counsell as its new Chief Executive.  He is currently the Chief Executive of the Money Advice Service, which is shortly to be subsumed within the Single Financial Guidance Body.

Mr Counsell succeeds Lesley Titcomb who in June announced that she was stepping down at the end of her four year term (see Pensions Bulletin 2018/23).

In separate news, Anthony Arter has been reappointed as the Pensions Ombudsman and PPF Ombudsman for a further two year term.

Christmas and New Year break

This is the last edition of the Pensions Bulletin for 2018.  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.

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