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Pensions Bulletin 2019/23

Our viewpoint

EU directive forces further changes to SIPs and disclosure law

The Government has (just in time – the deadline was 10 June) made regulations to implement that part of the EU’s revised Shareholder Rights Directive concerned with shareholder engagement by pension schemes (see Pensions Bulletin 2017/02).  The regulations introduce some significant new requirements for UK schemes by way of amendments to the existing investment and disclosure regulations.

Trustees will be required to have a policy on the arrangements that they have with their asset managers.  This policy must be included in the statement of investment principles (SIP) and must set out the following matters or explain the reasons why not:

  • How the arrangement with the asset manager incentivises the asset manager to align its investment strategy and decisions with the trustees’ investment policies
  • How that arrangement incentivises the asset manager to make decisions based on assessments about medium to long-term financial and non-financial performance of an issuer of debt or equity and to engage with issuers of debt or equity in order to improve their performance in the medium to long-term
  • How the method (and time horizon) of the evaluation of the asset manager’s performance and the remuneration for asset management services are in line with the trustees’ investment policies
  • How the trustees monitor portfolio turnover costs incurred by the asset manager, and how they define and monitor targeted portfolio turnover or turnover range; and
  • The duration of the arrangement with the asset manager

This policy must be included in SIPs by 1 October 2020.

By the same date, DB schemes are required to make their SIP freely available on a website.  This mirrors a requirement that is already due to come into force for DC schemes on 1 October 2019 (see Pensions Bulletin 2018/36).

The regulations also require DB schemes to make freely available on a website a statement:

  • Setting out how, and the extent to which, in the opinion of the trustees, their policies on exercising rights (including voting rights) and undertaking engagement in respect of their investments have been followed during the year, and
  • Describing the voting behaviour by, and on behalf of, trustees (including the most significant votes cast by trustees or on their behalf) during the year and state any use of the services of a proxy voter during that year

This statement also needs to be included in the scheme’s annual report.

This new requirement comes into force on 1 October 2021 which creates a tension as it would seem logical for the statement to only be put up on a website following the finalisation of the first scheme annual report falling due after this date.

DC schemes are already required to produce an annual statement about their SIP by 1 October 2020 which includes the first bullet above.  By 1 October 2021 their annual statement needs to cover the second bullet too.

The scope of the engagement policies which trustees are required to disclose in the SIP has also been widened to include capital structure and the management of actual or potential conflicts of interest.

Comment

It is unfortunate that the SIP requirements have been revised again so soon.  Many trustees are already working on revised SIPs that incorporate those changes which come into force on 1 October 2019.  They need to react quickly if they are to incorporate these new changes at the same time or else prepare two new SIPs in quick succession.  It is also unfortunate that the Pensions Regulator’s investment guidance has not yet been updated for either set of changes, although we understand updates are imminent.

The Directive aims to encourage responsible investment and corporate decisions that have a longer time horizon, instead of focusing on short-term financial gain.  Whilst we support this aim, we are sceptical that these regulations will be effective in achieving it.  In particular, the requirement for trustees to state their policy on asset manager arrangements seems ill-suited to UK pension schemes that invest in pooled funds and may just result in boilerplate wording that has little practical effect.

If the UK had left the EU in March, we might not have needed to implement this Directive.  Instead, new regulations have been rushed through without formal consultation.  The drafting presents various practical difficulties, not least that the DWP has extended the requirements to cover all asset classes, even though the Directive is only concerned with equity investments.  The corresponding rules for asset managers (see Pensions Bulletin 2019/22) are restricted to equities, so trustees may struggle to obtain the information they need to implement their new policies in this area.

CMA finalises its requirements for investment consultancy and fiduciary management

Following consultation in February (see News Alert 2019/02), the Competition and Markets Authority has finalised the Order that implements the remedies for the investment consultancy and fiduciary management market set out in its final report last December (see Pensions Bulletin 2018/50).

The Order came into force on 10 June 2019 (a day before the CMA’s deadline), with the requirement for industry-wide performance information standards coming into force immediately, and all the CMA’s other requirements coming into force six months later – on 10 December 2019.

The Order is largely as drafted in February with the CMA saying that none of the changes are material enough so as to require further consultation.  But despite this it is noticeable that the deadlines for compliance reporting have been slightly extended generally and for the industry-wide performance information standards the compliance deadline has changed from quarterly reporting to annual reporting.

Compliance statements by various parties (including trustees) must now be made to the CMA, confirming the extent to which relevant requirements have been met – by 8 July 2020 (and annually thereafter) for industry-wide performance information standards, and by 7 January 2021 (and annually thereafter) for all the other requirements.

On a connected matter, we understand that the Pensions Regulator will shortly be consulting on guidance for trustees on how they should run a competitive tender for fiduciary managers, as promised in March (see Pensions Bulletin 2019/10).

Comment

Now the Order is final, there are some key actions that trustees, fiduciary managers and investment consultants need to take – as set out in our News Alert.

Industry group updates its pension scams code once more

The Pension Scams Industry Group has issued a further edition of its Code of Good Practice designed to help trustees, pension scheme administrators and providers combat pension scams.  It is applicable on a voluntary basis to all transfer requests processed from 10 June 2019.

The Code has been updated to reflect recent regulatory and legislative changes as well as the evolving nature of pension scams.  However, most of the Code remains unchanged.  New additions include material relating to the introduction of the cold-calling ban, learnings from a scams survey undertaken by the Group and revised Action Fraud reporting guidance.

A further version of this now exceptionally lengthy document, is anticipated within the next 12 months.

Comment

Clearly a lot of work has gone into keeping this Code up to date.  As such, it is now important that those trustees and administrators who are voluntarily following the Code health check their transfer out processes against this Code to ensure that they remain up to the task of doing all they can to deny scammers access to hard-earned pensions savings at one obvious point of vulnerability for scheme members.

It is pleasing to see that the pensions minister has once more given his support to this initiative.  But he must do more – and introduce the promised legislation to restrict the right to transfer values, so that they can only go to bona fide schemes.

Pensions Regulator launches crackdown on reviews of DC default arrangements

The Pensions Regulator has announced a new drive to ensure that trustees of DC and hybrid schemes are meeting their legal obligations and regularly reviewing the investment strategy and performance of their scheme’s default arrangement(s).

The law requires that a pension scheme’s default strategy and the performance of its default arrangement must be reviewed every three years, or when there is a significant change in a scheme’s investment policy or demographic of its membership.

The Regulator states that more than 500 DC schemes with between two and 999 members have been contacted as part of a “pilot” following its thematic review into value for members.  Trustees have been asked to review guidance which outlines the Regulator’s expectations.  They are then asked to confirm if the strategy and performance of their scheme’s default arrangement have recently been reviewed and remain suitable, by completing a simple online declaration form.  The Regulator says that initial indicators show positive trustee engagement with the pilot.  But if a scheme’s default strategy has not been recently reviewed, trustees are being taken through steps by the Regulator to comply with the law, including reviewing the current strategy, taking members’ needs into account as well as the performance of the default arrangement.

Comment

We are not surprised that the Regulator is focussing on whether trustees are regularly reviewing their scheme’s default arrangements.  As they note, more than 95% of members of trust-based DC schemes are saving in a default arrangement so it is important that these are regularly reviewed.  And if trustees are not doing so then that is probably a fair indicator that other scheme governance requirements are also likely to be lacking.

This is also a timely intervention as the law governing default arrangements came into force on 6 April 2015, so the trustees of nearly all DC schemes should by now have carried out these reviews.  What the Regulator is conspicuously silent about is how compliant these 500 plus schemes had been before the Regulator’s intervention and what plans it has in relation to this topic once the pilot has been concluded.

BackTo60 argues its case in Court

Last week the High Court heard arguments from the BackTo60 campaign group regarding the group’s contention that women were not properly informed by successive Governments about the raising of State Pension Age for women born in the 1950s (see Pensions Bulletin 2018/49) and that the taper employed under which State Pension Age rose for women quite quickly from 60 to 65 was too severe.

The Government is vigorously defending its actions, with the argument being made in Court that the enactment of legislation carries with it no duty of fairness to the public and those affected had no right to expect notification of the changes.

On 7 June the DWP published its latest analysis relating to State Pension Age changes from the 1995 and 2011 Pensions Acts, in which it stated that the total cost estimate (including the impact on other state benefits) of reverting women’s State Pension Age back to 60 and men’s State Pension Age back to 65 over the period 2010/11 to 2025/26 would amount to a staggering £215.2bn.

Comment

There is clearly an enormous tab for taxpayers to pick up should the BackTo60 group win its argument.  And if it loses, the argument will no doubt continue at the political level.

The IFS speaks out over concerns about UK pension and social care systems

Paul Johnson, the Director of the Institute for Fiscal Studies, has given a lecture warning that the UK is not well prepared for the challenges of an ageing population.

Mr Johnson argues that there is a misguided sense of complacency about our current pension system when, in fact, there are serious risks such as:

  • Inadequate contributions accompanying very low interest rates
  • Individuals facing all the risk of low returns; and
  • Very few people now buying annuities as a form of longevity insurance, with the result that modern pensions look just like other individual savings pots

Mr Johnson also notes that in 2000 health spending accounted for less than a quarter of public service spending.  By the early 2020s it will account for nearly 40% of public service spending and it is unlikely that future increased spending on health, pensions and social care can be paid for entirely by cutting other public spending.  Mr Johnson advocates returning to health, pensions and social care systems that are not just financially sustainable, but also share risks and costs appropriately across and between generations.

This is the second report by the IFS in recent months which has been critical of the UK pensions system – in April 2019 the IFS called the annual allowance taper “most perverse” (see Pensions Bulletin 2019/15).

Comment

Mr Johnson raises valid concerns and has lifted the lid on the “dirty little secret” of the modern UK pensions system.  Yes, auto-enrolment has been a great success in increasing (by millions) the number of people saving into some form of pension.  But pension experts have been worried for a long time that the mandatory minimum contribution rates under that system are too low to provide the retirement outcomes that most people will require – future pensioners are likely to have to either have a much-reduced standard of living in retirement or will work longer before retiring.  Whilst there are many factors to balance in this complicated problem we hope that this latest contribution will further raise awareness of the looming crisis.

No change to SMPI assumptions – for now

For the second year in a row the Financial Reporting Council has concluded, after carrying out a review, that it does not need to make any changes to the assumptions used in the benefit projections required to be provided on an annual basis to members of occupational, personal and stakeholder pension schemes with rights to money purchase benefits.

The FRC is currently responsible for supporting guidance that sets out how such projections should be constructed and the assumptions they should use.  Following the review, the current version 4.2 of Actuarial Standard Technical Memorandum 1 is to remain in force until further notice, with the FRC confirming that it will be used for SMPIs produced in the year beginning 6 April 2020.

In giving its reasons for no change, the FRC points to “initiatives and uncertainties”, including the pensions dashboard, a potential new mortality base table in 2020 and Brexit, which mean that “now is not the time” to make changes to the assumptions.  But, it is noted that as these matters progress, it will be important for their impact to be reflected in subsequent versions of the FRC’s assumptions for statutory money purchase illustrations.

Comment

Had the FRC proposed any change it would likely not have come into force until April 2020, suggesting that any future change is nearly two years away.  This could potentially tie in with the start of the delivery of the dashboard, with the possibility that by then a much more fundamental review of SMPI methodology is undertaken on a number of counts.  Given that, this “no change” news will likely be welcomed by SMPI providers - as well as the FRC who are unlikely to be around to progress the next review (see Pensions Bulletin 2019/10).