Pensions Bulletin 2020/35
Our viewpoint
27 August 2020
- DWP consults on climate action by trustees
- RPI consultation closes
- Charge cap and cost disclosure consultation closes
- PPF appeals aspects of the Hughes judgment
- The PPF and Covid-19 – can the lifeboat sail to calmer waters?
- Chart your own course – your scheme, your journey
DWP consults on climate action by trustees
The Department for Work and Pensions has launched a consultation entitled “Taking action on climate risk: improving governance and reporting by occupational pension schemes”.
The consultation paper sets out firm proposals for mandating the existing Government expectation that large schemes will disclose their approach to managing climate-related risks and opportunities by 2022, in line with the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD). This will be achieved via regulations and statutory guidance, as provided for through the Pension Schemes Bill currently before Parliament (see Pensions Bulletin 2020/06).
Comment
This is an important consultation for trustees of large pension schemes. We are preparing a News Alert on this development which will be issued shortly.
RPI consultation closes
The long in the gestation consultation on when the shortcomings of the Retail Prices Index as a price inflation measure should be addressed, by bringing the methodology of the CPIH into the construction of the RPI, closed on 21 August.
The joint HM Treasury / UK Statistics Authority consultation, launched with the 11 March Budget (see Pensions Bulletin 2020/11), is technical in nature, with its focus being the point between 2025 and 2030 at which the switch should be made and how it should be done. However, this has not stopped some respondents, such as the Pensions and Lifetime Savings Association and the Association of British Insurers, calling for the latest possible implementation date, along with consideration of compensation for index-linked gilt holders.
The Institute and Faculty of Actuaries takes a more neutral stance, pointing out that the change will create winners and losers with potentially significant impacts on workers with pay deals linked to the RPI, and pension scheme members. As such, it argues, there should be parliamentary or legal scrutiny which properly weighs up the winners and losers.
The Government and the UK Statistics Authority will respond to the consultation in the autumn.
Comment
There is little doubt that the RPI is a flawed measure of inflation and needs to be reformed in some way or other. But how and when this is done is a political decision. That decision needs to be taken this autumn in order to bring to an end the current uncertainty.
Charge cap and cost disclosure consultation closes
The Department for Work and Pensions’ call for evidence on the effectiveness of costs, charges and transparency measures in protecting member outcomes, primarily in DC schemes (see Pensions Bulletin 2020/27), closed on 20 August and was signalled by a number of respondents making clear their views on the issues being raised.
LCP called for the ending of member-borne flat fees due to the detriment they can cause to certain members, new policies to ensure that small deferred pension pots are consolidated, is sceptical about whether and how transactions costs should be included in the overall charge cap and is concerned that an across-the-board reduction in the current 0.75% charge cap could be to the detriment of members.
The Pensions and Lifetime Savings Association is also against a reduction in the charge cap and believes that including transaction costs as a component of the charge cap may not be in members’ best interests.
Comment
We now wait to see how the DWP will take matters forward, with its intention to respond to this call for evidence later this year.
PPF appeals aspects of the Hughes judgment
Following the High Court ruling in Hughes v PPF in June (see Pensions Bulletin 2020/26), in which the imposition of the PPF compensation cap was deemed unlawful, both the Pension Protection Fund and the Department for Work and Pensions have lodged appeals against elements of the judgment.
The High Court judgment determined that the PPF can decide on the mechanism by which it will comply with the 2018 Hampshire ruling (see News Alert 2018/05). However, the judge went on to add a proviso that “the overall compensation payable during retirement (or the lifetime of a survivor) [has to at least] equal 50% of the amount of the benefits that the member (or the survivor) would have received under the pension scheme”, and it is this element that the PPF is appealing against.
The DWP is appealing against the ruling that the compensation cap is unlawful.
While the appeals are being processed, the PPF will continue to apply current procedures, including applying the cap itself, the one-off adjustment to implement the Hampshire ruling for future payments, but withholding arrears payments.
Comment
It is perhaps unsurprising that the PPF is appealing the High Court ruling, which in essence gives the PPF permission to give benefits based on an average calculation method, provided no one falls below the average. The DWP, in the meantime, lodges its appeal to a much weightier matter.
If these appeals fail, the requirement to allow for uncapped benefits may be swiftly implemented and this could have negative effects on some schemes’ section 179 valuation results.
The PPF and Covid-19 – can the lifeboat sail to calmer waters?
LCP’s latest “on point” paper examines the question on a number of pensions practitioners’ minds – how secure is the Pension Protection Fund for the stormy Covid-19 induced economic weather ahead?
The PPF is often thought of as a lifeboat for DB pension members, providing an important “insurance policy” to prevent much more significant reductions in retirement income should the scheme’s sponsoring employer become insolvent at the same time as the scheme itself is in deficit.
In order to address the question posed, the paper has modelled two economic scenarios and the resulting financial hit on the PPF:
- Insolvencies double – the increase in PPF entrants is doubled to rates similar to those following the 2008 global financial crisis but based on the higher level of average claims seen in recent years. Under this scenario, additional deficits of £10bn enter the PPF over the next six years
- Deeper Downturn – this assumes that the post Covid-19 recovery is much slower and / or insolvencies are significantly biased towards businesses in sectors that support large DB schemes. Under this scenario, additional deficits of £20bn enter the PPF over the next six years
The paper finds that the PPF has several levers it can pull to deal with and absorb the large additional liabilities it may face. These include raising levies, changing investments and finally reducing payments to members. Thankfully, even in the more serious scenario of a £20bn hit, a combination of adjustments to the PPF’s funding strategy and self-sufficiency targets could be enough to cover the deterioration in funding without the need to cut benefits.
Comment
It is reassuring to see that the pensions lifeboat is relatively well placed to navigate the storm ahead, but one cannot be complacent about the possibility of it having to cut payments should the pressure become too great. That there will be many more insolvencies amongst those sponsoring DB schemes than we are used to is beyond doubt. The crucial question is whether the firms that are hit will have large DB deficits – and in extremis, whether the PPF has to take one or more of the giant DB schemes in deficit on board.
Chart your own course – your scheme, your journey
Setting a destination and planning a journey for a DB pension scheme can be challenging at the best of times, and this year has not been plain sailing. Our new interactive digital report focuses on the practical steps trustees can take in this respect.
We face a lot of uncertainty including financial markets, sponsor covenants and the funding and investment code that the Pensions Regulator will eventually put in place. The report looks to make sense of these issues and set out practical steps on how trustees can overcome the dangers of inertia to make a robust journey plan to get to their ultimate destinations.