Pensions Bulletin 2020/32
Our viewpoint
6 August 2020
- Financial Support Direction threat yields formal support from linked charity
- Industry guidance issued on Implementation Statement disclosures
- GMP equalisation – planning member communications guidance issued
- Wind-up completion – technical tax glitch exposed
- PLSA examines customer journeys on DC occupational decumulation
- Getting out of lockdown – guidance for pension scheme administrators
- Is the FCA about to outlaw illustrative transfer values in retirement packs?
- MPs ask pensions industry for workable solutions to the small DC pot issue
- Transfers to overseas pension schemes continue to fall
LCP’s Pensions Bulletin returns after a shorter break than anticipated as there are a number of new developments to report.
Financial Support Direction threat yields formal support from linked charity
The Pensions Regulator’s latest regulatory intervention report is a straightforward tale of it in effect reversing an adverse consequence of an organisational split of a former public sector entity which left a DB pension scheme with little meaningful corporate support.
In the case of the National Institute of Agricultural Botany pension scheme, it would appear that the ‘insufficiently resourced’ condition for a Financial Support Direction was met, enabling the Regulator to first inform and then formally warn an asset rich registered charity that it would be required to put in place financial support, initially of its own choosing, in relation to a DB scheme sponsored by a cash poor, but closely related entity.
Following lengthy negotiations, the charity agreed to become a statutory employer in relation to the scheme and take joint responsibility for the scheme’s deficit repair contributions due as part of the recovery plan.
Comment
The organisational split took place over 20 years ago when the employer abandonment issue was not a focus of the Occupational Pensions Regulatory Authority. In this case it would appear that the result was not in doubt, once the charity had satisfied itself that by agreeing to take on joint responsibility for the scheme, it would not be compromising its charitable objectives.
Industry guidance issued on Implementation Statement disclosures
The Pensions and Lifetime Savings Association has published guidance for trustees of both DB and DC schemes producing new Implementation Statement disclosures, under regulations, finally settled over a year ago (see Pensions Bulletin 2019/23), requiring schemes to describe how and to what extent they have followed the policies set out in their Statement of Investment Principles.
The guidance sets out:
- What the legislation requires and by when
- Both general principles and more detailed possible considerations for trustees to produce good statements
- The specific considerations around voting behaviour disclosures
- ‘Top tips’ for investment and responsible investment communications
The whole of the guidance applies to “relevant” schemes with DC benefits. Only the parts of it concerning voting and engagement apply to schemes that just provide DB benefits (and DC benefits deriving from members’ additional voluntary contributions).
Comment
Implementation statements are new for trustees with the possibility of there being material differences in their quality, at least in the early years. This is where the PLSA’s guidance, put together by industry experts and with particular assistance from LCP, can help. And although scheme members will be a key audience for these statements, a significant level of interest is likely from policymakers, regulators and civil society groups, so it is important that trustees are also cognisant of how their statements are likely to land with such groups.
GMP equalisation – planning member communications guidance issued
The industry group looking at practical issues regarding GMP equalisation has published guidance to assist schemes in the early planning stages of a GMP equalisation project, where, amongst other things, they will be considering how they will approach their communications, how they will work effectively with their administrators, and what they really need to say to their members.
The guidance sets out some broad principles for communications in the early planning stage, some questions that members may ask at this point, with some sample answers, a checklist to help professionals and trustees ensure they have reviewed all existing documents that may need to change in the light of GMP equalisation and a jargon buster. The jargon that is ‘busted’ includes GMP and GMP equalisation.
A second guidance document is promised covering communication to members during the implementation stage of a GMP equalisation project. This may include a jargon buster for terms such as anti-franking and later earnings addition. The group has put together a short survey to help it scope out this second piece of guidance and welcomes all responses.
Comment
This is an excellently concise and attractively packaged document. We look forward to the second document which we suspect will be much more challenging.
Wind-up completion – technical tax glitch exposed
Correspondence between the Association of Pension Lawyers and HMRC has been published (on the APL member site and shared to Association of Consulting Actuaries members) relating to a flaw in current pensions tax legislation that may need consideration for schemes planning or in the middle of full wind-up projects that involve securing benefits with buyouts.
Usually, provided appropriate processes are followed, a buyout in this situation does not interfere with members holding Lifetime Allowance protections. However, the correspondence indicates that in HMRC’s view (a view with which we think some lawyers disagree), it seems that members with pensions in payment and holding any of the Fixed Protections would lose that protection when the buyout policy is secured for the member. So future tests against the Lifetime Allowance, should any occur, would be based on the standard Lifetime Allowance (or the member might be able to look to fall-back protection of Individual Protection 2016 to minimise impacts).
Comment
Clearly one would hope that if HMRC reads the law this way, it should ensure that the Government takes the first opportunity it has to correct it back (retrospectively) to align with what surely must have been the policy intent.
There are probably only a small number of members impacted in a given wind-up project, but this is an issue that could disrupt sensible planning of the wind-up. Ahead of any news of a change to the tax legislation, schemes may need to consider with their legal advisers what action if any to take, and what workarounds may be available.
PLSA examines customer journeys on DC occupational decumulation
The Pension and Lifetime Savings Association is consulting on its own proposals to establish a new regulatory regime requiring occupational pension schemes to support their members when making decisions about how to access their DC pensions, including by offering or signposting to products that meet minimum quality standards.
The PLSA thinks that schemes should be under a statutory obligation to support their members in respect of decumulation decisions, with such support, backed up with standards and guidance, consisting of three specific elements:
- Member engagement and communications
- Decumulation products (provision of or signposting to)
- Scheme/governance processes relating to design and/or selection and ongoing delivery of the two above elements
The PLSA says that it wants to “provide a proper framework that helps deliver a broadly consistent customer journey for savers across all the pension savings they may have”.
The call for evidence closes on 4 September 2020. Following analysis of responses, the PLSA intends to publish final recommendations in October 2020.
Comment
The PLSA is clearly concerned that more than five years on from the delivery of the Freedom and Choice agenda the issue of DC decumulation in the trust-based sector has not been addressed by government, putting members at risk of taking poor decisions, or worse. By contrast the FCA’s investment pathways initiative (see Pensions Bulletin 2019/30) has been finalised and is awaiting implementation by providers, albeit delayed until February 2021 due to the pandemic.
Getting out of lockdown – guidance for pension scheme administrators
Follow-up Covid-19 guidance, designed to highlight best practice for pension scheme administrators as they navigate their way out of lockdown, has been issued by the Pensions Administration Standards Association. It builds on what has been learned by administrators, in relation to their people, their technology and their members, during the enforced remote working over the last few months. The guidance sets out some thoughts on issues arising on what could be a long-drawn out return to office working, the implementation of which is expected to vary significantly between organisations, but with the likelihood that remote working will form part of the mix in the ‘new normal’.
Comment
Pensions administration, unlike various consulting activities, was nearly 100% delivered from office environments prior to the lockdown. If anything was going to fall over during the pandemic it should have been this. But instead, for the most part, it has thrived thanks to the resilience of those delivering this service and access to new technology enabling remote working without compromising security.
Is the FCA about to outlaw illustrative transfer values in retirement packs?
When the Financial Conduct Authority announced the outcome of its review into the DB transfer market in June (see Pensions Bulletin 2020/24) it issued a consultation on guidance on what it expects from FCA regulated firms when advising on pension transfers and conversions, particularly from DB to DC schemes. The draft guidance sets out best practice and case study examples of suitable and unsuitable advice.
However, buried away in Annex 2 of the consultation paper is draft guidance for employers and trustees on the support that they can give to members without straying into regulated advice territory. This contains a statement that trustees providing illustrative figures that compare potential outcomes of keeping the scheme pension or transferring it to provide DC benefits could be putting themselves at risk of giving “advice” for which they would not be authorised.
Consultation closes on 4 September 2020.
Comment
We understand that some, having read this guidance, are concerned that simply providing an illustrative transfer value with say a retirement quote could cross the advice boundary. It is not clear if this is intended and hopefully this will be clarified in the final version of the guidance due to be published in the first quarter of 2021.
MPs ask pensions industry for workable solutions to the small DC pot issue
The Work and Pensions Committee has published an open letter to the pensions industry about the problem of proliferating small pension pots.
The letter refers to the DWP’s call for evidence on the default fund charge cap and standardised cost disclosure (see Pensions Bulletin 2020/27), which includes a question on consolidating small dormant/deferred pots.
The MPs urge those responding to this consultation to propose workable solutions for consolidating very small pension pots and to send these also to the Committee as they intend to consider this topic further in early 2021.
Comment
The small pot issue is part of the price being paid for the successful auto-enrolment policy. But as the recent report from the Pensions Policy Institute has made clear (see Pensions Bulletin 2020/31) this must now be tackled.
Transfers to overseas pension schemes continue to fall
The number of individuals transferring to qualifying recognised overseas pension schemes (QROPS) has continued to fall in 2019/20 from the peak in 2014/15, according to statistics published by HM Revenue & Customs.
The decline is thought to be as a result of “changes in requirements” and the introduction of the 25% overseas transfer charge.
Comment
The charge was introduced in March 2017 and the statistics show a more than halving of the number of transfers in the tax year that followed. Since then there has been a steady drift downwards by value. The end of the Brexit implementation period could enable HMRC to deliver a further tightening of this transfer mechanism.