The trustee agenda: key developments so far in 2023

Key cases

Scheme actuary’s role in shortfall rule

In the case of Railways Pension Trustee Company Ltd v Atos IT Services UK Ltd & another [2022], the High Court ruled that the words “as determined by the actuary” in the Railways Pension Scheme’s shortfall rule involved “the exercise of judgment and discretion” rather than the actuary simply carrying out a ‘mathematical calculation’ to increase contributions. The Court also ruled upon the meaning of “arrangements to make good the shortfall”, determining that these words meant that the shortfall did not need to be removed entirely.

Although the judgment is case-specific, it has general relevance to many schemes which rules often include reference to ‘determined by the actuary’, for example, in respect of augmentations, contributions commutation and early and late retirement factors. See Gateley’s Insight for a full case summary.

‘World first’ climate risk claim – Shell plc

ClientEarth has issued a ‘world-first’ claim in the High Court against the board of directors of Shell plc for not aligning the company’s energy transition strategy with the Paris Agreement and a move to net zero. The directors are alleged to have breached their duty under the Companies Act 2006 to promote the success of the company for the benefit of members. Gateley’s Insight contains further details.

Meaning of protected pension age requirement for an actual or prospective right

In Devon and Somerset Fire and Rescue Authority v Howell [2023] EWHC 257 (Ch) the High Court has provided useful confirmation of HMRC’s understanding of the meaning of having an ‘actual or prospective right’ to pension benefits in the context of protected pension ages (PPAs).

Under the Finance Act 2004, normal minimum pension age (NMPA) is the earliest age at which members can access pension benefits without the payment being unauthorised (except for ill-health and members that have a PPA). NMPA has been 55 since 6 April 2010 (50 prior to this) and is due to increase to 57 in April 2028 (see our Insight).

Certain conditions must be met for a member to have a PPA including an entitlement condition, that the member has an “actual or prospective right…to any benefit from an age of less than…” 55 in this case (and 57 in respect of the 2028 PPA regime).

The court had to determine whether a right to take a pension from age 50 conditional on the fire and rescue authority’s permission was an ‘actual or prospective’ right. The court agreed with the Finance Act 2004’s explanatory notes and HMRC guidance that say that a requirement for third-party consent means that the entitlement condition is not satisfied. It decided that the requirement for permission was the same as consent and meant that the member did not have a prospective right to retire earlier than age 55 without the payment of pension being unauthorised.

The court also provided additional guidance on the ‘actual or prospective right’ meaning. Further details can be found in Gateley’s case summary.

Action

Trustees of schemes that have climate change reporting obligations should already be meeting what the Regulator refers to as the ‘basic requirements’, in which case no action should be required. However, they should look out for what the Regulator has to say on the quality of the disclosures and make sure they comply with the ESG and stewardship parts of the new single code of practice when this comes into effect.

The Pension Protection Fund (the PPF)

PPF levy ceiling for 2023/24 set at £1.2bn

The PPF levy ceiling for the 2023/24 financial year has been set at £1,246,964,705. The ceiling increases each year according to earnings’ increases, but the PPF has always collected much less than this maximum amount. The levy for the 2023/24 financial year will be £200m.

Action

Schemes using LDI will already have liaised with advisers regarding the impact of the recent gilt market volatility including the need to set LDI financial buffers in line with the Regulator’s 30 November 2022 guidance and to review the Scheme’s governance processes to ensure that they are sufficiently robust enough to deal with future adverse events of a similar nature. They should continue to monitor the markets and look out for future regulatory developments on this area.

Defined contribution

DC/CDC: Government plans to ‘start closing the pensions inequality gap’

On 30 January 2023, the DWP announced five defined contribution (DC) related measures which aim to ‘start closing the pensions inequality gap’ between DB and DC pension provision. The measures are not new – they have just been collated under one premise, that of creating ‘fairer, more predictable, and better-run pensions’.

Measure 1: Joint consultation on a new value for money (VfM) framework. The DWP feel that the current market makes it hard for DC schemes to assess VfM. The framework will initially act as an add-on to the existing value for members assessments but will in time replace these – schemes will need to consider the usual investment performance, costs and charges and service quality.

Measure 2: Response to the consultation on broadening DC investment opportunities – subject to Parliamentary approval, the Government will go ahead with statutory changes in Spring that will require relevant DC schemes to:

• disclose and explain their policy on illiquid investment through the statement of investment principles the first time that the SIP is revised after 1 October 2023 or by 1 October 2024 at the latest; and
• their default asset allocation in the annual chair’s statement beginning with the first scheme year ending after 1 October 2023; and
• allow trustees to invest in arrangements that include ‘well designed’ performance fees.

Trustees will need to take into account draft statutory guidance in respect of the asset allocation disclosures and performance-based fees.

Measure 3: Consultation on addressing the challenge of deferred small pots in respect of which the Government are looking at two solutions: (1) a default consolidator model; and (2) a ‘pot follows member’ model; both with member opt-out options.

Measure 4: Report on understanding member engagement with workplace pensions.

Measure 5: Consultation on Collective Defined Contribution (CDC) schemes – the Government is consulting on allowing multi-employer and master trust CDC schemes and how the CDC framework can provide additional design flexibility.

The consultation also looks at how CDC as a decumulation only option might work. These arrangements would give members coming up to retirement an income product that permits them to share investment and longevity risk.

All of the consultations close on 27 March 2023. Further details can be found in Gateley’s insight.

Auto-enrolment

Earnings trigger and qualifying earnings band to remain same

The DWP has confirmed that for the 2022/23 tax year the earnings trigger will remain fixed at £10,000, and both the lower and upper ends of the qualifying earnings band will stay the same (£6,240 and £50,270).

Automatic Enrolment Bill – progression through Parliament

The Private Members’ Pensions (Extension of Automatic Enrolment) (No. 2) Bill had its first reading in the House of Commons on 27 February 2023 and commenced its second reading on 3 March 2023. The explanatory notes explain that the Bill introduces regulatory powers which will allow reduction of the age at which eligible workers must be enrolled from 22 to 18 and a reduction or repeal of the Lower Earnings Limit of the qualifying earnings band.

Regulator statement urging trustees to support DC savers during present economic difficulties

The Regulator’s guidance statement urges trustees to support DC savers during the current economic challenges. The statement forms an ‘action checklist’ for trustees and covers three key areas; (1) reviewing governance and investment arrangements, (2) taking steps to support savers, and (3) communicating with members. Further details can be found in Gateley’s Insight.

Action

Trustees should look out for amended staging dates and see how these affect their schemes.

Action

Reporting to the FCA is not a legal requirement but the Regulator does reference doing this in its pension scams guidance. Therefore, schemes should make a report in appropriate circumstances.

Action

The importance of having high quality data is also important for good scheme governance and to meet pensions dashboards requirements. The Regulator expects schemes to review their data at least once a year and improve it where issues are identified.