Essential UK Pensions News

Introduction

Essential UK Pensions News covers the key pensions developments each month.

A stronger Pensions Regulator

1. Revised code of practice on contribution notices clarifies tests relevant to dividends

The Pensions Regulator’s revised Code of Practice 12 came into force on November 25, 2021.  This sets out the circumstances in which the Regulator expects to issue a contribution notice where it believes that the “material detriment” test, the “employer insolvency” test or the “employer resources” test has been met.

Interestingly, the finalised Code states that only the “material detriment” or “employer insolvency” tests would be relevant to dividend payments.  The consultation draft had suggested that the “employer resources” test could also be a trigger and this previously seemed the more natural route for the Regulator to take if minded to consider a contribution notice in relation to a dividend.

This revision is helpful in that companies considering dividend payments can now focus their analysis on the two tests called out in the Code.

Governance

2. Top-up payments to be introduced for net pay arrangements

The main point of interest for the pensions industry in the Chancellor’s autumn budget was that low earners saving in pension schemes using a net pay arrangement will receive top-up payments in respect of contributions made from 2024-25 onwards.

This is the Government’s response to a known disparity of tax treatment between employees saving in a pension scheme using a net pay arrangement and those saving in a scheme using relief at source.  The changes won’t come in for another three years which is unlikely to satisfy those low paid individuals who have lost out in the past.

3. DC charges: decision on flat fees but more to come on charge caps

The Department for Work and Pensions (DWP) has decided to press ahead with a ban on charging flat fees on DC pots worth £100 or less held within a default arrangement.  This restriction will come into force from April 2022.

It appears to have parked for now a decision on moving to a “universal charging structure” for default funds, noting that a majority who responded to the consultation were against this.

Separately the Chancellor committed in the autumn budget to consulting on further changes to the charge cap for DC schemes.  The aim is to ensure that the cap can better accommodate well-designed performance fees to ensure savers can benefit from higher return investments, while unlocking institutional investment to support some of the UK’s most innovative businesses.  The Government will continue wider policy work to understand and remove various barriers to illiquid investment.

The Government is determined to get DC schemes investing in long-term projects where the returns will be slow and the performance fees high.  It recently finalised the framework for a “Long Term Asset Fund” for this purpose.  We may now see more innovation in illiquid fund packaging for the DC market but the reality is that long-term projects and erratic, high performance fees don’t fit well with a pension model requiring instant valuations and instant access.

4. Unexpected change to rules for rise in normal minimum pension age

The normal minimum pension age is set to rise from 55 to 57 from April 2028. Members of pension schemes which give them an unconditional right to draw their benefits from age 55 will have that right preserved as a “protected pension age”. 

As reported in our July edition of Essential UK Pensions News, the Government had originally proposed having a “joining window” until April 2023, to give members a chance to transfer their benefits to a scheme that would give them a protected pension age.

However, following concerns that fraudsters could use this opportunity to pressure members into transferring unwisely, the Treasury unexpectedly announced on November 4, 2021 that it had decided to close the joining window with effect from 23.59 the previous day – before that window was even formally confirmed to exist.  Members who had already requested a transfer before that time will still be able to get their protected pension age but anyone who had not has missed their chance.  This U-turn was deliberately not publicised in advance so as to avoid a rush of last-minute transfers.

Trustees should work out whether their scheme will give members a protected pension age and consider updating transfer communications to make clear that members cannot change things by taking a transfer.

For more information and suggested action points, please see our recent article for Pensions Expert and our blogpost.

Transfers and scams

5. New trustee duties to block pension scams

The DWP has finalised its new rules about statutory pensions transfers which will give trustees significantly greater scope to say no to a member request to transfer their pension to another scheme. This is intended to help protect members from scams.

The revised regulations, which have been significantly updated since the version that was consulted on in the summer, will apply to any statutory transfers which are initiated from November 30, 2021, onwards.

Under the new regime, trustees will only be able to agree to a transfer if it is either to a “safe” type of scheme (namely a public sector scheme, an authorised master trust or an authorised collective money purchase scheme) or if they are satisfied the transfer does not show certain warning signs of a scam.  They will have to refuse transfers showing any “red flags” (the clearest signs of a scam).  If they spot amber flags (possible scam indicators) members can still choose to transfer but not until they have taken scams guidance from MoneyHelper.

There is no grace period for trustees and administrators to get up to speed, so the pressure is on to get to grips with the new rules and adapt schemes’ transfer processes.  The Pensions Regulator has published some guidance to help with this.

For further information, please see our recent briefing.

Investment

6. Members sue pension scheme trustees over ESG issues

Members of the Universities Superannuation Scheme (USS) have brought a claim in the High Court against the scheme’s trustee and trustee directors.  Amongst other things, the claimants allege that a failure by the trustee directors to divest from fossil fuels has caused, and will continue to cause, significant financial detriment to the scheme beneficiaries.

Trustees typically have a wide discretion over investment matters but it will be interesting to see how this case develops and whether it will encourage other members to bring claims in relation to ESG issues.

7. Pensions Regulator disappointed with engagement on climate change

The Pensions Regulator has warned that UK pension schemes “still have much work to do” to adapt to the challenges of climate change.  It commissioned surveys of schemes last year to assess the level of engagement with climate change and has published the results in a climate adaptation report.  The results showed that in 2020:

• only 43% of DC schemes took account of climate change in their investment strategies; and 
• 51% of DB schemes had not allocated time or resources to assessing any risks and opportunities associated with climate change

This new report is part of a UK-wide “adaptation” programme where government and public sector organisations explain what they will be doing to be ready for the challenges of climate change.  The Regulator recognises the “scale of the challenge” and that there is a lack of data, but notes that “practices are rapidly evolving” and data should improve as the financial system as a whole moves to mandatory climate reporting requirements.

According to the Regulator, trustees should:

• be considering climate change in their scheme’s investment strategies;
• allocate sufficient time and resources to assessing climate-related risks and opportunities; and
• ensure processes used to manage those risks and opportunities are robust.

This message is not just for the largest schemes or those already legally obliged to undertake climate-related governance and reporting.  As the Regulator comes under pressure to demonstrate progress, it may start to push smaller schemes to comply voluntarily.  Smaller schemes may want to factor this into their planning.

The report also recommends that trustees sign up to the 2020 UK Stewardship Code.  It notes that only 9% of schemes have so far done so.

8. Climate change reporting to be extended to UK’s largest companies

9. Proposed new requirements for stewardship and implementation statements

For example, when reporting on voting behaviour, trustees will need to include details such as:

• relevant statistics on voting behaviour;
• a rationale for some or all voting decisions and how this links to the scheme’s stewardship priorities, and
• where someone exercises votes on behalf of the trustees, whether that person has agreed to follow the trustees’ voting policy.

In addition, trustees will need to explain in their implementation statement how their stewardship activities are in scheme members’ best interests.

The consultation closes on January 6, 2022 so we expect the new guidance will come into force next year.

 10. FCA confirms rates for legacy use of synthetic LIBOR rates

GMP Equalisation

11. New Bill seeks to clarify GMP conversion rules

Margaret Ferrier MP’s private member’s Bill on GMP conversion has been published. The Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill would amend existing laws governing GMP conversion with the aim of making conversion easier by addressing known technical issues.

The proposals include:

• allowing regulations to set out minimum requirements for post-conversion survivors’ benefits;
• clarifying employer consent requirements; and
• removing the need to notify HMRC.

The DWP appears to be supporting the Bill which makes it more likely to succeed than most private member’s Bills.

This development will be welcomed by the many schemes interested in taking the conversion route to GMP equalisation.

Restructuring

12. Fraud Compensation Fund levy set to rise

The DWP is consulting about increasing the ceiling for the levy which funds the Fraud Compensation Fund managed by the PPF. 

This is not unexpected in the wake of a High Court decision (The Board of the PPF v Dalriada Trustees Ltd), which has enabled victims of some pension liberation scams to recoup their losses from the Fraud Compensation Fund.  For now the DWP has agreed to make a loan of approximately £250M over the period 2021-2025 to the Fraud Compensation fund to cover the expected further claims.  

The DWP proposes that the ceiling for the levy would more than double, rising from 30p to 65p for master trusts and from 75p to £1.80 per member for all other occupational pension schemes.

Schemes can expect their Fraud Compensation Fund levy to rise in the future.  The actual amount of the rise has not yet been confirmed.

Industry trends

13. Controversy over state pension triple lock

The House of Lords took issue with the Government’s plan to suspend for one year the earnings element of the state pension triple lock, proposing that earnings growth should be adjusted for the impact of the pandemic rather than disregarded.  As expected, the House of Commons has rejected this proposed amendment but this episode has reignited the debate about adequacy of state pensions and intergenerational fairness.

Pensions issues in the pipeline

* This table sets out some indicative action points that trustees and employers may wish to consider but should not be read as a comprehensive plan of action or client-specific advice. Should you wish to discuss these issues further, please contact the Norton Rose Fulbright LLP pension team who will be happy to assist.