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Pensions Bulletin 2020/01

Our viewpoint

Pension Schemes Bill republished

The Pension Schemes Bill that fell as a result of the dissolution of Parliament last year has now been republished.  It is substantially the same as the version that appeared last October (see Pensions Bulletin 2019/39) with nearly all adjustments being relatively minor and no new topics introduced.

There is still no news on legislation that will be needed in order that DB consolidators can be authorised and supervised by the Pensions Regulator, with the DWP yet to respond to its consultation on this matter (see Pensions Bulletin 2018/50).  And the simple fixes necessary to ensure that the GMP conversion legislation works as it should remain absent.

We have published a News Alert that summarises and comments on the Bill’s many provisions.  There is also now a new Insight hub on our website where we will draw together a whole range of thought pieces on the Bill and related matters, and which already includes the News Alert and a number of other articles.

Comment

This cross-party supported Bill returns to a Parliament that has been transformed by the General Election result.  If the Government wants to now build on the October version there would seem to be nothing, other than time and resource, to prevent it from doing so.

In the end Bauer did not bite that much

Fears that the structure of PPF compensation would have to be radically adjusted proved to be unfounded when on 19 December the European Court of Justice took a very different view to its Advocate General as to the minimum that needed to be provided by compensation schemes such as the PPF to be compliant with Article 8 of the EU’s 2008 Insolvency Directive.

Back in May 2019 the Advocate General opined that Member States had to protect all of the old age benefits affected by an employer’s insolvency and not just part or a designated percentage of such benefits (see Pensions Bulletin 2019/20).

Although stated in the context of Germany’s counterpart to the UK’s PPF, had the ECJ supported this finding, the PPF would have been seriously impacted, with features such as the 10% cutback if below pensionable age and the compensation cap almost certainly having to be jettisoned.

But the ECJ instead found that cutbacks from full protection were permissible.  Its starting point was that it had already found that the Directive required the individual to receive at least 50% of the value of their accrued rights (established as a baseline in the Hampshire case – see Pensions Bulletin 2018/36).  However, as it had previously stated, in certain circumstances the pension losses suffered could still be “manifestly disproportionate”.

On revisiting the intent of this part of the Directive, the ECJ said that the EU was seeking to protect an employee from particular hardship caused by the loss of pension rights and so any reduction would be “manifestly disproportionate” where the former employee’s ability to meet his or her needs was seriously compromised.

It then proceeded to quantify this by saying that a reduction would be manifestly disproportionate, even though the individual received at least 50% of their accrued rights, where as a result of the reduction the individual would be living or would have to live below the “at-risk-of-poverty” threshold determined by Eurostat for the Member State concerned.

These thresholds are published annually and it seems that the provisional 2018 UK threshold is €12,594 pa – in the region of £11,000 pa.

The judgment also found that the Insolvency Directive is capable of having direct effect on compensation schemes such as the PPF, so the judgment applies without requiring any changes to UK law.

Comment

So, after a number of cases on how to interpret Article 8, we now have some clarity as to the minimum that an insolvency protection scheme, such as the PPF, needs to provide.  Unfortunately, it presents the PPF with a further administrative issue because in order to ensure that PPF compensation meets this new test, it will surely need to make enquiries of, or seek declarations from, individuals in relation to other sources of pension income.

Nevertheless, in many cases, the individual’s prospective State pension entitlement alone (£9,110.40 pa from April 2020) will go a long way to ensuring that this new minimum is met.

But this further administrative challenge should not distract from the fact that the ECJ, in rejecting its Advocate General’s Opinion, has delivered much needed relief to the PPF whose compensation provisions might otherwise have needed to be substantially uplifted, potentially with retrospective effect, with all that this would have meant for the PPF’s solvency position and the demands that it would be making in future on levy payers.

LCP Responsible Investment Survey 2020 – manager scores improve but more to do

We have completed our fifth biennial Responsible Investment (RI) survey.  Comprising the results from 137 managers, nearly all of the major institutional investment managers in the UK, it is intended to help trustees actively oversee their managers’ approach to environmental, social and governance (ESG) factors and stewardship.

The questions we asked the managers cover topics such as their external commitments to RI, responsibility for RI within the organisation, their use of ESG data, consideration of ESG factors in the investment process, engagement, and voting.  We analysed the managers’ responses and calculated an overall RI score for each manager.  These range from 1 to 4 (where 1 is low and 4 is high).

Overall, there has been a general improvement in the scores of managers, for example, 58% of managers achieved a score of 3 or 4, whereas in our 2018 survey it was 37%.  However, there is variation amongst the various underlying topics, as well as between managers.

For more detailed analysis of the results, as well as some additional information on key RI developments, refer to our full report which you can access here.  For information on your specific managers, please speak to your LCP adviser.

Comment

We would have expected there to be an improvement in RI standards given the greater focus on RI in the investment industry over the last couple of years.  Broadly, this has been reflected in the results.  However, there are some areas where the results have been more disappointing, such as climate change and engagement.

We believe trustees should, with the help of their adviser, encourage managers to improve by maintaining a dialogue with them on their RI activities.

EIOPA publishes pension scheme stress tests without UK participation

On 17 December the European Insurance and Occupational Pensions Authority published the results of its stress tests for European pension schemes – both DB and DC.  20 countries were asked to participate (being deemed to have “material” pension funds ie more than €500m).  However, two countries did not reach the required level of participation – the UK and Ireland – and so were excluded from the analysis.  For the UK no data was submitted (see Pensions Bulletin 2019/18), almost certainly as a consequence of Brexit.

EIOPA produced a useful two-page fact sheet for those who do not want to read the 70-page report.  It shows, unsurprisingly, that an adverse scenario would wipe off almost one quarter of the value of participating scheme’s assets.

Following the implementation of IORP II ESG requirements EIOPA, for the first time, comments on scheme performance in this area, saying that the majority of schemes are taking appropriate steps, but only 30% have processes in place to manage ESG risks, and only 19% assess the impact of ESG factors on investment risks and returns.  EIOPA also says that equity investments show a high carbon exposure relative to the EU economy.

Comment

As we have come to expect, this report contains lots of useful data but now that the UK no longer participates the results are now only of theoretical interest on this side of the channel.

PPF releases new D&B insolvency score portal revealing many score changes

On 19 December the PPF released in beta form the new Dun & Bradstreet (“D&B”) insolvency score portal, and revealed that 60% of sponsoring employers can expect to see their Levy Band change from April 2020.

On the same day, the PPF also published its consultation on the insolvency risk aspects of the PPF levy rules for the next triennium – ie levy seasons 2021/22 to 2023/24.  The big focus is on the change of insolvency provider from Experian to D&B from April 2020.

Whilst there are some changes proposed for the insolvency score calculations (for example the mortgage age variable is being replaced) many of the score changes are caused by the different ways Experian and D&B collect and use data.  The consultation suggests that companies on Scorecard 1 (for the largest employers without a credit rating) are most likely to see a deterioration in their insolvency score.

Those who had “trustee” access to the Experian portal should now have received a registration email for the D&B portal, whilst those who have “company” access can register and request access to the appropriate companies.  The PPF strongly encourages scheme sponsors to review their scores on the new portal and check that the information D&B holds is up to date and accurate, to provide any self-submitted data to D&B and to raise any issues or concerns with D&B.

The D&B portal shows the insolvency score both under the current rules (but using D&B data methodology) and under the proposed methodology.  Comparing with the scores on the Experian portal will show how much of any change is due to different data and how much is due to the proposed new formulae.

Consultation closes on 11 February 2020 and the first levy invoices to be calculated with D&B insolvency scores will be issued in Autumn 2021, based on scores from April 2020.

Comment

For what was thought to be a relatively low key adjustment there are a lot of sponsoring employers seeing potential changes to their Levy Bands.  Whilst it is good news for some companies and pension schemes, for others there are only three months left to address what could be substantial increases in levies if the insolvency score changes go unmitigated.  We echo the PPF’s sentiment; it is worth checking the scores that matter to you sooner rather than later.

The Brexit Bill returns

A modified version of the European Union (Withdrawal Agreement) Bill had its second reading in the House of Commons on 20 December, shortly before Parliament rose for Christmas.  The Bill needs to make rapid progress in order to tie in with the UK’s “exit day” from the EU on 31 January 2020 and in this respect the Bill is scheduled to complete its remaining stages in the House of Commons on 9 January.

As before, the Bill provides for all mentions of “exit day” in regulations relating to the UK’s departure from the EU to be replaced with references to the end of the implementation period.  This in turn has been hard-coded as 31 December 2020 as the Bill now prevents the Government from extending this period.

During the now eleven-month implementation period, any EU-influenced regulatory background under which UK pension schemes operate should remain undisturbed.  But once we reach the end of 2020 many such provisions will need to be ‘domesticated’ or otherwise repealed.

And in this respect the Bill now allows the Government to specify the UK courts and tribunals that are not to be bound by European Court of Justice rulings that have been retained in UK law after the end of the implementation period and the extent to which, or the circumstances in which such courts and tribunals are not to be so bound.

Comment

The Bill contains no clues as to how this new ability to not be bound by past ECJ rulings is to operate.  Until we hear more one can only speculate as to the extent to which the UK Courts in future will be able to ignore some of the landmark ECJ pensions rulings in the past.

Budget Day set for 11 March

The long-delayed Budget has finally been set for 11 March 2020 and this time round there ought to be nothing to stop it going ahead.  From a pensions perspective what should be of note is whether this will deliver the promised review of the tapered annual allowance and its emerging pensions tax impact for  senior NHS clinicians; and if so whether this will herald a wider reform of pensions tax.  HM Treasury welcomes representations as part of the policy-making process and will be accepting these until midnight on 7 February 2020.

We are also awaiting a Government consultation on addressing the shortcomings of the RPI as a measure of inflation, due to start this month and with its response to be published by the end of this tax year and possibly by the time of the Budget.

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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