Developments in Employee Benefits law and practice

10 February 2019

Encouraging DC schemes to consider wider range of investments

This consultation sets out proposals to encourage defined contribution pension schemes to consider investing more widely, in areas such as:

  • start-up companies
  • housing

  • green energy

The proposals include:

  • requiring large schemes to report their policy on these types of investment

  • requiring smaller schemes to assess, every 3 years, whether they should consolidate into a larger scheme

  • changing how schemes calculate charges

The Minister for Pensions and Financial Inclusion delivered a speech at the Trade Union Congress ‘Fit for the future’ pensions conference when the consultation was launched.

On a related note, the All-Party Parliamentary Group (APPG) on Alternative Investment Management has published a report which examines the potential benefits of alternative investments to pension schemes, with a focus on defined contribution (DC) schemes.

The report also examines the cultural, regulatory and operational pressures that are encouraging UK DC schemes to shy away from investing in alternative investments, and recommends potential actions the government could take to alleviate those pressures.

APPG’s research has indicated two main areas in which alternative investments could potentially benefit pension schemes: diversification and access to the illiquidity premium.

Currently DC pension schemes largely rely on investments in bonds to diversify their portfolios. However, there are reasons to doubt the diversification such assets will provide in the future. By integrating alternative investments which provide returns that are uncorrelated with equity and bond markets into their funds, UK pension schemes should be able to lower the risks to their beneficiaries’ capital.

Further, by investing in alternative investments DC pension schemes may be able to take advantage of their long-term investment horizons and gather an ‘illiquidity premium’ - excess returns gained by investing capital for the long-term. Making it easier for DC pension schemes to access the illiquidity premium would have the added benefit of providing potentially billions of pounds worth of long-term investments to the wider UK economy. DC pension schemes represent an untapped source of long-term capital for the UK economy. Enabling such schemes to invest in alternative investments would constitute a crucial first step in unlocking that potential.

Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling and Compensation Cap) Order 2019

Under this Order, SI 2019/159, provisions are made to increase the levy ceiling and the standard amount of the compensation cap used by the Board of the Pension Protection Fund (the Board) in order to ensure that rises in average earnings are taken into account in setting the two amounts so that they maintain their value in England, Scotland and Wales. 
This Order will come into force partly on 14 March 2019, partly on 31 March 2019 and fully on 1 April 2019.
Provisions are made to:

  • Specify the earnings percentage used to calculate the levy ceiling, the amount of the levy ceiling, and the standard amount of the compensation cap for use in relation to the Pension Protection Fund in the financial year beginning on 1 April 2019—the Board is established by section 107 of the Pensions Act 2004 (PeA 2004) to provide compensation for members of certain occupational pension schemes which are under-funded at a certain level and whose sponsoring employer has become insolvent
  • Specify that the increase in the general level of earnings for the period from 1 August 2017 to 31 July 2018 is 3.3%—accordingly, the levy ceiling for the financial year beginning on 1 April 2019 is specified as £1,058,176,617
  • Provide that the standard amount of the compensation cap under PeA 2004, Sch 7, para 26A(7)(a) is £40,020.34 from 1 April 2019—this is an increase on the previous standard amount to reflect a higher general level of earnings
  • Revoke the Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling and Compensation Cap) Order 2018, SI 2018/39

Prison for mismanagement of pension funds

Company bosses could face up to seven years in prison if they mismanage employee pension schemes, says Work and Pensions Secretary Amber Rudd.

Rudd wants a new offence of “wilfully or recklessly” mismanaging funds. 

Plans outlined last year for a maximum sentence of two years in prison were toughened up after public consultation.

Ms Rudd said current rules mean that “acts of astonishing arrogance” by a few company directors are punished with fines “that barely dent bosses' bank balances”.

Under the proposed new law, which still requires Parliamentary approval, courts would also be given the power to levy unlimited fines for mismanagement of pensions.

Source: BBC News, 10 February

The Occupational and Personal Pension Schemes (Amendment etc.) (EU Exit) Regulations 2019

These regulations (SI 2019/192) make minor technical changes to UK pensions legislation to ensure it operates effectively once the UK has left the EU. Six items of primary legislation and 29 sets of regulations are being amended. The Occupational Pension Schemes (Cross-border Activities) Regulations 2005 (SI 2005/3381) will be revoked.

Contact:

John W. Wilson LLB(Hons) FPMI ACII, Head of Research| Email: john_wilson@jltgroup.com