07 Mar 2019

Pensions snapshot - March 2019

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This edition of snapshot looks at the latest legal developments in pensions. The topics covered in this edition are:

 

Government signals significant change in regulation of defined benefit pension schemes

In its response to its consultation paper on protecting defined benefit (DB) pension schemes, the Government has signalled a significant revamp of the moral hazard regime for DB pensions.

Some of the most notable changes proposed include:

  • 7 years' imprisonment and/or unlimited fines for wilful and reckless behaviour in relation to pension schemes;
  • the requirement for employers to notify The Pensions Regulator (TPR) of certain M&A activity and other transactions; and
  • a requirement for companies to provide a "declaration of intent" in relation to certain M&A activity to affected DB scheme trustees and TPR which, among other things, explains how any detriment to the DB scheme is to be mitigated.

DB scheme sponsors, trustees and all those involved in M&A activity will need to watch closely for further legislation and policy announcements on these proposals. For further information please click here to view our e-alert on this subject.

Government consults on consideration of illiquid assets and the consolidation of occupational defined contribution schemes

The DWP is consulting on how to prompt trustees of larger occupational defined contribution (DC) pension schemes to consider investing in illiquid assets in order for members to benefit from the illiquidity premium.

The DWP suggests requiring trustees to state their policy on illiquid assets in the Statement of Investment Principles and then to report annually on how they have implemented this. In addition, the default funds' percentage holdings in illiquid assets should also be provided.

The intention is that this requirement would apply only to schemes of a certain size (for example those with assets over a threshold of £250 million or £1 billion) or with a minimum number of members (for example 5,000 or 20,000). It is therefore likely that the impact of the measure would generally be limited to schemes which have in-house investment experts or access to external advisors.

In addition, the DWP is also proposing consolidation in the occupational DC market. There is concern that smaller DC schemes are not as well governed as larger schemes. The proposal put forward is to require the Chair's Statement to include an assessment of whether it might be in the members' best interests to be transferred into another scheme, for example a master trust. Factors to be considered would be charges and costs, as well as quality of governance and administration. It is suggested that schemes with more than £10 million in assets or 1,000 members would not need to produce such a statement, and those that do have to comply would only need to do so once every three years.

If these proposals are implemented, time will tell if they will have an impact on the illiquid assets market and DC consolidation, or if they will amount to just an administrative tick box exercise for DC trustees.

PPF approach to Hampshire ruling implementation to be challenged

In late 2018 the PPF set out its plans for calculating and paying increases to the benefits of PPF members affected by the Court of Justice of the European Union (CJEU) ruling in the Hampshire case. The CJEU ruled in this case that pension scheme members should receive at least 50% of the value of their accrued old age benefits if their employer becomes insolvent.

Briefly, the PPF's intention is to undertake a one-off calculation to work out if a member is affected by the ruling. The PPF will assess the total actuarial value of a member’s scheme benefits payable from the insolvency date and compare it against the total actuarial value of their PPF benefits at the same date. If the total actuarial value of the latter is less than 50% of the total actuarial value of the former, the PPF will increase the member's PPF benefits so that their actuarial value equals 50% of the actuarial value of the original scheme benefits.

The PPF has now issued a further update about its approach to calculating the required increases. This confirms that new High Court proceedings have been launched against the PPF which seek to challenge, amongst other things, its intended calculation approach.

No further information is currently available in relation to the court proceedings or the exact details of what is being challenged. However, for the time being, the PPF has decided that it will continue with its plan for paying increases to affected members. However, it will limit the size of arrears payments to avoid the risk of having to recover overpayments if the court decides that a different calculation approach is required.

The PPF intends to keep its approach under review in the light of how the proceedings develop.

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Mark Catchpole

Mark Catchpole
Partner

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Naeem Noor

Naeem Noor
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