What's Happening in Pensions - Issue 72

Master trusts

Note regarding "inadvertent" master trusts: Under the Pension Schemes Act 2017 and draft regulations, a master trust is an occupational pension scheme which (in essence):

• provides money purchase benefits (whether alone or in conjunction with other benefits), other than just in relation to AVCs; and
• is used by employers which are not connected with each other.

Some group schemes have found that they may inadvertently fall within the "master trust" definition because, for example:

• the scheme has participating employers that are not, and never have been, in the same group;
• an unconnected company to which employees have been transferred other than under a "TUPE" transfer is allowed to participate for more than six months;
• a joint venture participates in which the group has a stake of less than 33%; or
• a former joint venture still participates more than six months after ceasing to be associated,

but a group scheme will not be a master trust just because it still has members employed by a company that has left the group or who were TUPE transferred to a purchaser of a business from the group.

These schemes must take steps to ensure that they are not master trusts or else comply with the relevant requirements for master trusts. Please contact us urgently if you think you might have an issue in this regard.

The master trust authorisation regime comes into force on 1 October 2018 (though notification and discontinuance funding obligations already apply). Existing master trust schemes will have a period of six months from then either to apply to the Regulator for authorisation or to wind-up.

The Pensions Regulator now has various materials in relation to schemes applying to be authorised as master trusts and has consulted on a Master Trust Supervision and Enforcement Policy.

The legislation requires schemes applying for authorisation to demonstrate to the Pensions Regulator that five criteria are satisfied:

• Key individuals must be "fit and proper" persons.
• The scheme must be financially sustainable. It must have a sound business strategy (including a written business plan) and sufficient financial resources to meet the costs of setting up and running the scheme and to comply with the requirements that apply on discontinuance.
• The scheme's financial backer (the "scheme funder") must be a separate legal entity which carries out no other functions.
• The scheme's "systems and processes" must be adequate.
• There must be a "continuity strategy", setting out how the interests of members will be protected in the event of certain specified "triggering events", and administration charge levels.

A code of practice and guidance give more detail about what the Regulator expects with regard to these criteria.

There is a £41,000 fee to apply for authorisation of an existing master trust.

Pensions Minister's statement

The Pensions Minister, Guy Opperman MP, has issued a written statement to Parliament announcing that:

• The government hopes to publish conclusions on the recent consultation proposals for new notification duties and greater Pensions Regulator powers "towards the end of this year" (see WHiP Issue 71).
• There will be consultations in the autumn on (a) DB scheme consolidation, including DB "superfunds" and (b) collective DC schemes.
• The new, as yet unnamed, single financial guidance body will be constituted in October and launched in January (taking over current responsibilities of TPAS and Pension Wise).
• The pensions dashboard project will go ahead but as an industry initiative facilitated by the government (no further detail has been given at this stage but a government feasibility study report is expected soon).

PPF compensation levels

The European Court has ruled in Hampshire v Board of the Pension Protection Fund, further to a reference made by the Court of Appeal. The case concerns whether the current PPF compensation regime (including the cap) is in breach of the EU insolvency directive. The directive requires, among other things, EU member states to "protect" individuals in respect of their pension rights. The PPF and the government may now have to change PPF compensation, which would have implications for DB pension schemes.

Due to the application of the compensation cap, Mr Hampshire – a former Turner & Newall employee - would see his pension reduced by 67% and he will lose out further when he does not receive pension increases for his pre-1997 service. He challenged the PPF's valuation of the scheme's PPF liabilities (which valuation determined whether the PPF should assume responsibility for the scheme or the scheme will wind up outside the PPF), arguing that the measure of PPF compensation used for this purpose is in breach of EU law. He also argued that since the PPF is a public body, he can enforce his claim directly against it.

The Court of Appeal referred a number of preliminary questions to the European Court, as part of its consideration of Mr Hampshire's challenge.

The European Court has ruled that:

• Previous European Court judgments against the UK (the 2007 Robins case) and Ireland (the 2013 Hogan case) decided that the insolvency directive requires compensation of at least 50% of the value of the individual's accrued rights or entitlements to be paid.
• The EU insolvency directive requires, except in cases of abuse, every individual to be protected to (at least) that minimum level.
• The requirements of the directive, as previously interpreted by the European Court, are unconditional and sufficiently precise, such that they may be relied upon directly by an individual as against the PPF.

The judgement also says that pension increases that would have been provided under the scheme rules must be taken into account (bearing in mind that the PPF does not pay pension increases in respect of pre-1997 service) but seems to indicate that an assessment of value that takes assumed increases into account will suffice, rather than an annual check being required.

Clearly, a requirement for PPF compensation to be improved could result in higher levies for DB pension schemes. Any change to PPF compensation rules as a result of this case could also have implications for schemes in winding-up (statutory winding-up priorities are partly based on PPF compensation rules) and also, of course, for schemes in a PPF assessment period.

The PPF has said: "For those members affected, we will work to implement the judgment as quickly as possible. We now need to consider the ruling carefully to understand what action we can take prior to legislative change and/or the conclusion of UK court proceedings."

Dividends and deficit recovery contributions

The government has published its response to the consultation on corporate governance issues where firms are in, or may be approaching, insolvency and some wider corporate governance issues.
There will be no immediate steps to restrict the payment of dividends by companies with underfunded pension schemes. The government will, however:

• give further consideration to ways in which directors could provide stronger reassurances for shareholders and stakeholders that proposed dividends will not undermine the affordability of any deficit reduction payments agreed with pension fund trustees (this will be looked at as part of the consideration of fuller disclosure of capital allocation decisions and the case for a review of the law on dividend payments); and
• take steps to ensure that shareholders have an annual say on dividends if the practice of declaring only interim dividends to avoid a shareholder vote is found to be widespread and investor pressure proves insufficient.

Other points to note include that the government will:

• identify means to incorporate stewardship within the mandates given to asset managers by asset owners and establish safe channels through which institutional investors and others can escalate concerns about the management of a company by its directors;
• take measures, to include disqualification powers for the courts, to ensure greater accountability of directors in group companies when selling subsidiaries in distress, but having regard to the concerns that the new measures should not disincentivise rescues or unnecessarily hold directors liable for the conduct of others over which they have no control;
• legislate to enhance existing recovery powers of insolvency practitioners in relation to value extraction from a firm at the expense of its creditors (which would include a pension scheme in deficit) when a firm is in financial distress; and
• legislate to give the Insolvency Service the necessary powers to investigate directors of dissolved companies where they are suspected of having acted in breach of their legal obligations.

See our briefing note Protection of DB schemes: government plans (from page 6) for details of the consultation.

Corporate governance code

The FRC has published a new version of The UK Corporate Governance Code. The Code now explicitly says that "The pension contribution rates for executive directors, or payments in lieu, should be aligned with those available to the workforce". Our Corporate department's client briefing note is available here.

Investment consultancy and fiduciary management markets

The Competition and Markets Authority has published its provisional decision in the investigation of the investment consultancy and fiduciary management markets (see WHiP Issue 67). It says that competition problems affect both these markets but that its concerns about the fiduciary management market are greater. The proposed remedies therefore target the fiduciary management market and would require trustees to run competitive tender processes.

The CMA's provisional findings include:

• Around half of pension schemes choose the same provider for fiduciary management that they use for investment consultancy. Their current investment consultant can steer them to do this. This means that companies which offer both services have an advantage over other firms when it comes to getting this business from existing clients.
• A number of pension scheme trustees have low levels of engagement with providers in the sector when choosing their first fiduciary manager. Only a third of trustees run a tender process, so no competitive pressure is put on their existing investment consultant or fiduciary manager to offer the best terms or highest performance.
• Pension scheme trustees often do not have sufficient information on the fees or quality of these services to be able to judge if they are getting a good deal from their existing investment consultant or fiduciary manager, or if they could do better elsewhere.

The proposed remedies regarding the fiduciary management market include:

• Imposing duties on pension scheme trustees to carry out a competitive tender (a) before awarding a fiduciary management mandate for the first time and (b) within five years, where they already buy fiduciary management but did not carry out a competitive tender process before awarding the mandate.

The CMA also recommends that the Pensions Regulator provides detailed guidance to trustees on running competitive tender processes for fiduciary management.

• Imposing duties on fiduciary management firms to:
  • give warnings to customers on whether they are giving advice or marketing their fiduciary management service;
  • separate fiduciary management fees from fees for other services, with enhanced disclosure of underlying investment fees;
  • be clearer about fiduciary management fees to prospective customers, including costs relating to transition or exit;
  • develop and use a standard approach to report their performance track record to prospective customers.

The proposed remedies regarding the investment consultancy market include that:

• pension schemes would have to set strategic objectives with their investment consultant and the consultant should report on progress in meeting these objectives periodically, with reporting against any investment objectives being to agreed standards;
• consultants would have to report the performance of recommended asset management products and their own investment products to an agreed set of standards.

The CMA also proposes making the following recommendations to the government and regulators:

• The government should extend the FCA’s regulatory perimeter to include the relevant services provided by investment consultancy and fiduciary management firms.
• The Pensions Regulator should develop guidance to support pension trustees in asking for and using the enhanced information they will now be able to access.

The CMA's final report is required to be published by 13 March 2019.

Pension scams

The Pensions Regulator and FCA have launched a new advertising campaign to warn against pension scams. Alongside this, the Regulator has refreshed its materials for individuals, employers and trustees. These include:

• an updated web page for trustees;
• a leaflet for individuals (schemes can contact the Regulator at pensionscams@tpr.gov.uk for a print-ready PDF for inclusion in member statements and transfer packs);
• a transfer checklist for trustees; and
• posters that employers can display in the workplace.

Giving reasons for decisions

The Pensions Ombudsman has upheld a complaint against a SIPP administrator who decided not to award any death benefits to the partner of a deceased scheme member. He ordered the administrator to consider its discretion for a third time and this time to document the rationale for the decision fully. In doing so, he made some comments of wider application about giving reasons for decisions.

The Ombudsman had previously directed the administrator to reconsider the exercise of its discretion to award death benefits to the member's estate rather than to his partner. The administrator did so but made the same decision.

In response to the partner's request for reasons for the decision, the administrator replied: "The provision of a dependant's pension remains at the discretion of AJBML [the administrator]. In this instance, having taken into account all relevant considerations and ignored all irrelevant considerations AJBML decided that a benefit was not to be paid …".

The Ombudsman said: "I consider the absence of any documented reasons to support a decision as indicating that there were in fact no supportable reasons for the decision. Documented reasons need not themselves be lengthy but should be sufficient to convey to the reader an understanding of the factors which have been given some weight. It may also be appropriate to record why some factors have been discounted. The reasons should be sufficient to enable an aggrieved party to know whether there are grounds to challenge the decision".

He directed the administrator to reconsider again whether the complainant should be entitled to death benefits and to "fully document the rationale for its decision and communicate this with [the complainant] within 21 days of it being made".

Transferring scheme liable for scam transfer

The Pensions Ombudsman has determined that Northumbria Police Authority should not have paid a £112,000 transfer to an alleged scam scheme without first having sent the individual the Pensions Regulator's "scorpion" pension scam warning literature and making more enquiries about the scheme and the individual's relationship with it. The Ombudsman found that there had been maladministration and ordered that the transferred-out benefits be reinstated.

Mr N opted out of the Police Pension Scheme in 2012, shortly before reducing his working hours. Soon thereafter, he made a request to transfer his benefits to the London Quantum scheme, which was performed in August 2014. A £5,000 fee was deducted from the transfer value by his adviser and (Mr N later realised) the funds were to be placed in a high risk investment. In 2015, the Pensions Regulator appointed Dalriada as independent trustee of the London Quantum scheme.

Mr N became concerned that he had been scammed. The Ombudsman determined that it was maladministration by the Authority not to have given suitable warnings to Mr N, in line with industry practice at the time. Placing a warning on the intranet was not considered adequate: the Pensions Regulator's "scorpion" warnings, first published in February 2013, were intended to be sent individually to scheme members when they enquired about transfers.

The Ombudsman accepted that some aspects of the transfer request were not "red flags", for example the scheme was not new and Mr N was not under 55, but he noted that the scheme was an occupational pension scheme sponsored by a dormant company with an address far removed from the scheme member. The Authority was also aware that Mr N was still employed as a police officer and that police officers are not normally allowed to have additional employments.

The Ombudsman decided that the Authority should have engaged directly with Mr N and asked why he was transferring to this scheme, enabling an open discussion about the transfer request. It should also have requested a copy of the trust deed and rules of the London Quantum scheme, to ensure that the scheme was able to receive a transfer and provide benefits.

The Ombudsman had held an oral hearing in order to assess whether Mr N would have transferred even if the Authority had given him adequate warnings. He determined that Mr N's motivations were not so strong nor pressing that he could not have been deterred by appropriate warnings and that on the balance of probabilities he would not have gone ahead with the transfer if such warnings had been given.

The Ombudsman also concluded (controversially) that the statutory transfer discharge did not apply. He ruled that doing "what is needed to carry out what the member requires", in order to qualify for the statutory discharge under the Pension Schemes Act 1993, includes appropriate review of the transfer application, taking into account the law and regulatory guidance. He added that this includes appropriate due diligence and bringing warnings and concerns to the attention of the member.

The Ombudsman therefore ordered the Authority to reinstate Mr N's benefits in the scheme (or to provide equivalent benefits outside the scheme if that is not possible) and pay him £1,000 for significant distress and inconvenience. If Dalriada is able to retrieve some or all of Mr N's pension fund for his benefit then "the Authority shall be entitled to recover that amount from Mr N".

CETV reduction basis

The Pensions Ombudsman has rejected a complaint by a DB scheme member where the trustee reduced cash equivalent transfer values (CETVs) by reference to PPF priorities.

The member complained that there was no rational basis for the trustees to choose that basis for making the CETV reductions because the scheme was not in the PPF and was not in danger of entering it.

The Ombudsman determined that there was no maladministration. The trustee had taken and acted on advice from the scheme actuary. There was a long-term recovery plan in place and the reduction was made in the long-term interests of all members. It had made the decision properly.

The determination notes that the member had passed his normal pension age, so he would have been worse off if the trustees had instead decided to apply an across-the-board CETV reduction of a particular percentage for all members.

The determination also briefly notes a point about the Ombudsman's jurisdiction: the Ombudsman cannot make a determination that would have an adverse impact on individuals not subject to the complaint, ie, other members of the scheme.

DC governance

The Pensions Administration Standards Association has published governance guidance for DC schemes covering data, decumulation, controls and processes, management information and transitions.

Treasury committee report on household finances

An HM Treasury Select Committee report "Household finances: income, saving and debt" makes recommendations in relation to pension reforms, including as to tax relief, more guidance and extending automatic enrolment. Relevant conclusions and recommendations include the following:

Saving for retirement

• Despite automatic enrolment, further reforms to the pensions saving landscape and automatic enrolment will be required to ensure that households have sufficient income in retirement.
• The government should assess what is driving a sex equality gap in retirement savings and what the consequences could be for both individuals and households.
• There is little evidence of a plan, or even an ambition, to reduce further the number of under-savers from its current level of 12 million. If the government has reasons to think that current levels of under-saving are acceptable, then it should say so and explain why.
• There is widespread acknowledgement that tax relief is not an effective or well-targeted way of incentivising saving into pensions. Ultimately, the government may want to return to the question of whether there should be fundamental reform. However, the existing state of affairs could be improved through further, incremental changes. In particular, the government should give serious consideration to replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief, and promoting understanding of tax relief as a bonus or additional contribution.
• While maintaining its focus on keeping opt-outs from automatic enrolment low during the rise in the contribution rate to 8 per cent, the government should start considering the options for raising contribution rates for at least some people beyond that point, potentially by automatically escalating individual contribution rates in line with pay rises.
• There is an urgent need to bring the self-employed into the automatic enrolment system, but it is not clear that the government has a clear strategy or timetable for doing so.
• If the state pension "triple lock" is maintained in the longer term, the state pension will rise relative to earnings indefinitely. However, according to the government’s analysis, replacing it with earnings-uprating could result in a large rise in the number of under-savers. The next automatic enrolment review should explore the options for making up with private savings the shortfall that could result if the triple lock were abandoned in future.

Planning for retirement after pension freedoms

• The present level of many people’s engagement with and understanding of the choices available to them as a result of pension freedoms is inadequate. One approach to improving this situation is to encourage more people to take up the advice or, at a minimum, free guidance options available to them.
• The Single Financial Guidance Body, together with the government, should consider how a mid-life MOT could be introduced, and develop proposals for increased outreach work to engage people with pensions planning. The FCA should consider the case for introducing a strong form of default guidance before people are allowed to access their pension pots. The government should identify opportunities to nudge people towards pension guidance at life events where they interact with the public sector.
• The government should be actively involved in working with the FCA and the guidance bodies to identify opportunities to enhance consumer protection against scams and introducing default pathways to ensure that people do not make poor choices in retirement. It should respond to the FCA’s suggestion that it consider allowing people to access their tax-free cash separately from the rest of their pensions.
• The government should monitor the evolving annuity market and may need to intervene in future if evidence of sufficient risk pooling opportunities does not emerge.

Pension costs and transparency inquiry

The Work and Pensions Select Committee has launched a new inquiry into whether the pensions industry provides sufficient transparency to consumers around charges, investment strategy and performance.
The inquiry will examine whether enough is being done to ensure that individuals:

• "get value for money for their pension savings;
• understand what they are being charged and why;
• understand the short- and long-term impact of costs on retirement outcomes;
• can see how their money is being invested and how their investments are performing;
• are engaged enough to use information about costs and investments to make informed choices about their pension savings; and
• get good-value, impartial service from financial advisers".

Cold calling ban

The government has consulted on draft regulations to bring into force a ban on pensions cold calling. The draft regulations will prohibit pensions cold calling unless the caller is an "FCA-regulated person" or a (yet to be defined) "TPR-regulated person" and the individual being called:

• has consented to such calls being made by, or at the instigation of, that caller; or
• has an existing client relationship with the caller or instigator of the call, envisages receiving unsolicited calls for direct marketing in relation to pension schemes, and has been given a simple means of refusing the use of his or her contact details for direct marketing.

The government is satisfied that text messages and emails are already adequately restricted by the existing regulations.

The ban will be enforced by the Information Commissioner's Office (ICO). It will be able to fine offenders up to £500,000. There will not be a new criminal offence.

Regarding calls made from overseas, the consultation says: "As outlined in the August 2017 consultation response, the ICO will be unable to take action against firms located overseas, as they are outside the UK’s jurisdiction, unless the calls are made on behalf of a UK company. Whilst there is no way for the ban to be extended to overseas callers, the ICO has arrangements with international regulators to enable enforcement action in circumstances where companies operating wholly abroad make calls into the UK that would be unlawful if made in the UK."

The government intends to lay final regulations before Parliament "subject to Parliamentary timetabling" in autumn 2018. It will work with various organisations to publicise the ban.