Trustee Quarterly Update - December 2022

Final form dashboard regulations approved

The final form pensions dashboards regulations have now been approved by Parliament.  The regulations stipulate that the Government must give at least 6 months' notice of the date on which dashboards will be made available to the general public. On 26 October 2022 the then pensions minister Alex Burghart said that the Government expected that the public would have access to pensions dashboards for the first time in the middle of 2024.  For more detail on action points for trustees in relation to pensions dashboards, see our September Update.

Guidance for deferral of the connection deadline

The Government has also published draft guidance for trustees who wish to apply for a deferral of their deadline for connecting to the dashboards.  The regulations allow trustees to apply for a deferral if, prior to the regulations coming into force, the trustees have embarked on a programme to change administrator and are able to demonstrate that complying with the connection date in the regulations would be disproportionately burdensome or put the personal data of members at risk.

Pensions Dashboards Programme publishes revised data standards 

In November the Pensions Dashboards Programme published updated dashboard standards which will come into force following ministerial approval.  Trustees should check with their scheme administrators that they are on course to ensure that the scheme complies with the dashboard requirements and that they do not foresee any issues arising in connection with the updated dashboard standards.

Pensions Regulator consults on draft pensions dashboards compliance and enforcement policy

The Pensions Regulator (TPR) is consulting on its draft dashboards compliance and enforcement policy.  TPR says that it recognises that delivering pensions dashboards is a huge challenge for industry and that it will take a pragmatic approach to compliance.  However, it will take a robust enforcement approach to "wilful or reckless non-compliance".

TPR's key areas of focus

TPR says it will focus on quality of data held and on scheme governance, as these two areas are key to the success of dashboards and ongoing compliance.  It acknowledges that schemes will be highly dependent on third parties on order to comply with their duties.  TPR will consider using its powers against third parties "where necessary to do so".

TPR says it will focus strongly on connection compliance, including:

• failure by a scheme to connect by its statutory deadline;
• failure to connect all relevant members and benefits (eg missing AVC entitlements or providing benefit information which is not sufficiently up-to-date to meet legal requirements);
• failure to remain connected to the dashboard in line with MaPS' standards.

Key compliance steps which TPR expects schemes to take include:

• reviewing the quality of their data and seeking continuous improvement;
• having appropriate controls when selecting, appointing and managing service providers;
• having risk management processes, including for monitoring the resolution of issues between the scheme and third parties; and
• having processes in place for identifying, and if necessary reporting, breaches of the law.

Record keeping

TPR expects schemes to keep:

• audit trails of how they took steps to prepare to comply with their duties;
• records of compliance as set out in MaPS' reporting standards;
• a record of steps taken to resolve any issues which arose;
• records of their matching policy; 
• steps taken to improve their data.

Example scenarios

The draft policy includes a number of illustrative scenarios and sets out what action (if any) TPR would expect to take.  The illustrative scenarios indicate that TPR is unlikely to issue financial penalties for short-lived breaches occurring as a result of technical issues provided the trustees are able to show that they took reasonable steps to resolve the issue.  They also illustrate that TPR may direct its action against a service provider rather than the trustees if it considers that an issue is due to a service provider default.

Next steps

The consultation closes on 24 February 2023 and TPR aims to publish the final policy in spring 2023.

Statements on Managing investment and liquidity risk 

The Pensions Regulator (TPR) has issued two statements in the past quarter on the subject of its expectations of trustees regarding managing investment and liquidity risk.

12 October statement

The 12 October statement said that TPR's expectations of trustees include:

• engaging with investment advisers to "gain an accurate position so they can focus and prioritise the key areas of concern";
• reviewing operational processes to ensure they can make and implement decisions in response to changing circumstances;
• considering whether they have sufficient liquidity to meet collateral calls in a more volatile environment;
• considering whether the scheme is approaching funding triggers put in place for action;
• considering the appropriateness of assumptions used for transfer values in the light of higher yields;
• where trustees wish to explore buy-in/buy-out options but face capacity constraints in the bulk annuity market, focussing on putting themselves in as good a position as possible for when capacity allows them to move forward.

30 November statement

The background to the 30 November statement is a letter written by the regulators responsible for LDI fund managers in Luxembourg and Ireland, as LDI funds are regulated according to the jurisdiction in which the provider is based.  The letter relates to funds denominated in GBP.  The letter sets out a specific level of buffer which the regulators expect LDI funds to maintain to ensure that fluctuations in gilt yields can be absorbed without exhausting capital reserves.  If a manager considers it necessary to reduce a fund's resilience below that level, it is expected to inform the relevant regulator in advance with a justification, a risk assessment, and plans for returning the fund to current levels of resilience in the event of increased market volatility. The letter says that managers' plans for dealing with a changing market environment should take account of the impact of the actions of other market participants, eg asset disposals triggered by rising gilt yields.

The TPR statement says that trustees (through their advisers) should check the level of liquidity buffer the scheme has in place.  If the scheme does not maintain the level of liquidity buffer set by the Luxembourg and Ireland regulators, TPR expects trustees to:

• demonstrate the level of buffer the scheme has in place;
• complete a risk assessment of how the scheme will respond to stressed market events, including how the scheme will raise liquidity, taking into account that the ability to sell assets in such conditions may be greatly impaired;
• detail a step by step plan for bringing the scheme to higher levels of resilience in the event of volatility returning to the market, noting any assumptions made and timescales that the plan is based on; and
• document the arrangements and review them regularly.

Where statements from the Luxembourg and Ireland regulators refer to pooled funds, TPR believes the same level of resilience should be maintained for segregated or single client funds, with the scheme considering its level of hedging if it is unwilling to commit to that level of liquidity.

TPR sets out a list of specific steps which it "recommends" trustees should take, document and review regularly relating to:

• ensuring authorised signatories are up-to-date and decisions can be made at speed;
• stress testing the scheme's assets (whether part of a leveraged LDI fund or not) against the yield shock specified by the Ireland and Luxembourg regulators;
• calculating what collateral/margin calls might be made and when, which assets would be sold, and when sell instructions would need to be given; and
• confirming the asset allocation post-collateral/margin call.

TPR says that schemes may prefer to establish a line of credit with their sponsoring employer which can be used in place of investment liquidity.  It says that details of such arrangements should be documented and reviewed regularly and should only be used on a short-term basis for liquidity purposes.

TPR plans to issue a further update in its Annual Funding Statement in April 2023.

Latest DB funding code developments

Speaking at the PLSA Annual Conference in October, TPR's executive director of regulatory policy analysis and advice, David Fairs, said that TPR will be launching a consultation on the DB funding code "this side of Christmas".  Mr Fairs also said that TPR is reviewing its initial plan to use duration as a measure of maturity after recent market volatility raised concerns over this approach.

Blog on Mergers and acquisitions

In September TPR published a blog regarding its expectations in relation to mergers and acquisitions.  Some key points are:

• trustees will be subject to strict confidentiality provisions and so employers should not use market sensitivity and regulatory notification provisions as an excuse to keep trustees in the dark;
• trustees should be provided with direct access to the bidder and their advisers at the earliest opportunity in the transaction process;
• a warning that TPR expects a legally binding agreement with scheme trustees to be put in place prior to Completion so that purchasers can't "move the goalposts" after Completion; and
• trustees should not weaken the funding position and journey plan to facilitate a transaction unless they can clearly demonstrate with reasonable certainty the benefit of doing so, and secure appropriate protections against downside risk.

Consolidated enforcement policy and updated prosecution policy

In October the Pensions Regulator published its consolidated Scheme management enforcement policy, updated prosecution policy, and its response to its consultation on these policies.  

The enforcement policy consolidates three previous enforcement policies in relation to defined benefit, money purchase and public service pension schemes, and has been updated to cover the Regulator's new powers introduced by the Pension Schemes Act 2021.  The prosecutions policy has been updated to include reference to the new criminal sanction powers introduced by the Pension Schemes Act 2021.

Secretary of State for Work and Pensions v Beattie: EAT rules on age discrimination claims

In our previous Update we reported on the Employment Tribunal (ET) decision in Beattie v 20-20 Trustee Services Limited in which the ET held that the age discrimination exemption applicable to pre-1 December 2006 pensionable service was incompatible with EU law.  The Government intervened to appeal the ET's judgment and the Employment Appeal Tribunal gave its judgment on 27 October 2022.

Legal technicalities regarding appeal grounds meant that the EAT did not rule on the key issue of whether the exemption for pre-1 December 2006 pensionable service was permissible under EU law.  However, the Government succeeded in getting most of the claims dismissed due to the restrictions that the European Union (Withdrawal) Act 2018 now places on a person's ability to bring claims based on EU law.  The claims of two claimants were allowed to proceed because they had commenced proceedings before 31 December 2020, the date on which the Brexit transitional period ended.

Our thoughts

The age discrimination exemption for pre-1 December 2006 pensionable service is an important one that has been relied on by many schemes and employers.  It doesn't appear that this case will open the floodgates to claims relating to that period, given the EAT's ruling that the only claims that could proceed were those where proceedings had been commenced before 31 December 2020.  We think there are strong arguments that the exemption for pre-1 December 2006 service was valid under EU law.  However, legal technicalities designed to prevent new arguments being raised on appeal meant that these important arguments were not aired before the EAT.

Court rejects legal challenge to RPI reform

The High Court has rejected a legal challenge to the UK Statistics Authority's decision to align the Retail Prices Index (RPI) with the Consumer Prices Index including owner occupiers' housing costs (CPIH) (R on the application of BT Pension Scheme Trustees Limited). The trustees that brought the challenge have announced that they will not be appealing the High Court's decision.

Ombudsman dismisses member complaint about lack of discretionary pension increases

In the case of Mr H (CAS-33253-W9R0), the Ombudsman has dismissed a member's complaint regarding a scheme's failure to increase his pension once in payment.  All of the member's pensionable service was before April 1997, so the member had no statutory right to pension increases on non-GMP pension.  The Scheme's rules provided, "If the Trustee considers it appropriate having regard to the increase in the cost of living, the Trustee may, after obtaining Actuarial Advice, increase the amount of any pension or deferred pension by such amount as the Trustee shall consider appropriate but no such increase shall cause any pension to exceed Revenue Limits.” 

Giving his determination, the Ombudsman noted that the Scheme was in deficit on a "technical provisions" basis.  He said that the Trustee had to consider the impact that paying increases would have on the ongoing solvency of the Scheme, and that, "The Trustee's main responsibility is to meet the funding requirement of its contractual liabilities, such as paying the pensions, not to award discretionary bonuses which are ordinarily paid out of a surplus."

Our thoughts

Some aspects of this case were scheme specific.  The Scheme had an unusual benefit structure which appears to have caused some confusion on the part of the member.  However, the key point of wider relevance is the Ombudsman's view that where a scheme is in deficit, the main responsibility of scheme trustees is to ensure that accrued benefits payable as of right are adequately funded, not to pay discretionary increases.

Scheme not required to verify NI number and DOB provided by employer

In the case of Mr S CAS-44390-L8M3, the Ombudsman has dismissed a complaint against NEST, confirming that there was no requirement for NEST Corporation to independently verify that the NI number and date of birth details provided to NEST by the member's employer for auto-enrolment purposes were correct.  In Mr S's case, the details provided to NEST by his employer were incorrect.  This meant that when the member contacted NEST about opting out of auto-enrolment, he failed NEST's security checks with the result that that NEST refused to process the request.  NEST instead suggested that the member should ask his employer to provide the correct details. The member subsequently missed the window for opting out of auto-enrolment.

Our thoughts

Under the legislation governing auto-enrolment, a member wishing to opt out should give notice to the employer which is then required to inform the scheme.  In this case the member contacted NEST directly, and it appears that NEST would have been willing to process the opt-out had the member passed its security check by providing a date of birth and NI number that matched NEST's records.  From a trustee perspective, it is useful to note that the Ombudsman accepted that there was no requirement for the scheme to independently verify that the member's personal details as provided by the employer were correct.  At the point when the member had made a complaint under the scheme's IDRP, his contributions to NEST were valued at £13.90.  This determination thus also highlights the risk that even a low value complaint can escalate and take up disproportionate management time if not resolved at an early stage.

Ombudsman awards £1000 for Trustee's failure to undertake adequate investigations

In the case of Mr Y (CAS-31321-F4H2), the Ombudsman did not uphold the member's main complaint against a scheme trustee, but awarded £1000 for non-financial injustice for its failure to be more thorough and proactive in its search for relevant evidence at the IDRP stage of the member's complaint.  

The key issue in dispute was the length of the member's pensionable service in the scheme.  The scheme trustee maintained that the member's pensionable service had started in September 1992.  The member claimed that his pensionable service had started in April 1980.  The position was complicated by the fact that the member had worked for various different businesses within the same group of companies, and the group had operated various different pension schemes during the relevant time, some of which had since been wound up.  

Ultimately the Pensions Ombudsman found on the balance of probabilities that the member's pension contributions during the relevant period had been transferred into a different group scheme.  The Ombudsman therefore rejected the member's main complaint.  However, the Ombudsman considered that the Trustee should have been more thorough and proactive in its search for pertinent evidence during the IDRP.  A lot of relevant new information had been supplied by the trustee only in response to an extensive investigation by the Adjudicator at the Ombudsman's office.  The Ombudsman awarded the member £1000 for non-financial injustice, holding that the trustee's failure to properly carry out the IDRP amounted to maladministration.

Our thoughts

Inadequate records for periods of pensionable service completed decades ago can cause significant issues for trustees.  This case shows that trustees may be subject to an award for non-financial injustice if the Ombudsman considers that they have failed to carry out a thorough search for all relevant records at the IDRP stage of a complaint.

FRC announces changes to rules for calculating money purchase benefit illustrations

In October the Financial Reporting Council (FRC) announced changes to AS TM1, the actuarial standard which specifies the assumptions and methods used for calculating statutory illustrations of money purchase benefits.  The principle behind the new version, which will apply to illustrations issued on or after 1 October 2023, is that any two providers projecting identical funds for identical members should calculate identical estimated retirement income.  This is not the case for the current version which allows some flexibility in determining both the accumulation rate for projecting fund values and the assumed type of annuity.  The assumptions used for statutory money purchase illustrations must be the same as those used for pensions dashboard illustrations. 

Subject to some changes to points of detail, the FRC is going ahead with its plans to assign funds to a "volatility group" and specify the rate of return that must be assumed according to the fund's volatility group.  It will also require illustrations to assume that the member takes a level annuity with no dependant's pension and does not take a lump sum on retirement.

Our thoughts

The FRC's changes to AS TM1 have proven to be controversial, with a significant proportion of respondents to the consultation raising issues.  When issuing statutory money purchase illustrations and providing dashboards data, trustees will have no option but to comply with AS TM1.  However, to the extent that trustees have discretion over the wording of member communications, care should be taken to try to ensure that members understand the limitations of statutory money purchase illustrations and dashboards data.

DWP consults on new asset class disclosure requirements and performance fee rules

The DWP has consulted on draft regulations, together with guidance, which will:

• require schemes which provide money purchase benefits to include their policy in relation to investment in illiquid assets in their statement of investment principles (SIP) for their default arrangement.  The new requirement will apply on the first occasion when the default SIP is revised after 1 October 2023 and in any event from 1 October 2024;
• require schemes to report in the chair's statement on the percentage of default arrangement assets allocated to each asset class specified in the regulations.  This requirement will apply in relation to the first scheme year ending after 1 October 2023; and
• remove performance-based fees from the statutory charge cap provided such fees meet the requirements specified in the regulations.  The Government intends to make this change from 6 April 2023.

Trustees will be required to "disclose and explain" in the chair's statement their approach to illiquid assets.  The Government had originally proposed that the requirements would only apply to schemes with assets of £100 million or more, but has decided to remove this threshold so that the requirements will apply to many more schemes than originally proposed.  

When calculating the scheme's asset allocation, trustees will be required to have regard to Government guidance issued for this purpose.  The draft guidance provides further detail regarding how trustees should interpret the asset classes set out in the regulations.  It also says that trustees must look through the ownership structure of the fund vehicle and state the asset allocation "relating to the economic exposures of the underlying asset classes".  

The guidance also says that schemes should disclose asset allocation by reference to a range of member ages in recognition of the fact that asset allocation in a default arrangement may vary according to the member's age.  The guidance suggests that schemes may wish to use ages that are consistent with existing disclosures, for example those used for completing the annual value for members assessment, in relation to which the Government has advised using ages 25, 45 and 55.  The guidance suggest schemes should also disclose default arrangement asset allocation for members who are one day prior to State Pension Age.

Our thoughts

Assuming the draft regulations are brought into force in their current form, they will introduce significant new compliance requirements.  As the timing of the first reporting period will depend on the scheme's year end date, trustees should consider now what the relevant reporting period will be and what action will be required to meet the new reporting requirement.

PASA Good Practice Guidance on DC Transfers

In October the Pension Administration Standards Association (PASA) published its Good Practice Guidance on DC Transfers.  The guidance includes:

• a suggested standardised "process flow" setting out the steps which need to be undertaken as part of the transfer process;
• a recommendation that trustees agree with their administrators acceptable service levels regarding the timescale for processing transfers;
• template communications that can be used in the transfer process.

The guidance has no official status, but PASA expects the Pensions Ombudsman to refer to it as a source of what good industry practice looks like.

PPF Levy consultation: Almost all schemes expected to see levy fall in 2023/24

In September the PPF published its Long-Term Funding Strategy review and 2023/24 Levy consultation.  The PPF says that it is in a strong financial position and is now able to move to charging a significantly lower levy.  It says that almost all schemes are expected to see their levy fall in 2023/24.  The PPF intends to reduce the sensitivity of the levy to changes in insolvency risk by halving the incremental increase between levy bands as a first step to enabling a simpler approach to insolvency risk in the levy.

PASA guidance and updated code of conduct on administration transfer exit agreements

In September PASA published new Exit Agreements Guidance on changing pensions administration provider.  The guidance is intended to support trustees, administrators and scheme managers.  The guidance says that issues reported by PASA members changing scheme administrator include delays by the ceding administrator in providing data and records, unreasonable charges for completing the transfer or "out of scope" services, and deterioration of service by the ceding administrator during the notice period.

The guidance says trustees should check their contract with the ceding administrator to determine whether there are contractually agreed terms on exit (an "Exit Agreement").  The guidance includes a template exit agreement which is intended for use as a schedule to an administration contract or as a checklist for trustees and administrators to use to check that their Exit Agreement includes all recommended aspects.

From 1 January 2023, PASA is amending its Code of Conduct on Administration Provider Transfers to include the following points:

• for new administration appointments, the administration contract should include a clause setting out the terms in the event of a subsequent transfer of services; and
• for existing appointments, administrators should have a clearly stated policy on transferring schemes to a newly appointed administrator which can be followed when existing contracts are silent on the issue.  The policy should be available to trustees on request.