Developments in Employee Benefits law and practice

17 June 2019

Review of default arrangement 2018

Trustees are being scrutinised by The Pensions Regulator (TPR) in a new drive to ensure they are meeting their legal obligations and properly governing default arrangements.

Trustees of certain defined contribution (DC) and hybrid schemes must regularly review the default strategy and performance of the default arrangement.

TPR has contacted hundreds of trustees and asked them to confirm that they have reviewed their default arrangements. The move is part of TPR’s ongoing work to protect savers and ensure workplace pensions work.

David Fairs, Executive Director of Regulatory Policy, Analysis and Advice at TPR, said: “Our focus is on good outcomes for savers in their retirements. To provide pension savers with the best pot for retirement they need good investment returns as they contribute into a pension through their employment.

“Regularly reviewing a pension scheme’s default arrangement, which the majority of savers contribute into, is vital for trustees to ensure they are investing in the best interests of members.

“We are working to wake up those trustees who, research has shown us, do not engage with the regulator or sometimes do not realise they are not meeting standards of governance or administration that we expect.

“This pilot is among some of the things we are doing as part of a new approach to contact trustees about their legal duties, support them to become compliant where we can and inform them about the alternatives – including winding up their scheme – if they do not or cannot meet the standards which we expect.”

Updated code on combating pension scams

The Pension Scams Industry Group (PSIG), the voluntary body set up to support trustees, providers and administrators in combating pension scams, has published Version 2.1 of Combating Pension Scams – A Code of Good Practice.

The updated code reflects upon the developments and changes that have affected the industry over the last year. It follows the release of version 2.0, published in June 2018.

Key highlights include:

  • Introduction of the Cold Calling Ban.

  • TPR & FCA ScamSmart campaign and TPR Threat Assessment update.

  • Inclusion of the newly launched Money and Pensions Service.

  • The rise of claims management firms and impact on the industry.

  • Learnings from PSIG’s Scams Survey Pilot 2018.

  • Revised Action Fraud reporting guidance.

CMA issues market investigation order 

The CMA has issued its legally-binding Investment Consultancy and Fiduciary Management Market Investigation Order 2019 to help pension trustees make better decisions for £1.6 trillion of retirement assets that they oversee.

This marks the final step of the Competition and Markets Authority’s (CMA) reform of the investment consultancy and fiduciary management sectors, after its in-depth investigation found significant competition concerns.

Investment consultants and fiduciary managers play an important role in ensuring over half of all UK households’ retirement savings are invested wisely. They advise and provide services to trustees that oversee companies’ pension schemes.

The Order requires fiduciary managers – who make investment decisions on behalf of trustees – and investment consultants to provide clearer information about what their customers are getting for their money, and incentivises pension scheme trustees to shop around to make sure they are getting the best deal to suit their needs.

Amongst other things, it requires:

  • Pension scheme trustees who wish to delegate investment decisions for 20% or more of their scheme assets must run a competitive tender when first purchasing fiduciary management services, meaning they must ask at least 3 fiduciary managers to bid for their work. This means they can then select the best deal for their needs. The CMA’s investigation found that many trustees used only the fiduciary management service offered by their investment consultant, without exploring alternatives.

  • Pension scheme trustees who have already appointed a fiduciary manager for 20% or more of their scheme assets without a tender must put the service out to tender within 5 years

  • Fiduciary management firms to provide potential new customers with more information on their fees and performance, so they can compare service providers with ease. They must also provide more information on their fees to their existing clients.

The Occupational Pension Schemes (Investment and Disclosure) (Amendment) Regulations 2019 (SI 2019/982)

This statutory instrument places a requirement from 1 October 2020 on trustees of defined contribution and defined benefit pension schemes to explain in their Statement of Investment Principles (SIP) their policy on the arrangements they have with their asset managers, including:

  • How they monitor the investee company on capital structure.

  • How targeted portfolio turnover or turnover range is to be defined and monitored.

  • How they manage actual and potential conflicts of interest in relation to their engagement.

  • Details of their arrangements with their asset managers; the duration of the arrangement, how the scheme incentivises the asset manager to align investment strategies and decisions, and how they monitor portfolio turnover costs incurred by the asset manager.

  • Publishing their revised engagement policies which explain, amongst other things, how they have cast their votes in the general meetings of companies in which they hold shares.

From 1 October 2020, trustees of defined benefit pension schemes must publish their SIP on a publicly available, free to access website.
From 1 October 2021, trustees defined benefit pension schemes must produce and publish on a publicly available, free to access website, an annual statement which:

  • Explains how and the extent to which they have followed their engagement policy.

  • Describes the voting behaviour by and on behalf of the trustees, including the most significant votes cast by trustees or on their behalf.

ACA supports flexible savings vehicles for retirement and house purchases

The Association of Consulting Actuaries (ACA) has welcomed the debate sparked by the Housing Secretary, James Brokenshire’s, proposal to allow first-time buyers to use part of their pension pot as a deposit, namely that the ability for future generations to save in a flexible and joined-up manner is essential to help them meet ever increasing and competing savings needs.

ACA shares concerns expressed by many commentators that adequate retirement provision must not be compromised by draining pots too early in life.  However, it believes that, with sufficient safeguards, a more flexible approach to saving is preferable to requiring separate savings for different purposes.

ACA Chair, Jenny Condron commented:

“Anyone over the age of 55 can use their pension pot tax-efficiently for any purpose, including paying off mortgages. Given that younger generations will both work and retire more flexibly than in the past, we believe those under age 55 should also be given some, limited flexibility in how they use their pension savings in a tax-efficient way. We believe this would encourage greater and more efficient saving.”

Automatic enrolment declaration of compliance report

TPR has published its latest monthly report on automatic enrolment covering the period up to the end of May 2012, derived from information submitted by employers when they complete their declaration of compliance. In May 2019, 1,506,234 employers confirmed that they had met their duties and 10,089,000 eligible jobholders were automatically enrolled into an automatic enrolment pension scheme during the same period.

Restricting pension tax relief

The House of Commons Library has updated briefing paper CBP-5091, which looks at the reductions in the annual and lifetime allowances since 2010 and the tapered annual allowance.

Contact:

Julian Rowe, Policy, Professionalism & Research | Email: Julian.Rowe@MERCER.com