12 November 2020
- Committee stage concludes for the Pension Schemes Bill
- Furlough scheme extended again
- RPI reform decision to be announced on 25 November
- Pledge to beat pension scams launched
- Transfer quotation activity picks up following the first Covid-19 lockdown period
- Corporate insolvency – HMRC moves up the pecking order
- Roadmap towards mandatory climate-related disclosures published
- Cybercrime and pensions administration
The final part of the Committee stage debate on the Pension Schemes Bill took place in the House of Commons on 5 November with a multitude of topics under discussion.
The revised DB funding regime
In the morning session the discussion on this important part of the Bill was limited to whether any special dispensation needed to be made in the legislation in relation to open DB schemes; the Lords having thought so by pushing through an amendment in June (see Pensions Bulletin 2020/27). This amendment was strongly opposed by Guy Opperman who nevertheless undertook to ensure that “the secondary legislation works in a way that does not prevent appropriate open schemes from investing in riskier investments where there are potentially higher returns as long as the risks being taken can be supported and members’ benefits and the Pension Protection Fund are effectively protected”.
He also made clear that the significant lobbying that had taken place on this issue “will definitely influence the regulator’s approach” and that investment de-risking will not be required “for schemes that remain significantly immature, with strong employer covenants, who have been pursing appropriate funding and investment strategies”.
After further discussion the Lords’ amendment was reversed, although not without a vote. However, the very same amendment has since been re-tabled by the Liberal Democrats for consideration at Report stage.
Scams and transfer rights
A number of amendments proposed by the Work and Pensions Committee with support from the Pension Scams Industry Group were considered, whose purpose was to make it easier for trustees to deny a transfer request where they had well-founded scam concerns. However, it was acknowledged that, as a result of discussions that had taken place, the Bill as it currently stood was likely to contain sufficient powers for regulations to be produced enabling trustees to deny transfer requests when certain red flags were raised.
Guy Opperman spoke to the red flags that were under development stating that where a red flag was significant the regulations to come “will direct the member to guidance or information that they must take prior to being allowed to transfer”. This appeared to be additional to circumstances in which the trustees could legitimately deny a transfer request. He also made clear that he hopes to make rapid progress on the regulations once Royal Assent is achieved. However, one area of concern is where the destination scheme is an FCA-authorised self-invested personal pension that legitimately enables investment in a broader range of investments than conventional personal pensions.
The amendments were not pressed to a vote. However, further amendments have since been proposed by the Work and Pensions Committee for consideration at Report stage. These would explicitly add the red flags to the list of prescribed conditions to remove the statutory right to transfer. Another amendment would require the DWP to write to members every year within five years of being eligible to draw their benefits to offer them a guidance appointment.
The afternoon session was taken up considering a number of opposition amendments, relating to subjects most of which were outside the intended scope of the Bill. Unsurprisingly, none of these amendments succeeded. However, it did provide a means by which Guy Opperman set out once more that there could well be a further Pensions Bill in this Parliament, and that it would implement the findings of the 2017 automatic enrolment review as well as the full authorisation and supervision regime for DB superfunds. He also made clear that minimum contributions, currently 8% of qualifying earnings, are not sufficient, but any decision to go beyond 8% would need to involve the Chancellor and the Prime Minister, as well as the Secretary of State for Work and Pensions.
Report stage and Third Reading are scheduled to take place on 16 November.
Although the amendment relating to the funding of open DB schemes has now been removed from the Bill, it appears that the reassurances given by the pensions minister have not met a number of MPs’ concerns, so the minister will have to remake his arguments, this time on the floor of the House.
There does seem to be good progress on the transfer issue. Hopefully by mid-2021 trustees will have much more control over such transfers where they have genuine concerns about the destination scheme, but it may be difficult to fine tune the red flags so that the current generation of scams is fully captured.
On 5 November the UK Government took a substantial further step in the extension of the Coronavirus Job Retention Scheme by announcing that it would not operate for just November as had been announced on 31 October (see Pensions Bulletin 2020/45) but would extend through to March 2021. An HMRC policy paper provides further details and full guidance was published on 10 November.
The level of support announced for November will now operate through to January – so for those furloughed the Government will pay 80% of usual salary for hours not worked subject to a monthly cap of £2,500 multiplied by the ratio of hours not worked to normal hours worked. Employers will pay employer national insurance and pension contributions relating to this support.
This latest extension will be reviewed in January to examine whether the economic circumstances are improving enough for employers to be asked to increase contributions. It is possible that the 70% and 60% formulae which applied in September and October respectively will then operate, but there has been no signal from Government in this respect.
Extended support will also be made available to the self-employed and a cash grant of £3,000 per month will be available to businesses which are closed.
The Job Retention Bonus announced earlier this year, and which was due to be paid in February 2021, will not now operate as its purpose is served via the extension of the furlough scheme. However, a retention incentive is promised for deployment at the appropriate time.
This is a significant and expensive change of direction by the Chancellor, but which may save jobs and help businesses under pressure through to the spring. And to the extent it does the latter may put off the predicted substantial rise in business failures, and as a result ease pressure on the PPF. It may also give businesses more time to explore restructurings, taking advantage of the new provisions in the Corporate Governance and Insolvency Act, which in turn could disadvantage DB schemes should the company ultimately fail.
The results of the joint HM Treasury / UK Statistics Authority consultation on reform to the methodology underlying the construction of the Retail Prices Index are to be published on 25 November alongside the Spending Review, Rishi Sunak has confirmed in a letter sent to Sir David Norgrove, Chair of the UKSA.
The consultation was launched alongside the Spring Budget (see Pensions Bulletin 2020/11) with the intention at that time of responding before the Parliamentary summer recess; but both the consultation deadline and response were then pushed back by several months following the first Covid-19 outbreak.
It is not in doubt that there will be significant reform; the key issue is whether the RPI methodology will change sooner or later with the Government having to decide on a date between 2025 and 2030.
This reform has been a long time coming, it being nearly 2½ years since the House of Lords looked into the issue (see Pensions Bulletin 2018/25) and it being earlier still that the flaws in the RPI methodology surfaced. Now it is for the Government to decide, with the prospect of a significant impact on DB funding and accounting disclosures as well as in the pensions received by RPI-linked pensioners.
On 10 November the Pensions Regulator launched a new campaign calling on pension providers, trustees and administrators to sign up to a pledge to help protect pension savers from the devastating impact of pension scams.
The campaign, supported by the Pension Scams Industry Group, requires those who sign up to agree to the following six steps:
- Regularly warn members of the risk of scams
- Encourage those asking for cash drawdown to call the Pensions Advisory Service for free impartial guidance
- Learn the warning signs of a scam and best practice for transfers
- Take appropriate due diligence measures and document pension transfer procedures
- Clearly communicate concerns to customers if high-risk transfers are being made
- Report concerns about a suspected scam to the authorities and communicate this to the pension scheme member
The pledge can be signed up to through the Regulator’s website, which also allows for pledgers to self-certify to the Regulator that they meet the pledge, which can then be communicated to scheme members and the public. The Regulator’s trustee toolkit also now has a scams module providing assistance in this area.
We wholeheartedly support this campaign as we do the legislation currently going through Parliament that will for the first time since the February 2016 Hughes v Royal London case (see Pensions Bulletin 2016/07) offer the prospect of the industry being given the regulatory tools with which to combat pension scams. It is a matter of huge regret that it will have taken over five years for the authorities to have delivered what was clearly needed back in 2016, but we are now getting close.
Transfer quotation activity picks up following the first Covid-19 lockdown period, but take up rates remain low
We have issued our latest quarterly update on the transfer quotations and payment activity for the DB schemes we administer. The main headlines include:
- Transfer quotation levels in Q3 2020 were up 15% from the previous quarter, with a return to broadly pre-lockdown levels in July and September
- Take-up rates for the latest quarter remain low with only 21% of quotes paid out. This represents an increase from 20% in the previous quarter but is still the second lowest take-up rate seen since 2016
- A quarter of transfers paid out were to members aged 60 and over. Of the transfer values paid out in the latest quarter, 24% were paid to members aged 60 and over. This is the second highest level for members in this age category since we started our analysis in 2014
- The impact of Covid-19. As the country emerged from strict lockdown there was a gradual increase in transfer activity in late May and June and a return to pre-lockdown levels in September, perhaps in part due to pent-up demand, but this has fallen away more recently with current quotation requests broadly running at 80% of pre-lockdown levels
- Risks associated with increased transfer requests at a time of economic uncertainty. In an environment characterised by rising numbers of redundancies, concerns over the future strength and viability of employers and potentially large DB transfer values, trustees and employers need to be particularly vigilant of increased transfer activity. In an unusual move, the Financial Conduct Authority, the Pensions Regulator and the Money and Pensions Service issued a joint statement regarding their involvement with Rolls-Royce highlighting the risks associated with increased transfer requests as a consequence of redundancies and reminded advisers that they will take action in cases of unsuitable advice and bad practice
More details, including charts, are available here.
It will be interesting to see how transfer activity will change as we head into Lockdown 2. Will we see a similar fall off in activity as that seen in the first national lockdown or will more members be looking to their DB pensions to provide some financial flexibility in an environment characterised by redundancies, high unemployment and uncertainty about the future strength of employers and industry sectors? The Rolls-Royce case highlights the risks associated with increased transfer activity and inappropriate behaviour, including factory gating, by some advisers. As a result, trustees and employers may now consider that NOT putting in place a specialist IFA represents a material reputational risk.
On 1 December HMRC will move up a notch in the insolvency priority order in relation to certain taxes collected and held by businesses on behalf of other taxpayers ahead of transmission to HMRC, such as VAT, PAYE income tax and employee NICs. This is as a result of the Finance Act 2020 which received Royal Assent on 22 July. There is no change in treatment for corporation tax and employer NICs that are due.
Under the new rules, effective for insolvencies falling on or after 1 December, HMRC will be paid after fixed charge holders but before floating charge holders and unsecured creditors.
This adjustment to the insolvency law will mean less money to cover the “section 75 debt” presented by trustees of DB schemes in an insolvency situation and less by way of recoveries for the PPF should scheme benefits need to be replaced by PPF compensation. How significant this is will depend on the circumstances of each insolvency, but with the Government currently allowing companies to defer paying taxes, those that ultimately fail may have more owing to HMRC than in a pre-pandemic insolvency.
The lead being taken by the largest of occupational pension schemes in climate-related financial disclosures, is made plain in an interim report and accompanying roadmap published by HM Treasury on 9 November.
Both documents have been produced by a Treasury-led grouping whose purpose is to map a path by which the UK can deliver on the 2017 recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD). These disclosures are expected to be delivered on a mandatory basis across the economy by 2025, with a significant portion being in place by 2023.
Seven categories of organisation are covered in the roadmap – listed commercial companies, UK-registered companies, banks and building societies, insurance companies, asset managers, life insurers and FCA-regulated pension schemes, and occupational pension schemes.
For occupational pension schemes it is anticipated that by 2021 TCFD-aligned disclosures will be implemented by 42% of schemes (by asset value) and this will rise to 85% by 2025.
Action under each of the categories will now be taken forward by the relevant taskforce member organisation – the DWP and the Pensions Regulator in the case of occupational pension schemes - with a promise from the DWP of a technical consultation on regulations governing disclosures in early 2021, shortly after Royal Assent is anticipated for the Pension Schemes Bill. By then much of the legwork will have been done as a result of its August consultation (see our News Alert).
Although from an occupational pensions perspective there is nothing new in these documents it provides useful context for the TCFD-aligned disclosures that will soon be upon the largest of occupational pension schemes. Publication of TCFD-aligned disclosures by investee companies will help trustees manage their climate-related risks and produce their own disclosures, although it needs to extend to all of their assets, not just the UK portion.
The Pensions Administration Standards Association has published a short guidance document on the topic of cybercrime as it applies to pensions administrators. It examines the nature of cybercrime and administrators’ vulnerability to it and concludes with links to a number of sources.
In promoting this guidance PASA says that it aims to help administrators by outlining four key areas covering different elements of cybercrime: meeting legal and regulatory standards, understanding their organisation’s vulnerability to cybercrime, ensuring resilience, and finally in case of an attack, remaining able to fulfil critical functions.
The guidance provides a useful introduction to the subject and also sets the scene for a promised strengthening of PASA standards in the near future.
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.