Pensions Bulletin 2019/27
11 July 2019
Pensions Regulator sets out its stall on poorly governed schemes
Last week the Pensions Regulator launched a consultation on the future of trusteeship and governance in which it argued that it needed to take a number of actions, backed up by legislative change in some cases, in order to address a continuing issue of some occupational pension schemes not being properly run and so failing those whose retirement incomes depended on them.
We report and comment on this potentially significant development in a special News Alert.
This consultation plays to a concern that the Regulator has had for some time now that more needs to be done, particularly by a subset of schemes, to improve retirement outcomes. What will be interesting is how far the Regulator will be allowed to go to force into wind up those schemes it thinks are underperforming.
Climate guidance for pension schemes announced in the Government’s Green Finance Strategy
The Government has launched a new Green Finance Strategy which it describes as “a comprehensive approach to greening financial systems, creating new financial markets and capturing the resulting opportunities for UK firms”.
The strategy has two objectives:
- To align private sector financial flows with clean, environmentally sustainable and resilient growth, supported by Government action;
- To strengthen the competitiveness of the UK financial sector.
The strategy outlines a large number of new and existing initiatives spanning the entire financial sector. The ones directly relevant to occupational pension schemes include:
- An expectation that all listed companies and large asset owners will disclose in line with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations by 2022;
- A joint taskforce with UK regulators, chaired by Government, which will examine the most effective way to approach disclosure, including exploring the appropriateness of mandatory climate-related reporting; and
- An industry working group on climate change which will produce guidance for pension schemes on climate-related practices across governance, risk management, scenario analysis and disclosure. The Pensions Regulator expects to consult on this guidance in late 2019 with a view to putting it on a statutory footing during 2020 as part of the Governance Code being introduced to satisfy the requirements of IORP II (see Pensions Bulletin 2018/42).
To coincide with the launch of the strategy, the four UK financial regulators (jncluding the Pensions Regulator) published a joint statement on climate change which recognises the relevance of climate-related financial factors to their mandates and the importance of a collective response.
Against a backdrop of heightened public concern about climate change, we have seen increasingly strong rhetoric from politicians and regulators over recent weeks and months about the need for greater action by financial market participants. This strategy sets out how the Government proposes to encourage such action. We are encouraged by the co-ordinated approach being taken and the emphasis on collaboration between Government, regulators and the finance industry. As always, the devil will be in the detail and we look forward to participating in the Pensions Regulator’s consultation later this year. However, the direction of travel is already clear.
Public sector pension reforms – protections deemed age discriminatory
Last December the Government lost its appeal in the discrimination claims brought against them by judges and firefighters. It has recently been reported that the Government has been refused leave to appeal to the Supreme Court.
When the Government implemented reforms to public sector pensions in 2015 (2014 for local government employees) it did so with protections for accrued rights for all and with transitional protection arrangements for future accrual for those within ten years of pension age on 1 April 2012. These future accrual protections were challenged by younger judges and firefighters as age (and race and sex) discriminatory in the Employment Tribunal. The Government argued that the treatment was objectively justified since it aimed to protect those closest to retirement from the financial effects of pension reform.
In relation to the judges the Employment Tribunal ruled against the Government, holding that the Government had failed to identify a legitimate aim since there was no evidence of disadvantage suffered by the protected group, or any social policy objective which was served by treating those groups more favourably. Nor had the Government demonstrated that the transitional provisions were a proportionate means of achieving any assumed legitimate aim because they went beyond what was necessary either to achieve consistency or to protect those closest to retirement.
By contrast, for the firefighters the Employment Tribunal held that the transitional protections were a proportionate means of achieving legitimate aims.
The decisions were appealed to the Employment Appeals Tribunal, which upheld the decision in relation the judges, but for the firefighters found against the Government. The Court of Appeal also ruled against the Government. The cases will now be remitted back to the Employment Tribunal for directions.
It remains to be seen what directions the Tribunal will give and how the Government will address the issue, but it seems very likely that younger public sector workers across the board – not just judges and firefighters – will receive a large uplift for at least a temporary period with a correspondingly large cost to the exchequer.
PASA delivers guidance to improve the DB transfer process
On 8 July PASA, along with the Pensions Minister Guy Opperman, launched the first of two new DB transfer guidance documents with three key aims – to improve the overall member experience through faster, safer transfers, improve efficiency for administrators and improve communications and transparency in the processing of transfers.
The new guidance is supported by the Pensions Regulator which was involved in the process from the outset and which, along with the Financial Conduct Authority, produced in association with industry representatives, including PASA, a standardised ‘transfer template’. Its purpose is to get accurate and timely information on the scheme and benefits to the adviser so that the advice the member gets is robust, timely and at a lower cost. PASA recommends that administrators adopt the template and ensure that both sections are fully completed and sent to members’ advisers on request.
The guidance relates to ‘standard or straightforward’ cases – in essence normal requests for a statutory guaranteed cash equivalent transfer value where the scheme administrator has the benefit of some or full automation to calculate the transfer value. For such cases the guidance suggests that it should take no more than 7 or 8 working days from receiving the request to deliver a transfer quote and no more than 9 working days to settle and pay the transfer after receipt of all relevant forms. A further PASA document, scheduled for release towards the end of 2019, will cover ‘non-standard’ or complex cases. These include those requiring significant manual intervention and where a pension scam is suspected.
At the launch it was suggested that the whole process from enquiry to transfer should take no more than 10 weeks, but such a timescale is not mentioned in the guidance. It was also intimated that unless this voluntary guidance was widely adopted and transfer times improved as a result, the Regulator would be looking to write a Code of Practice in this area. The guidance does note that although it is voluntary, it is anticipated that the Pensions Ombudsman is likely to reference it when reviewing complaint cases.
This welcome initiative is predominantly member-focussed but should help to deliver improvements for all those involved in the DB transfer process.
In addition to adopting the template, administrators would be well-advised to review their current processes and see to what extent they can deliver improvements using the thoughts and ideas in this guidance. A 10-week turnaround may be the ‘gold standard’ right now, but one can easily see how pressure to improve transfer turnaround times will only grow.
PASA’s guidance for DB transfers complements similar work carried out by the Transfers and Re-registration Industry Group in relation to transferring and re-registering DC pension and investment assets on which a framework was finalised in July 2018 (see Pensions Bulletin 2018/27). Both seem also to bring to a close right now an initiative launched by HM Treasury four years ago in which it consulted on whether the transfer process could be made smoother and more efficient.
Record Kodak claim hits PPF funding, but reserves remain healthy
The Pension Protection Fund’s 2018/19 Annual Report and Accounts continues to paint a healthy picture, despite a record net cost of claims of £1.7bn over the year. Those claims, led by the largest single claim on the PPF to date – Kodak Pension Plan (No. 2) – were the main drivers behind the PPF’s reserves dropping from £6.7bn to £6.1bn. The PPF’s funding ratio has also dropped from 122.8% to 118.6% and its assessed chances of reaching self-sufficiency by 2030 correspondingly fell from 91% to 89%.
The effect of the Hampshire case, which requires the PPF to pay members at least 50% of the value of their scheme benefits, was to reduce reserves by about £300m. These costs were roughly cancelled out by the continually impressive overperformance of investment returns (which were 5.2% over the year).
The report notes that over the year the PPF continued to bring services such as investment management in-house, which has helped to lower expenses to below 2016/17 levels. Services such as Retire Now, first launched in March 2018 to give members more control and allow them to put their own benefits into payment, have helped member satisfaction reach 97%. And after an information security breach in late 2018 the PPF has been working with security partners to address the relevant issues.
The PPF now has assets under management of around £32bn with a membership of roughly 400,000 (with another 150,000 in assessment periods).
Another record year of claims has dented the reserves of a still strong PPF. The report notes that the biggest risk the PPF faces is the deficits of schemes it protects, and as such the potential effects of Brexit could have a big impact on its future funding. But arguably of more immediate concern could be the keenly awaited EU judgment on PSV vs Bauer (see Pensions Bulletin 2019/20), as an increase in PPF compensation to 100% of the value of members’ scheme benefits would have a devastating effect on the funding level of the PPF and likely lead to calls for the strengthening of DB funding requirements to reflect the new PPF benchmark.
Survivors’ pensions – the Government finally responds
Let’s start in 2013. The Marriage (Same Sex Couples) Act which introduced equal marriage for same sex couples in England and Wales became law. A relatively little-remarked provision of this Act required the Government to arrange for a review of survivor benefits provided by occupational pension schemes and for a report on the outcome of this review to be published by 1 July 2014.
This report was published on 26 June 2014. Our Pensions Bulletin 2014/07 includes a report on this. The report concerned itself not only with differences between same and opposite sex survivor benefits (which the Government had legislated to be permissible in respect of pre-5 December 2005 service – see below), but also differences between opposite sex survivor benefits provided to widows and widowers (which remains permissible under European law in respect of pre-17 May 1990 service).
Then, on 12 July 2017, the Supreme Court ruled in Mr Walker’s favour in his long-running case that it would be unlawful to restrict the same sex survivors’ pension payable on his death to his husband to service before 5 December 2005. The significance of this date is that paragraph 18 Schedule 9 of the Equality Act 2010 expressly permits same sex survivors’ pensions to apply this restriction and quite a lot of schemes did so. The Supreme Court ruled that paragraph 18 is incompatible with higher-ranking European Union Law. See our News Alert for more details.
Some five and two years after the above events, Guy Opperman made a statement to the House of Commons on 4 July. In it he said that:
- The Government respects the Supreme Court decision and it is now clear that same sex civil partners or spouses are entitled to survivor benefits in the same way as opposite sex spouses.
- In public sector schemes where the Government is the employer, same sex survivors’ benefits will be equalised with opposite sex survivors (with a limited exemption where in the past females’ benefits were improved subject to higher contributions).
- “Whilst the Government is responsible for public service pension schemes, private sector schemes are individually responsible for ensuring that they are compliant with the judgment. It is therefore not for the Government to direct private sector schemes in this instance, and any action taken by the Government in respect of public service pension schemes should not be interpreted as the minimum requirement for private pension schemes in considering how they respond to this judgement. These schemes will need to take their own advice to ensure that they are legally compliant with the judgment going forward.”
- Regarding the 2014 review: “…the Government has concluded that, aside from those changes brought about by the Supreme Court judgment, it will not make any further retrospective changes to the existing provisions in respect of occupational pension schemes to equalise survivor benefits. While this means that the differences in survivor benefits for accruals in past periods will remain for some, these will work their way out of the system in time”.
At last we get a statement from the Government on these linked issues. It is not clear why we have had to wait so long.
In relation to Walker, it remains unclear whether the offending legislation will be repealed. But trustees that have ever applied – perfectly legally, they thought – the 5 December 2005 restriction must, if they have not already, take legal advice on how to equalise, which might extend to the provision of back payments in respect of unequal survivor pensions in payment and to the estate of now deceased survivors.
Government publishes gender equality roadmap
On 3 July a policy paper was issued by the Government Equalities Office setting out a roadmap of work underway and new measures designed to address continuing evidence that gender inequality remains in many areas of life, including a ‘private pensions gap’ caused by inequalities in the labour market.
The paper sets out eight key drivers of inequality, with the Government promising to tackle each of them. In the section dealing with ‘financial instability later in life’ there are promises to:
- Update the online divorce process to include a behavioural nudge and improved guidance to ensure that couples are aware of and can consider the benefits of pensions sharing;
- Continue to monitor the impact of recent private pensions reforms on women and consider whether there is a need to look more closely and comprehensively at the private pensions outcomes experienced by women and other groups;
- Work with providers, the wider industry, the Pensions Regulator, and the Money and Pensions Service to understand how and where they can use better communications and specific messaging to support women to plan and save for greater security in retirement.
A Gender Equality Monitor has also been launched, bringing together a suite of metrics from across government to monitor important gender equality issues in the UK. Acknowledging that current measures of pension equality by gender are limited – the monitor currently includes only two (comparative average weekly incomes for single male and female pensioners above state pension age and workplace pension participation rates for eligible employees by gender) – there is also a commitment to explore additional measures.
There are somewhat limited proposals in the pensions space, as clearly it is only through taking successful action in relation to pay and job opportunities that, over time, the private pensions gap can be narrowed.
Could reform of inheritance tax be on its way?
The Office for Tax Simplification has produced a significant report containing a number of recommendations to the Chancellor to make substantive aspects of the design of inheritance tax simpler, more intuitive and easier to operate.
Amongst its 11 recommendations the OTS proposes a replacement of the annual gift exemption and the exemption for gifts in consideration of marriage or civil partnership with a single personal gift allowance, the reform of the exemption for regular gifts out of income, or its replacement with a higher personal gift allowance, the shortening to 5 years of the current 7-year period within which non-exempt gifts attract inheritance tax and the abolition of the tapered rate of inheritance tax on such non-exempt gifts. Where there is inheritance tax to pay on lifetime gifts, the OTS recommends that options are explored for simplifying and clarifying the rules on who is liable to pay this tax, and how the £325,000 threshold is allocated between different recipients.
Turning to life assurance products and pensions, the OTS makes the following observations and recommendations:
- Death benefits payable from term life insurance – the Government should consider ensuring that such benefits are inheritance tax free on the death of the life assured without the need for them to be written in trust;
- Death benefits payable by a pension product provider – the OTS notes that pension savings can only be passed on free of inheritance tax if the pension provider operates a discretion as to whether and to whom it is passed on to. It regards the potential for different treatment to be anomalous and notes that changing this would simplify inheritance tax, leaving providers to separately determine if they wish to continue to operate the discretionary trust system.
- Pension transfers – the OTS notes the risk of those deciding to transfer their pension from one provider to another triggering a ‘transfer of value’ giving rise to an immediate inheritance tax liability. It says that there is currently a mismatch between the concern of financial advisers and the number of cases which HMRC pursues, noting that the HMRC guidance is not particularly clear. Referencing some clarity on the issue arising from last year’s decision of the Court of Appeal in Parry v HMRC (see Pensions Bulletin 2019/22), the OTS states that it is expected that HMRC will revise its guidance once the appeal process has been completed. The OTS goes on to state that it would be helpful if HMRC were to provide further detailed guidance on the circumstances in which a gratuitous benefit may arise when making certain pension transfers, such as from a DB scheme into a personal pension scheme shortly before death.
The OTS concludes its chapter on life assurance products and pensions by saying that “it may be appropriate, at some point in the future for the Government to consider a wider review of the tax system and pensions, possibly carried out by the OTS”.
The proposed reform to term life insurance makes sense and will hopefully find its way into a future Finance Bill. The administration of pension schemes will also be eased if the linkage between discretionary treatment and inheritance tax is broken. And further HMRC guidance on pension transfers would be most welcome if it brings clarity on the circumstances in which inheritance tax arises, particularly to those seeking to transfer away from DB schemes in order to create a DC pot that can access the pension freedoms.
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.