Developments in Employee Benefits law and practice

25 June 2018

DWP consultation on trustees’ investment duties

The government has introduced regulations which will require trustees to produce a policy which assesses the sustainability of their investment decisions for pensions. For the first time, through this policy, members of pension schemes will have the power to have input over the impact of social and environmental factors on their investments.

The policy will be available to members enabling them to see how their money is being invested, so that they can make their own assessment of efforts to combat various risks, including climate change, poor corporate governance and socially harmful practices, and to make their views heard.

Defined contribution schemes will be required to make this policy available to the wider public.

The Department for Work and Pensions (DWP), with the Financial Conduct Authority (FCA), has opened a consultation to gather views on the draft Occupational Pension Schemes (Investment and Disclosure) (Amendment) Regulations 2018, which will close on 16 July 2018.

This forms the joint response of the two bodies, and, in an announcement on their site, the FCA has confirmed that the consultation will address rule changes which will require the Independent Governance Committees firms to report on their policies on:

  • considering long-term financial risks
  • accounting for members’ ethical concerns
  • stewardship

The DWP has also published a policy paper which includes plans to clarify the requirements for trustees of occupational pensions and the independent governance committees of workplace personal pensions on:

  • assessing environmental, social and governance considerations, including climate change
  • the viability of considering members’ non-financial or ethical concerns in pension schemes
  • the role of engagement and voting as aspects of stewardship of pension scheme assets

https://www.gov.uk/government/news/billions-invested-by-pension-schemes-to-be-used-for-social-good-under-new-regulations?utm_source=3a1a6a24-9f11-4b82-839e-4525bfc55236&utm_medium=email&utm_campaign=govuk-notifications&utm_content=daily

HMRC pension scheme registration guidance updated

HMRC have updated its pension scheme guidance to reflect application status information that will show online following an application to register a pension scheme.

https://www.gov.uk/guidance/pension-administrators-register-a-scheme

Royal London warns against chasing ‘risky income’

Research published by Royal London highlights the risk to investors of chasing high risk investments to generate income in retirement. The research shows that it is possible to have a good standard of living in retirement by investing across a risk-controlled mix of assets, targeting both income and capital growth.

The paper makes three key points:

  1. Chasing high natural yields in a low return environment almost inevitably involves taking a large risk with capital. It also leaves investors with a poorly diversified portfolio which exposes them to considerable volatility during periods of market stress. Those seeking an adequate level of natural yield are now driven towards ‘exotic high yield’ investments like peer to peer lending and aircraft leasing, whereas a much broader range of traditional investments used to generate a decent regular income.
  2. Going to the other extreme of being ultra-cautious in retirement will generate very poor levels of retirement income, especially because of low interest rates and increasing longevity, and could increase the likelihood of the pension pot running dry too soon.
  3. That focusing on getting the risk level right by investing across a range of asset classes that generate both income and capital growth helps to overcome both of these problems; multi-asset investing is more diversified and therefore reduces volatility, and seeking both income and capital growth opens up a much wider range of potential investments. Rather than living purely off ‘natural yield’, the paper recommends that individuals reinvest dividends, coupons and interest payments back into their fund and generate an income by selling units of capital each year to live off.

https://www.royallondon.com/about/media/news/2018/june/dont-chase-risky-income-in-retirement-new-warning-from-royal-london/

New DWP surveys

DWP has published its latest (2017) employers pension provision survey.

This report presents findings from the 2017 Employers’ Pension Provision Survey (EPP 2017). EPP 2017 was commissioned by the Department for Work and Pensions and undertaken by Kantar Public and the National Institute of Economic and Social Research (NIESR). The 2017 survey was the twelfth in an approximately biennial series that has been conducted since the mid-1990s.

A principal aim of the report is to describe the extent and nature of pension provision among private sector employers in Great Britain in 2017. This includes the proportion of firms providing pensions and the extent of employee membership of employer pension schemes, along with types of provision and employer contribution rates.

Comparisons are also made with key findings from earlier surveys in the series.

The report is also a key source of information on the impact of the workplace pension reforms so far. In addition to providing a picture of how pension provision is changing among private sector employers, the report considers employers’ awareness of the reforms and their responses to them, as well as measures of opt-out, cessation and re-enrolment.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/717607/employers-pension-provision-survey-2017.pdf

DWP has also published new automatic enrolment research.

This summary presents the key findings of a survey of small employers (with five to 29 workers) and micro employers (with one to four workers) on behalf of the Department for Work and Pensions. The survey covered employers who had automatically enrolled their staff into a qualifying workplace pension scheme between September 2016 and March 2017, and their experiences of this process.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/717423/automatic-enrolment-quantitative-research-with-small-and-micro-employers.pdf

FCA: Financial lives of consumers

The FCA’s Financial Lives survey report looks at the financial situation of people across the UK and highlights where in the UK people may be more vulnerable.

https://www.fca.org.uk/news/press-releases/fca-reveals-urban-rural-differences-how-consumers-experience-financial-services

Work and Pensions Committee: Pensions Freedoms – Government response to WPC ninth report

The Work and Pensions Committee published its Ninth Report of Session 2017–19, Pension freedoms (HC 917) on 5 April 2018. The Government response was received on 11 June 2018 and is appended to this report.

On proposals for ‘mid-life MOTs’, he Government agrees with the Committee that enabling individuals to take stock and assess their health, skills and finances, and plan for a financially secure future, is crucial. The Government is already working with employers like Aviva, who are already trialling a mid-life MOT, as well as other stakeholders, to build an evidence base. These findings will be used to inform testing this year.

However, on ‘default decumulation paths’, the Government is, at this stage, not convinced of the merits of default decumulation pathways and is concerned that measures to require individuals to be placed into particular products would be inconsistent with the freedom and choice reforms. The pension freedoms have deliberately moved away from the idea of defaulting individuals into a single product, namely annuities.

There is insufficient evidence to suggest a common default pathway would be suitable for the majority of people at this time, particularly given that most people reaching retirement with DC savings now and in the coming years will also have other retirement provision to take into account in their planning. Pension providers necessarily have a limited view of their customers’ financial position. The FCA noted in their response to the Committee that “consumers’ needs and circumstances differ significantly in decumulation, so a default pathway may not be appropriate for all of them.”

There is, however, a need to ensure that when consumers do exercise a choice to access part of their savings, what happens to their remaining savings is both understood and treated appropriately. Government will await the publication of the FCA’s final Retirement Outcomes Review in summer 2018 in order to consider fully its proposals on decumulation pathways, a charge cap on decumulation products and extending the role of Independent Governance Committees.

Ensuring that consumers have freedom and choice about how to use their retirement savings is a key priority for the Government, so that consumers are able to make the decisions that are right for them and are empowered to manage their income in retirement. The Government will continue to engage with the FCA, industry and consumer groups, to ensure that customers are treated fairly and benefit from appropriate protections.

https://publications.parliament.uk/pa/cm201719/cmselect/cmworpen/1231/123102.htm

New pension scams code

The Pension Scams Industry Group (PSIG), the voluntary body set up to combat pension scams through the publication of good practice in due diligence for trustees, providers and administrators, has launched Version 2.0 of Combating Pension Scams - A Code of Good Practice.

The original Code, first published in 2015, set out the key steps to help identify possible pension scams, as well as providing practical guidance like checklists and sample letters. Whilst the code has no statutory basis, schemes have been adopting its guidelines in the three years since its launch, resulting in the prevention of thousands of transfers to unauthorised arrangements and saving many people from a likely loss of pension savings.

Version 2.0 of the code has been published to reflect a new world of scamming and changes to the market and scammers’ tactics. Highlights include:

  • A focus on vulnerable customers
  • How schemes can talk to transferring members to collect better information
  • Recommending schemes refer insistent members to TPAS for impartial guidance
  • Making it easier for schemes to report suspected scams to Action Fraud
  • Expanded template letters and stronger member discharges
  • Case studies portraying real decisions made by real schemes
  • Greater clarity on member responsibility where decisions have been made contrary to due warning

http://www.combatingpensionscams.org.uk/

Views sought on exemptions from data controller charges

The Department for Digital, Culture, Media & Sport (DCMS) is seeking views on whether the current exemptions from paying charges are still appropriate and whether there should be any new exemptions. The consultation, which covers trustees of pension schemes, ends on 1 August 2018.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/717785/Consultation_Document__changes_to_exemptions_from_paying_charges_to_the_ICO.pdf

Consultation on insurable interests Bill

The Law Commission and the Scottish Law Commission have published a consultation and updated draft legislation with the intention of broadening the concept of insurable interest. Proposals include confirmation that pension trustees have an insurable interest in the lives of members of the group.

https://www.lawcom.gov.uk/project/insurance-contract-law-insurable-interest/#insurable-interest-consultation

Contact:

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

Stephen Williams, Senior Research Consultant | Email: stephen_williams@jltgroup.com