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Pensions Bulletin 2021/28

Our viewpoint

Climate risk – Pensions Regulator consults on guidance and enforcement

On 5 July the Pensions Regulator launched a consultation on two documents linked to the DWP’s now settled regulations and statutory guidance on the governance and reporting of climate-related risks and opportunities (see Pensions Bulletin 2021/24).  The first document provides some guidance for schemes subject to these new requirements.  The second sets out the Regulator’s policy (in the form of an appendix to its existing monetary penalties policy) on levying penalties for non-compliance.

Regulator guidance

The climate risk requirements come into force from 1 October 2021 (first wave of schemes with more than £5bn assets and master trusts, second wave with more than £1bn from 1 October 2022).  The Regulator’s draft guidance states that schemes in scope must comply and follow the statutory guidance.  In deciding whether schemes have complied, the Regulator will be looking for clear evidence that trustees:

  • Are taking proper account of climate change when making decisions and that advisers are helping them to do this
  • Have carried out analysis in a way that is consistent with the Taskforce on Climate-Related Financial Disclosure (TCFD) recommendations so that savers and others can be confident in it
  • Have seriously considered the risks and opportunities that climate change will bring to their scheme, in its particular circumstances
  • Have decided what to do as a result of this analysis and have set a target to help achieve that goal

The Regulator’s guidance is divided into sections on governance, strategy and scenario analysis, risk management, metrics, targets and report publication.  Each of these sections contain links to the corresponding sections of the statutory guidance, sets out “example steps to take”, some worked examples and concludes with what must and should be disclosed in the TCFD report.

The Regulator also states that it will publish further guidance on how trustees and their advisers could consider climate-related risks and opportunities as part of sponsor covenant assessment.

Monetary penalties policy

The legislation requires the Regulator to impose a penalty on trustees if they fail to publish their TCFD report free online within the required timeframe.  The minimum penalty is £2,500.  The maximum is £5,000 for an individual and £50,000 for corporates.

The draft policy on these mandatory penalties is that:

  • All schemes receive the minimum penalty of £2,500
  • Any penalty for a further/repeated breach will normally be at least £5,000
  • Where the scheme has a professional trustee in place the minimum penalty will generally be £5,000 as the Regulator expects higher standards from them

Even if there are extenuating circumstances, the penalty will never be less than £2,500.

The Regulator also has discretion to impose penalties for other breaches of the climate regulations.  In deciding the level of penalties it plans to look at breaches in three bands as indicated in the table below:

Band

Example

Type of person

Range (£)

1

Failing to get the climate change report signed by the chair

Individual

Any other case

0 - 1,000

0 – 10,000

2

Failing to disclose scheme resilience in the scenarios analysed

Individual

Any other case

0 - 2,500

0 - 25,000

3

Multiple breaches of the requirements to have proper governance of the risks and opportunities arising from climate change, with at least one breach in each of the four core areas (Governance, Strategy, Risk management, Metrics & targets)

Individual

Any other case

0 - 5,000

0 - 50,000

The monetary penalties are only part of the picture as the Regulator has other regulatory powers to police compliance.

Consultation closes on 31 August 2021.  The Regulator says it will publish the final guidance and appendix later in the year.

Comment

The main guidance does not provide a great deal of new information, which is fortunate for those schemes in the first wave given the short time left before the new regime comes into force.  It is less fortunate that there is no timescale for the additional Regulator guidance which is on the way regarding climate change and covenant.

The draft guidance is helpful in understanding how the Regulator will approach supervising this extensive body of law and regulation.  The example steps to take are generally useful and the approach to monetary penalties seems clear enough.

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DB scheme survey reveals insufficient attention being paid to climate change issues

The Pensions Regulator has published its latest survey of DB schemes in which it highlights in its press release that schemes are not as prepared as the Regulator would like them to be in relation to climate change issues.

The survey was intended to provide the Regulator with greater understanding of schemes’ administration practices and strategies, their approach to cyber security, the extent to which they were meeting the new duties introduced by the Competition and Markets Authority (CMA), and the actions they were taking in relation to climate-related risks and opportunities.

  • On scheme administration, the survey reveals encouraging results in areas such as strategy, performance measurement and tackling data issues
  • By contrast, the position on cyber security is not as strong as it could be in relation to controls in place, and worryingly a number of schemes reported they had experienced cyber-attacks or breaches in the last 12 months, some of which had had a negative impact on member data, access to files or networks etc
  • Compliance appears to be very high in relation to the new CMA duties on investment consultancy and fiduciary management services
  • On climate change issues, although nearly half of schemes have allocated time or resources to assessing any financial risks or opportunities associated with climate change, this effort is concentrated amongst the larger schemes. And when it comes to some specifics, such as assessing the risks/opportunities from particular climate-related scenarios, assessing their portfolio’s potential contribution to global warming, or tracking the carbon intensity of their portfolio, the number of schemes doing this is quite low.  Also, few schemes give significant consideration to climate change in their investment and funding strategies

Comment

Unsurprisingly, the Regulator has used the results of this survey to sound an alarm that schemes must do more in relation to climate change issues.  However, the survey was undertaken between October and November 2020 – well before the DWP’s regulations and statutory guidance were settled.  Whilst all trustee boards will need to build their capacity in this area, inevitably it will be the largest of schemes that will apply the greatest focus initially.

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Axminster ruling confirms Lloyds treatment of underpayments

The High Court has handed down judgment in a case involving a DB scheme in PPF assessment which will be of interest to trustees having to address underpayments that have come to light, including in relation to a GMP equalisation exercise.

The scheme concerned is the Axminster Carpets Group Retirement Benefits Plan and it is the part of the judgment relating to two clauses in the scheme’s trust documentation concerned with unclaimed monies that is of interest.

In the original Lloyds case (see our News Alert 2018/07), the High Court found that where pensions have been put into payment, any claims in respect of underpayments should be met subject to the operation of each scheme’s rules which may include restrictions and discretions.  What is of potential interest in the Axminster case is whether this scheme-specific approach would be overturned and if so to what extent.

However, the judge, who was the same as that for the Lloyds GMP equalisation cases, held that the same principle applied.  As before, but with the benefit of a much more detailed argument heard than in Lloyds, there is no overriding statutory limitation period.  The treatment of underpayments remains dependent on scheme rules and is dealt with accordingly.  In particular, in Axminster’s case:

  • The operation of the forfeiture rule does not have to acknowledge that members may not be aware that they have been underpaid, but it could be relevant where trustees are exercising a discretion to make a payment
  • The forfeiture rule operated by reference to members making specific claims for arrears – it is not enough to assume that asking for their pension to be put into payment constituted a claim for any arrears that might subsequently be identified
  • In exercising a discretion to make an arrears payment there could be factors, such as administrative difficulties in making such payments, that could count against a ‘first reaction’ to make good the underpayments

Comment

More issues were touched on in this lengthy judgment than reported above, but the key takeaway is that, as before, scheme provisions in relation to forfeiture and discretion will remain vital in determining how to address underpayments.  The judgment provides useful further case law in an area on which trustees will need to ensure that detailed legal advice is taken before settling their approach.

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Latest annual and lifetime allowance statistics published

On 30 June HMRC published its provisional estimates (for 2018/19) of those impacted by the annual and lifetime allowances and the likely additional revenue that will be raised as a result.

  • Annual allowance – 34,220 taxpayers reported, through self-assessment, that they had made chargeable 2018/19 pension savings above their annual allowance (that is 4,310 more individuals than for 2017/18, an increase of 14%) – with total excess contributions of £817m (down from £912m in 2017/18). The tax rate applying depends on the individual’s income tax rate but assuming a typical tax rate of 40%, this means £326m generated for the Exchequer, and an average charge per impacted member of £9,549
  • Lifetime allowance – 7,130 lifetime allowance charges were reported by schemes through AFT returns, slightly up on 2017/18 – with a total value of charges of £283m, up 5% from the 2017/18 figure shown

Comment

Given the reductions in these allowances over the years, it is not surprising that they are catching more and more people.  In 2018/19 the “tapered Annual Allowance” hit a wider range of high earners, and this may well explain the growth in numbers affected.  However, in 2020/21 (given the severe and sometimes anomalous impact for doctors) the Government made changes so that the tapering now only applies at the highest incomes.  As a consequence, the latest published annual allowance data will not be a good guide to the likely tax yields from the annual allowance in 2020/21 onwards.

In practice we suspect that there is a lot of under-reporting, from lack of understanding of the complex tax rules, and (for the public sector) well-known scheme data problems, benefit reviews etc.  Indeed, HMRC notes that there have been substantial (upward) revisions to the annual allowance and lifetime allowance figures for the past years following changes “enabling inclusion of late reporting and amendments”.

These statistics are also likely to reveal only part of the additional tax take resulting from the existence of these allowances as other individuals will have reduced their pension saving to avoid breaching these allowances (or to preserve one-off HMRC-granted “protections”) and this will have reduced the cost of pension tax relief to the Treasury but will not show up in the above figures.

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PASA issues counter fraud guidance

The Pensions Administration Standards Association has published guidance for UK pension schemes, trustees and providers on the many types of fraud affecting the pensions sector at present and the range of tactics that need to be deployed to counter them.

The fraud types discussed include identity fraud, opportunistic pension fraud, internal fraud, fraud against beneficiaries and investment and misappropriation risks.

Comment

One of the ironies of digitisation by pension schemes, which can only increase in order to support initiatives such as the pensions dashboard, is that schemes can then become more prone to cyber-attacks.  Understanding the nature of cyber fraud and having strategies in place to mitigate this risk and respond appropriately when an attacker gets through is fast becoming a core part of the successful management of any pension scheme.  But sight must not be lost of the more traditional frauds that can take place and which are also covered in this guide.

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MoneyHelper website officially launched

After a period of ‘beta’ operation since March, the Money and Pensions Service has launched its MoneyHelper website which provides a range of information and guidance for individuals across the various areas for which MaPS is responsible.  “MoneyHelper” replaces the Money Advice Service, The Pensions Advisory Service and Pension Wise legacy brands, although Pension Wise is to continue under the MoneyHelper umbrella.

The “Pensions & retirement” tab of the website covers a number of pension topics including dealing with pension problems and booking Pension Wise appointments when deciding how to access a DC pension pot.

Comment

Schemes that have been directing their members to the legacy websites in member communications may wish to revisit precisely how they are doing this as they have been taken down with automatic redirects put in place to the MoneyHelper site.

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Furlough scheme starts to wind down

The significant extension to the Coronavirus Job Retention Scheme announced in the Budget (see Pensions Bulletin 2021/09) is now starting to taper off.  An employer contribution is now required towards the cost of unworked hours – 10% in July, 20% in August and September – with the Scheme being completely wound down by the end of September.

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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.