Pensions quarterly update April - June 2023

Contracted-out schemes: validity of amendments 

Recently, Virgin Media and the Trustees of the NTL Pension Plan asked the High Court to decide whether changes made to the Plan in 1999 reducing the rate of revaluation for benefits accrued after 8 March 1999 were valid.

Being contracted-out, this scheme amendment should have been accompanied by an actuarial confirmation under section 37 Pension Schemes Act 1993. Neither Virgin nor the Trustees have been able to locate the requisite actuarial certificate.

The High Court decided:

• The amendment was void because the scheme did not have the actuarial confirmation required by law (Section 37 Pension Schemes Act 1993 and Regulation 42 Occupational Pension Scheme (Contracting-out) Regulations 1996).
• Any change to Section 9(2B) rights (contracted-out rights accrued from 6 April 1997) would be invalid and void, and the references in the legislation to section 9 (2B) rights included both past and future service rights
• Invalidity is not limited to adverse / potentially adverse effects on contracted-out rights.

More information about the High Court decision is available here

Analysis: another fine mess and a headache for trustees of contracted out schemes?

We understand that an appeal is unlikely, although it is possible that the same issue might arise in a future case, involving a different pension scheme.

This is potentially a big issue for contracted out schemes that are heading towards buy-out, buy-in and winding up, together with schemes that are already in the PPF.

The industry is looking at whether they can persuade the DWP to issue a regulation to resolve the problem.

For contracted out schemes, this is another issue which may eventually need action, and to identify the potential risk by carrying out a review of past amendments to ascertain whether actuarial certificates were obtained. It is too early for any further immediate actions.

The Pensions Regulator 

Equality and Diversity

The Pensions Regulator has published equality, diversity, and inclusion (EDI) guidance for pension scheme trustees and employers.

Pension scheme trustees are encouraged to seek EDI training and to develop and maintain an EDI policy. Planning for vacancies on the trustee board, and succession planning for key roles, is also encouraged. The guidance indicates that selection, rather than election, of member nominated trustees may be a method to improve EDI, as elections can exclude some groups of potential trustees.

The guidance notes that the chair has a key role in promoting EDI by building this into the working practices of the trustee board, and by working with the employer to ensure EDI is embedded in the employers engagement with the pension scheme, including in the appointment of employer nominated trustees.

TPR has just started a survey of all occupational pension scheme trustees to try to determine what level of EDI there is.

Value For Money (VFM)

This is at the heart of the Pensions Regulator’s Corporate Plan for 2023 to 2024, ensuring that savers get the pension they are entitled to receive.

The Pensions Regulator has been working closely with the Financial Conduct Authority (FCA) and the Department for Work and Pensions (DWP) on a VFM framework to equip those making savings decisions to deliver “good outcomes, increasing transparency and driving-up standards”.

TPR has said that its focus on VFM includes tackling pension scheme scams and the new, delayed, DB Funding Code. However it is possible that TPR will have to review its focus on the DB Funding Code, if the Government decides to change some of its pension priorities to use pension funds to try to kickstart the UK economy and also to reflect Parliament’s conclusions on the lessons to be learnt from the LDI crisis, through the findings of the Work and Pensions Committee.

LDI guidance

Following the challenges which affected markets in September and October 2022, the Pensions Regulator is the latest regulatory authority to issue guidance on the risks in using leveraged liability-driven investment strategies.

The guidance does not say anything surprising. As it is focused on pension scheme trustees, it includes a section on governance, reminding trustees of the limitations on the delegation of fiduciary powers and to check that delegations are both within the legal scope and appropriate for the pension scheme’s needs. 

The Work and Pensions Committee has published its report on defined benefit pensions with liability driven investments (LDI) following the “September 2022 episode affecting pension funds invested in leveraged LDI”.

The report notes that both accounting standards and pension scheme funding requirements contributed to the development of LDI because the requirement to calculate a present value of liabilities using a market-based discount rate resulted in liability levels being very sensitive to changes in interest rates.

Recommendations include:

TPR should improve the regulation of trustees and governance standards. The government should bring forward plans for investment consultants to be brought within the Financial Conduct Authority’s regulatory perimeter before the end of this Parliament. “DWP and TPR should halt their existing plans for a new funding regime, at least until it has produced a full impact assessment for the proposals, including the impact on financial stability and on open DB schemes.” 

Cybersecurity and Data Protection 

Fallout continues from the cyber-attack and data breach suffered by Capita earlier this year, with up to 350 pension schemes and thousands of individual scheme members being affected.

Capita now faces substantial costs to investigate and resolve the breach, together with input and oversight from the ICO and TPR.

A “class action” on behalf of affected individuals has been announced in the press, which could lead to compensation payments in due course.

TPR published a statement on 12 May, confirming that data had been exfiltrated from Capita’s servers, setting out some recommended actions for trustees and signposting them to TPR's cybersecurity guidance.

Trustees should treat Data Protection and Cyber Security as an ongoing concern, ensuring your policies and procedures are up to date.

DB Funding Code

This has been delayed until April 2024.

Because there is too much to do first, including recommendations on LDI from Parliamentary Committees ensuring consistency between the Code and the Regulations to implement it and ensuring sufficient time to lay the code before Parliament for 40 days.

Single Code of Practice

The timeline for this is still uncertain, with only 3 paragraphs dedicated to it in TPR’s Corporate Plan for 2023-24:

“It is essential that our expectations of trustees and governing bodies are clear and easily identified, and this year we will launch a new general code of practice. We have sought and acted upon feedback about the best way to present this information, and the new code marks a step change in how we do this.

The code will bring together ten of our existing codes of practice into one content source on our website, which will be regularly updated. The new, topic-based modular format will make it easier for trustees and their boards to identify our expectations and assess the degree to which they are meeting them.

A well-run scheme is not likely to see any major impacts resulting from the new code, but all schemes should be clear about the standards they are expected to meet. We seek to drive high and consistent standards through our new general code, but where these are not met, the code will give us a clear starting point for regulatory engagement in a wider range of areas.”

TPR Leadership Change

Nausicaa Delfas was appointed Chief Executive of The Pensions Regulator (TPR) on 1 April 2023, replacing David Fairs, outgoing Executive Director of Regulatory Policy, Analysis and Advice who left TPR in mid-March.

Before joining TPR, Nausicaa Delfas was Executive Director, Governance, at the Financial Conduct Authority (FCA). Until October 2022, she was Chief Executive and Chief Ombudsman of the Financial Ombudsman Service (interim), clearing its backlogs, and spearheading its strategic, operational, and digital transformation, resetting the organisation for the future. Originally a Solicitor at Freshfields, she previously held other senior roles at the FCA and FSA.

Pensions Dashboards 

The timetable for implementation has been delayed.

There is now a single “connection deadline” of 31 October 2026, with staging dates to be set out in guidance due later this year. However now at least the smaller schemes have been given a staging date but there is no date for schemes with less than 100 members.

In the meantime, Louise Davey, director of Regulatory Policy, Analysis and Advice at The Pensions Regulator (TPR) has reminded trustees “You can’t hurry getting data dashboards ready. But now is the time for action” and

“It’s more important than ever that trustees and scheme managers start working collaboratively to progress dashboards quickly and efficiently. A phased and well-planned approach to connection should be maintained so that savers can reap the benefits as soon as possible.”

PPF 

The PPF has published its sustainability strategy, which sets out how the organisation aims to achieve its ambition for catalysing the growth of a sustainable pensions industry.

The strategy outlines four key sustainability goals:

• demonstrating excellence in responsible investment.
• ensuring effective stakeholder engagement with integrity and respect;
• championing collaboration and leading by example; and
• being accountable for minimising the PPF's own environmental impacts.

Possible future developments: PPF as super-consolidator aka GB Savings?

The Tony Blair Institute for Global Change has produced a paper entitled Investing in the Future: Boosting Savings and Prosperity for the UK.

Proposals include expanding the remit of the PPF into a super-consolidator of pension funds (to be called GB Savings).

Sponsors of the smallest defined benefit (DB) pension funds would be offered the option to transfer their funds to the PPF on a "benefit-preserving" basis, without the need for the sponsor to fail first.

The Institute has also suggested that similar PPF style funds could be rolled out, regionally, to absorb the remaining DB funds, DC schemes, the LGPS and, potentially, the unfunded public sector schemes.

How we can help

For further information about Irwin Mitchell's Pensions team please visit the dedicated section of our website.