Pensions Bulletin 2019/19

Our viewpoint

The timetable slips on the new DB funding framework

On 9 May the Pensions Regulator made clear in a blog what many were expecting – that its timescales for delivering on the new DB funding framework have slipped.

More than a year has passed since the DWP outlined in a White Paper the work that it and the Pensions Regulator were to do (see Pensions Bulletin 2018/12), and it was anticipated that by now the Regulator would be consulting on broad options for the new funding framework.  Now we are told that the consultation will not be until the summer, but “depending on the legislative timetable”.  And the consultation on the actual code, which had been expected in the early autumn, will now take place at some point in 2020, but only “once we have more clarity on the intended primary and secondary legislative package”.

Given this delay, the blog is necessarily constrained in what it can say at this stage, but amongst the points made are that the first consultation to come will:

  • Set out ideas on how closed schemes should progressively reduce their reliance on the employer covenant and reach a position of low dependency by the time they are significantly mature
  • Look at a range of solutions within the funding framework for open schemes which do not unduly increase the cost of future accrual and lead to unnecessary scheme closures, whilst ensuring that members’ past service is protected to the same degree as in closed schemes
  • Set out clearer parameters (for example discount rates) around journey plans and associated technical provisions based on scheme-specific factors (eg maturity or covenant strength) and in the context of the long-term objective
  • Propose clearer guidelines on acceptable lengths of recovery plans for different covenant strengths and how this could work in practice – in particular, whether stronger employers should be required to fund technical provision deficits in a shorter period
  • Contain ideas for how contingent support could remain a central part of funding solutions; and
  • Outline proposals for how trustees could demonstrate whether the risk in their investment strategy is supported, for instance through a simple stress test

The blog also categorically states that the Regulator does not intend to pursue a “one size fits all” funding framework but needs to ensure that the flexibilities in the funding regime are not abused and that there is greater transparency.


It is disappointing that after all this time the Regulator has had to row back on the delivery of the new DB funding framework, but with so much uncertainty at the national political level it is hardly a surprise.  And in Parliament this week it seems that the pensions minister is not able to answer a simple question as to the timing of the Pensions Bill – more evidence that the Bill is delayed.

As to what we are likely to see from the Regulator when it is able to publish, although the devil will no doubt be in the detail, the hints above in its blog seem to accord with where many are thinking the Regulator has been going – and a natural progression from this year’s annual funding statement (see Pensions Bulletin 2019/09).

Angela Eagle looks to cut charges in DC schemes

On 8 May Angela Eagle, the Labour MP and former pensions minister, introduced a Private Member’s Bill that seeks to take current policy interventions further in relation to the charges implicit in DC pension products.

Under her Pension Charges Bill 2017-19 she proposes the creation of a mandatory cost disclosure framework, with the results forming a prominent part of the statements sent to each DC member annually.  In addition, her Bill seeks to extend the current cap on charges in auto-enrolment schemes during the accumulation stage to seemingly all DC pension savings, and to also introduce such a cap to the decumulation stage.  The essence of her argument is that excessive profits are being made by pension providers and that given the nature of the market it is only by mandating cost transparency and capping charges that the cost of DC pension provision can be driven down, delivering much-needed value for money for DC savers.


There are a number of policy interventions in this area already – the 0.75% charge cap is well-established but applies only at the accumulation stage to the default arrangements of most DC schemes used as qualifying schemes for auto-enrolment purposes.  This charge cap was reviewed in 2017, with the Government deciding to put off any change to the level or scope of the cap until 2020 by which time the Government expects to see a much clearer case for change.

The DWP has already delivered on measures to improve the transparency of costs and charges, with requirements coming into place for DC occupational schemes for scheme years ending on or after 6 April 2018.   The Financial Conduct Authority is currently consulting on similar measures for contract-based schemes, having set out rules requiring FCA-regulated firms managing money on behalf of DC workplace pension schemes to disclose administration charges and transaction costs to the governance bodies of those schemes using a standard approach.  There is also a well-advanced initiative to support consistent and standardised disclosure of costs and charges levied by the fund management industry to institutional investors, including DC schemes.

We have yet to see the detail of what Angela Eagle is proposing, but as of right now it would seem that this Bill is purely a mechanism under which she and her Labour colleagues can advance arguments that more needs to be done in this area.  With little chance of her Bill becoming law, it will be how these arguments play out in Parliament and beyond that will be of interest to watch, as some of what she is proposing may well become law in time, but through other means.

Corporate trustee gets into trouble with the Regulator

In what serves as a cautionary tale regarding pension scheme governance, a corporate professional trustee firm looking after a small multi-employer DC scheme has been fined a record £103,750 for breaching multiple areas of pension law.

The case concerns the McDonald's Franchisee Pension Scheme, which provides pensions for 32 franchisees of the fast food chain but is independent of McDonald's.

The Regulator contacted the Scheme in April 2017 to find out if the trustee was intending to apply for authorisation under the new master trust regime and through this became aware that that the trustee had failed in several statutory obligations, namely by:

  • Not obtaining audited accounts for each of the four years ending 5 April from 2014 up to and including 2017
  • Not sending Statutory Money Purchase Illustrations (SMPIs) to members for the years 2015 and 2016; and
  • Not reporting these breaches as soon as reasonably practicable (the above breaches, and others, were reported in November 2017)

The trustee put forward several grounds for mitigation including that: the breaches gave rise to no financial detriment to members; the Regulator had taken no regulatory action when the trustee had not obtained audited accounts between 2008-2011; the trustee had a strong track record in administering pension schemes; and that there was a lack of funds available to allow the trustee to retain advisers for the Scheme.

The Regulator’s Determinations Panel dismissed these arguments and was particularly troubled by the last one.  The trustee noted that until 9 January 2018 the Scheme’s governing documents did not provide for scheme expenses to be claimed from the employers.  The only source for payment of such expenses was member funds, which were small.  The trustee stated that it had the option to use this source for many years but had made a conscious decision not to do so, and hence not engaged auditors to prepare accounts.  The Determinations Panel thought this was a “misconceived approach” by the trustee.

The trustee accepted that it was a master trust although it said that it was not aware of this until it engaged legal advisers in July 2017.  The Regulator then sought a further fine on the basis that it was not notified that a decision had been made to wind-up the scheme – such a decision by a master trust is a “triggering event” under the Pension Schemes Act 2017 and must be notified.  However, the Determinations Panel ruled against the Regulator on the basis that, although the trustee directors may have decided in principle to wind up the scheme there was not sufficient evidence to show that the trustee, as a corporate body, had formally decided to do this.

The Panel concluded that it should impose a monetary penalty in respect of all three categories of breach in this case.  After considering aggravating and mitigating factors the Panel imposed fines of £25,000 for failing to obtain audited accounts, £18,750 for failing to supply SMPIs and £30,000 for six failures to notify breaches of the law to it.

The Panel also noted that it expected better of a corporate professional trustee which had already been previously warned about breaching its obligations in 2011/12.  The Determination Notice also makes clear in a number of places that this case is intended to “send the right message to the regulated community about the importance of these statutory obligations, and thus promote the good administration of pension schemes in the future”.

Under separate action from the same engagement, the trustee was fined £30,000 for failing to have at least three trustees on a master trust board as required by regulations.


The facts of the matter seem quite clear but that does not stop it being interesting reading on several fronts.  Amongst other things, it shows that large fines can be imposed on small schemes even where there has not been obvious financial detriment to members and that a professional trustee is not by itself a guarantee that a scheme will be well run.

Pensions Ombudsman throws the book at trustees for breaches of investment duties

In what is admittedly an unusual case, the Pensions Ombudsman has ordered the trustees of a DC occupational pension scheme to personally pay approximately £2.4m (plus judgment interest of 8%) to the scheme for multiple failures centred around the way in which the trustees carried out their investment duties.

In 2012, shortly after opening the scheme’s membership up to any individual who the trustees in their discretion could admit, the trustees selected a Swiss investment manager to manage “contracts for difference and Forex parings”, in which they envisaged returns exceeding 25% pa.  The charging structure in the agreement entered into was not documented and it turned out that of the approximately £1.3m invested, £260,000 in “finance costs”; £100,000 in “Prime Broker’s fees” and £740,000 in commission was paid.  Only £106,000 of the original investment was left by 2014 and the manager went into liquidation in 2016.  There were also some other unorthodox investments including loans.

Unsurprisingly, 14 scheme members complained to the Pensions Ombudsman who, in a lengthy determination, upheld the complaints, finding that multiple breaches of trust as well as maladministration had taken place.  As well as ordering the trustees to pay the scheme out of their own pockets, he also directed them to pay each of the complainants £5,000 in recognition of the exceptional levels of distress and inconvenience suffered.

In reaching his decision the Ombudsman considered the following statutory provisions regarding pension scheme investment:

  • Section 33 of the Pensions Act 1995 provides that a trustee’s liability for failure to perform their investment functions cannot be excluded or restricted. This means that the exoneration clause in the deed did not apply to these breaches and the trustees are on the hook personally
  • The investment regulations require the trustees to have due regard to diversification. No such regard was had
  • Section 36 of the Pensions Act 1995 requires trustees to take written investment advice when choosing investments. This was not done

The Ombudsman also found that entering into the asset management agreement without documenting the charges, fees and commissions was in breach of the trustees’ duty to act with care and skill, their various duties under case law and their fiduciary duty to act honestly and in good faith as well as being maladministration.

In addition, the trustees were found to have issued misleading statements to members.


This was no ordinary DC occupational pension scheme, but as it was structured as such a scheme, the trustees had clear duties as if it was.  While, hopefully, such extreme failures as reported in this sorry tale will be rare, it serves as a reminder of the law governing trustees’ exercise of investment powers – in particular that trustees may be liable personally for breaches of their duties in relation to investment in a way that they may not be for other types of breach.

Appeal Court says history can only be re-written so far

The Court of Appeal has overturned the High Court judgment in the case of BIC UK Limited v Burgess (see Pensions Bulletin 2018/17).

The High Court judge had decided that the introduction of pension increases in the early 1990s which had not been done with the necessary formalities could be validated using retrospective amending powers adopted in a 1993 deed.  The Court of Appeal has now held that this “was a step too far and involved the re-writing of history to an impermissible extent”.

This decision was based on analysis of the case law in other situations involving retrospective validation of things done without proper formalities.  In this case though, the circumstances did not permit this.  While the 1993 deed introduced a retrospective amendment power, it did so for a purpose not connected with pension increases (retrospectively documenting the amalgamation of the BIC UK Pension Scheme with a Works Scheme).  Nothing in the drafting of the 1993 deed, in its recitals or elsewhere suggests that the trustees at that time intended the deed to introduce powers to retrospectively validate the invalid pension increases.  Noone knew they were invalid until many years later.


So, unless further appealed, it transpires that some pensioners have been overpaid for decades.  This is one of those cases about documentation that is very scheme specific.  However, the High Court judge’s ruling that the remedy of “equitable recoupment” applies to overpaid pensions is undisturbed meaning that the statutory limitation of six years will not apply both to the overpayments to BIC pensioners and, it seems, potentially to overpayments from schemes generally.

Trustees fined for failing to deliver DB valuations

In a judgment that became available last week, the Pensions Regulator has fined the trustees of a small DB scheme £3,500 each per non-delivered DB valuation – the failure happening in respect of the 2013 and 2016 valuations.

The case concerns the Leicestershire DVK Retirement Benefits Scheme – a DB scheme set up in 2012 as part of the outsourcing of elderly care services from Leicestershire County Council.

The case was brought to the attention of the Regulator in 2014 via a whistle blow by the then scheme actuary in relation to non-completion of the 2013 valuation.  This set off a lengthy trail of largely one-sided correspondence between the Regulator and the trustees, characterised by the trustees not engaging with the Regulator.  Inevitably this led to a series of warnings, a formal warning notice in June 2018 and a fine issued by the Determinations Panel in November 2018.

What is of interest in this case is that having been issued with the fines the trustees decided to refer the matter to the Upper Tribunal, requesting clemency but not putting forward anything substantive as to what they were doing to resolve the issue.  The Upper Tribunal was not impressed either with the arguments put forward by the trustees or their behaviour to date towards the scheme.  It found that the Regulator had acted within its powers and the fines levied were consistent with the Regulator’s published guidelines.


The result is hardly a surprise, but it is of interest to see the Upper Tribunal test the Regulator’s logic both as to applying a fine and determining its quantum.  It seems quite clear in this case that this scheme was not being properly administered – and in such a situation the buck stops with the trustees.

38 master trust applications received as extension period closes

A total of 38 authorisation applications have been submitted by master trusts, the Pensions Regulator has revealed.

Of the ten schemes granted an extension (see Pensions Bulletin 2019/08), eight have filed an application, one no longer meets the definition of a master trust, and another has decided not to apply for authorisation.  Six of the 38 master trusts have been granted authorisation and these are listed on the Regulator’s website.


So we are now down to a maximum of 38 authorised master trusts – and as the application process is onerous it is probably safe to assume that a majority of these will be authorised.  However, the Regulator has six months to decide, starting from when the application is received, so it will likely be several months yet before we know the final successful applicants.

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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