Welcome to the first edition of Pensions Points your quarterly guide to the key pensions issues you need to be aware of.
This quarters pointers look at:
- Consolidation of the Regulators Codes of Practice into a single code
- The impending arrival of pensions dashboards
- ESG Investing and the need for due diligence
- McCloud Are We Nearly There Yet?
- An Employment Tribunal case that threatens one of the key age discrimination exemptions for Pension schemes
- An update on one of the Last quarters more interesting Pensions Ombudsman’s determinations
The long awaited ‘single Code of Practice’ is nearly here.
There’s no go live date as such but, following TPR’s interim response to the consultation outcome, it is expected to be laid before Parliament and implemented by the autumn.
Promising to increase accessibility, clarity and legal accuracy by eliminating outdated and duplicated information, it is by no means just a consolidation exercise. The new Code seeks to rationalise 10 out of the 15 existing codes of practice, and capture changes implemented by the Governance Regulations 2018.
Applicable to public and private sector defined contribution and defined benefit schemes, the Code is structured around 5 thematic areas: the governing body, funding and investment, administration, communications and disclosure, and reporting to TPR.
Somewhat optimistically, TPR also hopes that the new Code will ensure greater consistency of the expected standards and best practice for different types of schemes, insofar as legislative requirements permit.
Significant focus is anticipated on climate change, cyber security, stewardship and IT maintenance. The more drastic changes create new obligations for schemes in respect of better management of internal controls and ‘effective systems of governance’, regular own assessments of risk, and establishing a written framework for remuneration practices.
Are the new expectations unfamiliar to you? Will implementation of the Code present a real challenge to the running of your scheme? There’s no need to panic. But in gearing up for extra governance duties amongst other things, the sooner Trustees start preparations, the better.
Whether it is checklists, policy documents or preparing additional monitoring systems, if you’d like to discuss how we can help you in preparing for compliance with the new Code, please do get in touch.
The pension dashboard is coming closer to reality. Larger schemes will need to provide data to it starting in April 2023, and all pension schemes will need to be connected by some time after 2026. It will allow anyone to get as accurate a snapshot of their total pension saving, state, work-based and personal, in one place.
Although the central data source for the dashboard will be preserved, providers will be allowed access to it so that anyone who is interested in learning more about their total pension pot can access that information as easily as possible.
Consultation on standards for accessing the new pensions dashboard started on 19 July. The DWP produced its response to the previous consultation on the regulations governing the dashboard on 15 July.
Schemes need to be ready for their ‘go-live’ date. It can’t be done at the last minute. In particular, as well as ensuring that the scheme’s data can be provided to the Dashboard, it is essential that data is accurate – the old saying ‘garbage in, garbage out’ was never truer. Scheme will need to sign up to the data standard required by the Dashboard, and there could be consequences if poor data is provided, meaning people don’t have accurate information about their pension saving. And data cleaning exercises take time and resources to carry out. The Pensions Regulator will have the power to issue fines of up to £5,000 for an individual, £50,000 for a company.
Compliance with the dashboard is going to affect every pension scheme, every trustee, administrator and manager.
If you’d like to discuss how we can help you in preparing for Pensions Dashboard compliance, please get in touch.
Increasing regulatory requirements mean ESG is rapidly becoming a major factor in relation to investment decisions.
Since the bringing of 2021 we have seen TCFD – climate related disclosures become mandatory for premium listed UK companies and the UKs largest pension schemes with the obligation expected to apply to all pension schemes by 2024. New Sustainability Disclosure Requirements applying to all companies, financial institutions and pension schemes to make disclosures around ESG metrics and an expected obligation from 2022 for UK pension schemes to disclose their investment portfolios alignment with the Paris Agreement.
In an environment where ESG investments have become the fastest growing investment sector there is a bewildering array of options and pitfalls for any prospective investor.
One of the most significant hazards with ESG investing is lack of any industrywide standards and forms of comparison this has allowed lots of investment funds (which weren’t in any way ESG orientated to simply rebadge themselves) with an ESG sounding name whilst simply maintaining the same underlying portfolio. So look at the investment funds history and composition and ignore the title and marketing brochure.
The way funds are constructed can also be enlightening anyone expecting significant investment in renewables or new technology like Green hydrogen in a fund targeting carbon neutrality may be shocked to find that many funds of this type are heavily weighted to oil, gas and mining companies because as huge carbon emitters now these are the businesses de carbonising the fastest.
Carbon neutrality, offsets and sustainable alternatives represent a new set of due diligence issues for investors to consider. Firstly with sustainable alternatives the starting point is do they exist or are you investing in businesses hoping to develop these alternatives, emissions free jet fuel, carbon capture and storage, biomass all either don’t currently exist or cannot be produced at scale. Carbon neutral investments may often be underpinned by carbon offset trading. At its best this is using natural systems to lock up generated carbon from the air and supplementing wider de-carbonising strategies. In reality often due diligence reveals the companies using these schemes are not reducing carbon usage and are using carbon credits to claim neutrality. In some cases no new natural systems are developed and the credit is used to defend an existing resource.
Finally the oft neglected Social element of investing has even fewer comparative and consistent metrics to allow transparency of material risks than the limited number for Environmental investing and just as Greenwashing is a due diligence issue to be aware of social washing is a rising issue in this sector. Most UK social value assessments focus on procurement and supply chain issues but defining social value is more complex than just social attribution metrics trying to capture value in monetary terms. Due diligence can help to focus on – other aspects of the investments looking at estimated life changes through employment, or housing opportunities generated by the investment for individuals or a community. Equally it could assessing the impact on diversity, fair pay working conditions, sick pay or any one of a number of areas which are important to the groups impacted.
Against that background the role for due diligence is as important as ever in allowing investors to make informed investment decisions and understand and assess likely risks.
Given that’s its some 4 years since the McCloud judgment was made and two years since the Government first consulted on the options for removing the discrimination suffered by members who were not eligible for transitional protection due to their age you might be forgiven for thinking that we have nearly cleared up the matter. But the reality is whilst some progress has been made there will be at least a further 12 months (and possibly longer) before the whole matter can be considered resolved.
When the government’s 2015 public sector scheme changes were found to be age discriminatory it was hoped resolution would be quick, but implementation of the Remedy has been anything but. The first phase which saw all active members of legacy schemes moved to the new post 2015 schemes occurred in April this year so all accrual for the future will be in these career average schemes. The second phase the deferred choice underpin (giving members a choice between pre and post 2015 scheme benefits for service between 1st April 2015 and 31st March 2022) is targeted for implementation in October 2023 but there are a number of issues to resolve before then.
On the positive side various government bodies (MOD, Dept. of Health and Social care, Home office Cabinet office and DFE have all published consultation responses to the phase 2 changes as they would apply to teaching, NHS, Firefighter, Civil Service and other public sector schemes. We have both the Finance act 2022 and The Public Service Pensions and Judicial offices Act 2002 supporting both the scheme pays approach for tax and also allowing the Treasury to make amending regulations around pensions tax and the implementation of phase one of the remedy.
However there is still no clear date for the consultation on draft regulations to implement stage 2, and challenges around the proposed remedy are beginning to arise. The BMA, the FBU and others are challenging via judicial review the government’s moves to alter the cost sharing arrangements by making the cost of the remedy a member cost. There are issues around the treatment of immediate detriment cases and Contingent decisions where agreements between unions and employers to recalculate the benefits of members crystallised between 1/4/2015 and 31/3/2022 (including deaths) last year face difficulties. Whilst the Pensions Ombudsman has encouraged schemes to communicate with members around how and when these types of cases will be dealt with, and confirmed it won’t investigate complaints linked to the age discrimination remedy, it will potentially look at cases where severe financial hardship arises. In addition there are allegations government has been pressuring individual FRAs and police services to halt any immediate detriment remedies until the Tax position has been finalise in 2023. The FBU had threatened further legal action around this point.
So the answer to the question appears to be dependent on your outlook more a case of I don’t know, I forgot where we were going! or we might be get out and check! rather than a simple yes or no.
In a post-McCloud world, pension schemes have taken another beating in a ruling by the Employment Tribunal that potentially forbids schemes from placing caps on benefits paid out during the PPF assessment period.
In January 2022, a 17 strong group of claimants succeeded in arguing that a reduction to their pension payments by the T&N Retirement Benefits Scheme, because they had not reached normal pension age when the Scheme entered into the assessment period, amounted to less favourable treatment related to their age.
Certain limitations on payment of benefits during the assessment period were imposed under the Pensions Act 2004 in order to safeguard the lifeboat’s funding levels.
The Scheme relied on this, and the statutory time limit that prevents the general prohibition on age discrimination from applying to rules and practices in respect of benefits accrued and payable for pensionable service prior to 1st December 2006. This argument ceremoniously failed and the time limit was held to be incompatible with European, and subsequent UK, discrimination law.
What about exemptions, I hear you ask? These are safe, for now. But this case raises concerns over other benefits not sat within an exemption that may be subject to similar challenge.
DWP is appealing the decision, which is due to be heard later this year. If upheld, schemes may be forced to review their pre-2006 benefits under a newfound microscope. The PPF will also be battling demands for higher compensation levels at the expense of its funding levels.
A period of uncertainty begins as we await the inevitable surge of further decisions on this issue.
Although actually fairly straightforward on its facts, this determination is interesting as it shows the differences between the ‘compensation’ benefits offered by the Pension Protection Fund (PPF) and those potentially offered under the rules of a former scheme that has transferred in.
Ms N’s father was a pensioner in a section of the Railways Pension Scheme that transferred to the PPF in 2013. As a pensioner, his own benefits were not reduced on transfer, although things like future increases for inflation did reduce. He died in 2021. Ms N was aged 39 at that time. She suffers from multiple sclerosis.
In 1998, her father signed an expression of wish form requesting that benefits on his death be given to her. She and it appears he believed that this meant she would receive his pension after his death.
Under the rules of the PPF, a pension is only paid to a dependant who cannot otherwise support themselves to the age of 23. The PPF therefore told Ms N that she was not entitled to compensation from them. She appealed and in time took her case to the Ombudsman. Here, there was a significant difference in perception and expectation, even though it was unlikely Ms N would have received further benefits even from the Railways Scheme.
When a scheme transfers to the PPF, that old scheme’s rules and procedures fall away. Although the bulk of the ‘main’ benefits survive, subject of course to various limits, elements such as benefits on death are subject to the PPF’s own rules and procedures. These can be very different to those operated by a former scheme.
As well as a claim in respect of her pension, she also complained that the PPF had used an outdated and offensive term in relation to her condition. That term was used by the PPF when quoting from the Railways Scheme rules, but the PPF still apologised and sent her flowers.
This complaint also shows the breath of the Ombudsman’s ability to consider an extremely wide range of elements as aside from considering the claim for death benefits the Ombudsman also considered separately whether the offensive term constituted maladministration which as a term we have always known covers a very wide range of possible issues. Whilst it was found that there was no maladministration here its consideration shows both that it was within his remit, and in other circumstances he may have made an award for maladministration for its use.
If you would like to discuss any of these topics in more detail, please contact our Pensions team.