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: a government consultation on proposals to significantly expand notifiable events; the 2020 Stewardship Code; and the latest compliance and enforcement bulletin by the Pensions Regulator.
- Corporate transactions: government consults on significant expansion of notifiable events
- Stewardship Code: FRC announces signatories
- Latest TPR compliance and enforcement bulletin
- PPF compensation cap: Hughes update
- State pension uprating to be modified for 2022/23
- Investing pension funds sustainably – a lawyer and provider’s view
The government is consulting on proposed regulations that would significantly extend the existing notifiable events regime, which is designed to give the Pensions Regulator (TPR) early warning of possible calls on the Pension Protection Fund (PPF). The changes are intended to be effective from April 2022. Where there is a PPF-eligible scheme (this captures private sector occupational schemes with DB benefits, with some exclusions), the proposals are relevant to the following types of event:
- the sale or transfer of a material proportion of the business or assets of a scheme employer (a material proportion being more than 25% of its annual revenue/gross asset value respectively, which would be considered cumulatively with any sales of this type decided upon or completed within the preceding 12 months);
- changes of control of a scheme employer; and
- the grant or extension of a relevant security over the employer’s assets, where the secured creditor would have priority over the scheme. ‘Relevant security’ means security granted or extended at a level of more than 25% of either the employer’s consolidated revenues or its gross assets. It includes a fixed or floating charge. It does not include the refinancing of an existing debt, security for specific chattels, or financing of company vehicles. TPR will provide more information in its code of practice and guidance.
As a reminder, under the existing notifiable events framework (section 69 of the Pensions Act 2004), a relevant event must be notified in writing to TPR as soon as reasonably practicable: read more about this. The Pension Schemes Act 2021 creates further duties: once in force, section 69A will impose a duty to notify TPR and scheme trustees: a) of a section 69A notifiable event; b) of any material change in, or in the expected effects of, that event; and c) if a section 69A notifiable event is not going to, or does not, take place. Notice must be given as soon as reasonably practicable and, in the case of a) and b), an accompanying statement must also be provided to TPR and the trustees. The Act also provides for a financial penalty of up to £1 million for non-compliance with sections 69 or 69A.
The government’s intention is that, for the three event types mentioned above, notification obligations could be triggered under both frameworks, with a duty to notify TPR arising under section 69 when a decision in principle is taken to proceed (prior to any negotiations), together with a separate notice and statement obligation under section 69A once the main terms have been proposed. For both frameworks, TPR has the power to direct that the obligation to notify specified events does not apply, or applies only in certain circumstances. The consultation does not indicate whether TPR will update its existing section 69 direction, or issue a direction for section 69A, although it notes that TPR will update its code of practice and issue guidance.
There are some differences in the current consultation from the early stage proposals (for example, there is no threshold based on the proportion of scheme liabilities for which an employer has funding responsibility – the events are relevant to all scheme employers). There is some ambiguity in the draft regulations about when a notification obligation is triggered on relevant transactions; and it is possible that the proposals and/or specific drafting will be adjusted as a result of consultation feedback. We will be responding to this consultation – please speak to your usual Allen & Overy contact if you would like to provide any comments for inclusion. The consultation closes on 27 October 2021.
Read the consultation.
The Financial Reporting Council (FRC) has published a list of signatories to the 2020 Stewardship Code, together with a copy of each signatory’s stewardship report. The list includes asset managers, asset owners (including some pension schemes) and service providers.
TPR encourages schemes to sign up to the Stewardship Code; however, a significant proportion of overall applicants were unsuccessful (this includes some applications by asset owners). The next application deadline is 31 October 2021. If you are interested in signing up to the Code, please contact your usual Allen & Overy adviser to discuss this.
Read the list of signatories and stewardship reports.
TPR’s latest compliance and enforcement bulletin for January to June 2021 indicates an increase in the use of some of TPR’s enforcement powers, including its information-gathering powers. No clearance applications were made during this period. TPR has also published an accompanying press release commenting that the overall use of its auto-enrolment enforcement powers has returned to pre-pandemic levels, and reminding employers of their auto-enrolment duties.
Read the bulletin.
Read the press release.
The PPF has published an update indicating that the Court of Appeal’s decision in relation to the PPF compensation cap will not be appealed. Last year the High Court ruled that the compensation cap involved unlawful age discrimination; in July the Court of Appeal dismissed an appeal against that finding, although it allowed the PPF’s appeal against some aspects of the earlier decision: read about the decision.
The PPF has said that it will continue to pay members their current level of benefits until it has planned the implementation of the decision.
Read the update.
The government plans to modify the mechanism for state pension uprating for next year, so that growth in earnings will not be taken into account; affected pensions would be increased by the higher of inflation or 2.5% instead. This is in response to high earnings growth during the reference period, as a result of the Covid-19 pandemic. The changes would be implemented by a new Bill which has been introduced to Parliament.
Read the press release and the Bill.
With over £2.4 trillion of investments held by UK occupational pension schemes, it’s easy to see why ever-increasing sustainability obligations for pension schemes are an essential part of the UK government’s drive to net-zero, putting pressure on trustees to invest sustainably. But what are the legal requirements trustees need to consider when making sustainable investment decisions and how can they achieve a sustainable strategy that isn’t to the detriment of financial return?
In this webinar, Matt Townsend, Co-Head of Allen & Overy’s Sustainability Working Group, will chair a session with Jessica Kerslake, Partner in Allen & Overy’s Pensions team, and Steve Waygood, Chief Responsible Investment Officer at Aviva Investors. Jessica will outline the latest legal requirements and the factors trustees must consider. Steve will set out the steps Aviva has taken to navigate these legal requirements, reaching positive sustainable investment decisions based on financial factors and creating one of the UK’s first default investment strategies that incorporates both ethical and ESG considerations