In Sight. a quarterly pensions publication. Focus on trusteeship and governance. This quarter s round-up

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1 Aon Hewitt In Sight a quarterly pensions publication November 2017 This quarter s round-up Page 1 Focus on trusteeship and governance 2 Regulator reviews its working practices 3 New money laundering regulations 3 on pension scams 3 Pensions tax update 4 DC charges 4 DC flexibilities 4 Review of auto-enrolment continues 5 Determining employment status 5 Cases 6 Pension Protection Fund 7 News round-up Regular features 7 On the horizon 8 Training and events Focus on trusteeship and governance The Regulator is continuing its drive to improve governance standards across pension schemes. As well as launching a governance campaign, it has set out how it will generally use its powers to impose monetary penalties and published a revised description of who it considers to be a professional trustee. Launch of governance campaign As part of its 21st century trustee initiative, the Regulator has launched a new campaign aimed at raising the standards of governance. The Regulator has said that it is not creating new or higher standards of governance. Rather it intends to be clearer about what it thinks good governance looks like. It will remind those running schemes how to meet expected standards and what it will do if those standards are not met. The announcement followed publication of research highlighting that many pension schemes are not meeting expected governance standards. Recent surveys revealed that the majority of members are in relatively well-run schemes but that results for individual small and mediumsized schemes are disappointing. The Regulator plans to tackle the poor standards that have been identified through its education programme, including its 21st century trusteeship work. As part of the campaign, targeted s will signpost new material on the Regulator's website containing content that sets out the standards that schemes are expected to meet, along with supporting resources and practical tools. The initial pages run through the basics of good governance. Over the next year, additional content will be added at regular intervals covering key governance themes. As higher standards of governance and compliance tend to be a feature of larger, better managed schemes, the Regulator will also continue to examine whether sub-standard schemes should be consolidated with larger, well-run schemes. Continued on next page

2 A new policy on fines Now that the Regulator is communicating its expectations more clearly to trustees, it has made clear that those who fail to meet required standards may face further regulatory action. A new monetary penalties policy sets out how the Regulator will generally use its powers to impose penalties for those who contravene pensions legislation. The Regulator plans to publish regular bulletins setting out how it has used its powers, including any monetary penalties it has applied. Compliance with basic governance duties In a recent compliance and enforcement bulletin, the Regulator has again reminded trustees that they can expect to receive penalties if they fail in what it considers to be basic trustee duties. The bulletin explains how the Regulator tackles non-compliance with the requirements for schemes to complete a scheme return and (if relevant) prepare an annual chair's statement. The Regulator considers that a failure to comply with these duties can be indicative of wider governance issues. The new description focuses on whether a person s business includes trusteeship. A person (whether or not a company) will normally be considered a professional trustee if they have represented themselves to one or more unrelated schemes as having expertise in trustee matters generally. The policy confirms that the payment of remuneration should not in itself determine that the person is a professional trustee; a remunerated trustee who is or has been a scheme member or who works for the employer would not normally be considered a professional trustee. The policy document gives examples of when the Regulator may consider someone to be a professional trustee. The Professional Trustee Standards Working Group, established by the pensions industry's professional bodies following a recommendation by the Regulator, is developing higher standards and accreditation for those who are considered to be professional trustees, including fit and proper protocols. Trustees should undertake a regular scheme governance self-assessment, to identify any actions that they want to take to improve standards. The Regulator chose to name those schemes whose trustees have been fined for failing to complete scheme returns or the annual chair s governance statement. During 2016, fines were given to 88 trustees for failures in relation to submission of scheme returns and, separately, 85 schemes received a mandatory fine for not preparing a chair's statement. The bulletin notes that a large proportion of these fines were issued against small schemes. Who is a professional trustee? The Regulator expects professional trustees to demonstrate higher standards than other trustees and they are likely to be given higher penalties under the new monetary penalties policy. Following consultation, the Regulator has published its policy describing who it considers to be a professional trustee. Regulator reviews its working practices The Regulator has been carrying out a review of the way it works. In a document entitled Protecting workplace pensions it identified five areas as opportunities for change: Clarifying how responsibilities are split between other bodies, such as the Financial Conduct Authority and Pension Protection Fund; and reviewing the relationships it has with those it regulates and their advisers. Providing clarity on the standards and behaviours expected of trustees, including examples of good and bad practice, and producing appropriate guidance for master trusts. Collecting information and intelligence from a wider range of sources in order to be more proactive in predicting issues and trends. The Regulator will be more visible in areas where it has traditionally been less prominent, such as engagement with smaller schemes. It will also ask to meet those it regulates so they can explain how they are meeting expectations and it will be doing more thematic work to assess emerging risks. Continuing to test the wider and swifter use of its powers, pushing the boundaries to use these powers to maximum effect. If any powers are found to be not fit for purpose it will make a case to government for amended powers. Creating a more adaptable approach to meet the fluctuating challenges it faces. It will streamline its own governance and clarify accountabilities and decision-making authority at all levels. 2 In Sight November 2017

3 New money laundering regulations New guidance sets out HMRC s view of the latest money laundering legislation as it applies to pension schemes. Although some details remain unclear, it appears that for most schemes there is unlikely to be a significant impact. The main requirements are as follows: Record-keeping there is a requirement to keep certain records, but this is information that we would expect trustees to already hold. Disclosure to third parties when entering into business transactions with others who are under an obligation to undertake money laundering checks, trustees must disclose their status as trustees. There are also requirements to give further details of the scheme if requested. Additional requirements for certain schemes other requirements apply to schemes that are liable in any year for certain taxes, such those arising in connection with a direct investment in property. There are deadlines for such schemes to register with HMRC s Trust Registration Service. Trustees should familiarise themselves with their disclosure duties when entering into business transactions and confirm with their investment managers that they are not liable for any taxes that would trigger the money laundering registration requirements as set out in HMRC s guidance. on pension scams The government has responded to its December 2016 consultation on measures aimed at tackling three different aspects of pension scams, confirming that it intends to go ahead with its proposals, although further work on the detail is still required. The measures are: Restricting the statutory right to a transfer the statutory right would exist only where the receiving scheme is a personal pension or authorised master trust, or an occupational scheme where a genuine employment link can be demonstrated. For non-statutory transfers (ie those permitted at the trustees' discretion or in accordance with the scheme rules, including those that become so because of this change), the government s view is that trustees should make all reasonable efforts to pay the transfer unless there is good reason not to, but that they still need to carry out due diligence. The new transfer regime will not be finalised until the master trust authorisation regime is in place (which will not happen until late 2018). Making it harder to open fraudulent schemes the government will require occupational schemes to be registered with HMRC through active (ie non-dormant) companies. Some of the necessary legislation is to be included in the Finance Bill 2018 (see below). A ban on cold calls in relation to pensions this will include cold calls encouraging members to transfer or to release funds from their scheme and then make inappropriate investments, or inducing members to release funds early. The ban will cover all electronic communications about pensions, including s and text messages, but it will not apply where there is a legitimate existing relationship. There is no timescale for any legislation to come into force. Separately, the Regulator has highlighted that a number of scam websites contain anti-scam messages to trick members into believing they are legitimate businesses. This includes using the Regulator s own anti-scam kitemark without its consent. Schemes should continue to highlight the risks of pension scams to members who are considering transferring their benefits, and need to ensure transfers are being paid to bona fide schemes. Pensions tax update Second Finance Bill of 2017 The Finance (No. 2) Bill includes the provisions withdrawn from the first Finance Bill of the year (now the Finance Act 2017) when it was fasttracked through Parliament before the general election: the reduction in the money purchase annual allowance to 4,000; and the 500 exemption for pensions advice provided by an employer. As expected, both of these provisions will be backdated to 6 April Draft Finance Bill 2018 A further Finance Bill will be introduced following the Autumn Budget on 22 November. Draft legislation and supporting documents have been published in advance, including provisions to tackle pension scams as announced in the government s consultation response (see above). The draft legislation would introduce powers for HMRC to refuse to register and to de-register certain pension schemes, including a master trust that does not have authorisation from the Regulator under the new authorisation and supervision regime; it would also apply to schemes that have a dormant company as a sponsoring employer. Consultation ended on 25 October 2017 and the final content of the Bill is expected to be confirmed at the time of the Autumn Budget. Aon Hewitt 3

4 DC charges Disclosure of transaction costs Regulated firms that handle pension scheme funds will have to provide a breakdown of administration and transaction costs when requested by governance bodies from 3 January Trustees and Independent Governance Committees (IGCs) have a duty to calculate costs and charges borne by members of money purchase schemes, make an assessment of value for money and report on them in an annual statement. Currently, although trustees and IGCs must request and report on transaction costs as far as they are able to, there is no requirement for asset managers to disclose information on these costs. Following consultation, the Financial Conduct Authority (FCA) has published a policy statement containing new rules and guidance that require regulated firms managing money on behalf of DC schemes to disclose these costs in a standardised way. The rules place requirements on firms to disclose certain information and include a methodology for calculating transaction costs, but do not set out how that information should be disclosed. It is understood that the Department for Work and Pensions (DWP) is planning to consult on proposals about how costs and charges relating to occupational money purchase schemes should be published and disclosed to scheme members. Subject to final regulations coming into force, the FCA intends to consult in the second quarter of 2018 on its proposals to achieve similar outcomes for contractbased schemes. Implementing the cap on early exit charges On 1 October 2017, regulations introduced a cap on early exit charges within occupational schemes that provide money purchase benefits, including AVCs. The DWP has published statutory guidance on the calculation of the 1% limit for any member who joined the scheme before 1 October 2017, indicating how market value adjustments and terminal bonuses (normally found in with-profits arrangements) should be treated. Where a member joins an occupational scheme after 1 October 2017, no early exit charges are allowed. DC flexibilities FCA retirement outcomes review The FCA has published the interim findings of its retirement outcomes review, looking at how the retirement income market has changed since the introduction of the April 2015 flexibilities, with a focus on those who do not take regulated advice. A number of potential remedies are being considered to address issues identified in the report, including: additional protections for those buying drawdown; allowing consumers to take some of their savings early without having to put the rest into a drawdown product; making it easier for consumers to compare and shop around for drawdown products; and ensuring consumers have access to tools and services to help them make good choices. The FCA expects to issue its final report in the first half of Investigation into the success of pension flexibilities Alongside the FCA review, the Work and Pensions Committee has launched an inquiry into the extent to which the pension freedoms are achieving their objectives and whether policy changes are needed. One of the main concerns is the potential for fraudsters to scam people who access their pots. The inquiry will also consider how individuals are using their savings, as research indicates that members are making choices without utilising the support and guidance available. The Committee called for written evidence, including recommendations for improvement, by 23 October. Review of auto-enrolment continues As part of its ongoing review of automatic enrolment, the DWP has consulted on two aspects: the alternative quality requirements for defined benefit (DB) schemes, and the requirements for seafarers and offshore workers. The consultation asks questions about how the legislation is working, but does not at this stage make specific proposals for change. Testing against the alternative quality requirements for DB schemes is one way of determining whether an employer s scheme can be a qualifying scheme. The test is based on the cost of providing benefits. The aim of this review is to test to what extent the regulations are operating as intended, including whether there are any unintended consequences, and to what degree the provisions are continuing to deliver simplifications and efficiencies for employers and schemes. Separately, the consultation asked for details relating to seafarers and offshore workers, whether specific difficulties have been experienced, and whether any additional guidance or support would be useful. 4 In Sight November 2017

5 Determining employment status Self-employed courier was in fact a worker An Employment Tribunal has ruled that a cycle courier should have been classed as a worker, not as an independent contractor. An individual s employment status is important because it determines their legal rights. A worker is entitled to rights and benefits including holiday pay, the national minimum wage and protection from discrimination. An employer s automatic enrolment duties apply in respect of a worker. Other cases will depend on their own facts, but this demonstrates that courts will look beyond any written contractual arrangement and will evaluate the wider working relationship in order to determine an individual s employment status. The Taylor review The issue of identifying employment status has been the subject of several recent cases and it was addressed earlier this year by the Taylor Review of Modern Working Practices. The independent review considered potential changes to employment law to keep pace with working practices and made a number of key recommendations around employment status and protections. It recommended that the term 'worker' should be retained in legislation but that it should include 'employees' and a new group of 'dependent contractors' (those who are not employees but who are not genuinely self-employed, who are eligible for worker rights). The report also calls on the government to explore ways to improve pension provision amongst the self-employed and suggests autoenrolling self-employed people into a pension and administering this through self-assessment tax returns. The next step is for the government to consider the extent to which it wants to introduce any of the recommendations into law. Cases The Court of Appeal has found in favour of the employer in two cases involving pension scheme changes. The IBM appeal: member expectations The Court of Appeal has overturned the High Court's decision that IBM had breached its duty of good faith by implementing benefit changes that were inconsistent with members' reasonable expectations. The Appeal Court ruled that, while the company's conduct and communications had given rise to member expectations, the High Court had been wrong to treat them as being of paramount significance. Rather, the members' expectations were just one of many relevant factors, with others including the financial and economic circumstances of the company. The decision must have been made after the relevant factors have been considered and the irrelevant factors have been ignored; it must also not be a decision that no rational decision maker could have reached. Capping pensionable salary through the employment contract In a case involving similar elements to the IBM case, the Court of Appeal held that the employer was entitled to impose a cap of 1% a year on future pensionable salary increases and that this did not amount to a breach of the implied duty of trust owed to its employees. In Bradbury vs BBC the Court found that the BBC s action was reasonable in the light of the rising scheme deficit and its potential future liability, resources and obligations as well as other steps it had taken. Part-time worker case referred to CJEU The Supreme Court has referred the case of O'Brien v Ministry of Justice to the European Court, to rule on whether periods of employment before July 2000 must be taken into account when quantifying the pension entitlement of part-time workers (if those periods would have been taken into account for comparable full-time workers). The Court decided not to grant an injunction to undo the changes, but members are entitled to claim damages against IBM for the failure to consult properly (which was not in dispute). It is understood that the members will not appeal this ruling. It remains important for trustees and employers to take care that consultations about benefit changes are carried out properly and that member communications do not create inappropriate expectations. Aon Hewitt 5

6 Pension Protection Fund Levies for the next three years The Pension Protection Fund (PPF) has been consulting on its final levy proposals for 2018/19, the principles of which will also apply for the following two years. The proposals from its initial consultation in March will go ahead with only minor amendments, but some further changes have been proposed, including a review of the levy parameters. The PPF plans to collect 550 million in levies for 2018/19 - a 10% reduction from 2017/18 - however, the proposed changes are generally expected to result in a levy increase for schemes with larger employers. There have been some significant changes to the calculation of insolvency risk, including: Credit ratings will be used for employers with a rating issued by one of the three main agencies. For those who do not have a rating but are regulated by the Financial Conduct Authority, a specific industry rating will be used. A small group of employers who are "close to government" will be assigned to levy band 1 (the lowest risk). Pension Protection scores calculated by Experian will still be used for other employers, but the large and complex and independent full scorecards will be replaced by two new scorecards according to whether annual turnover is more or less than 30 million. For 2018/19 a six month average of month-end scores from October 2017 to March 2018 will be used, but it will then revert back to a 12 month average. These changes are expected to result in a large number of employers being placed in a worse levy band than in prior years. The PPF is also increasing the insolvency rates applicable to employers in levy bands 1-3. The changes to insolvency risk will generally increase levies, but this is offset by a reduction in the risk-based levy scaling factor to 0.48 (from 0.65 currently). The PPF also proposes changes to the asset and liability stress factors used to adjust the funding position of schemes in the levy calculation, which are generally expected to reduce the underfunding level used in the levy calculation. The scheme-based levy multiplier will remain at % of a scheme s liabilities, but the PPF proposes to reduce the risk-based levy cap to 0.5% of a scheme's liabilities (from 0.75%). There will be relaxations to the Type A contingent asset requirements where the guarantor is a scheme employer, and also where there are multiple guarantors under a single guarantee. Both of the proposed approaches to simplify the certification of deficit-reduction contributions (DRCs) will be adopted: Option Alpha is available to all schemes and is the same as the current regime, but without the requirement to include investment management expenses. Option Beta is only available where the scheme's section 179 liabilities are less than 10 million, there was no benefit accrual during the certification period, and the amounts certified are not greater than 1 million. Under this option, the trustees or a representative of the employer can submit the certificate (rather than an actuary). The final 2018/19 Levy Determination is due to be published in December 2017, with invoicing expected to commence in autumn Schemes can start to estimate their 2018/19 levy and consider any mitigating actions. In particular, trustees and employers should: Understand how they are affected by the changes to the calculation of insolvency risk and consider any mitigation options Experian's web portal has been updated with the new scores. Where relevant, ensure the information used by Experian in the calculation of scores is correct. Obtain and submit a guarantor strength report where a type A contingent asset is expected to reduce their levy by more than 100,000. Consider if it is beneficial to certify DRCs, particularly if this would not have been the case previously. There are also changes to the contingent assets regime including: There will be new standard form agreements for new Type A and Type B contingent assets. The PPF is likely to require existing contingent assets to be re-executed using the new wording for the 2019/20 levy, but not for 2018/19. Schemes with a Type A contingent asset that results in a levy saving of more than 100,000 will have to obtain a report on the strength of the guarantor and submit this before certification in order for the guarantee to be accepted. 6 In Sight November 2017

7 News round-up An update on Brexit and pensions The UK is due to withdraw from the EU by 29 March 2019, although transitional arrangements may be negotiated. The European Union (Withdrawal) Bill is expected to repeal the European Communities Act 1972 on the same date, but convert EU law into domestic law. Many of the EU requirements that are most significant for pensions have already been incorporated into UK legislation. After exit, the UK Parliament would be able to make amendments to the detail of all this legislation. Following the referendum result, the Pensions Regulator published a guidance statement urging trustees and sponsors to remain vigilant and review their circumstances in light of the increased uncertainty. These comments are likely to remain relevant throughout the withdrawal process. SPA rise to 68 to be brought forward The government has announced its intention to bring forward the timetable for increasing state pension age (SPA) from 67 to 68. In its report on the first periodic review of SPA, the government proposes that the increase will occur between 2037 and 2039, seven years earlier than under current legislation; the change will affect those born between 6 April 1970 and 5 April This follows a key recommendation made by John Cridland in his independent review earlier this year. Legislation provides for a further review to be conducted by July 2023 at latest. The government has said that only then will it confirm the exact date of the increase to 68; this will allow the latest life expectancy projections (issued every two years) to be used and give time to assess the effect of changes already underway (i.e. the equalisation of male and female SPA at age 65 and the rise of SPA from 65 to 66). Legislation might not therefore be laid before Parliament until after the next general election (currently scheduled for 2022). The government will seek to provide a minimum of ten years notice for individuals affected by changes to their SPA. DWP to publish White Paper The government has confirmed its intention to publish a white paper on the future of defined benefit pension schemes in the winter. This is expected to consider the need to evolve and adapt the regulatory regime to improve security for members. It is also expected to address measures to drive efficiency, such as consolidation. This follows the green paper published for consultation in February, and subsequent Conservative party manifesto commitments to tighten the rules and increase the punishment for those caught mismanaging pension schemes. On the horizon Here are some key future developments likely to affect pensions. April 2018 May 2018 November 2018 September 2020 Lifetime allowance due to rise in line with CPI to September 2017 New EU General Data Protection Regulation will apply State pension age reaches 65 for women State pension age reaches 66 for men and women Auto-enrolment minimum DC contributions increase to 5% (including 2% employer) April 2019 Auto-enrolment minimum DC contributions increase to 8% (including 3% employer) Aon Hewitt 7

8 Training and events Dates scheduled for our pensions training seminars are set out below. Unless it says otherwise, all courses and events take place in central London. If you would like to make a reservation, or receive a copy of the brochure or further information, please pensionstraining.enquiries@ aonhewitt.com or telephone the Pensions Training team on: +44 (0) You can also book online at aon.com/pensionstraining Pensions training courses Defined Benefit part 1 (one day) Pension Governance Committee (half day) Defined Benefit part 2 (one day) Defined Contribution (one day) PMI Award in Pension Trusteeship (two days) Other events Dates November January, 20 February (Leeds), 17 April, 22 May, 4 July, 4 September (Leeds), 17 October, 27 November January, 26 February (Leeds) February, 25 September February November (Manchester), 13 December March, 16 May (Manchester), 13 June, 17 July, 14 November (Manchester), 11 December March November March, 10 July, 7 November March /15 March (Surrey), 10/11 October (Surrey) /14 March (Surrey) Dates Aon Hewitt 2018 Pension Conference: Pensions: new journeys, new destinations To register, please go to: 13 February Birmingham 20 February London 6 March Bristol 20 March Manchester 17 April Leeds 24 April Edinburgh 2 May London Contacts If you have any questions on In Sight, please speak to your usual Aon Hewitt consultant or contact: Helen-Mary Finney +44 (0) helen-mary.finney@aonhewitt.com About Aon Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance. For further information on our capabilities and to learn how we empower results for clients, please visit: Aon plc All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales. Registered No: