Pensions Bulletin 2019/04
31 January 2019
Don’t panic, Mr Mainwaring!
The Pensions Regulator issued a statement last Thursday in which it sought to alleviate concerns that DB pension trustees may be having as Brexit nears, with still no signs of a withdrawal agreement being finalised between the UK and the EU, and the Sunday papers not helping the situation by talking about martial law being declared.
The Regulator quite rightly points out that there should not be any disruption in the pensions legislative sphere regardless of how we leave the EU, points to some “no deal” guidance from the DWP on the payment of occupational pension benefits to EU citizens in the UK and to UK nationals in the EU and reminds those few UK schemes that operate cross-border that whilst it looks like they are likely to have a problem, the Regulator is on the case.
On scheme funding, the Regulator says that the 2019 annual funding statement will be published in early March and will provide an update on the Regulator’s expectations around managing risks from the perspective of DB schemes which will be relevant to Brexit and the wider economic environment.
The Regulator also reminds trustees and scheme sponsors of the Brexit-related steps it expected them to initiate, as outlined in its 2016 statement after the referendum result was announced (see Pensions Bulletin 2016/29) and in its 2018 annual funding statement. Trustees are also asked that, where relevant, they undertake a review of any actions or contingency plans in the context of “no deal” if they have not already done so.
This statement looks like one of those things that all Government departments and their offshoots are having to do to demonstrate that they have addressed the Brexit issues for their stakeholders but, in essence, does not take us much further forward than the statement they gave back in July 2016.
Lloyds case – there will be no appeal
We have heard that the window within which any of the parties in the Lloyds Banking case could launch an appeal has now closed. This means that the key finding of last October’s judgment (see Pensions Bulletin 2018/44) stands – schemes that were contracted-out for any period between 17 May 1990 and 5 April 1997 will need to take action to resolve any inequalities in benefits that accrued during this period due to the unequal GMPs that would also have accrued in this period.
In an unrelated development, on 23 January HMRC published a webpage headed “GMP conversion and equalisation” which promises its audience that they can find out how to convert GMPs into other scheme benefits and equalise pensions to remove inequalities. However, all that this webpage does is mention the long-standing GMP conversion legislation, point to the DWP 2016 consultation on how this legislation could be used to resolve the GMP inequality issue and point to HMRC’s GMP checker service.
The news that there will be no appeal is highly significant as it removes the possibility that schemes might not have to address the GMP inequality issue. However, it is likely to be quite some time before most schemes will be in a position to deliver a solution for those of their members who are affected by the judgment. A lot of preparatory work will be necessary, schemes may wish to wait until some follow-up points in the Lloyds case are resolved (a consequential hearing is expected to be held in the second quarter of 2019) and as any adjustment to benefits could well set off tax traps, schemes will be waiting on news from HMRC.
The DWP is preparing guidance on how the GMP conversion legislation can be used to address the GMP inequality issue, but there is not yet a firm date for it to be published.
Taking account of the latest mortality statistics
As we move into 2019 there are two developments in mortality statistics that are likely to find their way into setting mortality assumptions when assessing DB pension scheme liabilities – one regarding the base table defining current rates of mortality, and the other regarding the standard projection model for how these rates may change in the future.
Base tables – the move from “S2” to “S3”
The CMI (Continuous Mortality Investigation) has recently published the “S3 series” of mortality base tables.
The tables are based on the mortality experienced between 2009 and 2016 of around 3 million pensioners of self-administered DB pension schemes. In total, 30 tables were published covering different pensioner sub-groups, compared to 18 tables for the previous S2 series. Additional tables include the experience for male dependants and those with pensions in excess of £40,000 pa for males and £16,000 pa for females (referred to as “very light”).
The impact of moving from the S2 series (projected with the CMI projections model) to the S3 series varies depending on which table you look at. Looking at the “all pensioner” table (S3PA), period life expectancies at age 60 increase by around 1.5% for males and 3% for females. The main driver for this increase is that pensioners of DB pension schemes have, in general, experienced higher rates of improvement in recent years than the general population of England and Wales.
However, it is typical to adjust (or rate) a base table so it is specific to the characteristics of the members of the pension scheme it is being used to model, rather than the pensioners the table was fitted to. With an appropriate scheme-specific rating, we wouldn't expect life expectancies to materially alter by moving from S2 to the equivalent S3 table.
Future improvements – to become more responsive to an acknowledged slowdown?
The number of deaths in England and Wales over 2018 was relatively high, continuing the trend in the slowdown in the rates of mortality improvements seen since 2011 in the general population of England and Wales. The CMI's Projection Model, commonly used to model future improvements in mortality for DB pension schemes, is calibrated to the general population. The CMI has recently finished its consultation on a proposal to reduce the core (default) level of smoothing in its model, to make it more responsive to this emerging trend. We wait for the outcome of the consultation. If the CMI’s proposal is implemented, and used without modification, the next core version of the model (“CMI 2018”) due to be published in February/March is expected to produce lower projected life expectancies due to the combination of allowing for the experience over 2018 and amending the smoothing.
When next reviewing their mortality assumptions, trustees and sponsoring employers should discuss with their advisers moving to the new S3 base tables and the latest core projections model (CMI 2018), both with appropriate scheme-specific adjustments so the overall assumption is tailored to their scheme members.
Investment Association looks at sustainability and responsible investment
On 25 January the Investment Association launched a consultation on sustainability and responsible investment in which it is seeking the views of asset managers on the following key areas:
- Agreed standard definitions: proposed definitions for the different sustainable investment approaches, including commonly used terms such as environmental, social and governance (ESG) integration, impact investing, and negative screening, with the aim of agreeing an industry-endorsed set of standard definitions
- Development of a UK product label: a proposed voluntary UK product label designed to assist retail investors and their advisers to easily identify funds which have adopted a sustainable investment approach. The label would also draw attention to the sustainability and responsible investment expertise within the UK
- “Stock-take” of reporting frameworks: a review of reporting frameworks used by asset managers to disclose how they embed ESG considerations into their investment process, and the impact that their investments have had on wider sustainability indicators. This is being done to brief the Association and to assist it in any future initiatives it may carry out in this space
The Association hopes that its proposals will bring greater clarity from asset managers to help savers and investors navigate and better access what is a growing feature of the investment management industry. Consultation closes on 1 March 2019.
This is a welcome initiative for an area in which terms abound, each of which can be interpreted differently. The labelling idea could potentially be useful for trustees as well as retail investors but would need a critical mass of adopters for it to succeed.
FCA launches consultation on drawdown investment pathways
The Financial Conduct Authority’s promised consultation on investment pathways for drawdown, for those in contract-based DC plans who do not take advice, has now been launched. First signalled last July (see Pensions Bulletin 2018/27), the FCA is now proposing that when a non-advised customer either asks to enter drawdown or wishes to transfer assets already in drawdown, they will be prompted to choose from four objectives for how they intend to take their retirement pot – and be offered an investment solution based on their choice.
The consultation document makes clear that the four objectives are stylised by the following statements:
- I have no plans to touch my money in the next five years
- I plan to use my money to set up a guaranteed income (annuity) within the next five years
- I plan to start taking my money as long-term income within the next five years; or
- I plan to take out all my money within the next five years
There will also be some constraints on the “choice architecture” (ie framework) within which these investment pathways are presented to a customer.
Providers will be free to develop an investment solution for each of these pathways, with the consultation paper not exploring how such solutions should be structured. However, the FCA says that there can be only one solution for each pathway and they cannot all be the same.
Smaller drawdown providers – ie those with fewer than 500 non-advised consumers a year entering drawdown – must still take non-advised consumers through the choice architecture and present the objectives but will then be able to refer investors to another provider or the Single Financial Guidance Body’s drawdown comparator tool.
The FCA expects firms to “challenge themselves” on the level of charges they impose on investment pathways, with the threat that a cap might be imposed if necessary.
The FCA is also proposing rules that will require providers to ensure that drawdown customers:
- Invest in cash only if they make an active decision to do so. Providers must also give customers warnings about the likely impact of investing in cash on their long-term income, both when they enter drawdown (or transfer funds already in drawdown into a new product) and on an ongoing basis
- Receive information on the actual charges they have paid on their drawdown funds over the year “in pounds and pence and inclusive of transaction costs”
The whole process is usefully summarised in a flow diagram on page 32 of the consultation document.
Consultation closes on 5 April 2019 and the FCA intends to finalise its rules and issue a policy statement in July 2019, giving providers a 12 month implementation period in relation to drawdown investment pathways. There is some confusion as to when the rules on cash investing and charges should be implemented, with the press release saying by 6 April 2020 and the consultation document inferring that the same timescale applies as for the investment pathways.
Information customers receive in the lead-up to, and after, accessing their pension savings
The FCA is proceeding with the rules and guidance on information disclosure proposed last July. The new rules and guidance cover:
- Information which is sent to customers before they decide how to access their pension savings, including “wake-up” packs, “wake-up” pack reminders, and additional retirement risk warnings
- Information provided to customers about annuities and eligibility for enhanced annuities; and
- Changes to make the cost of drawdown products clearer and more comparable
The changes to “wake up” packs, retirement risk warnings, reminder requirements and the annuity prompt come into force on 1 November 2019. Changes to make the cost of drawdown products clearer and comparisons easier will come into force on 6 April 2020.
It is good to see the investment pathway concept take shape in the contract market in the form of draft rules and guidance. Just as retirement saving has had to be encouraged through the auto-enrolment initiative and default funds developed, so it is necessary to provide some simple routes down which the unadvised should travel to rebalance their investments to make them “drawdown ready”. It will be interesting to see the investment solutions that the providers now build and how long it takes before something similar emerges in the DC trust sector.
CMA publishes remedies implementation timetable
Following on from the publication in December of its final decisions on how the industry should address the competition issues uncovered during its extensive investigation into the investment consultancy and fiduciary management markets (see Pensions Bulletin 2018/50), the Competition and Markets Authority has now published an implementation timetable for these remedies.
The statutory deadline for implementing remedial action is 11 June 2019 and a draft Order is expected to be circulated in February.
Data measurement - updated guidance
The Pensions Regulator has published an updated version of its quick guide to measuring data. This is the guide, first published in November 2017 (see Pensions Bulletin 2017/47) whose purpose is to encourage trustees to put in place a formal measurement process under which they can regularly assess the quality of the membership data they need to hold to successfully administer their pension scheme.
The guide sets out what data needs to be measured, how it should be measured, and how “common” and key scheme-specific (“conditional”) data scores should be calculated.
Ensuring schemes have accurate and up-to-date data is always vital, but perhaps even more so with the advent of the pensions dashboard and the need for many schemes to get ready to address the GMP inequality issue.
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.