7 days

7 Days is a weekly round up of developments in pensions, normally published on Monday afternoons. We collate this information from key industry sources, such as the DWP, HMRC and TPR.

In this 7 Days

• Insolvency regulations updated
• FCA issues value for money in workplace schemes policy statement
• FCA releases updated consumer transfer videos
• HMRC publishes Pension Schemes Newsletter 133
• House of Commons Library publishes new pensions-related briefing paper
• PASA GMP publications
• PPF levy consultation published
• PPI issues Briefing Note 127
• Small Pots Cross-Industry Co-Ordination Group publishes progress report
• Productive Finance Working Group addresses the barriers to less liquid investment
• TPR publishes suite of policies, guidance and new consultations
• WPC publishes report on pension stewardship and COP26

Insolvency regulations updated

The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10)(No. 2) Regulations 2021 were laid on 28 September 2021 and substitute a new Schedule 10 to CIGA 2020. These Regulations replace the recent Corporate Insolvency and Governance Act 2020 (Coronavirus)(Amendment of Schedule 10) Regulations 2021 (see 7 Days), which contained an error and are therefore revoked by the new Regulations.

FCA issues value for money in workplace schemes policy statement

On 4 October 2021, the FCA published its final rules on how IGCs and Governance Advisory Arrangements (“GAAs”) should compare the value of pension products and services, and promote the best value for their scheme members. The new rules aim to be “a step towards a more systematic and transparent framework for assessing VFM in pensions”, and to enhance IGCs’ ability to compare pension products and drive VFM on behalf of the consumers they represent.

The rules come into force today, 4 October 2021, and firms and IGCs will have until the end of September 2022 to publish their next VFM report.

The release also notes the recent publication of its joint discussion paper with TPR, seeking input from relevant stakeholders around prescribing standardised metrics or benchmarks for VFM elements across the pensions market, designed to make it easier to compare different products (see 7 Days).

FCA releases updated consumer transfer videos

The FCA has updated its resources aimed at helping consumers better understand financial advice on transferring from a DB to a DC scheme, replacing its current video with five shorter ones. These cover the FCA’s expectations of financial advisers when advising consumers on pension transfers, “mandatory information and choosing an adviser”, “getting to know you”, “adviser research and communication of advice”, and “post-advice”.

HMRC publishes Pension Schemes Newsletter 133

On 30 September 2021, HMRC published Pension Schemes Newsletter 133. It contains articles on:

• relief at source (annual return of information and notification of residency status reports)
• delays in features relating to pension scheme migration
• reporting multiple small pots payments using Real Time Information, and
• errors in updates to the Pensions Tax Manual being noted.

House of Commons Library publishes new pensions-related briefing paper

On 24 September 2021, the House of Commons Library published a new briefing paper on pension scheme investments and climate change. This looks at the new governance and reporting requirements in this area being phased in from 1 October 2021 – see our Alert for more information.

PASA GMP publications

Following requests from the industry to expand upon the section included in its methodology guidance, on 29 September 2021 PASA issued supplemental guidance on allowing for anti-franking when achieving GMP equality. It examines the interaction of anti-franking requirements under legislation with GMP equalisation, considering why anti-franking is important and suggesting approaches to deal with key areas of uncertainty.

The guidance notes that all schemes should consider anti-franking as part of achieving GMP equality, as its impact can be significant. It therefore looks at three of the potential approaches to applying anti-franking for equalisation purposes – see our Alert for further detail.

In the same week, PASA also issued its GMP implementation stage communications guidance (see 7 Days).

Future guidance on “Administration of GMP Equalisation” will aim to explore in more detail the interaction of multiple pension streams with administration and payroll systems. PASA also intends to publish a set of Equalisation Q&As in October 2021.

PPF levy consultation published

The PPF issued its levy consultation on 28 September 2021. The proposal makes the following minor changes to the previous year’s levy rules:

• the levy estimate for 2022/23 is £415m (a drop of £105m on 2021/22). The PPF is able to make this reduction as its funding is strong and there have been improvements to scheme funding. However, it notes that the full economic impact of COVID-19 is yet to unfold
• the rules for commercial consolidators and schemes without a substantial sponsor are being brought together in a single appendix. This is to ensure all schemes without a conventional sponsorship structure (to be known as “Alternative Covenant Schemes”) can be treated consistently. The rules will establish a shared charging methodology based on option pricing, but the PPF will have discretion to exclude schemes it considers should not be charged on this basis. It asks for feedback on the extent to which such schemes currently exist and how these proposals should evolve in future
• it is revising its approach to overriding scores for companies that have had a restructuring plan / other insolvency related event. Broadly, where a company enters into a relevant insolvency event / analogous overseas event it has an override of 100% insolvency probability placed on its monthly scores. The PPF has decided that, for now, no override will be applied to companies entering into a free-standing moratorium due to its short-term nature, but the override will apply to those entering into a restructuring plan. However, a new rule will allow rescued companies to return to standard scoring after the plan has been ratified by the Court, implemented and the company has filed new accounts. As the current information collected by D&B doesn’t distinguish between the different procedures, the PPF notes that eligible schemes may need to engage with it and D&B to prove a rescue has occurred.

As usual, the PPF expects to publish final rules, guidance and its policy statement in December.

PPI issues Briefing Note 127

The PPI has published Briefing Note 127, Shopping around for annuities: the changing market. This explores how the annuity market has changed since the introduction of the DC retirement freedoms in 2015 and its previous research in 2017. It also examines why people may not be choosing to purchase annuities, how shopping around between annuity providers might benefit people in retirement, as well as what might be done by providers to encourage people to be more active in the market.

Small Pots Cross-Industry Co-Ordination Group publishes progress report

On 30 September 2021, the Small Pots Cross-Industry Co-Ordination Group published an “initial update” report.

Convened by the PLSA and ABI, the Group builds on the work of the previous, DWP-chaired, Working Group. Its purpose is to look to “reduce the future proliferation of small DC pension pots with their detrimental effect on member value for money and to reduce the existing stock of such small pots that has already been built up”.

The report looks at work undertaken to date, and the expected next phases. Acknowledging that there are “small subsets of the small pots universe” where arguments exist for members maintaining small pots, its proposals protect these, presenting potential solutions and recommendations. Further considerations are likely to emerge as the Group’s work progresses, but the report notes that there is general acceptance that the pensions industry may only be able to go so far without regulatory intervention.

Productive Finance Working Group addresses the barriers to less liquid investment

On 27 September 2021, the Productive Finance Working Group published a report into facilitating greater investment in longer term, less liquid assets, in particular by DC pension schemes.

The report looks at the “barriers and challenges” such investments face, and makes “four recommendations, underpinned by 13 specific actions, with a focus on supporting DC pension schemes to invest and developing the long-term asset fund (LTAF) structure.” They include:

• shifting the focus to long-term value – DC schemes trustees, trade bodies and consultants should consider how increasing investment in less liquid assets could generate greater long-term value for their members
• building scale – the DC market has a high proportion of small schemes. Their lack of scale can make it challenging for them to invest in less liquid assets for a variety of reasons
• a new approach to liquidity management – most DC schemes currently invest predominantly in daily-dealing funds which, in theory, means their holdings can be sold at short notice. Investment in less liquid assets does not present the same daily-dealing opportunity. Therefore, a broader range of DC schemes should find ways to enable them to invest in less liquid assets as part of a diversified portfolio. To support that, the Group recommends that the industry develops guidance, in collaboration with the Bank of England and the FCA, on good practices for liquidity management at a fund level
• widening investment in less liquid assets – the Group recommends that the FCA consult on changing its rules for investment in illiquid assets through unit-linked funds and reviewing the LTAF distribution rules to facilitate wider distribution to appropriate retail clients.

The Group’s “roadmap” expects the recommendations to have been fully implemented by Q2 2022.

On 30 September, TPR published a blog entitled DC: Investing for the future in response to the report. TPR’s Executive Director of Regulatory Policy, Analysis and Advice, David Fairs, commented that “consultants have helped to drive investment and risk management innovation in the DB market over many years. Regrettably, the DC market has not yet benefitted from the same level of innovation… A combined effort across industry will be required. We will work with DWP and other parties, as appropriate, as the 13 recommendations in the report are taken forward.”

TPR publishes suite of policies, guidance and new consultations

Under changes made by the PSA21, TPR now has power to impose three new criminal offences, including for avoidance of an employer debt and conduct risking accrued DB schemes benefits. Alongside these new powers, a new civil penalty of up to £1million, additional contribution notice (“CN”) tests and enhanced information-gathering powers also came into force on 1 October (see our Alert).

On 29 September 2021, TPR published:

• the finalised policy on its approach to investigation and prosecution of the new criminal offences, together with TPR’s response to that consultation, which outlines the main comments made (see Sackers’ response). Significant changes have been made since the first draft, with expanded examples to clarify when the new sanctions might apply. The policy now includes a detailed case study, using a fictional set of facts illustrating when TPR expects to consider use of its new criminal powers, as well as noting some common scenarios where it would not expect to use them. The final policy confirms that “the new criminal offences do not have retrospective effect, which means that we can only prosecute people for acts that took place on or after 1 October 2021.” However, TPR may take into account facts from before that date as part of its investigations, eg where it indicates someone’s intent. Conversely, anyone under investigation “may wish to rely on those facts in their defence”. The policy notes that it has been created by TPR alone and may not reflect the interpretation of other prosecting authorities
• its finalised code of practice and accompanying code-related guidance addressing the two new CN tests (as well as updating the circumstances in which the existing “material detriment” test will be met)
• a consultation on TPR’s approach to other new powers being introduced by the PSA21. Responses to the Criminal Offences consultation noted that it would be helpful for TPR’s criminal powers to be put into context in relation to its CN and financial penalty powers, and with its broader approach to enforcement. This consultation therefore addresses how and when TPR will use its information-gathering powers, its approach to the new monetary penalty, and how its powers will be operated where they overlap, ie more than one is engaged at the same time. This consultation closes on 22 December, and TPR plans to finalise these policies early in 2022.

WPC publishes report on pension stewardship and COP26

Ahead of COP26 in November, the WPC has issued its Fourth Report of Session 2021–22, Pension stewardship and COP26, making recommendations on reporting standards, pension scheme governance and investment and stewardship.

Stephen Timms MP, Chair of the WPC, said “With pension investments unrestrained by borders, international agreement is going to be key if the potential for pension schemes to contribute to cutting carbon emissions is to be realised. Pension schemes “can play a major role in helping the real economy transition to net-zero but encouraging companies to become more sustainable through good and effective stewardship should always be the first step before moves to sell off assets that are unable to reduce their contribution to climate change”. The Government therefore “needs to ensure that its policies do not incentivise divestment over good stewardship of schemes.”

Amongst other things, the report recommends that:

• TPR establishes a working group to develop guidance for schemes looking to set net-zero targets, which would address how trustees’ fiduciary duties sit with climate change risk considerations
• the Government consult on whether there is a case for mandating that automatic enrolment default options should align to UK Government climate goals.