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Pensions Matter at Pinsent Masons: February 2019

Monthly update from the Pinsent Masons Pensions team.

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For a video briefing giving more details about key issues in this bulletin, please click here(link may not work with all browsers, try Edge (Windows 10) or Google Chrome)



Employers guilty of endangering pension schemes could face prison

The government has confirmed it will introduce a new criminal offence of "wilful or reckless behaviour" in relation to a pension scheme, and employers found guilty could face up to seven years in prison or an unlimited fine.  Failure to comply with a contribution notice will also become a criminal offence.  There will be new fines of up to £1 million for breaches such as knowingly or recklessly providing false information to trustees or the Pensions Regulator.  The government's response to the consultation on strengthening the Regulator's powers also expands the notifiable events regime (with updated guidance and a revised code of practice to be prepared by the Regulator) – although not all the additions originally put forward will be included.  Reforms also introduce a new declaration of intent, which will put trustees and the Regulator on notice of corporate transactions which might affect the pension scheme.  The government will work with the Regulator and the PPF on plans to streamline the process for issuing financial support directions (to be renamed financial support notices).  Legislation to implement the changes will be brought forward "when Parliamentary time allows", so it is not clear exactly when the reforms will take effect.



Government plans to encourage DC investment innovation and consolidation

The DWP is consulting on measures to encourage trustees of DC schemes to invest in a wider range of assets.  The government thinks this will help drive new investment in sectors such as small and medium businesses, housing, green energy and other infrastructure.  The government wants larger DC schemes to be required to publish their policy on illiquid investments in their statement of investment principles.  Schemes above a minimum size may need to report annually on their holdings of these assets.  The government also wants more consolidation of smaller DC schemes, as bigger schemes can access a broader range of investments.  Smaller DC schemes may be required to assess (every 3 years) whether members may receive better value if the scheme was consolidated into a larger scheme or wound up.  In addition, the government is looking into the charge cap which applies to default funds in DC auto-enrolment schemes, to ensure that performance fees can be accommodated within the cap – to widen the potential investments that schemes can consider.  This consultation includes updated guidance on the charge cap to clarify the charges and costs intended to be subject to the cap.  Further guidance on trustees’ duties is expected later this year.

The consultation closes on 1 April 2019.  The changes proposed would not apply to schemes which only provide DC benefits from additional voluntary contributions (AVCs).



TPR urges trustees to prepare for Brexit

The Pensions Regulator has reminded trustees of DB schemes of steps they need to take to prepare for Brexit.  In particular, given the prospect of a no-deal Brexit, trustees need to have discussions with employers and consider whether Brexit uncertainty may affect their employers’ covenant (and whether scheme investment and funding strategies remain appropriate).  If sponsors are looking to extend recovery plans, trustees should ensure that shareholders are also sharing the burden proportionately and consider seeking other forms of security.  Brexit plans should be kept under review.

TPR also wants trustees to familiarise themselves with the DWP’s no-deal guidance about occupational pension payments to EU citizens in the UK and UK nationals in the EU.  Trustees should be prepared to communicate with members about continuity of benefit payments.  Trustees whose schemes are authorised and approved to accept cross-border contributions need to consider how either a negotiated withdrawal settlement or a no-deal Brexit might affect their members.  They should be considering contingency plans together with employers and scheme advisers.



Finance Act 2019 resolves uncertainty for excepted group life schemes

The Finance Act 2019, which received royal assent on 12 February, resolves the uncertainty about whether some survivors can receive benefits from an excepted group life scheme.  Employers sometimes use excepted group life policies to provide life insurance cover, but they are not registered pension schemes.  It was unclear whether beneficiaries under these schemes were restricted to the deceased employee's "household and family", which might have prevented, say, unmarried partners and grandchildren from receiving death benefits.  The new legislation resolves this uncertainty by explicitly removing this restriction from April 2019, which gets rid of a potential headache for employers.  (It is, however, still worth remembering that where excepted group life schemes are offered through salary sacrifice, they do not benefit from the same National Insurance advantages as registered pension schemes.)



Regulators strengthen UK's stewardship duties

The Financial Reporting Council (FRC) is planning changes to the UK Stewardship Code for institutional investors to reflect changes in expectations since the code was last updated in 2012.  This follows criticism in the recent Kingman independent review of the FRC, which found the code was "well-intentioned" but not effective in practice, and needed to focus more on outcomes than on policy statements.  The changes aim to raise significantly the standard expected from institutional investors.  The scope of the code will be broadened to include investment decision-making and investment in assets other than listed equity (such as fixed-income bonds and infrastructure equity).  The code now also refers explicity to environmental, social and governance (ESG) factors - signatories will need to take into account material ESG factors, including climate change, when fulfilling their stewardship responsibilities.  Fund managers who sign up to the code must make public disclosures about their stewardship activities and report annually on how effectively they have achieved their objectives.

Stewardship is also under consideration by the Financial Conduct Authority (FCA), which is consulting on how to implement an EU Directive on shareholder rights and promoting long-term investment decision-making.  The FRC believes its amended Stewardship Code is more demanding than the directive requirements.  The directive comes into effect in June 2019 and the UK government has indicated it will implement the reforms regardless of its agreed future relationship with the EU.   




DWP to allow schemes to reduce bridging pensions after age 65

Regulations are being amended to allow schemes to adjust their bridging pensions to reflect the rise in the state pension age.  Bridging pensions are paid by some schemes when a member's pension commences before state pension age.  The scheme would typically pay a higher pension until the member's state pension becomes payable, at which point the scheme pension would be reduced.  Currently, any reduction can only take place between age 60 and age 65 without the scheme breaching equality requirements relating to age; the new regulations will allow schemes to reduce members' pension payments between age 60 and the member's state pension age (which could be up to age 68, for those born after 5 April 1978).  The government wants the change to take effect at the earliest opportunity, but the state pension age began to increase above age 65 in December 2018 so the delay could cause difficulties for schemes.  The government is asking whether there are ways schemes can minimise this impact.



HMRC considering pensions tax issues arising from GMP equalisation

Following the Lloyds Banking Group case, which confirmed that trustees must equalise guaranteed minimum pensions, HMRC has confirmed that it is considering the pension tax issues arising from the judgment.  HMRC intends to give more information and advice on this through its pension schemes newsletters in the coming months.  Meanwhile, the Pensions Administration Standards Association (PASA) is leading a new industry group formed to help pension schemes deal with the equalisation of GMPs.  The group expects to develop and promote best practice on a range of issues, from how to address missing data to dealing with transfer requests and rectifying underpayments.



FCA consults on new rules to protect savers entering drawdown

The FCA is proposing measures to increase savers' engagement with personal pensions and protect those who move to drawdown arrangements.  From 1 November 2019, providers will need to give savers stronger messages about open-market annuity options from age 50 onwards and additional retirement risk warnings.  They will also need to encourage savers to take advantage of consumer guidance about pensions.  From 2020 onwards, firms are expected to provide information about the costs of drawdown in a way that makes them clearer and easier to compare.  The FCA wants to introduce standardised "investment pathways" for those customers (an estimated 100,000 each year) moving to drawdown without taking financial advice – four ready-made investment solutions each based on different sets of objectives.  The FCA fears consumers who do not take financial advice risk missing out by keeping their drawdown pots in cash, so customers will receive warnings about how holding cash affects long-term income.     



BA trustees granted indemnity from scheme to fund Supreme Court appeal

The trustees of the BA pension scheme have been granted permission to use scheme assets to fund an appeal to the Supreme Court.  The trustees’ decision to amend scheme rules and award discretionary pension increases to compensate for the change from RPI to CPI revaluation was declared invalid by the Court of Appeal in 2018.  The trustees now have a costs indemnity out of scheme assets (capped at just over £1million) to enable them to appeal this judgment.  The judge considered that a successful appeal by the trustees would benefit the vast majority of the scheme members and would not be detrimental to other beneficiaries as BA would be obliged to fund any discretionary increases.  Even if the appeal is unsuccessful, it is reasonable to expect that the Supreme Court will provide greater clarity on the limits of the trustees’ power to amend the scheme.  For these and other reasons, the trustees would be acting in the interests of the scheme as a whole in pursuing the appeal.  Now that this costs indemnity has been awarded, the appeal in this long running saga is due to be heard in July 2019.




High Court confirms scheme amended using statutory powers 

Coats UK Pension Scheme Trustees Ltd v Styles and others (High Court)

The court upheld an appeal against a decision of the Deputy Pensions Ombudsman that a 3% LPI cap on pension increases had been removed from the scheme rules after A-Day.  The court decided that the trustees had validly amended the scheme to preserve a pre-A-Day cap on pension increases by exercising an amendment power contained in legislation.  The Pensions Act 1995 allowed the trustees to amend the scheme by resolution for specific purposes – in this case to preserve pre-A-Day limits.  The judge said that as the statutory powers were the only means by which the trustees could have validly made the amendments, he ought to assume that they intended to use this route.  In the absence of any evidence to the contrary, the trustees did not need to provide evidence of a positive intention to use their statutory power.   



Government to appeal recent age discrimination ruling

The government has confirmed it is seeking permission to appeal a recent Court of Appeal ruling that members of the Judicial Pension Scheme and the Firefighters' Pension Scheme suffered age discrimination.  As reported last month, when less generous benefits were introduced to these schemes, transitional provisions sought to protect the benefits of older workers – but the Court declared this was unlawful age discrimination.



And finally…

Golf may be the stereotypical retirement pastime, but Neil Brittlebank from West Yorkshire has spent his retirement enjoying a more esoteric hobby – collecting hundreds of unusual house bricks.  The 83-year-old and his wife have travelled the country in search of rare specimens, but he is now so well known for his collection that strangers leave bricks at his house with notes explaining the story behind them.  Mr Brittlebank's hobby is celebrated in Dull Men of Great Britain, a book cataloguing the achievements of the Dull Men's Club, whose members are passionate about "the everyday, unglamorous things in life".  Another member is a retired paint company technical manager, whose job involved sitting with a stopwatch and literally watching paint dry…

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