18 July 2019
Radical shake up of Regulator’s Codes of Practice on the way?
After a few weeks of rumours around the industry the Pensions Regulator has confirmed that it is reviewing its 15 Codes of Practice “to form a single, shorter code” which is “quicker to find, use and update, so that trustees and managers of all types of scheme can be more responsive to changes in regulation”.
The Regulator’s early focus will be on the Codes most affected by last year’s governance regulations. These regulations require, amongst other things, the Regulator to deliver a Code in order that the UK is compliant with the IORP II governance requirements (see Pensions Bulletin 2018/42).
To this end Codes of Practice 9 (internal controls) and 13 (defined contribution) will be reviewed first, as will content from Codes of Practice 14 (public service schemes) and 15 (master trusts). Trustees will need to be able to demonstrate that they have an effective system of governance within 12 months of publication of the updated Code.
The Regulator is planning to launch a formal consultation later in the year, but before then, it will engage with stakeholders for feedback on the proposed design and content.
The IORP II-influenced governance regulations place new requirements on certain occupational pension schemes, the most far-reaching of which is the requirement to establish an effective system of governance. This builds on the previous requirement for trustees to maintain adequate internal controls.
Under the regulations, trustees are expected to have an effective system of governance that is proportionate to the size, nature, scale and complexity of their scheme. This will need to include a documented risk assessment, and the Code will reflect the Regulator’s expectations of this work.
It is not clear when this Code will come into force but our early guesstimate is spring 2020.
This is an ambitious project. The Regulator’s website contains vast amounts of material for employers, trustees and advisers which can be hard to track down and keep on top of when it is updated. We hope that this review will reach the outcome it intends.
EIOPA sets out expectations for pension scheme governance under IORP II
The European Insurance and Occupational Pensions Agency has published four “Opinions” to assist National Competent Authorities (NCAs) such as the Pensions Regulator in the UK in the implementation of the IORP II Directive. The Opinions cover:
- The use of governance and risk assessment documents in the supervision of pension schemes and sets out how EIOPA expects the “own risk assessments” (ORAs) that the Directive requires will be carried out. The NCAs are told that they should review ORAs to ensure that they are forward-looking and considering internal and external emerging developments likely to affect schemes’ future risk profile. A helpful checklist is included
- The practical implementation of the common framework for risk assessment and transparency which encourages the NCAs to make schemes aware of the availability of the “common framework”
- The supervision of the management of operational risks for both DB and, increasingly, DC schemes with an emphasis on the emerging cyber risks
- The supervision of the management of environment, social and governance risks where an illustrative mapping of how ESG risks may arise in traditional prudential risks is included. NCAs should encourage schemes to consider the impact of their long-term investment decisions and activities on ESG factors through their stewardship role, as well as having regard to the impact of sustainability risks on pension fund liabilities
These Opinions have no direct legal bearing status on UK schemes but they are of interest as it is possible that some of the content may emerge here in due course in the form of the Regulator’s governance code (see article above).
The “common framework” aka “holistic balance sheet” aka “Solvency 2 for pensions” (see for example Pensions Bulletin 2016/16) is like the vampire in the 60’s horror film. It keeps sitting up however many times it seems to be staked through the heart.
Professional trustee accreditation scheme launch delayed
The voluntary initiative to improve and provide assurance about the quality of professional trustees and discourage poor practices in the market, has suffered a setback with a delay in the rolling out of the accreditation process that was expected to have happened by now following the publication of standards and the accreditation process in February (see Pensions Bulletin 2019/08).
We understand the delay is due to finalising the assessment standards for the soft skills part of the accreditation. The complete accreditation process should now be launched in the autumn.
The Association of Professional Pension Trustees continues to own the standards and will maintain and update them whereas the Pensions Management Institute will run the day-to-day accreditation process.
The slight delay is mildly disappointing, particularly in the context of the Regulator’s consultation on trusteeship last week (see Pensions Bulletin 2019/27) which is placing considerable store on such a scheme being up and running. However, it is clearly better to get the accreditation standards right first-time round. We look forward to the launch later this year.
Government fills in the detail on opposite-sex civil partnerships
On 10 July the Government published its plans for extending civil partnerships to opposite-sex couples, with an aim of making opposite-sex civil partnership available by the end of 2019. The Government Equalities Office is also seeking views on a time-limited opportunity for those in opposite-sex marriages to convert them into civil partnerships at the end of which the current ability to convert a same-sex marriage to a civil partnership will also end. Consultation on this proposal runs until 20 August 2019, and if this is taken forward, any substantive changes are likely to follow in 2020.
Earlier this year (see Pensions Bulletin 2019/12) a private members’ bill received Royal Assent setting the groundwork for this latest development. In the Government’s latest plans the intention is, where appropriate, to extend existing rights that apply to same-sex civil partners or opposite-sex married couples to opposite-sex civil partners. This includes financial benefits and entitlements, such as pension rights.
In relation to pensions:
- For the State Pension, for those who reached State Pension Age before 6 April 2016, the Government intends to align the State Pension rules relating to increasing or inheriting State Pension entitlement for opposite-sex civil partners with those in place for same-sex civil partners. It is not clear whether the Government will make any similar adjustments for the far more limited situations that can arise for those reaching State Pension Age from this date
- For occupational pension schemes the Government intends to match opposite-sex civil partners’ pension entitlements to those of opposite-sex married couples. No further detail is given. Presumably on becoming an opposite-sex civil partner the individual concerned will be treated equally in respect of any future survivor pensions with those of an opposite-sex married comparator
- There are no plans to equalise treatment between female and male survivors of opposite-sex marriage in public service pension schemes, as public service pension schemes already exceed the requirements following on from the 1990 Barber v GRE case. However, the Government does propose to align survivors’ benefits for opposite-sex civil partners with those that are available to survivors of opposite-sex marriage
The necessary legislation will presumably follow in due course, but it is not clear whether this will be in place before the end of the year.
Occupational schemes that currently operate different treatment in relation to survivor pensions for opposite-sex couples, according to whether or not they are married, will need to take legal advice to see what changes may be necessary to scheme rules and practices.
As the Government has now accepted the Walker judgment (see Pensions Bulletin 2019/27) there is unlikely to be any service limitation, so in theory some schemes could see a significant increase in contingent liabilities.
However, we expect that in many cases it will be a question of tidying up and modernising survivor pensions references since many such pensions will be payable to those not married on grounds of dependency.
GMP equalisation group issues a ‘Call to Action’
The industry group set up to deliver ‘good practice’ guidance on tackling GMP equalisation (see Pensions Bulletin 2019/24) has issued its first substantive document. Aimed predominantly at trustees and sponsors, the group’s ‘Call to Action’ will also be of interest to anyone who is involved with the operation and governance of a pension scheme that may be impacted by GMP equalisation.
This 16-page document looks at three topics for which there are good reasons for trustees and sponsors to take action now:
- GMP rectification – this section looks at how to decide, after completing GMP reconciliation, whether to move swiftly on to rectification or wait until the equalisation project is ready to roll
- Data – this looks at the steps that can be taken now to get scheme data into the best possible shape ready for detailed equalisation work
- Impacted transactions – this sets out some issues to think about (together with the scheme’s advisers) where members are exercising options now – such as whether to equalise transfer values ahead of the long-term benefit solution and the options available in relation to the various forms of trivial commutation payments
The guide finishes with a tick box list of actions that might be found useful in preparation for the GMP equalisation project.
GMP equalisation projects involve several stages including important decisions on approach, some of which will be held up by external issues, such as pensions tax. This high-level guide provides a useful reminder of some of the actions that can be taken now in such a project despite the remaining legal and legislative uncertainty. However, most trustees and scheme sponsors will be more interested in the more detailed guidance documents promised, some of which may be available in early autumn.
Public sector pension reforms – the Government responds
Following the news that the Government has been refused leave to appeal to the Supreme Court in relation to the discrimination claims brought against them by judges and firefighters (see Pensions Bulletin 2019/27), the Government has made a statement in the House of Commons as to how it now intends to proceed.
In this statement the Government says the following:
- It respects the Supreme Court’s decision in relation to the joined cases of McCloud and Mostyn and will engage fully with the Employment Tribunal to agree how the discrimination will be remedied
- As the ‘transitional protection’ which has been found to be discriminatory was offered to members of all the main public service pension schemes, the Government believes that the difference in treatment will need to be remedied across all those schemes – this includes schemes for the NHS, civil service, local government, teachers, police, armed forces, judiciary and fire and rescue workers
It will be for the Employment Tribunal to determine a remedy in respect of the firefighters and judicial pension schemes, but alongside this process, the Government will be engaging with employer and member representatives, as well as the devolved administrations, to help inform its proposals to the Tribunal and in respect of the other public service pension schemes.
We are not surprised that the Government has yet to show its hand as to how it intends to restructure benefits, but it does seem almost inevitable that a ‘McCloud window’ will now need to be created (in the same way that there was a ‘Barber window’ for sex equalisation) during which all those not benefitting from the transitional protection will be given such protection, with the only question being how long this window will last.
Growth continues at NEST
On 11 July NEST Corporation published its annual report and accounts for 2018/19 along with the annual report and accounts for the NEST pension scheme. Over the past 12 months membership has grown from 6.4 million to 7.9 million members and assets under management have grown from £2.7 billion to £5.7 billion. NEST is also providing pensions for 720,000 employers (up from 616,000).
Looking forward, NEST reports progress on the procurement of its next scheme administration contract, expects to have assets under management of around £10 billion by 31 March 2020, and is hopeful that the second increase in minimum contributions that took place this April, will not have an adverse impact on opt-out rates, which remain low.
It also reports that it is on track to repay the Government loan (with its latest forecasts suggesting that this can be achieved by 2038) and is confident that it meets the criteria set by the Pensions Regulator to become an authorised master trust.
NEST is now one of the biggest DC schemes in the UK (and the biggest Master Trust) and can be expected to continue to grow in the coming years. However, it is building up a substantial bloc of members who have stopped contributing, either because they have opted out or have left their employer – some 3.8 million of the current 7.9 million membership.
And it is goodnight from TPAS
On 11 July the Pensions Advisory Service published its annual report and accounts for 2018/19, although as the last of its main functions were passed over to the now-named Money and Pensions Service (MAPS) at the end of 2018 this year’s report is in effect for the final nine months of TPAS’s existence ending on 31 December 2018.
The report shows a significant increase in activity levels compared to the previous year, once expressed on an annualised basis, with customer satisfaction remaining very high.
The existence of this free-to-use service has been a lifeline for many individuals over the years and it has always been held in high regard. We trust that the good work will continue, whether it is under the aegis of the Money and Pensions Service or through those now working at the Pensions Ombudsman’s Office.
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.