In this week’s digest we look at the Pensions Regulator’s consultation on how it will apply the new contribution notice tests, its blog on liquidity risk and its latest ‘TPR Talks’ podcast.
We also cover the first set of commencement regulations under the Pension Schemes Act 2021, the DWP consultation on permitted DC charges, an update on data protection & the EC and staging for the Pensions Dashboards Programme.
Consultation on how the Regulator will apply the new contribution notice tests
The Pensions Regulator (the Regulator) is seeking views, through a consultation on changes to its material detriment code of practice:12 (the Material Detriment Code) and accompanying guidance, as to how it will apply the two new contribution notice tests (the New CN Tests) which were introduced under the Pension Schemes Act 2021 (the Act) (see our landing page for the Act). The new employer insolvency and employer resources tests will sit alongside the existing main purpose and material detriment tests.
The New CN Tests are designed to focus on the impact of an act on the employer covenant at the time it happens, 'like a snapshot'. They are expected to come into force this Autumn. The Department for Work and Pensions (DWP) consulted on regulations relating to the meaning of 'employer resources' in March 2021 (see our Insight Update).
The draft updated Material Detriment Code encompasses both New CN Tests and sets out new circumstances which could result in the Regulator issuing a CN where it is of the view that any of the tests set out in the Material Detriment Code could be satisfied, including:
- The removal or substantial reduction of sponsor support or where it becomes nominal (any of the tests);
- Weakening of the scheme's creditor position (material detriment and/or employer insolvency);
- Certain cases of dividend payments or a return of capital by the sponsoring employer (any of the tests);
- Payments favouring other creditors of the employer over the scheme where no such sums are then due to those creditors (any of the tests).
However, a CN will only be issued where it is reasonable to impose liability having regard to:
- "the extent to which, in all the circumstances of the case, it was reasonable for the person to act, or fail to act, in the way that the person did, and
- such other matters as the Regulator considers relevant."
Therefore, one of the three tests could be met but the Regulator could decide that it would be not be reasonable, in the circumstances, for a CN to be issued.
The guidance provides illustrative examples of how certain circumstances might be considered in practice and additional information relating to the Regulator's CN experience. These examples are not precedents and do not cover all cases. The Regulator may decide to 'run more than one case in the alternative'; for example, run a case based on the employer resources test, or in the alternative, because the material detriment test is met.
Examples given that would not normally meet the material detriment or New CN Tests include a properly conducted buyout, general poor trading and granting of security where the employer liaises with the trustees and provides suitable mitigation.
Examples given that might come within the scope of the CN powers include sponsor substitution with a nominal shell company, transfer of a profitable part of the business outside of the employer covenant group with loss of half the covenant, a significant reduction of sponsor support through a transfer of scheme liabilities and a removal of sponsor support through a manufactured insolvency.
The consultation closes on 7 July 2021. The draft code is due to come into force in October 2021.
Regulator blog on liquidity risk
The Regulator has published a blog on liquidity risk against the background of the recent economic market upheaval caused by the pandemic and the increased focus of the Financial Policy Committee of the Bank of England on building up system resilience together with other regulatory bodies.
The blog emphasises the Regulator's desire for trustees to improve their understanding of their scheme's cashflow and liquidity needs, and to monitor and mitigate relevant risks. This follows new opportunities to invest in debt that have arisen during the pandemic. However, some opportunities have made schemes vulnerable to "sudden shifts in market sentiment, financial conditions tightening and market liquidity".
The Regulator also picks up on the concerns raised about its expectation, as set out in the draft new code of practice (see our Insight Update), that "Unless there are exceptional circumstances, governing bodies should ensure no more than a fifth of scheme investments are held in assets not traded on regulated markets". (This expectation appears to set out the Regulator's interpretation of the statutory requirement that assets should consist predominantly of investments admitted to trading on regulated markets.)
The Regulator confirms that this expectation was included as an attempt to helpfully set out an 'appropriate maximum allocation' which should apply unless there is an exceptional case (and to guard against the small proportion of schemes that have tried to exploit the statutory principles). However, it does not want to restrict investment in illiquid assets unnecessarily, and so will consider further whether changes should be made to the level set out in the draft code.
Regulator podcasts on gig economy workers
The Regulator has released two further podcasts in its "TPR Talks" series.
The third podcast focuses on the Pension Schemes Act 2021, pension scams, climate change and also the rights of gig economy workers. It confirms that the Regulator has been working 'closely' with Uber following the Supreme Court ruling (see our Insight Update) and requesting that other gig economy organisations consider the pensions eligibility of their workers.
The fourth podcast features Chris Curry, principal of the Pensions Dashboards Programme who discusses how it connects government, regulatory and pensions industry activity to 'make dashboards work for savers'.
The other Regulator "TPR Talks" podcasts (on pension scams and climate change) can be accessed here.
Pension Schemes Act 2021 (the Act): First set of commencement regulations
On 24 May 2021, the Pension Schemes Act 2021 (Commencement No. 1) Regulations 2021 were made. These bring into force on 31 May 2021 the following provisions of the Act:
- Section 124 (climate change risk): The Act introduces new climate change provisions into the Pensions Act 1995 which will require occupational pension schemes to manage the effects of climate change and to report on how they have done so in line with the Taskforce on Climate-related Financial Disclosures recommendations. These provisions will be supplemented by regulations which were the subject of consultation earlier in the year (see our Insight Update for further details of the regulations and draft statutory and non-statutory guidance).
- Section 126 (Pension Protection Fund (PPF) pensionable service changes): Provisions have been included in the Act in respect of how transferred-in benefits are aggregated for compensation cap purposes.
- Paragraph 8(a), Schedule 7 (Regulator: minor and consequential amendments): This provision requires the Regulator to include the New CN Tests into the code of practice relating to contribution notices (see above article).
- Regulation-making provisions: A number of provisions are also brought into force by the regulations allowing regulations to be made including in relation to the employer resources CN test, Regulator interviews & penalties and transfer provisions.
DWP consultation on permitted charges in DC pension schemes
The DWP's Review of the Default Fund Charge Cap and Standardised Costs Disclosure (reported on in our January 2021 Insight Update) confirmed its intention that the charging of flat fees on defined contribution (DC) default pension pots under £100 would be prohibited to prevent such pots being depleted by charges and administration costs.
The DWP is now consulting on how this threshold should be brought in and the statutory changes that will be made to the Occupational Pension Schemes (Charges and Governance) Regulations 2015 to implement the new 'de minimis'. The intention is that the de minimis will apply only to the flat fee element of the combination charge.
The consultation also seeks views on the proposal to switch to a 'universal charging structure' for qualifying DC schemes used for auto-enrolment to protect against 'high and unfair charges' and to improve member understanding and engagement. This would replace the existing three permitted charging structures so that a single framework would be used going forwards allowing charging of a single percentage annual management charge, based on the value of the member's pot within the default fund.
Update on EC assessment of adequacy of UK's data protection regime
Following last week's Insight Update on the European Commission's (the EC) assessment of the adequacy of the UK's data protection regime, MEPs have passed a resolution asking that the EC amend the draft adequacy decisions for the transfer of personal data from the EU to the UK because of concerns about alignment with EU court rulings and to address issues raised by the European Data Protection Board regarding bulk access practices, onward transfers and international agreements. This follows the European Parliament's Civil Liberties Committee's confirmation that the decisions should be amended because of broadly similar issues.
The MEPs' majority view is that the matters of concern should be resolved before any adequacy decisions are granted to the UK. However, the resolution will not delay progress of the adequacy decisions in the 'comitology procedure' whereby the EC will seek approval from EU member states and, if approved, the decisions will be finalised. A decision from the EC is expected 'within the coming months'. If the adequacy decisions are not adopted this will impact the continued free flow of personal data from the EU to the UK when the temporary 'bridging' mechanism agreed as part of the withdrawal arrangements ends in June 2021.
Pensions Dashboards Programme – call for input on staging
The Pensions Dashboards Programme (the PDP) has issued a call for input on staging outlining the order and timing of when data providers will connect to the pensions dashboard. The suggestions have been formulated after liaison with the DWP, the Financial Conduct Authority (the FCA) and the Regulator.
The proposal is that the staging for Wave 1 (master trusts, FCA regulated pension providers & occupational schemes with 1000+ members) which will start in April 2023 and carry on until 2024+ should be split into three cohorts:
- Cohort 1: Starting Spring 2023 - Authorised master trusts and FCA-regulated providers of personal pensions;
- Cohort 2: During 2023 - Defined contribution schemes used for automatic-enrolment with over 1,000 members, ordered largest to smallest; and
- Cohort 3: During 2023 – All remaining occupational pension schemes with over 1,000 members (ordered largest to smallest) and public service schemes from late 2023.
The PDP recommend that medium sized occupational schemes with between 100-999 members form a second staging 'wave' with the timeline perhaps extending past Wave 1's two-year timeline. Small schemes should be staged after this.
Although the staging will be set out in DWP regulations and FCA rules, the feedback to the call for input will help shape future policy. It also provides a useful indication of possible timings. The call for input closes on 9 July 2021.