02 Sep 2019

Pensions snapshot - September 2019

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

DWP consults on regulations in relation to trustee oversight of investment consultants and fiduciary managers

As reported in our July edition of pensions snapshot, the Competition and Markets Authority (CMA) introduced The Investment Consultancy and Fiduciary Management Market Investigation Order 2019 in June of this year (the Order). The Order was introduced as part of a number of reforms to the investment consultancy (IC) and fiduciary management (FM) sector after the CMA found competition problems. It is intended to improve ongoing engagement by pension scheme trustees with their IC and FM providers and to lead to improvements in obtaining value for money from IC and FM services.

The DWP has now launched a consultation on draft amending regulations that will integrate the Order into existing pensions law and change the way trustees are required to manage their relationships with their IC and FM providers. Broadly speaking, the Occupational Pension Schemes (Governance and Registration) (Amendment) Regulations 2019 in their current form would impose the following new requirements on trustees:

  • With effect from 6 April 2020, trustees must carry out a “qualifying tender process” (or arrange for such a process to be carried out on their behalf) before:
     
    • appointing a new FM provider to manage 20% or more of the scheme’s “manageable assets”; or
    • increasing the amount of the scheme’s “manageable assets” which are managed by an existing FM provider to 20% or more.

      A “qualifying tender process” requires the trustees to (i) invite, and use reasonable endeavours to obtain, bids for the provision of FM services from at least three unconnected FM providers, and (ii) evaluate the bids obtained. A scheme’s “manageable assets” are all its assets, other than any buy-in policies.
  • If, immediately before 6 April 2020, a scheme has one or more existing FM providers in place who (i) manage 20% or more of the scheme’s “manageable assets”, and (ii) were appointed without a tender, trustees must carry out a “qualifying tender process” (as described above) before the end of a five year period beginning with the day on which the earliest of the existing FM provider arrangements commenced. If that five year period expires before the end of 9 June 2021, the date for compliance is 9 June 2021.
  • Trustees will be required to set objectives for their IC providers in respect of the activities the providers carry out. These objectives must normally have regard to the scheme’s statement of investment principles and must be reviewed and, if appropriate, revised at least every three years (or without delay if there is any significant change in investment policy). In addition, trustees must review the IC provider’s performance against the objectives at least every 12 months.
  • The Pensions Regulator (TPR) will be tasked with ensuring compliance with the new requirements. Trustees will be required to report compliance to TPR on an annual basis using the scheme return process. TPR will update the scheme return to include questions in relation to the new requirements.

The consultation closes on 2 September 2019 and the DWP intends to lay the final regulations before Parliament in December 2019/January 2020. The regulations are expected to come into force with effect from 6 April 2020. However, as things stand, the relevant provisions in the Order will come into force on 10 December 2019. The Order is binding legislation and trustees should therefore look to ensure that they are compliant by this earlier date in order to avoid any potential CMA enforcement action.

TPR is separately consulting on four guides designed to support trustees in meeting the new requirements and engaging with their IC and FM providers. This consultation is due to close on 11 September 2019.

Pensions Ombudsman disagrees that member is entitled to unreduced pension

A recent Pensions Ombudsman (PO) determination considered a complaint from Mr S that he was entitled to an unreduced pension from age 60 in respect of transferred-in service.

Mr S was provided with an inaccurate statement containing an early retirement estimate and early retirement factors. The estimate understated the reduction in respect of his entitlement transferred from a previous employer’s scheme into the current pension scheme. Mr S argued that he had based his decision to resign on this information and that his transferred-in benefit would have been available unreduced from age 60.

The complaint was rejected by the PO because the rules of the past and current scheme did not allow for Mr S to retire on an unreduced pension at age 60. Early retirement was subject to company consent and there were different rules for deferred members. The PO also concluded that Mr S was not ‘mis-sold’ the opportunity to transfer as mis-selling involved receiving unsuitable advice, unexplained risks or not receiving necessary information to make a decision. The information provided to Mr S did not indicate that this was the case.  

The PO also concluded that the £500 already offered by the trustees for the distress and inconvenience caused by providing the misleading information was appropriate compensation and he therefore made no further award.

The determination once again underlines the importance of ensuring that member communications as to the terms of a transfer into a pension scheme and any benefit quotations provided are completely clear.

Consultation response paves the way for extension to the Pensions Ombudsman’s jurisdiction

Following the conclusion of its consultation process concerning the Pensions Ombudsman (PO) in January this year, the DWP has released its consultation response, highlighting two notable developments for pensions industry stakeholders.

First, the DWP will propose legislation to enable employers to bring maladministration complaints or disputes of law about group personal pension plans to the PO. To deal with the potential for overlap with the Financial Ombudsman’s existing jurisdiction over such plans, there will be signposting from the PO and the Financial Ombudsman in line with those bodies’ existing memorandum of understanding to help direct complainants to the most appropriate body.

Second, the DWP clarifies its views as to how the PO’s early resolution service (ERS) should operate and how it should interact with an occupational pension scheme’s statutory internal dispute resolution procedure (IDRP). The DWP considers that the ERS would be a useful route for less complex disputes providing “a route to resolution that is relatively quicker and therefore more cost-effective, in a potentially less formal manner.”  It anticipates the ERS functions would include:

  • giving the parties a steer on the position;
  • facilitating the process by which parties can engage in meaningful discussions regarding a settlement; and
  • assisting the applicant to make a complaint through the IDRP, if necessary.

The DWP also confirms that the outcome of an ERS process would not be binding on the parties, though the parties would be free to enter into their own enforceable settlement agreement if they wished. If a settlement is not reached, the parties would still have access to a formal PO investigation and determination process. The DWP expects that the ERS would operate in much the same way as the old TPAS service operated. However, the DWP considers that the ERS should be available at any stage of the IDRP.

Pensions Ombudsman concludes provider had discretion to impose discontinuance charge on employer

This Pensions Ombudsman (PO) case was unusually brought by an employer, as opposed to an individual.  The employer sought to argue that a 20% discontinuance charge - which the scheme provider would impose if investment services were moved elsewhere - was excessive and disproportionate.  The employer maintained that it had never been made aware that such a charge could be imposed and, in any case, if such a charge were imposed it should be based on the provider’s legitimately incurred costs rather than calculated according to actuarial discretion.

In dismissing the employer’s complaint the Deputy Pensions Ombudsman (DPO) noted that the policy documents had set the basis on which charges would be calculated and conferred a discretion on the actuary as to how to calculate such charges.  The DPO also noted that, by levying the 20% discontinuance charge, the provider was attempting to recover costs incurred which would have otherwise been recovered had it continued to provide services to the scheme.  It was not, therefore, seeking to impose a penalty for early discontinuance.

The case is interesting in that it is not a classic member complaint but, instead, a complaint brought by a corporate entity against the provider of services.  It serves to highlight the ever-changing role of the PO and it will be interesting to see if further cases of this nature are brought to the PO’s attention in the future.

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