In this week’s digest we take a look at the Pensions Regulator’s draft policy on the new criminal offences, updated timings for the second DB scheme funding code consultation, the Regulator’s corporate strategy, its regulatory intervention report on the Silentnight case, the PPF 7800 Index, guidance for LGPS authorities on the new employer flexibility powers, the introduction of mandatory scrutiny of connected pre-pack administrations and the adoption of a ‘net-zero investment’ framework by major UK pension schemes and asset owners.
Regulator publishes consultation on the new Pension Schemes Act 2021 criminal powers
Exactly a month after the Pension Schemes Act 2021 received Royal Assent on 11 February 2021, the Pensions Regulator (the Regulator) has published its much anticipated draft policy and consultation on how it will investigate and prosecute the new criminal offences. The consultation closes on 22 April 2021.
The draft policy outlines the Regulator’s proposed approach with examples of what kind of behaviour and actions might come within the remit of the new offences. Serious concerns were raised about the scope of the new offences, in terms of both the types of behaviour it could apply to and who could be caught by it.
The draft policy is helpful in that it confirms that the Regulator’s intention “is not to change commercial norms or accepted standards of corporate behaviour” but to catch more “serious intentional or reckless conduct” that is already present in the Contribution Notice powers, but it is still light on the detail that could provide greater reassurance.
Accordingly, there is still uncertainty for the pensions industry regarding how the new criminal powers will be interpreted in practice and perhaps also for the prosecuting authorities – as the draft policy notes it will be the courts which “ultimately decide the correct interpretation of the law”. This is likely to give rise to more cautious corporate behaviour at least in the interim whilst the offences and other extended Regulator powers ‘bed in’.
Read our article here for further analysis of the draft policy and consultation.
Regulator confirms updated timings for the revised DB scheme funding code
Speaking at the Pensions and Lifetime Savings Association’s Investment Conference 2021, David Fairs from the Regulator has confirmed that the timescale for publication of the second consultation on the revised defined benefit (DB) funding code of practice has moved back from mid-2021 until towards the end of 2021, making it unlikely that the code will be brought in before late 2022 or early 2023.
Although valuations do not come under the new code until it is in force, schemes can still begin to prepare as there are certain concepts of the new code which are already present in the Regulator’s 2020 annual funding statement, for example, having a long-term objective with a clear journey plan as to how this will be achieved and with delivery managed within an integrated risk management framework.
The regulator’s 15-year vision to protect savers
The Regulator has published its Corporate Strategy which sets out its “15-year vision to protect savers”. It confirms a ‘fundamental shift’ in the approach it will take with an increasing focus on defined contribution savers, which is needed to respond to the switch from DB to DC pension provision that has taken place over recent years. As such, its five strategic priorities over the next 15 years will be:
- Priority 1: Security – protecting DB and DC pensions savings including from scammers.
- Priority 2: Value for money – which in addition to reasonable costs and charges encompasses investments, services and administration.
- Priority 3: Scrutiny of decision making – including those which “pose a heightened risk” to the quality of savers’ outcomes.
- Priority 4: Innovation – to improve security, efficiency, transparency, simplicity and choice.
- Priority 5: Bold and innovative regulation.
The Regulator will begin to focus on these priorities straightaway by increasing efforts against scams, publishing a climate change strategy and producing a discussion paper on value for money so expect to see further initiatives on these ‘core’ areas very soon.
Regulatory intervention report published on long running Silentnight case
The Regulator has issued its regulatory intervention report on the Silentnight Group DB Scheme outlining how it used its anti-avoidance powers following the severance of the scheme from the sponsoring employer through a pre-pack administration.
The case is a long-standing one dating back to 2011. The Regulator’s position was that, after acquiring the employers’ bank debt, the UK and overseas targets (the HIG Group – a US private equity group) brought about the employers’ insolvency and then bought the business at an undervalue during the ensuing administration looking to make a £47m capital gain on the deal, and thereby reducing the amount recoverable by the scheme to the material detriment of members.
Two warning notices advising that the Regulator would be seeking contribution notices were issued in 2014 and 2016, the first for £17.2m and the second for £96.4m. This is unusual for the Regulator and there subsequently followed a 2016 judicial review application by the targets alleging that the second warning notice was unlawful on a couple of grounds including because of the interaction that had taken place between the Regulator and the scheme trustees before the second warning notice was issued. The court refused to grant permission for the judicial review given that there was another remedy for the targets through the Determinations Panel. Although the court did not comment on the merits of the targets’ position, the Regulator remains of the view that it is able to issue more than one warning notice in relation to the same power and the same background facts, and that it is appropriate for it to engage with the scheme trustees when investigating concerns of detriment in relation to a scheme.
The case ended up settling before the Determinations Panel hearing. Although recovery for the scheme will total around £35m (£25m from the targets and the remainder from the liquidation proceeds) this will most probably not be enough to prevent it from transferring to the Pension Protection Fund (the PPF).
The report highlights that the Regulator would not as a matter of course expect to use its enforcement powers against lenders as it would not expect that they would ordinarily bring about unnecessary insolvencies but will pursue them if need be. It also emphasises that settlement discussions can take place at the same time as ongoing regulatory proceedings.
PPF 7800 Index shows schemes going into surplus
The PPF 7800 Index setting out the latest estimated funding position on a section 179 basis as at the end of February 2021 of the eligible 5,318 DB schemes shows that:
- The aggregate surplus increased over the month to £14.6bn from a deficit of £65bn at the end of January 2021 – this is a huge improvement from the position this time last year, when there was a deficit of £124.6bn;
- The funding ratio increased from 96.5% at the end of January 2021 to 100.8%; and
- The deficit of the schemes in deficit reduced to £154.4bn from £212.4bn at the end of January 2021.
Guidance for LGPS administering authorities on September 2020 employer flexibilities
The Ministry of Housing, Communities & Local Government guidance assists Local Government Pension Scheme (LGPS) administering authorities that wish to implement the new employer flexibility powers which were introduced into the LGPS Regulations 2013 in September 2020 including the power to:
- 6.1 Review employer contributions after certain significant changes;
- 6.2 Spread exit payments where the employer no longer has any active members in the fund; and to
- 6.3 Enter into deferred debt arrangements with exiting employers.
The guidance should be considered together with more detailed guidance prepared by the Local Government Pension Scheme Advisory Board for England and Wales, which is designed to assist both administering authorities and employers.
Mandatory scrutiny of pre-pack administrations to be introduced
Draft regulations have been laid in Parliament which will make it a requirement for there to be independent scrutiny of pre-pack administration sales which take place within eight weeks of a company entering administration and which involve connected parties, for example the insolvent company’s existing directors or shareholders.
Voluntary measures to scrutinise pre-pack sales were introduced in November 2015 – however, the Government review into take-up noted concerns about lack of transparency and protection (albeit the PPF did not generally see evidence that pre-packs were being used to abandon DB pension schemes). The Corporate Insolvency and Governance Act 2020 resurrected powers enabling the Government to issue regulations in this area and the Government has now decided to use these powers to make connected party pre-packs subject to independent scrutiny. The regulations are due to come into force on 30 April 2021.
UK pension schemes adopt framework to achieve net-zero carbon emissions by 2050
Various major UK pension schemes (including the National Grid, Church of England, Northern Local Government and Lloyds Banking Group pension schemes and NEST) and other asset owners (including Scottish Widows, Royal London, Axa and Legal & General) managing $8.5tn in assets have adopted the Net Zero Investment Framework launched by the Institutional Investors Group on Climate Change. The framework outlines how investors can achieve net-zero carbon emissions by 2050 and the Pensions Minister has expressed his support for the framework welcoming the ‘hugely practical guidance’ it provides.