Current Developments December 2018 A summary of the current hot topics in pensions

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1 Current Developments December 2018 A summary of the current hot topics in pensions Legislation and Regulatory Guarantee Minimum Pension (GMP) Equalisation Background: On 6 April 1978 the Government introduced the State Earnings Related Pension Scheme (SERPS) allowing individuals to earn an earnings related pension in addition to the basic state pension. Many employers at the time, operating suitable pension schemes, could contract the scheme out of SERPS if the scheme provided a pension at least equal to a statutory minimum level, referred to as a Guaranteed Minimum Pension (GMP). In return for contracting out of SERPS, both the employer and members paid a lower level of National Insurance contributions. The amount of GMP to be paid within the scheme is outlined in legislation which states crucially that GMPs are paid from different ages, 60 for women and 65 for men and GMPs for females accrued more quickly than their male counterparts. The ages at which GMPs are paid mirrors the state pension ages at the time. Many schemes operated on the GMP basis outlined in legislation for many years. Following the Barber judgement on 17 May 1990, schemes were required to equalise retirement ages and benefits paid. As many schemes were contracted out at the time of the Barber judgement with the calculation and level of GMP set out in legislation, there has been some uncertainty over whether GMPs were caught by the Barber ruling. In 2010 the Government announced that GMP benefits should be equal for males and females and consulted on the basis of achieving this. Subsequent commentary has been published since the 2010 announcement but a clear method of achieving GMP equalisation has not been agreed upon and most schemes still hold and pay GMPs which are unequal. Lloyds Banking Group case: Without going into the detail of the case, on 26 October 2018, the judgement delivered in the High Court stated that the Trustee of the Scheme in question was under a duty to make sure that equal benefits are paid, including where these benefits are in the form of GMP. Various different methods of GMP equalisation were considered (4 methods with further variants of those methods). We do not intend to go into detail of these methods here. The outcome of this case means that there is now a defined requirement for trustees to equalise GMPs in respect of service between 17 May 1990 and 5 April Scheme rules will need to be checked to see whether beneficiaries may be entitled to payments in arrears. There could be a six year limitation period defined in scheme rules. It is for the Authorised and regulated by the Financial Conduct Authority. Registered in England no VAT registration no

2 trustees of pension schemes, in conjunction with their Scheme Actuary and advisers, to decide upon the method of GMP equalisation they will use and the course of action they will take. Trigon s initial response: Whilst there has been some clarification delivered through this case, there is still some uncertainty within the industry. For one, there may still be an appeal lodged by Lloyds Banking Group. Secondly, the industry is awaiting guidance from the Department of Work and Pensions (DWP) on how GMP conversion legislation can be used to equalise benefits. Trigon will continue to monitor the situation, appreciating that it may take some time to obtain further clarity. From an administrative point of view, we will work with trustees to determine how they wish to proceed initially. Actions required by trustees: 1. We recommend trustees of affected pension schemes consider taking legal advice on this matter. 2. Trustees will need to consider the impact this judgement has on cash equivalent transfer values where GMPs have not been equalised. Consideration also needs to be given to trivial commutation lump sums and serious ill-health lump sums, where benefits from the scheme are also extinguished. Trustees can seek advice from their lawyers on this, or discuss the matter with their Scheme Actuary. 3. Trustees will need to consider resources required in order to focus on GMP equalisation in the near future. There will be cost implications which trustees may wish to make their sponsoring employer aware of sooner rather than later. 4. Materiality limits will need to be checked with the sponsoring employer s auditors, to determine whether a notional allowance should be added to the value of the liabilities. 5. Trustees will need to consider to what extent they allow for the currently unknown financial implication of GMP equalisation in the next actuarial valuation. Again, this should be discussed with the Scheme Actuary during the next actuarial valuation discussions. 6. GMP reconciliation exercises should now be nearing completion if not already complete. Where this is not the case, trustees should look to reconcile GMPs with HMRC as soon as possible. 7. Don t panic! Remember that there may still be an appeal and that the industry is still awaiting further guidance from DWP. New Secretary of State for Work and Pensions Esther McVey resigned from Government on the 15 November 2018 and has been replaced by the Rt Hon Amber Rudd (Conservative MP for Hastings and Rye). The Secretary of State for Work and Pensions directly oversees departmental management and expenditure for the Department of Work and Pensions (DWP), which is the body responsible for administering the State Pension and other working age benefits. 2

3 Amber Rudd graduated from the University of Edinburgh with a degree in History, and has a strong financial background, having worked in investment banking and venture capital, and writing for financial publications, before being elected to Parliament in May She has served on the Environment, Food and Rural Affairs select committee; acted as Secretary of State at the Department of Energy and Climate Change; and was previously Home Secretary from July 2016 to April Barnardo s denied indexation swap The Supreme Court has ruled against an appeal from Barnardo s to change the inflationary index used to increase member s benefits in their pension Scheme. The charity had argued that the Trustees had discretion to change the index from retail prices index (RPI) to consumer prices index (CPI) due to the way in which the Scheme Rule had been drafted. The Rule in question specified that revaluation must be based on the general index of retail prices or any replacement adopted by the Trustees without prejudicing approval. Whilst the judges accepted that CPI is a better measure of price inflation than RPI, their decision to deny permission was due to the hardwiring of RPI into the rules. This case brings clarity for Barnardo s, and whilst the ruling was based upon the specific wording of the Scheme s Rules, it may provide comfort for other schemes that have been considering whether they are able to make such a change. DWP publish CDC consultation The Department for Work and Pensions (DWP) have published their long-awaited paper on collective forms of savings, known as collective defined contribution (CDC). A number of proposals have been made which seek to improve retirement outcomes, primarily for people who are uncomfortable making complex financial decisions at the time of their retirement. It may be the case that the scale of assets and membership required to pool risk safely will mean the option is only viable for the largest schemes such as the Royal Mail, who announced earlier this year plans to introduce the UK s first CDC scheme, but the DWP consultation is seen as a good opportunity to consider how best to provide for millions of retirees in the years ahead. DWP publish the pensions dashboard feasibility study The Department for Work and Pensions (DWP) has published a report describing how it plans to implement a non-commercial, single pensions dashboard (before moving to the planned multi-dashboard system), facilitated by the Single Financial Guidance Body. The Pensions and Financial Inclusion Minister, Guy Opperman, hopes that the dashboard will be a key milestone in reforming pensions, and that plain pensions information at the touch of a screen will ensure better-informed, more engaged savers. There is some concern at the news that state pension data will not be included from the outset, but the DWP have said they will work with the industry to ensure this is included at some point. 3

4 While scheme participation in the dashboard will initially be voluntary, the DWP states that their eventual aim is that it will be compulsory, with some exemptions such as small selfadministered schemes. After its launch in 2019, it is hoped that the majority of schemes will be onboarded by The consultation regarding the dashboard will close on 28 January 2019, and is asking for input on such ideas as phased implementation, and whether certain types of data should be excluded from the dashboard in order to safeguard consumers. Users will have the ability to revoke their consent for the dashboard to hold their data. Redress for non-financial injustice The Pensions Ombudsman has issued revised guidance for dealing with redress for nonfinancial injustice (commonly referred to as distress and inconvenience ) caused by maladministration. Within the guidance is an introduction of fixed compensation amounts, ranging from no award where the injustice is deemed to be nominal, up to more than 2,000 where exceptional distress or inconvenience has been suffered. Each case of non-financial injustice will be assessed by the Ombudsman on its own facts and merits, with the particular circumstances of the individual taken into consideration. The resources of the pension scheme will also be considered, with the intention being that no award to any applicant will be to the detriment of other scheme members. State Pensions The level of New state Pension will increase to pw from April 2019, provided the individual has sufficient National Insurance credits. For those who reached state pension age before 6 April 2016, the old rules still apply and the Basic State Pension, from April 2019 will rise to pw. The married couple s pension will amount to Again sufficient National Insurance credits are required. The Pensions Regulator / Pension Protection Fund (PPF) FCA and TPR publish joint pensions strategy On 18 October 2018 the Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) launched a joint regulatory strategy to tackle the problem of people having inadequate income upon reaching retirement, or income which is lower than they anticipated. There are two particular priority areas for joint action where the FCA and TPR will work together going forwards. The first looks at analysing the entire consumer pensions journey to identify aspects where people require more education and tools to make considered, well-informed decisions. The second will see the organisations utilising their powers to set and enforce clear standards and principles to ensure that pensions are well governed, well funded, and offer good value for money. The full strategy can be found here. The two organisations have collaborated successfully in the past to produce a joint campaign aimed at tackling pension scams, fueled by the finding that victims of pension scams lost an average of 91,000 each in The TV advertising campaign and associated website aimed to raise awareness of the common tactics used to steal savings. 4

5 Court of Justice European Union - Hampshire vs the Board of the PPF The PPF has been considering the implications of the ruling in the Hampshire case, which states that pension scheme members should receive at least 50% of the value of their accrued old age benefits if their employer becomes insolvent. We understand that this affects a small number of PPF and Financial Assistance Scheme (FAS) members who are currently receiving less than 50%. In a recently published statement, the PPF provides high-level detail of its intended phased approach to implementing the ruling. It is understood, however, that further information about the benefits in original schemes is or may be required. The PPF is finalising the method to be used and also working on guidance, which we understand will be published shortly. On the horizon Institutions for Occupational Retirement Provisions (IORP II) The revised Institutions for Occupational Retirement Provisions directive (IORP II) is legislation which was brought into effect by the European Union in January 2017, which aims to set common standards to improve governance of occupational pension schemes. Member states must transpose these new rules into their national law by 13 January 2019; note that this is the deadline for the Government to enact the changes, rather than for pension schemes to comply with them. On October the Department for Work and Pensions (DWP) published two sets of guidelines to implement the IORP II changes: the Occupational Pension Schemes (Governance) (Amendment) Regulations 2018 ( the Governance Regulations ), and the Occupational Pension Schemes (Cross-border Activities) (Amendment) Regulations 2018 ( the Cross-border Regulations ). Under IORP II, occupational pension schemes will be required to put in place and follow effective governance systems, including internal controls. These systems will vary from scheme to scheme as they are required to represent the complexity and scale of each scheme s individual organisational structure, and to take into account the level of risk to which the scheme is exposed. The trustees will be required to document these systems in an own risk assessment. It is worth noting that the DWP s Governance Regulations do not provide specific instructions on how schemes should follow the guidance, or how the Pensions Regulator (TPR) should regulate them; more detail will follow in codes of practice from TPR. These codes of practice will cover such areas as having an effective internal controls policy, policies relating to outsourcing activities, remuneration policies, and the aforementioned own risk assessment. TPR intend to consult on these codes of practice next year, with any changes unlikely to take effect before late 2019, and the government has stated that it intends to give schemes adequate time to familiarise themselves with the new regulations and plan any required changes. 5

6 Forthcoming Trigon Events We are pleased to confirm that training will take place at Trigon s offices in Bristol on the following dates: Tuesday 30 April 2019 Wednesday 26 June 2019 Thursday 21 November 2019 Topic TBC closer to the date Topic TBC closer to the date Legal Update Training, covering the latest legal developments and case law Morning Seminar (9:30am 1:00pm) Buffet lunch Morning Seminar (9:30am 1:00pm) Buffet lunch Morning Seminar (9:30am 1:00pm) Buffet lunch Please save these dates in your diaries. Further details on each training event, including the topic and timings, will be issued closer to each date. If you would like to register your place for any of the above dates, please em pensionstraining@trigon.co.uk. If you require further information at this stage, please contact your usual Trigon representative If you require further information at the stage, please contact your usual Trigon representative. This note contains only generic information and is not intended to be advice suitable for any particular party. If you would like help or guidance with any of the information contained please contact your Trigon representative who will be pleased to assist you. 6