The trustee agenda: a look back at recent developments

In the last two Entrust articles we focused on what lay ahead for trustees, employers and pension advisers during the remaining months of 2022. In this edition, we look backwards and provide a recap of the key developments since the beginning of July.

Case law

Forfeiture case

The high court has interpreted a rule in the CMG UK Pension Scheme which provided that benefits or instalments of benefits not claimed within 6 years of their date of payment “shall be retained by the Trustees for the purposes of the Scheme” as being a forfeiture provision which extinguished any benefit or benefit instalment not claimed by the member within 6 years of the payment date irrespective of whether the member had knowledge of the claim. The court also confirmed its agreement with Arnold J in the Burgess v BIC UK Ltd case that the Pensions Ombudsman office is not a competent court for the purposes of enforcing equitable recoupment where a member disputes the amount of an overpayment.

RPI judicial review application

The high court has dismissed the application made by the trustees of the BT Pension Scheme, the Ford Pension Schemes and the Marks and Spencer Pension Scheme which sought judicial review of the Government’s and the UK Statistics Authority’s (UKSA) consultation response which confirmed that UKSA’s planned reform of the Retail Prices Index which would align it with the Consumer Prices Index including owner occupiers’ housing costs would go ahead as from February 2030 with no compensation for index-linked gilt holders (see our article). 

Action

The decision provides welcome clarity on the lawfulness of the RPI change. Trustees and employers should ensure they address the impact of the RPI change in plenty of time before its implementation.

Pensions Ombudsman

New Pensions Ombudsman

The new Pensions Ombudsman (and Pension Protection Fund Ombudsman) is Dominic Harris, a pension partner at law firm CMS. Mr Harris will take over from Anthony Arter who was the Pensions and PPF Ombudsman since May 2015. Mr Harris’ position will start on 16 January 2023.

Legislation

Online Safety Bill

The Online Safety Bill had been delayed due to the wait for a new Prime Minister’s appointment. Gateley’s March Insight explained that the bill had been amended following pressure to require the “largest and most popular social media platforms and search engines” to prevent paid-for fraudulent advertisements appearing on their services.

Data Protection and Digital Information Bill

The Data Protection and Digital Information Bill was introduced into Parliament on 18 July 2022. The bill will “update and simplify” the UK GDPR and the Data Protection Act 2018 to reduce burdens on organisations and to make certain parts more flexible in terms of compliance. The changes include reform of the Information Commissioner, setting up a digital verification services framework and clarifying the rules on international transfers and cross-border flows of personal data. This edition of Gateley’s Insight has further details.

Action

One to watch for now – updates to existing data protection policies and documentation will likely be required, for example to refer to new terminology.

Draft Finance Bill 2023

This contains three pensions-related measures: (1) ones relating to pensions relief for net pay low earners; (2) clarification on CMP schemes; and (3) provisions relating to the Dormant Assets Scheme. See Gateley’s Insight for further details.

Auto-enrolment Bill

Richard Holden MP’s private members’ bill which will lower the entry age for automatic enrolment from 22 to 18 and remove the lower qualifying earnings threshold from contribution calculations was brought back to Parliament on 20 July 2022. As our March Gateley Insight explained, the bill was delayed earlier this year. The bill is due to be published and to receive its second reading on 28 October 2022.

Consultations

DWP consultation on the draft funding and investment regulations

Perhaps the most significant development of the last two months is the much awaited publication of the DWP consultation on the draft funding and investment strategy regulations. The draft regulations flesh out the detail of the new Pensions Act 2004 provisions which will require a DB scheme to:

• have a funding and investment strategy (FIS) which will ensure that scheme benefits can be provided over the ‘long term’. This will require the scheme to have low dependency on the sponsoring employer with high resilience to investment risk by the time it is significantly mature; and
• to set out the FIS in a statement of strategy signed by the chair which will be sent to the Regulator together with the valuation (which will have to be submitted whether or not the scheme is in deficit).

The intention behind the changes is to set clearer funding standards and to provide the Regulator with improved oversight.

Although the impact on some schemes may be limited, for example, those which already fund with a low dependency at significant maturity objective, for others the new requirements could potentially have a significant impact, for example, the requirement for those schemes with a weak employer covenant to de-risk may prove challenging and even schemes with strong employers may face a need to fund the deficit sooner.

Gateley’s insight outlines the key points from the consultation.

Action

The Trustees (and the sponsoring employer) will need to familiarise themselves with the regulations and developments on the Pensions Regulator’s (TPR) revised DB funding code and understand how these will impact their scheme.

Until the regulations and revised code are in force scheme funding valuations will need to be agreed with the new requirements in mind.

Consideration of social risks and opportunities – consultation outcome

The Government’s response to a March 2021 call for evidence asking for views on how schemes approach social risks and opportunities was published on 15 July 2022.

The Government believes schemes should improve consideration of the ‘S’ in ESG. Trustees can either include financially material social risks and opportunities policies within the SIP as a standalone policy or in an integrated way. If an integrated approach is taken, trustees should still “actively consider which social risks and opportunities might be financially material”. Trustees also need to understand the effect that social risks and opportunities have on the employer covenant and how it will affect support over time.

The response encourages schemes to join the Occupational Pensions Stewardship Council, a forum set up to promote and facilitate high stewardship standards of pension assets through shared experience and practical support services. It also notes that a new Minister-led taskforce will be set up to help support the pensions industry on this area.

Further details can be found in Gateley’s Insight.

Action

Trustees of schemes with 100 or more members must already include within their statement of investment principles their policy on financially material social factors. All trustees should be aware of and keep up to date with developments in this area.

DWP response on master trust ERI regulations

The DWP’s response to its March 2022 combined consultation which included proposed draft ERI regulations that would remove some employer-related investment restrictions for master trust schemes with 500 or more active participating employers (see our Insight) confirms that the regulations will be introduced as proposed subject to a few minor alterations. See Gateley’s Insight for more information.

The Pensions Regulator

Joint statement on transfers

On 5 July 2022, the DWP and TPR published a joint statement on the November 2021 transfer value regulations (Gateley’s Insight covers the regulations and TPR’s transfer request guidance).

Amongst other things, the statement (and amended Regulator guidance) addresses concerns about how the regulations apply to transfers involving overseas investments (that this amber flag may catch more transfers than intended – see Gateley’s Insight) and ‘small-scale’ incentives. Various parts of the guidance have been amended to address these concerns.

The updated guidance notes:

“Your scheme rules may still allow you to make non-statutory transfers even when … risk indicators are present. You should consider the checks in this guidance when assessing whether to grant a non-statutory transfer, but the regulations do not prevent you from making a non-statutory transfer payment where you consider that the transfer is in the member’s interests and does not pose a risk. You should not use non-statutory transfers to avoid carrying out due diligence.”

For further details please see Gateley’s Insight.

New scam strategy

TPR has published a new scam strategy that has been produced following the Regulator’s and National Fraud Intelligence Bureau’s recent joint assessment of pension scam threat (see Gateley’s Insight).

You can read more about the strategy in Gateley’s Insight.

Action

Trustees should keep up to date with the methods scammers use and ensure that they (and the scheme administrators) have policies and procedures in place to comply with the regulations when dealing with transfers.

Updated FM tender and IC objectives guidance

TPR has updated its guidance on the fiduciary management services’ tender process and setting objectives for investment consultants ahead of the coming into force of the Occupational Pension Schemes (Governance and Registration) (Amendment) Regulations 2022 on 1 October 2022. These regulations will integrate the CMA Order obligations for trustees to carry out a tender exercise when appointing fiduciary managers in respect of 20% or above of scheme assets and to set strategic objectives for investment consultancy providers into pensions legislation.

There are a small number of minor differences between the CMA Order and the regulations (as set out in the Key Differences section of the IC guidance). The main change is that the Regulator will take over compliance from the Competition and Markets Authority which should mean that trustees will have to answer additional scheme return questions instead of sending an annual compliance statement to the CMA.

The FM guidance has been updated to add in two new appendices on how trustees can assess performance of fiduciary management services using the Global Investment Performance Standards.

Gateley’s Insight has further information.

Action

Trustees should already be complying with the relevant requirements so, for most schemes, there should not be additional work to undertake. However, they will need to start reporting compliance via the scheme return to TPR.

Trustees should also note that the Regulator encourages objectives to be set for all advisers and for those IC services not already covered by the regulations. They should also periodically review whether to undertake a re-tender FM exercise and consider the appointed FM’s performance – see Appendix D of the FM guidance for performance review guidance.

Blog on refinancing

TPR’s 10 August 2022 blog on refinancing risks sets out what the Regulator expects of trustees and sponsoring employers now that refinancing returns to a more normal position following the pandemic as set against the backdrop of a ‘challenging and inflationary financial climate’. 

Action

Trustees and employers need to engage effectively at an early stage on any refinancing – trustees must understand the implications on the pension scheme and employer covenant and any detriment must be mitigated as much as possible. Trustees should look at debt covenants and refinancing within their monitoring, information sharing and contingency planning frameworks.

Pensions dashboards

Pensions Dashboards (Prohibition of Indemnification) Bill

The private members’ Pensions Dashboards (Prohibition of Indemnification) Bill has been making its way through Parliament. The bill will include breaches of the pensions dashboards legislation within the prohibition in the Pensions Act 2004 that prevents scheme assets from being used to reimburse trustees for certain fines and civil penalties. The bill has government backing which means it is likely to receive Royal Assent. Gateley’s Insight has further details.

Pensions Dashboards Regulations 2022 – consultation response

The DWP has responded to its consultation on the draft Pensions Dashboards Regulations which set out the dashboards requirements for schemes and qualifying providers. Several amendments will be made to the draft regulations to take account of responders’ comments. A summary of key policies document provides a useful synopsis of the response.

The staging deadlines for the first two cohorts (schemes with 20,000 or more active and deferred members) have been pushed back by two months. Further key points from the consultation and response can be found in Gateley’s Insight.

Updated TPR guidance on dashboards

TPR has updated its initial dashboards guidance to take account of the DWP’s response to its consultation on the draft Pensions Dashboards Regulations (see Gateley’s Insight). The update refers to the two-month staging deadline delay for the first two cohorts and to the requirement for a Data Protection Impact Assessment where data is matched, combined or compared from multiple sources (this will need to be either produced or updated where a scheme already has one).

PDP dashboards standards

The Pensions Dashboards Programme has published a consultation on several standards and guidance notes covering the dashboards requirements. They set out the ‘technical and operational detail’ behind the legislation.

Action

Trustees should continue (or start if they have not done so already) discussions with relevant organisations in relation to their scheme’s connection requirements. TPR’s guidance contains a useful ‘preparing to connect’ checklist.

Other developments

PLSA guides

The PLSA’s Made Simple guide on cyber risk helps pension professionals understand cyber risk and what action should be taken to deal with it.

The PLSA has also published a Made Simple Guide to Own Risk Assessments (ORAs). Trustees of occupational pension schemes with 100 or more members will have to undertake an annual documented ORA of their scheme’s system of governance when TPR’s combined code of practice comes into effect.

The PLSA guide introduces ORAs, provides practical assistance on completing the ORA, sets out some good governance examples and discusses the areas trustees may wish to consider focusing on (climate change, stewardship, inclusion and diversity and cyber risk).

Action

TPR’s new code requires that the first ORA is completed within one year of the code coming into force and the Trustees should begin preparing for this deadline if they have not already done so. Our article has further details and links to more in-depth information which has been prepared by our Gateley colleagues.