It has been a busy quarter for important pensions updates. As we enter the spring, we take a look at the some of the key pensions issues that you need to be aware of.
Regulator Crackdown on ESG Non-compliance
The Pensions Regulator (TPR) has issued a warning to trustees that they could be fined if they fail to report on ESG and climate change investments.
Quick reminder: ESG (environmental, social and governance) is used to screen investments and to encourage companies to act responsibly. Since 2019, pension funds have been required to publish ESG policies on their websites allowing members to see how they target ESG investments. Where they have more than 100 members, they must also publish a statement of investment principles (SIP) and an implementation statement (IS) showing how those principles are enacted. Larger schemes with £1bn plus assets must publish an annual climate change report (TCFD report). TPR guidance was last updated in September 2022, which supplements the Department for Work and Pensions statutory guidance on climate reporting.
The broader goal to maximise ‘green investment’ opportunities will only be achieved the sooner trustees engage with the issues and their obligations.
But unfortunately, many have been caught red-handed not having complied with these basic ESG requirements, including a number of defined contribution schemes which have reportedly failed to provide valid website addresses for their TCFD reports in their scheme returns.
What does this mean? TPR’s new Spring campaign will have the ability to impose fines of up to £50,000 on rule breaking trustees. Schemes will be notified of this and TPR’s closer analysis of return data to monitor compliance. Later in the Summer, TPR will bring SIP and IS under the microscope and share the results of its review with the industry to highlight good practice.
So trustees beware that, unless steps are taken to ensure compliance, TPR might be coming for you.
Automatic Enrolment – All Aboard!
The Pensions (Extension of Automatic Enrolment) (No. 2) Bill was introduced as a Private Members’ Bill on 27 February 2023. Since then, the bill has passed through its second reading on 3 March 2023 and the Committee Stage on 15 March 2023.
The Bill seeks to amend the current Pensions Act 2008 to allow the Secretary of State to make regulations that would lower the age limit for auto enrolment to 18 from 22 as it is currently. The Bill also seeks to allow introduction of regulations to lower the earnings limit so that pension contributions can be made from the first pound rather than at the current minimum earnings threshold. This is following the concerns highlighted by DWP that currently 12.5 million people are estimated to be under-saving for retirement. The changes would allow young people and low earners to start contributing to their pension earlier and without threshold limitations.
The proposed changes are largely welcomed by Parliament, are backed by the DWP and have thus far not seen any significant opposition. The Pensions and Lifetime Saving Association has also given its seal of approval, alongside Scottish Widows Head of Pensions Policy, Pete Glancy, who acknowledged that introducing the change may increase pension pots by up to 15% for young workers and 150% for lower paid earners.
Pensions Minister, Laura Trott, confirmed that the government would like to consult further on the changes in Autumn 2023, so there is still a significant amount of time before any substantive changes are likely to be introduced. Additionally, the Bill itself does not introduce the changes, it merely provides the power to do so, further delaying any notion of swift implementation. Though, regardless of these drawbacks, the introduction of the Bill and the positive reception it has received is a promising indicator that significant reform is not too far away.
The McCloud Remedy - Where are we Now?
The ongoing McCloud saga rumbles on and we have been eagerly awaiting progress on the second ‘retrospective’ part of the remedy due to come into force on 1 October 2023. The wait seems to be over for NHS Scheme members as the DHSC have recently launched a consultation on the draft NHS Pension Schemes (Remediable Service) Regulations 2023 (the Draft Regulations) which seek to remove the effect of the transitional protections. In particular the Draft Regulations primarily provide scheme administrators with the ability to provide members with a deferred choice whether they receive benefits based on the ‘legacy scheme rules’ or the ‘new scheme rules’ over the remedy period between 1 April 2015 and 31 March 2022. This is as well as ‘roll-back’ of pensionable service which returns members who moved to the 2015 scheme back to the legacy scheme for the remedy period. The publishing of the consultation indicates that the government should be well on their way to introduce these changes by the beginning of October. The consultation is available here and closes on 6 June 2023.
The High Court has also recently dismissed judicial review proceedings where the Fire Brigades Union (FBU) and British Medical Association (BMA) challenged the Public Service Pensions (Valuation and Employer Costs Cap) (Amendment) Directions 2021. The FBU and BMA were challenging the inclusion of the McCloud remedy costs in to the cost control mechanism (CCM).The CCM works in a way that if a cost moves too far away from the ‘target cost’ then member contributions and/or benefits are adjusted to enable a return to the target level. This passes the cost of the McCLoud remedy over to the pension schemes rather than being picked up by the public purse. The unfortunate outcome of this is that the ‘floor breaches’ or decreases in costs were resolved but without the increase in benefits being provided to members.
The High Court dismissed all of their claims including that the government should bear the costs of its own discriminatory conduct and rejecting that the definition of ‘cost’ in the Public Service Pensions Act 2013 would exclude the McCloud remedy. There were also a number of equality arguments made, but the High Court dismissed these on the basis that the nature of McCLoud remedy itself led to disparity in advantages and disadvantages, not the CCM. However, the FBU have since confirmed that they are looking to appeal the decision, so this may not be the end of the story...
Pensions, Dependency and Human Rights
The Court of Appeal considered in Green v Commissioner of Police and the Metropolis whether a provision in the Police Pensions Regulations 1987 (“the Regulations”) which terminated a widow/widower/civil partner survivor's pension if they remarried or began cohabiting with a new partner, was incompatible with Article 12 of the European Convention of Human Rights (the right to marry). Provisions such as this were common in many Public Sector schemes until the mid-2000s and often lead to demands for repayment of overpaid pensions from the member on remarriage or the point of living together with a new partner.
The basis of the appeal was that the High Court judge had erred in law, in finding that the Regulations were not incompatible. It was held that the regulation in question did not act to 'impair', 'injure' or 'substantially interfere with' the exercise of the right to marry enshrined in Article 12 of the European Convention of Human Rights, and was proportionate to achieve a legitimate objective. Nor did the Regulations unreasonably inhibit it, especially in light of the fact that later versions of the scheme (2006 and 2015) to which the member may have transferred had no such restriction on remarriage or the formation of new relationships. As a result, there was no basis for concluding that the High Court Judge had applied an incorrect test in relation to Article 12, or that his approach to the necessary evaluative judgment was flawed and consequently the appeal was dismissed.
As part of the judgment, the point was made that the rule was less about marriage as opposed to cohabitation and reflected a time when survivor’s benefits were based on dependency. Particularly, financial dependency and situations where the nature of the relationship itself was analogous to income. However outdated the social view of the concepts may seem, the courts view was clear that this restriction on benefits was part of a wider package of benefits and breaching the rule can lead to the benefits being discontinued.
Dashboard Delays – What’s Next?
Last month, the Department for Work and Pensions (DWP) issued a written ministerial statement setting out changes to the mandatory deadlines for pension providers and schemes to connect to the Pensions Dashboard Programme (PDP).
Members will need to wait a little bit longer for the much anticipated ‘one-stop shop’ for all your pension needs, as the original timetable for schemes starting to connect in August this year remains up in the air. In the statement it is recognised that the project of achieving the digital architecture which underpins the pensions dashboards is a “significant undertaking” and that, in line with the legislation and the Financial Conduct Authority’s rules for pension providers, “more time is needed for this complex build”.
The government has therefore confirmed that the “new Chair of the Programme Board will develop a new plan for delivery”. DWP has separately provided reassurance that all parties remain committed making dashboards happen, so watch this space.
Whilst the overall framework for the PDP remains unchanged, many within the industry have criticised the government for having made an empty promise to revolutionise the way that individuals can engage with their retirement planning. It has become evident that more resource needs to be allocated to DWP getting dashboards back on track and reassuring the millions of consumer beneficiaries that there is a clear timeline for implementation.
Schemes will of course need to continue their preparation (data collection/accuracy etc.) and have all data readily available by the staging deadline, whenever that might now be. TPR has also updated its guidance to include a checklist to guide schemes in their preparations in the meantime.
Some might say that the delay is a blessing in disguise and provides much-needed contingencies for everyone involved. The government has also assured the pensions industry that it will have “adequate time and necessary technical information” to prepare for further deadlines. After all, the last thing we want is a system that goes live without being able to guarantee its effective delivery.
Auto Enrolment – Ombudsman Makes Clear Position for Employers with Contributions Quandary
The last quarter has seen a regular flow of five or six determinations a month from the Pensions Ombudsman around the area of auto enrolment compliance. All of them have very common elements, including the deduction of contributions from the employee to pay into an auto enrolment qualifying scheme and a subsequent failure to make the payments to the scheme by the individual’s employer. In each case the determination has been upheld against the employer and the member has been awarded £1,000 for distress and inconvenience along with the employer being ordered to make good the missing payments. Whilst ongoing issues with auto enrolment compliance in some sectors are well known, the matters coming for determination are setting out with stark clarity the risks for employers in this area.
Since 2012 the main risk for employers has been from The Pensions Regulator (TPR) with its ability to levy escalating penalty notices for non-compliance with the auto enrolment regime, alongside public naming and shaming of errant employers. With around 70,000 compliance and penalty notices issued per quarter, TPR continues to be very active in ensuring enforcement. What employers are now seeing in addition to direct regulatory risk, is a growing number of employees and former employees willing to take cases to the Pensions Ombudsman as an alternative to Employment Tribunals and in addition to whistleblowing to TPR. This is largely because employees cannot claim for unlawful deductions from wages in the Employment Tribunal. Indeed, the statutory definition of ‘wages’ is ‘any sums payable to the worker in connection with their employment’ and the Employment Appeal Tribunal had said that this does not include pension contributions required to be paid to a pension provider on the employee's behalf. The alternative of claiming for breach of contract in the Employment Tribunal is also less appealing than submitting a claim with the Pensions Ombudsman for a number of reasons, including limitations on eligibility to bring such a claim and the maximum compensation awarded if you succeed.
The recent cases would seem to concur with this understanding, a significant number stem from payment issues between March 2020 and the end of 2022 and involve former employees. In all the determinations, case workers had already attempted to resolve the problems with the employers and were met with no success (there will be other cases where matters have been corrected at this stage). For example, Solutions4Health Limited (CAS-62321-R7P2) involved a former employee who was made redundant and the employer paid contributions two years after they first became due and after the date redundancy was implemented. The determination went further and ordered calculation and payment for loss of investment return over that period.
Employers need to be alert to the fact that in addition to regulatory issues with TPR, there is an effective and increasing use of the Pensions Ombudsman by employees for securing their pension rights. If cases do arise, engaging with caseworkers and being proactive in attempting to deal with any breaches will place employers in much better stead in the long run.
If you would like to discuss any of these topics in more detail, please contact our Pensions team.