Welcome to your weekly update from the Allen & Overy Pensions team, covering all the latest legal and regulatory developments in the world of workplace pensions.
This week we cover topics including: DB funding regulations: consultation; TPR CDC code; High Court: members ordered to access pension benefits to pay debts; Consultation on technical changes to FCF and PPF regulations.
- DB funding regulations: consultation
- TPR CDC code
- High Court: members ordered to access pension benefits to pay debts
- Consultation on technical changes to FCF and PPF regulations
DB funding regulations: consultation
The Pension Schemes Act 2021 sets out the framework for changes to the scheme-specific funding regime, including a requirement for trustees to have a funding and investment strategy (FIS) in place to ensure that pensions can be provided over the long term. This will be set out in a written statement of strategy; the scheme’s technical provisions must be calculated in a way that is consistent with that strategy. Draft regulations setting out much of the underlying detail have now been published for consultation; additional elements will be set out in a revised DB funding Code of Practice – TPR is due to consult on this later this year.
Key elements of the new requirements are as follows:
- Trustees must set a FIS – that is, a strategy for ensuring that benefits can be provided over the long term. This will specify the intended funding level and planned investments at the relevant date (see below). A key principle when determining the FIS is a requirement that schemes should be in a state of low dependency on their sponsoring employer by the time they are significantly mature. This would require scheme assets to be invested in a low dependency investment allocation (one that is resilient to short-term adverse market changes, and where cash flow from investments broadly matches benefit payments) and to be fully funded on a low dependency funding basis (meaning that no further employer contributions are expected to be required under reasonably foreseeable circumstances).
- The actuary is required to estimate the date on which the scheme will reach significant maturity at each valuation. The FIS must then specify the scheme’s intended funding level and investments at a ‘relevant date’ not later than the end of the scheme year in which the scheme is expected to (or did) reach significant maturity. This is intended to be flexible enough to allow the characteristics of different schemes, including open schemes, to be taken into account. The maturity of a scheme will be measured based on the duration of liabilities, and further guidance on this will be provided by TPR in the DB Funding Code. The Code will also specify the point when, in TPR’s view, ‘significant maturity’ is reached and the scheme is expected to be invested and funded on a low dependency basis – this is likely to be when a scheme reaches a duration of liabilities of 12 years.
- In determining or revising the FIS, trustees must take into account the strength of the employer covenant, which is defined as ‘the financial ability of the employer to support the scheme together with the level of support that can be provided by any contingent assets, to the extent that these contingent assets are legally enforceable by the trustees or managers and sufficient to provide that support at the time it might be needed’. Financial ability to support the scheme is assessed by reference to the likelihood of employer insolvency and the employer’s cash flow, together with other factors that are likely to affect the performance or development of the employer's business, as set out in the Code of Practice.
- Trustees must prepare a written statement setting out the FIS and other matters, including the extent to which, in the opinion of the trustees, the FIS is being successfully implemented (and, if not, proposed remedial steps); the main risks faced by the scheme in implementing the strategy and how the trustees intend to mitigate or manage them; and reflections on any significant decisions taken by the trustees that are relevant to the strategy (including any lessons learned). It must be signed by the chair of trustees.
- The scheme’s technical provisions are to be calculated in a way that is consistent with the scheme’s FIS, as set out in the statement of strategy. The impact assessment published alongside the consultation notes that this could potentially lead to material increases in technical provisions for some schemes.
The consultation also seeks views in some areas – for example whether a scheme that has reached its point of significant maturity should be able to take additional investment risk provided this is supported by high-quality contingent assets. The proposals also include introducing a principle in relation to recovery plans that funding deficits should be recovered as soon as the sponsoring employer can reasonably afford (at the moment, TPR guidance cites this as one of a number of factors to consider), and the consultation asks whether this should be given primacy over other considerations. This would increase pressure towards shorter recovery plans.
The deadline for responses to the consultation is 17 October 2022.
Read the consultation.
TPR CDC code
TPR’s code of practice for the authorisation and supervision of collective defined contribution (CDC, also known as collective money purchase) schemes has now been finalised. An Order has been made bringing the Code into force today (1 August 2022).
Read the code of practice and the Order.
High Court: members ordered to access pension benefits to pay debts
The High Court has considered two cases regarding access to pension benefits to pay amounts owed by members. Both decisions follow the 2012 case of Blight v Brewster and the recent (March 2022) Bacci v Green case in allowing pension benefits to be used to satisfy creditor obligations. This demonstrates a trend in courts being less inclined to see pensions as assets that must be protected.
In the first case, Brake and others v Guy and others, the member had failed to pay costs ordered after losing a court case and the court was asked to consider whether a third party debt order (TPDO) could be granted ordering the trustee of his pension scheme to pay over his benefits to meet part of the obligation. The member had designated his benefits to flexi-access drawdown (meaning he could choose to take portions of his pension pot as and when he chose) and had already taken his 25% tax free pension commencement lump sum.
The judge found that a TPDO could not be finalised immediately because the pension fund was invested. The judge considered that if it had been held in cash, the fact that the member had unrestricted access to his funds (because they were in flexi-access drawdown) would have made the TPDO possible. Instead, he found that it was just and reasonable to grant an injunction ordering the member to exercise his right to draw down his remaining pension entitlement, which would then be payable by the trustee under a TPDO.
The judge held that the precedents in the two 2012 cases mentioned above were not limited to situations involving fraud. He dismissed arguments that a clause in the pension documentation that stated that the trustee may decline to follow members’ instructions gave the trustee a general discretion to withhold the benefits, calling this ‘commercial nonsense, indeed, probably commercial suicide’. He also rejected arguments that the benefits shouldn’t be paid because of the trustee’s fiduciary duty; because they would be subject to income tax; or because they were a ‘drop in the ocean’ compared with the overall amounts due.
Read the case.
The second case, Lindsay v O’Loughnane, involved a similar situation: the defendant had been ordered to pay substantial damages and costs after losing a case involving his deceitful actions in relation to his currency conversion business. Here, a TPDO could not be made, because the defendant had not yet reached his normal pension age. Therefore the order being sought was for the defendant to give notice to his pension providers asking that they continue to hold his pension, requesting drawdown on his normal retirement date and directing payment to the claimant.
The judge discussed whether the fact that one of the pension arrangements was a successor policy to an occupational pension scheme caused an issue, as occupational schemes are subject to section 91 of the Pensions Act 1995, which restricts the circumstances in which pension entitlements can be assigned. He held that it did not: the arrangement was now not occupational, but even if it had been, the March 2022 judgment in Bacci v Green confirmed that section 91 did not prevent this sort of order being made.
Read the case.
Consultation on technical changes to FCF and PPF regulations
The Department for Work and Pensions (DWP) is consulting on technical changes to the operation of the Pension Protection Fund (PPF) and the Fraud Compensation Fund (FCF). The changes propose that the Board of the PPF can make an interim payment for an additional prescribed liability in order to cover scheme fees and costs while FCF claims are progressed. This would enable trustees to make recoveries for victims of pension liberation – currently in some circumstances the lack of assets to progress a FCF application has caused claims to stall. The regulations also propose to amend PPF provisions with regard to surviving child dependants so that a gap between qualifying courses of more than one year (for example where a child dependant takes a gap year) does not result in the loss of PPF compensation.
The consultation closes on 9 September 2022.
Read the consultation documents.