In depth

Pensions legislation and case law update: the latest developments week ended 29th January 2021

Gateley Legal

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In this week’s update, we discuss the 2021/22 auto-enrolment earnings trigger and qualifying earnings bands, scheme returns, HMT’s response to the WPC’s queries on pension scams, FCA data on DB pension transfer advice, the IoFA’s report on trustee decision making and the DWP’s consultation and guide on climate change risks.

PPF 2021/22 levy rules published

Development: 

The Pension Protection Fund (the PPF) has published the 2021/22 final levy rules together with its policy statement summarising the responses received during the consultation and the PPF's conclusions

The published rules confirm that the PPF:

  • have introduced the small scheme adjustment (halving the levy for schemes with liabilities less than £20m and tapering it for those with liabilities between £20m and £50m) and reduced the risk-based levy cap from 0.5% to 0.25% of liabilities; 
  • will measure insolvency risk on the basis used since April 2020 using credit ratings and the PPF specific insolvency risk model operated by Dun & Bradstreet; 
  • expect to collect a levy of £520m, keeping the levy scaling factor of 0.48.

Key point: 

The final rules confirm the position for the 2021/22 levy as set out in the 'direction of travel' which the PPF published in December 2020; see Gateley's article for further details. The policy statement explains that overall there was strong support for the proposals. The PPF recognises that the statement comes at a difficult time because of the pandemic and reiterates that it will continue to monitor the economic situation and other matters 'carefully' and determine whether changes to future years' rules are needed.

Auto-enrolment: DWP publishes earnings trigger and qualifying earnings bands for 2021/22

Development:

The DWP has published the outcome of its statutory annual review of the automatic enrolment earnings trigger and qualifying earnings band. For the 2021/22 tax year:

  • the earnings trigger will remain fixed at £10,000; and
  • the lower end of the qualifying earnings band will remain at £6,240 but the upper end will increase from £50,000 to £50,270. 

Key point: 

The decision to keep the earnings trigger at £10,000 reflects the Government wishing to strike the right balance between affordability and the policy objective of allowing individuals to save a 'meaningful level of savings' whilst also providing 'stability' during the economic uncertainty caused by the pandemic. 

The 2017 Review of Automatic Enrolment proposed removing the lower earnings limit and this remains the Government's intention subject to learning from the 2018 and 2019 increases to contributions and after paying 'close attention' to the 'impact and costs of making changes'. The Government will decide on the best approach after discussions with employers and other interested parties and having considered the effect of the pandemic and the Government's 'overall focus on the economic recovery'. 

Regulator updates guidance on DB/hybrid scheme returns – mid-February issue date

The Pensions Regulator (the Regulator) has updated its guidance on defined benefit (DB) and hybrid scheme returns confirming that scheme returns will now be issued from mid-February 2021 rather than the end of January. Schemes will have until 31 March 2021 to submit their completed return. 

Our insight article provided details of the two additional questions which may be added to the return if systems updates which are being implemented by the Regulator are made in time. 

DWP consults on proposals requiring schemes to address climate change risks and publishes guide on aligning schemes with TCFD recommendations

Development:

The DWP has published a consultation including draft legislation and statutory guidance on its proposals (initially consulted upon in August 2020) to require trustees of larger occupational pension schemes and authorised pension schemes to ensure that there is effective governance with respect to climate change including mandatory 'Taskforce on Climate-related Financial Disclosures' (TCFD) Reporting. (The TCFD published a report in 2017 making 11 recommendations for all organisations on the disclosure of climate-related financial risks and opportunities.) The consultation closes on 10 March 2021.

The DWP has also published a Guide: aligning your pension scheme with the TCFD recommendations to assist trustees to assess how climate-related risks and opportunities may impact their strategies. The quick start guide: introduction provides a useful summary of the types of climate risk, the legal requirements on trustees and the TCFD recommendations. 

Key point: 

The proposed changes outlined in the consultations will be introduced in stages. Large schemes with £5 billion or more in assets, authorised master trusts and authorised collective money purchase schemes will be targeted first with an intended implementation date of October 2021. There will be a further rollout to schemes with £1 billion or more of assets the following year with a review in 2023 and a consultation in 2024 to decide on whether to widen the regime to smaller schemes.

Correspondence between WPC chair and the treasury on pension scams

Development: 

The Economic Secretary to the Treasury has responded to Stephen Timms, Chair of the Work and Pensions Committee, on questions raised regarding pension scams and HMRC. The correspondence forms part of the Committee's inquiry into protecting pension savers.

Key point: 

The response discusses the actions taken by HMRC to de-register 770 schemes used for pension liberation and how it has responded to over 20,000 requests about scheme status. 

In response to a question as to whether HMRC could decide not to pursue a tax bill for unauthorised access, HMT notes HMRC's remit covers pension avoidance schemes but that in certain circumstances no tax breach may have occurred.

Responding to criticism about its 'unrelenting and uncompromising' approach to pension scam victims (on top of losing their pension savings victims are often hit with large tax bills), HMRC notes its commitment to setting up affordable payment arrangements and the availability of support through the Time to Pay service. 

FCA data reveals improved provision of DB pension transfer advice but the reduction of firms offering advice

Development:

The FCA has published its second set of ad hoc data about the DB pensions transfers advice market covering the October 2018 to March 2020 period and involving 1,965 firms. From April 2021, all firms with DB transfer permission must report data on a six-monthly basis. 

Key point: 

The results show 'signs of improvement' with firms beginning to 'act more inline' with the FCA expectation that, for the majority of individuals, a transfer out of a DB arrangement is not in the individual's best interests and a 'significant reduction' in individuals proceeding with a transfer against advice not to do so. This is positive news.

There is also a reduction in the number of firms providing DB advice which will, for some, be because of issues relating to having adequate professional indemnity insurance. 

The data is used by the FCA to focus its supervision on firms where the risk of poor practice is highest.

Institute and Faculty of Actuaries (IOFA) report on pension trustee decision making 

Development:

The IFoA's Actuarial Research Centre has produced a report which looked at the biases that can present in trustee decision-making. The report is the culmination of a two-year project which was led by a multidisciplinary research team from various universities and IPSOS. It identifies several areas which appeared to merit steps being taken to improve decision-making including: 

  • Capacity challenges: time pressure reduces the quality of decision making and can result in more risky decisions being made.

    To deal with capacity issues the report's recommendations include presenting information to avoid 'excessive cognitive overload', segregation of information and advice, and producing 'more targeted and focused' agendas;
     
  • Capability challenges: even with in-depth training and higher financial literacy than a layperson, trustees are not impervious to decision biases, in particular when considering MNTs in comparison with professional trustees.

    Recommendations in this area include considering employing a higher percentage of professional trustees, training and applying stricter requirements for selecting prospective trustees;
     
  • Risk biases with potential adverse influence through similarity of trustee boards (with gender, ethnicity and age imbalances), surrogate decision making and perceived personal liability.

    The researchers suggest ways of addressing such biases might include increasing diversity, adopting procedures to make certain tasks less susceptible to bias such as assigning a role of 'Devil's advocate' which uses dissent to identify inadequacies and uncover bias and utilising communication techniques to encourage a 'broader range' of views which can improve the robustness of decisions;
     
  • Board management: the two relevant aspects identified in the report were the chair's role and an inclination towards 'consensus decision making' which can lead to inadequate consideration of alternative and dissenting viewpoints.

    The role of chair can lead to hierarchical review and decision making which can impede the sharing of views and information due to confidence and reputational concerns amongst 'lower status' members. To address this the chair needs to encourage a culture of accountability and responsibility with an emphasis on facilitating good discussion and decision making.

    A formal voting system and/or secret ballot voting may assist in avoiding the potential downfalls of consensus decision making;
     
  • Third party management: effective use of advisers is a 'core best-practice' goal and lack of confidence and appropriate training can potentially mean advice has excessive influence.

    The report recommends reviewing best practice in adviser selection and how advice is considered.

Key point:

The chair of the IFoA Board referred to the research as adding to "existing calls for greater professionalism for pension trustees…" with the growth of DC pensions requiring an 'extended skill set'. 

The report identifies potential risks in the decision-making process which trustees will find useful when considering their own governance practices and outlines practical steps which can be taken to improve decision making where relevant.

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