Trustee Quarterly Update - March 2023

Court rules on interpretation of protected pension age test

A recent High Court case has ruled on the test for deciding whether a member has retained a "protected pension age" of 50 following the increase in "normal minimum pension age" from 50 to 55 (Devon and Somerset Fire and Rescue Authority v Howell).  For more detail, click here.

Court rules trust power not exercised for a proper purpose

An important court ruling has clarified the law in relation to the principle that trustees exercising their powers must do so for a "proper purpose".  The case of Grand View Private Trust Co Ltd v Wen-Young Wong concerned a trust established under the law of Bermuda. The Privy Council held that the trustee had used the power to appoint and remove beneficiaries for an improper purpose. On a literal reading of the power there were no limits on who could be appointed or removed as a beneficiary.  However, having considered the wording of the trust as a whole the Privy Council concluded that the proper purpose of the power to add or remove beneficiaries was to further the interests of one or more of the original beneficiaries.  The power could not be used to remove all original beneficiaries and fundamentally alter the nature of the trust.  For more detail, click here.

Court partially allows appeal against Ombudsman decision that incorrect pension figures did not affect member's retirement decision

In the case of Andrew v Royal Devon and Exeter NHS Foundation Trust, the court has partially upheld an appeal against a Pensions Ombudsman decision where the Ombudsman had failed to consider the possibility that, had the member received correct pension figures, he might have successfully sought redeployment rather than taking ill-health early retirement.  For more detail, click here.

Consultation on DB funding code

In December 2022 the Pensions Regulator published a consultation on its new DB funding code.  The code will apply to actuarial valuations with an effective date after the code comes into force, currently expected to be in October 2023.

Two key principles underlying the new scheme funding regime are that trustees should target a state of low dependency on the employer by the time the scheme is "significantly mature", and that deficits should be cleared as soon as the employer can reasonably afford.  "Low dependency" means reaching a state where no further employer contributions are expected to be required to fund accrued benefits and the assumed investment strategy is to broadly match cash flow from investments with payments under the scheme and to invest in such a way that the value of scheme assets relative to liabilities is highly resilient to short-term changes in market conditions.

"Significant maturity" involves a calculation which looks at the average time (duration) until payments under the scheme are expected to be made, weighted by the discounted value of the relevant payments.  The draft code provides that the duration at which the scheme reaches significant maturity is 12 years.

TPR's original consultation in 2020 proposed two routes for complying with the funding code, Fast Track and Bespoke.  For Fast Track, TPR planned to set out standards in relation to all aspects of funding and investment arrangements, and a scheme would only qualify as Fast Track compliant if it satisfied every aspect.  Any scheme not qualifying for Fast Track would be classed as following the "Bespoke" route, with trustees having to explain the divergence from Fast Track.  The current consultation retains the concepts of Fast Track and Bespoke, but explains that Fast Track will be a filtering mechanism adopted by TPR rather than forming part of the code.  TPR includes the Fast Track parameters in a separate document.  This will give TPR more flexibility to change the Fast Track parameters at short notice.  Schemes meeting the Fast Track parameters are unlikely to have their funding approaches scrutinised by TPR.  This does not mean that all schemes following the Bespoke route will necessarily attract TPR scrutiny.  TPR recognises that there may be good reasons for a scheme to follow a Bespoke rather than Fast Track route.

The consultation closes on 24 March 2023.

Regulator amends transfer values guidance to clarify type of appointment needed

The Pensions Regulator has amended its guidance on dealing with transfer requests to include a link to be provided to members to ensure they book a "Pension Safeguarding Guidance" appointment.  It appears that some members wishing to take transfer values have been booking the wrong type of appointment, ie a Pension Wise appointment for over fifties about their DC pensions or an appointment to obtain general MoneyHelper advice.

DWP guidance on deferred connection to dashboards

The DWP has published guidance on applying to defer connection to pensions dashboards.  There are limited grounds on which a scheme may apply to defer the date on which it must connect to the dashboard.  A deferral can only be granted if the trustees show that before 12 December 2022 (the coming into force date of the Pensions Dashboards Regulations 2022):

• they had embarked on a programme to transfer scheme data to a new administrator; and/or
• they had entered into a contract containing an obligation to retender the administration of the scheme and the timetable for this is reasonable and conflicts with the staging deadline for the scheme.

In addition to the above points, the trustees must be able to provide evidence that complying with the staging deadline would be disproportionately burdensome or would put the personal data of members at risk.

Before granting an extension on the "disproportionately burdensome" ground, the DWP will normally expect to see evidence that reasonable alternative options for securing compliance have been considered and determined to be unviable.

The latest date for making an application to defer is 11 December 2023.

Ombudsman rejects complaint by individual who had "Nelsonian knowledge" that he was not entitled to benefits paid in error

The Pensions Ombudsman has rejected a complaint from an individual who was asked to repay benefits totalling almost £10,000 which he had received despite never having been a member of the scheme in question (Mr R CAS-33474-K7Y1).  The Ombudsman found that Mr R had "Nelsonian knowledge", ie he was aware that he might not be entitled to the pension, but had turned a blind eye to this rather than making further enquiries.  This meant that he was not able to bring a "change of position" defence to the repayment claim.  For more detail, click here.

Ombudsman applies Pensions Regulator's 2013 standards to April 2015 transfer 

The Ombudsman has applied the standards of the Pensions Regulator's 2013 pension scams guidance, which included the "Scorpion" warning leaflet, when considering the level of checks that a scheme administrator should have carried out before processing a transfer in April 2015 (Mr N CAS-48914-L5F3).  The Ombudsman did not uphold the complaint made by the member, who lost approximately £50,000 as a result of transferring his pension fund to a scheme which turned out to involve a scam.  For more detail, click here.

Final levy rules for 2023/24

The PPF has published the final form levy rules for 2023/24. The PPF anticipates that almost all schemes will pay less under the new rules.  The PPF has also confirmed that it will go ahead with proposals to reduce the increments between levy bands to significantly reduce volatility in levies.  

Schemes wishing to obtain recognition for contingent assests must certify/re-certify these by midnight on 31 March 2023. 

Consultation on buy-out valuation assumptions

The PPF has consulted on proposed changes to the actuarial assumptions it uses for calculating whether a scheme is fully funded for the purposes of section 179 of the Pensions Act 2004.  The main changes proposed are: increasing the discount rate for certain tranches of benefit; a move to the CMI 2021 mortality projections model; and amending the calculation of expenses.

New asset class disclosure requirements and performance fee rules

In our last Update we reported that the DWP had consulted on draft regulations and guidance in relation to new reporting requirements regarding schemes' investment policies and asset allocations for their default arrangements.  The DWP has now published its response to the consultation together with the final form regulations.  Subject to some amendments on points of detail, the DWP is going ahead with its proposals, which will:

• require schemes to include in their default arrangement SIP their policy in relation to investment in illiquid assets.  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.  This change is due to come into force from 6 April 2023.  New disclosure requirements will apply to the use of performance-based fees.

Consultation: Value for Money: A framework on metrics, standards, and disclosures

The DWP, Pensions Regulator and FCA have jointly published a consultation on policy proposals to require trustees of DC schemes (as well as providers and governance committees of workplace personal pension schemes) to disclose, assess and compare the value for money (VFM) their workplace pension scheme provides. The proposals are intended to encourage greater standardisation of reporting, allowing trustees to make more informed investment and governance decisions and employers to better compare DC schemes when choosing where to automatically enrol their employees.  The DWP wants to encourage a "cultural shift" from focussing on costs to overall value.  It sees the key elements of the VFM framework as: investment performance; costs and charges: and quality of service.

The consultation notes that in October 2021, regulations came into force requiring occupational DC schemes with less than £100 million in assets under management to complete a more detailed Value for Members assessment.  The DWP intends that the new VFM framework will build on, and in time replace the Value for Members assessments.

The consultation runs until 27 March 2023.

Pensions Regulator blog re need for DC trustees to "upskill or up sticks"

In a blog post published in December, Pensions Regulator director David Fairs highlights the importance of good governance in DC schemes, saying that "trustees need to upskill or up sticks".  The blog post highlights that trustees of most DC schemes with total assets of less than £100 million must carry out a detailed "Value for Members" assessment every year.  Mr Fairs suggests that even where trustees believe their scheme offers value for members, they should consider whether members might be better served by consolidation with larger scale providers with access to greater governance resourcing and access to a wider range of investment opportunities.  The blog post also highlights the challenges posed by investments in illiquid assets, for example in relation to placing a realistic value on such assets.

Pensions Regulator sets out expectations of DC trustees in current economic climate

In a statement published in January, the Pensions Regulator (TPR) has set out its expectations regarding the support DC trustees should be providing to members in the current economic climate.  The statement includes a suggested checklist that trustees can use to develop their own action plan.

Key areas covered in the statement include:

Governance and investment arrangements

TPR recommends trustees should:

• review whether their scheme has sufficient scale, time and resource to govern the DC arrangements effectively.  This particularly applies to hybrid schemes;
• check their investment advisers' remit to make sure the focus is on delivering good saver outcomes rather than solely concentrating on costs and charges.  TPR recommends trustees review the extent to which proactive investment advice is allowed for in the investment adviser's remit, delivered and acted on in practice;
• review the characteristics of their scheme's member profiles, eg age profile, pot size and information on how members are accessing or plan to access their benefits.  This can lead to better scheme design and member outcomes;
• analyse changes in member behaviour.  This can be used to target actions to get members the best outcomes;
• review the scheme's investment arrangements and implementation.  TPR expects trustees to provide a suitable range of self-select investment funds for members who do not wish to invest in the default arrangement;
• monitor fund performance and how this impacts different groups of members, eg those approaching retirement; and
• review the risks posed by holding cash in times of high inflation and ensure that members who choose to hold their funds in cash better understand the risks.

Supporting and communicating with members

TPR expects trustees to:

• target support towards those members most in need of help;
• ensure members have enough information to make informed decisions about their pension savings even where the information is not required by law;
• as standard:
  • give members a copy of the MoneyHelper leaflet your pension: your choices or similar information;
  • signpost them to free, balanced and objective tools, such as the Moneyhelper pension calculator; and
  • encourage them to take up free guidance services offered by MoneyHelper or Pension Wise;
• help members understand what a fall in the value of their pension fund means for them given their personal circumstances, particularly where members are approaching retirement;
• encourage members to communicate their plans regarding when and how they wish to take their benefits;
• encourage members to seek guidance/advice and to warn them about scammers; and
• consider what additional information and guidance should be provided alongside the annual benefit statement.

Small pots call for evidence

The Government has issued a call for evidence to support development of policy options for large scale automated consolidation solutions to address the increasing number of small pension pots (to which contributions have ceased) in schemes used for auto-enrolment. Among other things, the Government seeks views on what figure should be used for determining whether pots should be eligible for automatic consolidation due to their small size.  The Government suggests four possible limits for this purpose: £1000, £2500, £5000 and £10,000.

The consultation closes on 27 March 2023. 

Our thoughts

This is not the first time that the issue of small pension pots has been considered by government.  Previous government plans for a "pot follows member" system, which would have provided for the automatic transfer of pots of under £10,000, were shelved in 2015.

FCA calls on schemes to report pensions transfer concerns

The FCA has published a new web page calling on trustees to report to the FCA if they have serious concerns about a pension transfer.

The FCA specifically asks trustees to report to it about:

• individuals who provide unauthorised advice on pension transfers;
• increases in the volume of transfers advised by the same adviser; 
• a member requesting a transfer following a cold call or unsolicited contact;
• a member being offered an incentive to make a transfer;
• a receiving scheme with high risk or unregulated investments;
• receiving scheme charges that are unclear or high;
• a receiving scheme investment structure that is is unclear, complex or unorthodox; and
• "potential scam activity".

The FCA also flags that "an unusual pattern of behaviour involving switches within a defined contribution scheme or a sharp or unusual rise in transfer requests involving the same firm" could indicate scam activity.

Our thoughts

Some of the factors flagged by the FCA would always be a cause for concern (eg an individual providing unauthorised advice on a pension transfer).  For others the position is more nuanced. For example, a transfer by one individual to a SIPP offering a wide range of investments might not necessarily indicate scam activity, but a sudden unexplained uptick in members requesting transfers to the same SIPP would be more suspicious.