Welcome to your weekly update from the Allen & Overy Pensions team, covering all the latest legal and regulatory developments in the world of occupational pensions.
This week we cover topics including: DC returns, value for members and more: response to consultations; New consultation: future of the DC pension market; Forfeiture and limitation issues: the Axminster Carpets case; TPR: Equality, diversity and inclusion strategy; and FCA: TCFD for asset managers and pension providers.
- DC returns, value for members and more: response to consultations
- New consultation: future of the DC pension market
- Forfeiture and limitation issues: the Axminster Carpets case
- TPR: Equality, diversity and inclusion strategy
- FCA: TCFD for asset managers and pension providers
DC returns, value for members and more: response to consultations
The government has published a joint response to two recent consultations on improving outcomes for DC members by improving value for money in smaller schemes and requiring all schemes to publish their net returns; and changing the treatment of performance fees within the charge cap on default funds in auto-enrolment schemes.
Under the new requirements:
- Trustees of all ‘relevant schemes’ (regardless of size) will be required to publish their net investment returns on default and self-select funds as part of the chair’s statement for the first scheme year ending after 1 October 2021, and make them publicly available online. Returns for previous years should also be shown, going back at least five years or to the start date of the scheme (if later). Returns over longer periods should be reported if available. Statutory guidance has been published to assist with this (see link below).
- Trustees of schemes with assets of less than £100 million (that have been in operation for at least three years) will have to assess the value for members achieved in respect of the scheme’s DC assets (measured against three comparator schemes), and report in their chair’s statement and on the scheme return whether or not the scheme provides good value. The requirement will apply from the first scheme year ending after 31 December 2021 and then annually. If trustees determine that the scheme does not provide good value, they will have to make improvements or consolidate/wind up the scheme. Schemes that would otherwise be in scope will be exempt if they have informed the Pensions Regulator that they are winding up, before the due date for their chair’s statement.
New statutory guidance, ‘Completing the annual Value for Members assessment and Reporting of Net Investment Returns’, will be effective from 1 October 2021.
Following a separate consultation, schemes will be able to smooth the performance fees element included within the charge cap over multiple years (this is intended to remove a potential barrier to investing in illiquid asset classes). The government had also proposed to make changes to the rules on how ‘look-through’ costs for pooled funds should be treated, but is continuing to consider its position on this following feedback and aims to confirm any next steps before the summer Parliamentary recess.
In addition, the government is amending the statutory guidance on reporting costs and charges to clarify issues around how illustrations should be produced and presented. The updated guidance includes clarification on how to determine the median pot size used in illustrations; confirms that trustees may use different approaches to those set out in statutory guidance where they have good reason to do so; and confirms that in multi-employer schemes, the illustrations for the highest and lowest self-select funds in which members are invested should be shown at scheme (not employer) level, and should identify all default arrangements. The updated guidance, ‘Reporting of costs, charges and other information’, will take effect from 1 October 2021.
The government will also make changes to regulations to clarify requirements for wholly-insured schemes and schemes offering ‘with profits’ default arrangements. It will also clarify that where self-select funds have been available to members, costs and charges disclosures must be made in respect of them even if those funds have not been available (or members have not invested in them) during the relevant scheme year.
Read the consultation response and draft regulations.
Read the statutory guidance on the value for members assessment and reporting of net investment returns.
Read the updated statutory guidance on reporting of costs and charges.
New consultation: future of the DC pension market
Alongside the changes set out above, the government is consulting on the case for greater consolidation in the DC market, including for medium and large schemes (with between £100 million and £5 billion of assets under management) to be required to assess value for members and, as the Pensions Minister puts it, ‘justify their continued existence’.
The call for evidence asks a range of questions around potential barriers to consolidation and how to incentivise consolidation in this segment of the DC market. Possible ideas include a new value for members assessment for non-master trust schemes (and/or financial incentives to close the scheme); a floor on net returns below which winding-up must be considered; and TPR intervention following evidence of poor governance or performance. Responses must be received before 30 July 2021.
Read the consultation.
Forfeiture and limitation issues: the Axminster Carpets case
The High Court has ruled on a number of issues relating to limitation, forfeiture and arrears of pensions, in a case relating to the Axminster Carpets Group Retirement Benefits Plan. The ruling touches on several of the complex issues involved with GMP equalisation as well as wider benefit rectification exercises, and will be of wide interest: Punter Southall Governance Services Ltd v Hazlett.
The case concerned the correct rate of pension increases (which depended on the validity of various amending deeds) and associated technical questions – the parties asked the court to approve a compromise of the increase issues and grant various forms of relief that cleared up most of the technical issues. The effect of the compromise was that some members would be owed arrears of payments in relation to pension increases and/or equalisation (of pension ages and in relation to GMPs). The arrears gave rise to questions for the court to determine about limitation, the forfeiture of unpaid pensions, the exercise of discretions, and interest.
In the Lloyds litigation on GMP equalisation, Mr Justice Morgan determined that there was no limitation period applicable to claims for payment arrears due from a trust in these circumstances, but that this was subject to the scheme rules, which might permit or require forfeiture of arrears that would otherwise be due to scheme beneficiaries. Similar issues arose in this case, in which a 1992 Deed permitted monies that were payable but not claimed within six years to be used for other purposes at the Trustees’ discretion; the 2001 deed stated that ‘if a beneficiary fails to claim a benefit within six years of its becoming due, it shall be forfeited’, subject to Trustee discretion to pay all or part of the benefit to the beneficiary or to use it for other purposes.
Morgan J held that the 1992 clause was not a forfeiture clause as it did not deal with forfeiture of an entitlement to arrears. The 2001 clause was a forfeiture provision; the reference to ‘a benefit’ did not refer to the whole pension but to any instalment or part of an instalment that was due but unpaid. The reference to ‘failing to claim a benefit’ did not mean that there had to be fault on the part of a beneficiary (most members would not know that there was any unpaid part to claim); it simply meant that no claim had been made.
The court went on to consider what factors should or might be borne in mind by a trustee in considering whether to exercise a discretionary forfeiture power – for example, the absence of fault on the part of the beneficiaries in failing to claim unpaid arrears about which they could not reasonably have been expected to know, and/or the presence of fault on the part of the trustees, would be relevant factors as to the exercise of discretion in whether to pay arrears or treat them as forfeited. Administrative issues – for example the difficulty of calculating arrears due to missing data – were also considered; Mr Justice Morgan stopped short of suggesting that every case had to be examined individually in all circumstances and said that a rational and proportionate response to administrative difficulties was required:
‘I can see that it might be appropriate… to say that the difficulty involved in examining a particular case on an individual basis to see if it presents the same generic difficulties as other cases might be such that a case by case examination is not considered appropriate’.
Read the decision.
TPR: Equality, diversity and inclusion strategy
TPR has published its Equality, Diversity and Inclusion Strategy, outlining its plans to identify and address structural inequalities and to improve diversity and inclusion, both internally within TPR and across its regulated community. This includes ongoing work to support and encourage trustee boards to become more diverse and inclusive in their decision-making:
‘Inclusive governing bodies are those in which boards are more diverse, chairs take their inclusive leadership role seriously, and where contributions from a range of perspectives are valued.’
TPR is holding a webinar on 21 July to which all stakeholders are invited, to discuss next steps. Find out more.
Read the strategy.
FCA: TCFD for asset managers and pension providers
The Financial Conduct Authority is consulting on proposals to introduce climate change reporting rules and guidance for asset managers, life insurers and FCA-regulated pension providers. The proposals will assist occupational pension scheme trustees by requiring the annual publication of consistent and comparable disclosures regarding asset managers’ products and portfolios, supporting an aligned flow of information along the investment chain including mandatory carbon emissions and carbon intensity metrics.
The FCA will introduce a new ‘Environmental, Social and Governance (ESG) Sourcebook’ in the FCA Handbook to set out its proposed rules and guidance; at the moment the proposals are limited to climate change disclosures but the FCA expects that this will expand over time to cover ESG issues.
The consultation closes on 10 September 2021.
Read the consultation paper.