In this week’s edition we look at extended timeframes for use of some of the measures under the Corporate Insolvency and Governance Act 2020, GMP equalisation, transfers out and the Lloyds Banking case, the Pensions Regulator’s blog on climate change, the Government’s response to the DC default charge cap call for evidence, proposed changes designed to improve DC member outcomes and possible redress for certain members with GMPs following the switch to the single-tier state pension.
Corporate Insolvency and Governance Act 2020 measures extended
Certain temporary measures which were introduced by the Government in the Corporate Insolvency and Governance Act 2020 (CIGA) to protect businesses from insolvency and which were due to expire on 30 September 2020 have been extended.
Of particular relevance to pension schemes are the continuation of:
- the restriction on the use of statutory demands and winding-up petitions until 31 December 2020; and
- the modifications to the moratorium procedure which relax the entry requirements until 30 March 2021.
Our Insight article provides further detail of the pension implications of CIGA.
Lloyds GMP equalisation: further hearing on transfers to be heard during October
The third hearing in the Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank plc & others (Lloyds) case was heard in part in May 2020. The parties have sought guidance about the extent of the trustee’s obligation to revisit past transfers out of the schemes. The Department for Work and Pensions (DWP), one of the defenders in the action, is of the view that where transfers out have not been calculated correctly, the position needs to be put right by the transferring trustees. We understand that the remaining part of the case will be dealt with during an additional two days’ hearing at the end of October 2020.
If trustees are required to equalise past transfers out this will only add to the costs and time that the GMP equalisation exercise will incur. We will monitor the outcome of the hearing and provide an update once the judgement is released.
In the meantime, trustees undertaking a GMP equalisation exercise should find three recently published guides a useful aid; the GMP Equalisation Working Group published guidance on data issues and a further guide on member communications and the Pensions and Lifetime Savings Association (the PLSA) has produced a 'made simple' guide on the GMP equalisation process.
The Pensions Regulator’s blog on ESG considerations: trustees must focus on climate change
The Pensions Regulator's (the Regulator) 1 October 2020 blog on climate change discusses the building pressure on trustees to look more at environmental, social and governance (ESG) factors. The Regulator acknowledges that this pressure is being applied not just by the Government and regulators but also by members.
The Regulator refers to the potentially significant effects that climate change may have on scheme investments and employer covenants as well as on how the Regulator will meet its statutory objectives.
The Regulator is increasing its focus in line with the increased scrutiny that the Government is placing on schemes through changes to be introduced by the Pension Schemes Bill (and via requirements already introduced as regards the content of a relevant scheme’s Statement of Investment Principles and the production of an implementation statement), which include requirements on larger schemes initially to consider and publish details of the effect of climate change on the scheme and its investments.
The blog emphasises the growing importance of climate change for schemes and the necessity for it to become, if it is not already, a 'fundamental consideration' for trustees. The questions raised by climate change are considered by the Regulator to be integral to good governance.
It is clear that the questions and issues which ESG, and climate change, in particular, raise must be addressed by trustees especially given the growing prominence of this issue not just for pension schemes but in the broader investment sphere.
Responses to the DC default charge cap call for evidence
Various responses have now been received to the DWP's June 2020 call for evidence requesting views on potential proposals to:
- amend the default fund charge cap (currently set at 0.75%) including reducing its level; and to
- increase the use of the Cost Transparency Initiative's templates as a standardised method of cost disclosure.
The PLSA does not support a reduction in the cap because of the potential this could have to 'reduce sophistication' and 'dampen innovation' in default investment strategies. It opposes making use of the cost disclosure templates a legislative requirement, instead suggesting that uptake could be increased by additional monitoring from the Pensions Regulator.
The Association of Consulting Actuaries published its response on 1 October 2020. It also does not support a reduction in the cap on the grounds that it could prevent innovation and potentially detrimentally affect member outcomes. It also believes that making the cost disclosure templates mandatory could lead to 'additional work and potential confusion'.
There does not seem to be much appetite in the pensions industry for either a reduction in the current charge cap or the mandatory use of the cost disclosure templates so it will be interesting to see whether any changes will be made. The findings are due to be published by the Government as part of the charges review by the end of 2020.
Proposed changes to improve DC member outcomes
The DWP has published its response to the February 2019 consultation 'Investment Innovation and Future Consolidation'. The response includes draft regulations and statutory guidance following the 2019 consultation exercise that the DWP is seeking views on, and a further consultation on proposed measures to improve outcomes for DC scheme members.
The Government has proposed a number of changes designed to facilitate investment in illiquid and other alternative investment classes, encourage consolidation of smaller DC schemes, which the Government strongly believes will improve governance and value for members, and clarify the production and publication of costs and charges information in connection with chair's statements.
We detail below a number of the proposed changes all of which are intended to take effect on and from 5 October 2021:
- To improve transparency: all relevant schemes (broadly, occupational schemes which provide DC benefits other than AVCs) will be required to report on the net return on investments of default and member selected funds in the annual chair's statement;
- To improve member outcomes and to encourage consolidation: subject to certain exceptions, trustees of DC/hybrid schemes with assets below £100 million will have to report against a more prescriptive set of 'value for member' requirements and also on how their scheme provides 'value for members' and, if it does not, to report this outcome in the scheme return and either improve or consolidate;
- To facilitate investment in illiquid investments through changes to the default fund charge cap: schemes will be permitted to smooth the calculation of performance fees and the definition of administration charges will be clarified;
- Other changes: the charges and transaction cost information will be extended to include those funds which are no longer available for members to choose and not just default and self-select funds;
- Other changes: the requirement to produce a default statement of investment principles will be extended to include 'with profits' schemes.
The consultation closes on 30 October 2020.
The Government clearly wishes to encourage DC schemes to invest to a greater degree in illiquid and other alternative investment classes. It also sees a need for scheme governance and transparency to be improved.
Although the Government acknowledges that not all small schemes are badly run, the 'value for member' changes are being introduced to accelerate the rate at which smaller schemes consolidate and wind up, because many do not benefit from economies of scale and have difficulties accessing services and investment strategies available to larger schemes. The Government believes that it is only in exceptional cases where trustees have good reason to believe that they can make the necessary improvements to value for members 'rapidly and cost-effectively' that it would expect trustees to take steps to improve the scheme rather than commence winding up.
Factsheet to be published on impact on GMP indexation of switch to single-tier state pension
In 2019, following complaints by two individuals, the Parliamentary and Health Service Ombudsman (the Ombudsman) found the Government guilty of maladministration over unclear, inaccurate and incomplete communication of the negative effect that the change to the single-tier state pension might have on increases to certain individuals' GMP benefits where they had contracted out of the state pension.
The Ombudsman recommended that the Government provide clearer information about the impact that the GMP indexation changes might have and that it invites other individuals who believe that they might have suffered in a similar way to come forward.
The DWP has proposed that it publish a factsheet on GOV.UK by way of response to the Ombudsman's findings and a draft is currently with the Ombudsman for comments. When this becomes available trustees may wish to let members know so that they can obtain further details of the issue and, where relevant, take steps to obtain redress. We will provide further updates in due course.