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 the following topics: the Pensions Regulator’s annual funding statement; a consultation on updated guidance on contribution notices; a consultation on permitted charges; and pensions dashboards.
- TPR: latest annual funding statement
- TPR consults on updated contribution notice guidance
- Permitted charges consultation
- Dashboards: call for input on staging, new infohub
TPR: latest annual funding statement
The Pensions Regulator (TPR) has published its latest annual funding statement. All DB schemes and sponsors should familiarise themselves with the content, and especially those with an effective valuation date between 22 September 2020 and 21 September 2021 (Tranche 16) or where funding and risk strategies are being reviewed in connection with wider scheme changes.
The statement discusses how trustees should consider the long-term funding and investment of their scheme depending on factors including the impact of Covid-19, Brexit, climate change, scheme maturity and the scheme’s funding position relative to its long-term target. TPR notes that although short-term covenant visibility may have improved, trustees must be alert to the risks of weakening employer covenants and remain engaged with employers as uncertainties continue. Some key points are set out below.
- TPR has again emphasised the importance of covenant assessment and that independent specialist advice may be required, including in the context of Covid-19 and Brexit. It notes that most trustees have increased the frequency and intensity of covenant monitoring – TPR considers this to be good practice and encourages trustees to continue with this. It has also warned trustees to be vigilant about covenant leakage.
- TPR has suggested that trustees will largely be dealing with employers in the following three categories:
- Covid-19 has had limited impact on the business.
- Material initial impact from Covid-19, but trading has or is recovering strongly. As business support schemes end, some employers may experience additional short-term liquidity pressures.
- Ongoing material impact from Covid-19; affordability is stressed; medium-term prospects are unclear.
TPR considers it beneficial for all trustees to consider stress testing or scenario planning, and that this is especially important for trustees where scheme employers fall into the third category above.
- Where external developments such as Covid-19 or Brexit have had a limited impact on the employer’s business, TPR expects trustees to adopt a ‘business as usual’ approach to setting recovery plans. There is specific guidance for trustees on requests to reduce or suspend contributions, or to change contribution structures for various reasons, including affordability constraints and tax planning.
- TPR expects trustees to be prepared and ready to act in the event of any corporate activity. Trustees should be able to identify detrimental events, to take a rigorous approach to assessing the impact of any transactions, and to negotiate mitigation.
- Trustees should consider the impact of climate change on integrated risk management (IRM). TPR has suggested that trustees of Tranche 16 schemes should be documenting their key risks at the present valuation and how they are managing these within an IRM framework, as this should make it easier to complete their first own risk assessment (which will take place before the following valuation).
- On the new funding code, TPR will wait for the government consultation on the related draft regulations to finish before it publishes its consultation on the draft code. It expects this to take place towards the end of 2021; the new code is not expected to come into force before late 2022 at the earliest. All Tranche 16 valuations will be regulated according to the legislation and guidance that is currently in force, but trustees are encouraged to set a long-term funding target, ahead of the new funding regime.
Read the statement.
TPR consults on updated contribution notice guidance
TPR is consulting on changes to its existing code of practice, and code-related guidance, on contribution notices (CNs) in light of the new tests introduced by the Pension Schemes Act 2021 (these are expected to commence in the autumn). The draft code includes a revised list of circumstances in which TPR expects to issue a CN if it is of the opinion that one of the statutory tests for a CN could be met (although a CN may only be issued if other conditions are also met, including a ‘reasonableness’ requirement). These circumstances are:
- Sponsor support is removed, substantially reduced or becomes nominal (any of the tests).
- Weakening of the scheme’s creditor position (material detriment and/or employer insolvency tests).
- Some instances of paying a dividend or a return of capital by the sponsoring employer (any of the tests).
- Payments favouring other creditors of the employer over the scheme where no such sums are then due to those creditors (any of the tests).
TPR has also proposed updates to the guidance including new examples of conduct that could be the subject of a CN: these include reduced sponsor support after a disposal and in a restructuring; a ‘manufactured’ insolvency where sponsor support is removed; weakening of the scheme’s position as a creditor; payment of significant dividends to a parent company; and a payment favouring other creditors.
The consultation closes on 7 July 2021; the Code is intended to come into force in October 2021.
Read the consultation.
The government is consulting on permitted charges in default funds in DC schemes used for auto-enrolment. This follows an announcement earlier this year: read about the earlier announcement.
The government is seeking feedback on:
- Its plans for implementing the £100 de minimis pot size, at or below which flat fees cannot be charged (specific rules would apply where a member has multiple pots within the same provider’s default arrangement). This would apply to all members (both active and deferred), with no tapering for pots above the £100 threshold. The government is targeting an implementation date of April 2022.
- Replacing the existing permitted charges framework with a single, universal, permitted charging structure. Under this approach, the single permitted charging structure would allow the use of a single percentage annual management charge, based on the value of the member’s pot within the default fund, and combination charging would no longer be permitted. The government has acknowledged the potential impact of the change, particularly on master trusts, and is also seeking feedback from employers on the proposal.
The consultation closes on 16 July 2021.
Read the consultation.
The Pensions Dashboards Programme (PDP) has published a call for input on the proposed order and timing of the staged connection of pension providers to the dashboards ecosystem. The sequencing will ultimately be determined by the government and the Financial Conduct Authority, but the PDP has been asked to develop a proposal to inform their approach and suggests that staging would be comprised of three ‘waves’. Wave one (1,000+ memberships) would run for up to two years from April 2023, and would have three cohorts. It would commence with master trusts and FCA-regulated providers (in spring 2023), followed by DC schemes used for auto-enrolment (during 2023), and then all remaining occupational schemes with 1,000+ memberships (in order of size). The largest DB schemes would onboard in 2023. Wave two (100 to 999 memberships) would be unlikely to commence before 2024. The call for input closes on Friday 9 July 2021.
Read the call for input.
The PDP has also published a new infohub with information for providers and pension schemes, including key dates, information on steps to connect to dashboards, and a new technical document on the digital architecture. Schemes need to be preparing now for connection to the dashboard.
Visit the infohub.
The PDP is also running two webinars in early June to provide support and information around staging. These will cover an overview of the digital architecture and the policy around staging: read more here.