In depth

Pensions Insight: week ended 17 June 2022

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In this edition of our Insight our update includes reports on the Pensions Regulator's new Corporate Plan and its joint scam guide and the DWP's response to its consultation on climate change.

The Pensions Regulator's round-up

New Corporate Plan

The Pensions Regulator has published its Corporate Plan setting out its priorities over the next two years and how the Regulator will 'deliver' the five strategic priorities within its 15-year Corporate Strategy which was published last year (see our Insight).

Of particular note from the Corporate Plan are the following Regulator plans:

  • Defined benefit funding code of practice: the Regulator plans to publish the second consultation on the new DB funding code in Autumn 2022, with the code coming into force from September 2023 (although these timings are not definitive);
  • Pensions dashboards: there will be a continued focus on pensions dashboards including a Regulator education programme emphasising the action schemes need to take to comply;
  • Value for members framework: it will continue its work with the DWP and the Financial Conduct Authority on a Value for Money Framework (see our Insight) which aims to help drive competition and improve value in the DC pensions market; and
  • Auto-enrolment: the Regulator plans to start five regulatory initiatives during 2022 and 2023 whereby it will engage with schemes and employers on specific risks and review its bulk enforcement process.

Regulator, FCA and Action Fraud joint scam guide

The Regulator, the Financial Conduct Authority and Action Fraud have published a joint guide on reporting pension scams. At the same time, the Regulator has blogged on scams focusing on the recent fraud case involving Alan Barratt and Susan Dalton (see our Insight) and published a pension scams threat assessment: summary following its joint review of scams with the National Fraud Intelligence Bureau.

The following review findings will be of particular interest to trustees:

  • Decrease in pension liberation & increase in investment scams: Pension liberation cases are decreasing but retirement savings are increasingly vulnerable to investment scams and and there is an increase in transfer requests to international self-invested personal pensions (SIPPs) with targeted members often living abroad and non-UK based intermediaries and advisers who 'coach' savers on the transfer procedure;
  • High or unsubstantiated fees: these are at times a significant issue especially in international SIPP cases;
  • Brand impersonation and cloned companies: the use of these increased during the pandemic;
  • Communication: there is an increase in social media targeting and less cold calls.

The materials all encourage reporting – the 5-page joint guide provides information on why, what, when, to whom and what happens regarding reporting and includes red and amber flag scam examples (see our Insight for details of the transfer regulations which recently introduced the flag requirements).

DWP responds to consultation on climate risk governance and reporting new metric and SIP and implementation statement guidance

Consultation response

On 17 June 2022, the DWP issued its response to its consultation (see our Insight) on climate and investment reporting together with:

  • draft regulations which, from 1 October 2022, will require trustees of large occupational pension schemes that are required to comply with new climate risk governance and reporting requirements (see our Insight) to adopt a new portfolio alignment metric that will explain the degree to which the scheme's investments align with the Paris Agreement goal of limiting increase in the global temperature to 1.5˚ Celsius above pre-industrial levels;
  • statutory guidance on the governance and reporting of climate change risk for trustees of those schemes within scope of the new requirements; and
  • guidance on stewardship and ESG matters in the statement of investment principles (SIP) (non-statutory) and implementation statement (statutory).

Climate change regulations and guidance

As from 1 October 2022, more than 80% of UK members will be in pension schemes that are subject to the new climate change governance and reporting requirements. Many of the 60 responses received to the consultation were supportive of the various proposals and only few changes have been made to the draft regulations that will amend the main climate change regulations to introduce the new portfolio alignment metric requirement.

There were concerns regarding methodological challenges for calculating and reporting of metric. However, but the Government did not see these as sufficient to delay the additional metric's introduction or to prescribe on a specific metric.

There have also been no amendments to the extent or timings of the new requirement despite trustees having to report on alignment metrics that asset managers do not yet have to report on.

The response confirms that issues regarding availability of data should not affect trustees being able to comply on an 'as far as they are able' principle as they are required to do with the current metric requirements of the regulations. The principle requires trustees to ask for data from asset managers and to 'make reasonable and proportionate efforts' to attain this.

Guidance - 'Must', 'should' and 'may'

Both sets of guidance use the words 'must', 'should' and 'may' to refer to things that trustees have to do under legislation (must), are expected to do and if they do not should explain why not (should), and that trustees can choose to do but, if they do not, have no requirement to explain why.

SIP and implementation statement guidance

Purpose: The SIP and implementation statement guidance has been produced to "address deficiencies in scheme governance in relation to stewardship and Environmental, Social and Governance (ESG) best practice" and to set out the expectations of the DWP on the implementation statement. The focus is very much on stewardship with financially material ESG factors and non-financial factors being included but to a smaller degree.

Status: Trustees must have regard to the parts of the guidance that are statutory in respect of the implementation statement and are 'encouraged' to take account of the parts that are non-statutory as 'good practice' but are not required to do so. Paragraphs of a statutory nature are marked as 'SG'.

Review: The guidance and stewardship activities disclosures will be reviewed by the DWP in the second half of 2023.

Points to note: Of the points covered in the response we refer to the following:

  • Audience: The guidance now clarifies that the primary audience for the SIP and the implementation statement is the Pensions Regulator following comments from responders as to whether the target audience for both should be members as previously suggested in the draft guidance – where scheme-specific research demonstrates that members may be more likely to connect with a different communication style they should think about drafting member-facing summary versions; 
  • Member views: the guidance also clarifies that trustees are not expected to take non-financial factors into account but can do so if they wish and has been updated generally to reflect the legal position in this area; and
  • UK Stewardship Code: there is reference throughout where parts of the implementation statement guidance have 'potential alignment' to the Stewardship Code principles. The Stewardship Code sets stewardship standards for asset owners and asset managers and service providers on an 'apply and explain' principles basis. Information from Stewardship Code reports can be used in the implementation statement where this satisfies legal requirements.

Action required

Trustees will need to familiarise themselves with the new requirements as they apply to their schemes. Although the new climate change governance and reporting requirements only apply to larger schemes at present, the guidance on SIPs and implementation statements is far wider reaching (trust-based occupational pension schemes with 100 or more members having to produce a SIP and implementation statement) and trustees will wish to liaise with their investment advisers as to the new requirements of the guidance.

PASA publishes updated DC Governance Guidance

PASA has published updated DC Governance Guidance which reflects developments in this area since the original guidance was published 4 years ago. It sets out expectations for those in the administration process with a focus on six key areas: data; transitions; decumulation; reporting; controls and procedures; and the chair's statement (the latter being a new section). Trustees will find this guidance useful in understanding what PASA's views are as to effective administration governance for DC arrangements.

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