09 Apr 2020

Pensions snapshot - April 2020


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


Pensions pain relief during the COVID-19 outbreak

The Government, The Pensions Regulator (TPR) and the Pension Protection Fund (PPF) have put a number of pensions-related measures in place over the past month to assist businesses and trustees with the deepening COVID-19 outbreak.

TPR Guidance

TPR has issued a range of COVID-19 related guidance notes covering administration, investment and DB funding issues.

In particular the guidance:

  • explains how DB scheme trustees should approach sponsor requests to reduce or suspend deficit repair contributions;
  • confirms TPR will not impose fines against DB scheme trustees for late submission of valuation documents (but will review its position on this in June); and
  • warns of the heightened risk of scam activity.

For further details on TPR's guidance see our briefing notes here and here.

Coronavirus Job Retention Scheme (CJRS)

The Government launched the CJRS, a grant scheme which enables employers to "furlough" their employees - a type of paid leave - so an employer can recover 80% of an employee's “reference salary” up to a cap of £2500. From a pensions perspective:

  • employers can also recover employer pension contributions up to the amount of the minimum automatic enrolment contribution on the employee's subsidised CJRS wage;
  • the CJRS guidance is clear that employee pension contributions paid via salary sacrifice should not be included in the reference salary used to determine a claim for a grant; and
  • for now, the CJRS guidance contains scant detail on the interaction between furlough pay and salary sacrifice - employers who operate salary sacrifice should consider their arrangements to check how any sacrifice arrangement operates in the context of any furlough leave.

For further information around furloughing, our employment team has put together this briefing note.

PPF information page

The PPF has set up an information page for levy payers during the COVID-19 outbreak. In summary:

  • there is no general extension of the PPF's data submission deadlines.  However, the PPF may accept late documentation where it is reasonable and the trustees can demonstrate efforts have been made to keep delays to a minimum;
  • the PPF has modified its approach on certain matters such as accepting soft copy rather than hard copy documents for a new contingent asset submission, accepting e-signatures to certain (but not all) documents and accepting email copies rather than certified copies; and
  • the PPF offer guidance on whether certain assessments for contingent assets and asset backed structures need to take account of COVID-19 related considerations.

Some help from us

Navigating how the CJRS and other relieving measures interact with pension arrangements is not straightforward. We can assist with any queries employers and trustees have and other COVID-19 related points to facilitate clearer decision making at this challenging time. For trustees, our short guide with steps to consider when running virtual meetings may also help.


Regulator launches consultation on revised DB scheme funding code of practice

The Pensions Regulator (TPR) has launched a consultation which seeks views on a revised defined benefit (DB) scheme funding code of practice which will:

  • implement measures consistent with changes expected to be made to the statutory funding regime by the Pension Schemes Bill 2019-20 (such as the requirement for trustees to implement a funding and investment strategy which seeks to ensure scheme benefits can be provided over the long term (known as the “long-term objective” (LTO)); and
  • clarify the standards TPR expects trustees and employers to apply in order to comply with the statutory funding regime.

TPR is ultimately seeking to create a sustainable DB funding framework, which provides the right balance between the security of member benefits and the costs to employers of running their DB schemes.

The consultation document is over 170 pages long, which gives an indication of the complex issues on which views are being sought. However, there are a couple of standout highlights worth mentioning:

Key principles – The consultation identifies the key overarching principles which TPR believes should underpin all scheme valuations:

  • Compliance and evidence – trustees/employers should understand scheme funding/investment risks and trustees should be able to demonstrate how risks are managed.
  • The LTO – “significantly mature” schemes should have a low level of dependency on the employer and be invested with a high resilience to risk.
  • Journey plans/technical provisions – trustees should develop a journey plan to the LTO, aim for investment risk to decrease as the scheme matures and set technical provisions linked to the LTO.
  • Scheme investments – investment strategy and asset allocation should be broadly aligned with the scheme’s funding strategy.
  • Employer covenant – schemes with stronger employer covenants can take more risk and assume higher returns, but trustees should assume a reducing level of reliance on the covenant over time.
  • Additional support – trustees can take account of additional support for the scheme in valuations (such as contingent assets or parent company guarantees) provided it is sufficient for the risks being supported, appropriately valued, legally enforceable and realisable when required.
  • Recovery plans – schemes deficits should be recovered as soon as affordability allows, whilst minimising any adverse impact on the sustainable growth of the employer.
  • Open schemes – active members’ accrued benefits in open schemes should have the same level of security as deferred members’ accrued benefits in closed schemes, i.e. TPR expects the funding strategy for accrued benefits in an open scheme to be consistent with that for accrued benefits in a closed scheme of the same maturity.

Twin-track compliance - Trustees will be able to choose to use either the "Fast Track" or "Bespoke" approach for completing and submitting a scheme actuarial valuation.

  • The Fast Track approach will be relatively straightforward and is likely to result in minimum scrutiny by TPR. However, it will be developed in accordance with the above principles and will be prescriptive. Trustees that want to adopt this approach will need to demonstrate that their valuation and recovery plan complies with TPR’s objective and quantitative compliance guidelines. These guidelines will be set out in the code and will cover things like the LTO and timing to reach the LTO, technical provisions, recovery plan length and structure, investment risk and future service contributions. TPR’s view is that this approach provides an objective baseline of "tolerated risk" for schemes in different circumstances.
  • The Bespoke approach will be adopted by schemes that either cannot use the Fast Track approach or prefer a more bespoke scheme-specific valuation. It will give trustees more flexibility to take account of scheme- and employer-specific variables when completing the valuation. The flip-side is that schemes using this approach will need to provide TPR with more detailed information/evidence and are likely to receive more TPR scrutiny. Trustees might want to adopt the Bespoke approach where, for example, they want to take additional risks over and above those tolerated by the Fast Track approach or the employer covenant is so weak that the scheme cannot meet some aspects of the Fast Track approach.

Trustees adopting one of the above approaches will not be tied to the same approach for future valuations.

The exact impact of the revised code on DB schemes remains to be seen. However, TPR is clear that “there could be significant impact for some schemes, particularly those that have been running excessive and unjustifiable levels of risk.”

The consultation closes on 2 September 2020. TPR expects the revised code and associated legislation to come into force at the end of 2021.


TPR’s response to DWP on its approach on integrating climate change risks into its activities

The push against climate change is on. On the 20 February, The Pensions Regulator (TPR) replied to the Department of Work and Pensions (DWP’s) letter of the 14 February setting out TPR’s response on integrating climate change into its activities. TPR’s response recognised the important role it has in ensuring that advisers or pension scheme managers clearly understand the nature of this challenge, as well as having appropriate processes and mitigations to help deal with climate change more widely.

TPR’s reply noted a few practical points:

  • TPR’s approach of 'compliance with the basics' will apply to all schemes and require compliance with the basics such as completing and making available the statement of investment principles. Where schemes appear unwilling or unable to comply with these types of governance requirements, TPR’s strategy will be to encourage them to consolidate into larger schemes such as master trusts, where governance will be more effective.
  • It will focus immediate efforts on the largest schemes and actively supervise master trusts.
  • Enforcement action will be considered and applied as necessary in cases of non-compliance and non-co-operation.
  • There will be a continuation of proactive engagement with schemes, including TPR asking more questions and seeking feedback from trustees on their policies. 
  • It will monitor the pensions landscape through questions on climate change in its annual governance survey of DC schemes.

In order to truly tackle climate change and the responsibility that we all have in pensions, TPR is working alongside DWP colleagues, the Government and industry bodies on guidance that will help trustees identify, assess and disclose their scheme's exposure to climate risk. Trustees should then be better placed to understand what climate-related issues mean for their scheme and, in turn, be equipped to decide on good outcomes for pension savers.

Following TPR’s response to the DWP’s letter, the DWP and Pension Climate Risk Industry Group published a consultation on 12 March on new, non-statutory guidance for occupational pension schemes when assessing, managing and reporting climate-related risks. The consultation closes on 7 May.  In addition, TPR is also keen to hear from the industry as to how best to engage with the recommendations of the Taskforce on Climate-related Financial Disclosures which should help trustees implement and evolve their own specific scheme policy on climate change.


Pension Schemes Bill proposes statutory change in relation to climate change and restrictions on transfer rights

Further amendments have been tabled in relation to the Pension Schemes Bill 2019-20 (the Bill) which is still making its way through the process of becoming actual legislation.

In addition to TPR’s approach (see above), a new section 41A of the Pensions Act 1995 will be introduced which will “impose requirements on the trustees or managers of an occupational pension scheme of a prescribed description with a view to securing that there is effective governance of the scheme with respect to the effects of climate change”.  These requirements could include reviewing the exposure of the scheme to climate change risks and determining, reviewing and revising a strategy for managing the scheme’s exposure.  The new Section 41B will require trustees to publish information relating to the effects of climate change on the scheme.  TPR will be able to enforce these requirements and will have the ability to issue fines for non-compliance.

Separately, the Bill is seeking to impose greater restrictions on transfer rights with the aim being to protect members from scams.  Regulations will stipulate the destinations and circumstances under which a pension scheme member will have a right to transfer their pension savings to another scheme.  The conditions for transfer are expected to require members to demonstrate residence where the proposed receiving scheme is located in another jurisdiction and/or that they are receiving employment income from the sponsoring employer of the receiving scheme.

The Bill continues to move forward and is currently going through the committee review/reporting stage in the House of Lords.


The Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2020

The Pension Schemes Bill 2019-20 introduced a legislative framework for collective money purchase (CMP) schemes, with the technical detail to be set out in new secondary legislation (see the March 2020 edition of Snapshot). Following criticism of the extensive nature of the regulation-making powers contained in the Pension Schemes Bill from the House of Lords, the government published the CMP Regulations for illustrative purposes.

The CMP Regulations are subject to parliamentary passage of the Pension Schemes Bill. Some parts of the CMP Regulations have been left blank pending the outcome of future consultation, such as matters which TPR must take into account when exercising its powers under the Pension Schemes Bill in relation to CMP schemes.

The CMP Regulations provide for an authorisation regime for CMP schemes similar to the regime in place for master trusts.  They include requirements as to scheme design, calculation of benefits, financial viability, actuarial valuations, and for schemes to be run by fit and proper persons. CMP schemes will be overseen by TPR.


Electronic execution of documents

In our October 2019 snapshot we covered the Law Commission’s 2019 report on the electronic execution of documents. On 3 March 2020, the Lord Chancellor and Secretary of State for Justice issued a written statement with the Government’s response to this report.

The written statement, in summary, sets out the following:

  • The Government agrees with the report’s conclusion that formal primary legislation is not necessary to reinforce the legal validity of electronic signatures.
  • The Law Commission’s draft legislative provision reflects the Government’s view of the legal position on electronic signatures. They are permissible and can be used in confidence in commercial and consumer documents.
  • The recommendation by the Law Commission that the Government should convene an Industry Working Group has been accepted. The Industry Working Group will be asked to consider the question of video witnessing of electronic signatures. Further consideration on the security and technology of electronic signatures is required from suitably experienced experts.
  • The Government mentions the need to ensure that reforms in relation to electronic signatures do not have any adverse impact, particularly on vulnerable people.
  • The Law Commission’s recommendation that there should be a wider review of the law of deeds is accepted and it will ask the Law Commission to undertake the review.

Given the current working environment of many, the fact that electronic signatures can be used in commercial and consumer documents is helpful.  However, the position in relation to deeds is still subject to a review by the Law Commission and, until that is addressed, we are stuck with more traditional methods of execution!