Pensions legislation and case law update: the latest developments week ended 26 March 2021

In this week’s digest we look at the DWP’s Call for Evidence  on social factors in ESG, the Pensions Regulator’s extradition of a fraud suspect and its regulatory report on the Focusplay fraud case, the Regulator’s settlement policy and the Pensions Ombudsman’s guidance to trustees when facilitating independent financial advice for members.

DWP call for evidence on social factors in ESG policies

Development: 

The DWP has launched a Call for Evidence on the effect of social factors on pension schemes' Environmental, Social and Governance (ESG) policies, to aid understanding of the current position and to identify what further steps might be taken to ensure adequate consideration is taken of social factor risks and opportunities. 

On launch, the Pensions Minister, Guy Opperman, said that "climate change should not be trustees' sole consideration. Financially material social factors also pose risks to schemes' investments" and by considering social risks and opportunities long-term value in investment strategies can be improved. 

At present, occupational pension schemes with 100 or more members must produce a statement of investment principles (SIP) (and, subject to certain exceptions, those schemes with 2 or more members which provide money purchase benefits and have a default arrangement must produce a default SIP). 

Legislation requires that the SIP include the trustees' policies on financially material considerations including ESG factors and the extent (if at all) to which non-financial matters are taken into account in investments. Non-financial matters are broadly defined as including the ethical, social and environmental impact and quality of life views of a scheme's members and beneficiaries.

Social factors can include workforce conditions, health and safety in supply chains and production, selling & remuneration practices, community impact, use of local workforces and moral, religious, or value-based viewpoints. Particular reference in the launch material is made to issues of diversity, gender and the empowerment of women.

Key point: 

The Government notes that ESG factors have been dominated by climate change and that social factors have been given less prominence. This is of concern to the Government as trustees need to also consider other financially material ESG factors including the social element. 

In a recent review of the SIPs of 40 large pension schemes, it was identified that the majority did not distinguish between environmental, social and governance factors. Specific social factor policies were in the minority whereas the majority used 'boiler-plate' wording referencing delegation to asset managers and 'brief assurances' as to consistency between the policies of asset managers and the ESG policies of the trustees.

There is now a push from the Government for trustees to focus more closely on ESG factors other than climate change. As the Call for Evidence notes, trustees "are required to have a policy on social factors they consider to be financially material" . The consultation also sets out how trustees can take social factors into account as part of a trustee's duty to act in the members' best interests, considers voting and engagement issues and how social factors can present themselves as investment opportunities in keeping with trustees' fiduciary duties.

The Call for Evidence will close on 16 June 2021. Trustees wishing to consider further the role of social factors in their ESG policies should liaise with relevant advisers.

The pensions regulator secures extradition of suspected fraudster

Development: 

The Pensions Regulator (the Regulator) has secured the extradition of a 61 year-old-man from Spain under a European Arrest Warrant, in relation to a pension fraud prosecution. This is the first time that the Regulator, working with the police, has secured such extradition.

The suspect will next appear before Westminster Magistrates' Court on April 13, 2021 when the case is expected to be sent to the crown court. Two other individuals have also been charged in connection with the case. It is alleged that during 2012 to 2014, 245 savers were induced to transfer pension amounts totalling £13.7m into 11 pension schemes, controlled by the defendants.

Key point: 

This case emphasises the significant threat that fraudsters and pension scams pose to scheme members especially in difficult economic times such as the present. Scheme members and trustees need to continue to be alert to the warning signs of a scam and the tactics that fraudsters use to engineer scams; further details of the Regulator's recent pledge to combat pension scams initiative can be found here. 

Regulator S89 regulatory intervention report on Focusplay RBS

Development: 

The Regulator has published its regulatory intervention report following the prosecution of  Roger Bessent, an accountant who acted as trustee and administrator of the Focusplay Retirement Benefit Scheme and who fraudulently transferred monies into businesses he part-owned. Mr Bessent was sentenced to 35 months in prison in March 2019 and, following this, was ordered to repay £274,333 to the scheme in October 2020.

Mr Bessent pleaded guilty to fraud by abuse of his position as trustee of the scheme and making prohibited employer-related investments in the form of at least five loans to companies with which Mr Bessent was associated. The investigation started in August 2016 following a report from a whistleblower concerned about the governance of the scheme. The Insolvency Service also ran a parallel investigation which was supported by the Regulator and Dalriada Trustees Limited was appointed by the Regulator as independent trustee in May 2017.

Key point: 

The report highlights how the Regulator will work alongside other regulators and law enforcement agencies to bring proceedings. This may include suspending Regulator enforcement where another body takes action with a similar purpose; in Mr Bessent's case disqualification under the Company Directors Disqualification Act 1986 by the Insolvency Service had a broadly similar effect to that which could have been achieved under pensions legislation.

Fortunately, cases concerning this degree of criminality are relatively rare and it is welcome to see the Regulator taking a strong stance against such behaviour in keeping with its statutory objective to protect members' benefits. As the Regulator emphasises in the report, it "will bring the full force of the law against people who dishonestly abuse" their "position of trust, against the interests of savers and for their own benefit". 

The regulator publishes settlement policy 

Development: 

The Regulator has published its approach to settlements of regulatory or civil enforcement action, that is, where the "target of potential or ongoing enforcement action offers something in return for [the Regulator] agreeing not to pursue or continue the action". 

The benefits of settlement agreements can include allowing swifter conclusion of enforcement, a positive outcome for schemes and members, avoidance of legal proceedings and saving the time and resources of all involved parties.

Key point:

The policy notes that the aim of any settlement should be that it offers a "fair and appropriate outcome having regard to the circumstances of the case and our statutory objectives" and sets out the general principles which will be adopted by the Regulator when considering settlements. These include the Regulator balancing the proposed settlement outcome against the potential enforcement outcome and other relevant factors such as: 

• legal advice on the chance of success; 
• the views of relevant stakeholders such as the trustees and the Pension Protection Fund (the PPF); 
• protection of the members and the PPF;
• the strength of the case and its expected duration and costs; 
• ongoing sustainability of the solution and its long term impact; and 
• behavioural change. 

The policy includes examples of settlement options such as sponsoring employer change, Section 75 guarantees, security and the transfer of members to an alternative scheme. 

As highlighted in the recent Silentnight regulatory intervention report, settlement offers will tend to be progressed alongside the investigation or proceedings which will usually be run in parallel to the negotiation discussions. 

It should be noted that the Regulator's approach does not apply to penalty amounts (where the monetary penalties policy applies), applications such as clearance, criminal proceedings, judicial review proceedings, the period during which financial support consequent upon the issue of a Financial Support Direction must be put in place and enforcement of Pensions Act 2008 employer duties.

TPO guidance on panels and independent financial advisers 

Development: 

The Pensions Ombudsman (TPO) has published a factsheet on Panels and Independent Financial Advisers (IFAs) which provides 'generic information and guidance' on TPO's approach to providing factual information to members about IFAs.
Independent financial advice from regulated advisers can assist in retirement planning and help prevent pension scams. Although scheme administrators, employers and trustees are not able to give financial advice unless they are authorised by the Financial Conduct Authority (the FCA) they can provide factual information including information on where members can access independent financial advice. 

The factsheet discusses provision of such information, for example, a list of advisers that members could use to access an IFA. The FCA's view is that a one-off exercise of this nature is unlikely to be a regulated activity requiring FCA authorisation. However, care must still be taken when compiling any list or panel of IFAs and the factsheet sets out TPOs expectations and the possible risks in more detail.

Key point: 

Any schemes that wish to provide members with details of IFA firms must ensure that they undertake suitable due diligence. Members who are given poor financial advice from an IFA on a list provided by a scheme who suffers a loss as a result may complain not just to the Financial Ombudsman Service about the IFA but to TPO about the administrator, trustee or employer who has prepared the list on the basis that sufficient care was not taken in its preparation. 

The factsheet goes on to list a number of steps that would place the relevant person in a stronger position should such a claim emerge including undertaking appropriate monitoring of the list. In addition to reviewing TPO's factsheet, we recommend that any schemes thinking about setting up an IFA panel or list consider taking professional advice. 

Government consultation on audit and corporate governance

Development: 

The Department for Business, Energy & Industrial Strategy is consulting on 'Restoring trust in audit and corporate governance'. This follows the high profile collapses of BHS in 2016 and Carillion in 2018 and three subsequent independent reviews in 2018: the independent review of the UK audit market led by Donald Brydon, former chair of the London Stock Exchange Group, Sir John Kingman's independent review of the Financial Reporting Council and the Competition and Markets Authority paper on competition in the statutory audit market.

The Brydon Review concluded that audits need to provide more information, the FRC Review that the existing regulator should be replaced and the CMA study that there was over-dominance of larger companies in statutory audits.
The Government agreed with the Reviews' findings and this consultation sets out the reforms which are proposed to address the issues identified.

Key point: 

Part of the proposals include amendments to the dividend payment rules including a reporting requirement on companies to disclose distributable reserves and an obligation on directors to issue a formal statement on the legality and affordability of proposed dividends. Specific reference is made to the importance of dividends to pension funds and the consultation asks for views on potential adverse effects such as unnecessarily decreasing dividend levels. 

The closing date is 8 July 2021.

Round up of other news: small pension pots working group and spring 2021 pensions tax announcements

New industry working group to look at Small Pension Pots 

The Pensions and Lifetime Savings Association and the Association of British Insurers has established a new 'industry co-ordination' group to implement the DWP's recommendation that a group be set up to consider further the implementation of systemic solutions and a consolidation model which can be used to deal with the issue of deferred small pension pots.

The number of these pots has increased significantly since the introduction of automatic enrolment. They tend to be a consequence of savers changing employment and losing track of their pension savings and the Government wish to protect members from the 'costs and complexity of multiple pension accounts'. 

The group will publish a progress report this Summer.

Spring 2021: Tax policies and consultations - review of superfunds taxation, McCloud and the Dormant Assets Scheme

As part of its Spring 2021: Tax policies and consultations the Government has announced that it will: 

• review the appropriate taxation framework for defined benefit pension superfunds which will take place at the same time as the superfunds regulatory regime is developed;
• introduce technical updates to the pensions tax framework to address issues arising from the remedial arrangements which deal with the Court of Appeal's judgment in the McCloud age discrimination case (Lord Chancellor and another v McCloud and others; Secretary of State for the Home Department and others v Sargeant and others [2018]); and
• include the expansion of the Dormant Assets Scheme to include additional assets from the insurance and pensions, investment and wealth management, and securities sectors through amendments in a future Finance Bill.