In depth

Pensions legislation and case law update: the latest developments week ended 22 October

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In this week’s insight we cover the PPF’s annual report showing its improved financial position, HM Treasury’s roadmap to sustainable investing and the FCA’s review of unsuitable DB transfer advice.

Also covered is the DWP’s response to its consultation on simplified annual benefit statements for DC automatic enrolment schemes, the National Audit Office’s plan to investigate the FCA’s regulation of financial advice given to members of the British Steel Pension Scheme, new asset class information required in future scheme returns, the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Act 2021 and the DWP consultation paper on a new portfolio alignment metric for large occupational pension schemes.

PPF annual report 2020/21 shows improved financial position

The Pension Protection Fund's 2020/21 annual report and accounts was published on 18 October 2021. In summary, although pandemic concerns as regards the effect on businesses have not disappeared, the PPF has seen robust investment performance and 'rigorous risk management' which has in turn led to a strengthened financial position.

The PPF's website explains that the report shows that progress has been made in respect of its five strategic priorities: (1) sustainable funding in volatile times; (2) build for innovation; (3) brilliant service; (4) the best of financial and public services; and (5) clear value for money.

Particular highlights referenced by the PPF include:

  • The payment of £1bn in compensation to 179,500 members in 2020/21. This compares to £860m paid in the previous financial year.
  • An increase in reserves to £9bn compared to £5.1bn in 2020.
  • A reference to continued uncertainty regarding possible future claims. This remains the greatest risk to the PPF.
  • An increase in funding by 13.9% to 127.3% with assets under management growing from £36bn to £38bn.

    Access the accompanying press release.

HM Treasury publishes roadmap to sustainable investing

The Government believes that investors and businesses need a full range of information regarding environmental risks and that this information should be a key factor in every investment decision and a business's strategy.

With this in mind, on 18 October 2021, HM Treasury published a policy paper, Greening Finance: A Roadmap to Sustainable Investing setting out the Government's "long-term ambition to green the financial system and align it with the UK's world-leading net-zero commitment." This ambition will be achieved in three stages: (1) informing investors and consumers; (2) acting on the information; and (3) shifting financial flows to align with net zero and other environmental goals. 

The Greening Finance policy paper concentrates on the first stage – making sure that useful sustainability information is accessible by financial market decision-makers. This will be done through Sustainability Disclosure Requirements (SDR) with 'implementation pathways' for different sectors of the economy. These new SDRs will apply to companies, certain financial institutions and occupational pension schemes.

Steps on the roadmap

There are various steps on the roadmap: SDR; introducing a UK Green Taxonomy, a 'dictionary' which will set out a list of economic activities that are environmentally sustainable; reducing the obstacles to effective stewardship; and being at the forefront of international efforts to change the financial system.

The roadmap is also a 'call to action' for the pensions and investment industry to use the SDR information to begin aligning capital with a net zero economy.

Pensions

The regulatory approach for different 'sectors' is summarised in Annex A of the policy paper. This covers corporate disclosure, asset manager and asset owner disclosure (including pensions), investment product disclosure, and financial advisers.

The plan is for asset managers and asset owners to disclose "how they are managing their sustainability risks, opportunities and impacts and how they take sustainability into account in managing or administering investments on behalf of clients and consumers". 

Certain UK pension schemes will also have to disclose their "sustainability-related risks, opportunities and impacts" with the intention being that this information will be combined with TCFD reporting and be linked to the annual report and accounts so that there is clear communication with members. The scope and timing of these requirements are to be decided upon following consultation. 

Timings and future consultations

The roadmap also includes details of timings and forthcoming consultations including the following.

November 2021: Discussion papers on SDR disclosures, consumer-facing product-level SDR disclosures and the sustainable investment labelling regime will be published.

Q1 2022: Consultation on climate change mitigation and climate change adaptation criteria under the UK green taxonomy to be published.

During 2022: The Government will update the Green Finance Strategy, which aims to align private sector finance with 'clean, environmentally sustainable and resilient growth'.

Comment

This policy paper follows a whole raft of climate-related Government initiatives and, given the increasingly urgent need to address climate change, the financial sector including pension schemes should expect there to be further changes ahead. Future consultations should provide greater detail of the precise scope and timings for pension schemes. 

FCA and unsuitable DB pension transfer advice

So far this year, the Financial Conduct Authority has written to a total of 3,591 customers of companies in liquidation where it has identified that unsuitable DB pension transfer advice was provided. A list of relevant companies has also been published – it currently includes 10 firms. This correspondence forms part of the FCA's work to support consumers who have been given unsuitable DB transfer advice to obtain compensation. Improving the DB pension transfer advice market is a key focus for the FCA.

Department for Work and Pensions’ response to simpler annual benefits statements consultation

On 19 October 2021, the DWP published its response to the consultation on simpler annual benefit statements. The Occupational and Personal Pension Schemes (Disclosure of Information) (Statements of Benefits: Money Purchase Benefits) (Amendment) Regulations 2021 have also been laid before Parliament – they will introduce a requirement for trustees of DC automatic enrolment schemes to issue simpler benefit statements. There will also be a requirement for the Secretary of State to conduct a review of how effective these regulations are, at least every five years. 

The changes mean that trustees of DC schemes that are used for automatic enrolment will have to issue 'simpler annual benefit statements' to members (excluding pensioners) with effect from 1 October 2022. The aim is to improve member engagement by ensuring that core information is both clear and easy to understand. The benefit statements must be issued within 12 months of the end of each scheme year. 

The statements must not be longer than one double-sided sheet of A4 paper when printed (subject to any duties that the trustees may have under the Equality Act 2010 which would require them to provide the statement in an alternative format). 

Statutory guidance: how to provide simpler annual benefit statements must be referred to by trustees as regards content and layout. The guidance includes an illustrative template.

The new statement will allow a member to see:

•    How much money is in the arrangement and what has been saved in the statement year;
•    How much money they might have at retirement; and 
•    What can be done to increase the amount available at retirement.

NAO investigates actions taken by FCA to regulate financial advice given to members of the British Steel Pension Scheme

A press release by the National Audit Office on the 20th October 2021 has announced that it will be launching an investigation into the actions taken by the Financial Conduct Authority to regulate financial advice given to the members of the British Steel Pension Scheme (BSPS).

The NAO has reported that when the BSPS was restructured in 2017, many of the 7,700 members who decided to transfer their funds out of the scheme received unsuitable financial advice which may have resulted in the loss of significant sums of money. The NAO estimates that these members who transferred out of the BSPS represented around £2.8 billion in funds.

It was stated within the press release that the investigation will look at the activities of the FCA when regulating the provision of financial advice in the BSPS case, its plans for supporting the members who may be entitled to redress and to what extent is compensation being delivered.

The investigation has been scheduled for Spring 2022.

Regulator to collect asset class information in scheme returns from 2023

The Pensions Regulator and the Pension Protection Fund (PPF) have issued a joint response to a consultation on their proposals to increase the asset class information collected from defined benefit (DB) schemes in the annual scheme return.

It was reported that the proposals had significant support and that the Regulator will now update its scheme returns from 2023 to require schemes to show the allocation to bonds, split into investment grade and sub-investment grade and to provide certain other additional information. The information will be used by the Regulator to assess the investment risk of schemes and will support the PPF in its levy calculation. There will be a three-tiered approach in order to determine the amount of information required, based on scheme size using section 179 liabilities.

  • Tier 1 Schemes, less than £30 million, will be required to provide “simplified” information.
  • Tier 2 Schemes, £30 million to less than £1.5 billion will be required to provide more detailed asset class information in scheme returns – “standard” information. 
  • Tier 3 Schemes, £1.5 billion or more, will be required to provide the standard information as well as risk factor stresses – “enhanced” information. 

The boundary between Tier 1 and Tier 2 schemes will be kept under review with the intention to reduce it £20 million (or less) at a later date. 

The Regulator has also announced that it is making changes to its scheme portal to enable implementation of the new scheme return from 2023. In addition, the PPF is to consult on the rule changes required to facilitate the use of the new asset information in the 2023/24 levy consultation.

Compensation (London Capital & Finance plc and Fraud Compensation Fund) Act 2021 has received Royal Assent

On 20 October 2021, the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Act 2021 received Royal Assent. This Act enables the establishment of the compensation scheme for London Capital & Finance (LC&F) bondholders. It also makes amendments to the Pensions Act 2004 to allow the Secretary of State to make a loan to the Board of the Pension Protection Fund (PPF) following the High Court decision in Board of the Pension Protection Fund v Dalriada Trustees Ltd. In the case, the High Court held that members of certain types of scam pension schemes relating to pensions liberation are entitled to compensation from the Fraud Compensation Fund (FCF). This decision led the PPF to increase its fraud compensation levy for the 2021/22 levy year to 75p per occupational pension scheme member and 30p per member for master trusts.

Climate risk governance and reporting: DWP consultation paper on portfolio alignment metric for large occupational pension schemes

The DWP released a consultation paper on 21 October 2021 alongside draft regulations and guidance that will require trustees of large occupational pension schemes to adopt a new portfolio alignment metric that will describe the extent to which their investments are aligned with the Paris Agreement goal of limiting the increase in the global temperature. The consultation will run from 21 October 2021 to 6 January 2022. The paper puts forward proposals that will require trustees of relevant schemes to measure and report on their investment portfolios alignment with the Paris Agreement. It also looks to consider draft statutory and non-statutory guidance which are intended to provide clarity for trustees on stewardship and environmental, social and governance issues. 

Trustees will be required to disclose the metric that they have calculated in the report they must now prepare in line with the recommendations of the Task Force on Climate-related Financial Disclosures. This new requirement will only apply to occupational pension schemes which had relevant assets of at least £5 billion on their first scheme year-end date falling on or after 1 March 2020 and who remain subject to the governance and reporting requirements on 1 October 2022. It will also apply to trustees of occupational pension schemes, authorised master trusts and collective money purchase schemes with at least £1 billion in relevant assets on 1 March 2021.

Schemes that fall within this purview must comply with these requirements from 1 October 2022. This includes schemes that are part-way through a scheme year. However, an easement may allow for pre-existing data to be used within calculations if this is the case.  

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