PENSIONS PLANNER YOUR GUIDE TO FUTURE DEVELOPMENTS JUNE 2019 - Herbert Smith Freehills
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PENSIONS PLANNER YOUR GUIDE TO FUTURE DEVELOPMENTS JUNE 2019
02 PENSIONS PLANNER MAY 2019 HERBERT SMITH FREEHILLS
Contents
03 Foreword Contacts
Alison Brown
04 Quarter in review Executive Partner, Employment,
Pensions and Incentives
06 Timeline T +44 20 7466 2427
alison.brown@hsf.com
08 In the spotlight Samantha Brown
Partner, Head of Pensions
• Next three months Pensions
T +44 20 7466 2249
• Three to twelve months samantha.brown@hsf.com
• On the horizon Rachel Pinto
Partner
Pensions
T +44 20 7466 2638
rachel.pinto@hsf.com
Tim Smith
Professional Support Lawyer
Pensions
T +44 20 7466 2542
tim.smith@hsf.comHERBERT SMITH FREEHILLS PENSIONS PLANNER MAY 2019 03
Foreword
The last quarter marked the end of an era. Not the and governance (ESG) factors in setting their We also continue to innovate and in April we
end of the UK's membership of the EU, as had been scheme's investment strategy. launched our new UK pensions blog.
expected, but the end of the roll-out of
automatic enrolment. The focus on ESG factors, including climate This is a great way to keep up with our latest
change, in investment decision-making is thinking on current developments in pensions law
Launched in October 2012, following many years increasing across the board, not just in the and practice. You can subscribe at hsfnotes.com/
of consensus building, automatic enrolment pensions arena, and it is an issue that is receiving pensions/subscribe/.
stands as a great example of effective long-term increasing attention from policymakers, regulators
policy making. and pressure groups alike. We hope you like it!
April saw the final step-up in the phasing in of the The impact of GMP equalisation also continues to
minimum auto-enrolment contribution rates. All be felt, as trustees and sponsors consider the best
eyes will now be on the impact, if any, on opt-out way to equalise benefits under their scheme. GMP
rates before the debate about how best to build on conversion is seen by many as the silver bullet that
the initial success of automatic enrolment hots up. could solve the equalisation conundrum. However,
the DWP's recent guidance leaves a number of
The Brexit process trundles on with the outcome important questions unanswered. Most schemes
still uncertain. Alongside the now familiar pattern are also awaiting confirmation from HMRC on the
of deadlines being set and then passed, the words tax implications of conversion, and of GMP
"as soon as Parliamentary time allows" have equalisation more broadly, before taking action.
become an established feature of the
post-referendum political landscape. The current air of uncertainty is doing nothing to
dampen innovation, however, with the Government
The next Queen's speech has become the latest confirming its support for:
victim of the Brexit malaise. It is expected that a
••the industry to press ahead with the development
new Pensions Bill will be brought forward in the
of a new online pension dashboard, and
next session of Parliament. However, the timing of
this and the make-up of the Government that will ••Royal Mail's plans to establish a collective DC
be bringing it forward is anybody's guess. pension plan.
The risks posed by climate change have also been The Government is also expected to back the
dominating the headlines. This issue is moving up establishment of new DB consolidator vehicles.
the agenda for trustee boards as they prepare for However, we are still waiting for details of the
the introduction of new statutory measures in regulatory framework for consolidators to be
October 2019, which will require trustees to set out confirmed – something which is likely to be crucial
their policy on how they take account of financially to their success.
material factors, including environmental, social04 PENSIONS PLANNER MAY 2019 HERBERT SMITH FREEHILLS
Quarter in review
Government confirms plans to strengthen the For more on the Regulator's new powers read The statement is relevant to all DB schemes but it Key messages from tPR’s 2019
Regulator's powers our blog. is particularly relevant to schemes preparing annual funding statement
valuations with an effective date between
In its response to the consultation on protecting
22 September 2018 and 21 September 2019.
defined benefit (DB) pension schemes and Comment: Although the consultation
strengthening the Pensions Regulator, the response confirms the headline changes, Average recovery plan length
It sets out the approach that the Regulator
Government confirmed that it plans to: much of the detail is subject to further is 7 years.
expects to be taken in 10 different scenarios,
••introduce a new criminal offence of wilful or consideration. For example, the new tests for which vary according to the financial strength of a
reckless behaviour in relation to a DB pension contribution notices and FSDs (to be renamed scheme’s sponsor, a scheme’s funding position and
scheme (aimed at company directors) "Financial Support Notices") and the timing its maturity.
and content of the Declaration of Intent are
••give the Regulator the power to issue fines of Read more about the annual funding statement in Recovery plans for schemes
still to be determined. Therefore, sponsors
up to £1 million in these circumstances and for our blog. with strong sponsors expected
will need to wait for the draft legislation and
other breaches by corporate sponsors of their Regulator guidance for confirmation of the to be significantly shorter
pensions obligations scope of these new powers and how they than this
may be used. Comment: The latest funding statement
••require corporate sponsors to issue a Declaration reflects the tougher, more prescriptive
of Intent in relation to proposed corporate approach that the Regulator is taking on
transactions and re-financing to notify trustees funding and other matters. We can expect to
TPR's annual funding statement Trustees expected to set long
and the Regulator about the transaction and how see this repeated in the new funding Code of term objective for their
they plan to mitigate any detriment to their In March, the Pensions Regulator published its Practice for DB schemes. Consultation on the scheme and to fund for this.
scheme, and 2019 annual funding statement for DB schemes. principles that will underpin the new Code
••make changes to the Regulator’s existing The statement: are due to be consulted on in late summer.
anti-avoidance powers to make it easier for it ••reflects the Regulator’s tougher approach
to impose Contribution Notices and Financial If dividends exceed deficit
Support Directions (FSDs) on corporate ••confirms the Regulator’s focus on reducing the DWP's GMP conversion guidance leaves tricky recovery contributions (DRCs),
sponsors and on connected and length of deficit recovery plans and requiring questions unanswered scheme should have strong
associated parties. schemes to set a long term funding target, and funding target and short
Since the High Court confirmed the need for
recovery plan.
••spells out more clearly the Regulator’s schemes to equalise pensions for the effect of
The response does not make clear when these expectations regarding the balance between GMPs in October last year, GMP conversion has
changes will come into force. Some of the deficit recovery contributions and the payment been seen by many as the preferred option for
proposals, such as the new criminal offence and of dividends in different circumstances. most schemes. However, attempts to use the For weak employers dividends
civil fines, will require primary legislation and it is conversion legislation have been postponed should be less than DRCs or
anticipated that they will be included in the next For many schemes, this is likely to result in the pending guidance from the DWP. have ceased.
Pensions Bill. This means that the new powers are sponsor being required to put more money into
unlikely to come into force until Spring 2020 at their scheme more quickly.
the earliest.HERBERT SMITH FREEHILLS PENSIONS PLANNER MAY 2019 05
Just before Easter, the DWP published its For more on the DWP's guidance read our blog. British Airways agrees settlement with trustees PPF urges trustees to put contingency plans
guidance. But it leaves a lot of the tricky questions in pension increases case in place
unanswered and so does not, as yet, provide the
Comment: GMP conversion offers the chance The trustees of the Airways Pension Scheme (APS) The Pension Protection Fund (PPF) has issued
silver bullet that trustees and sponsors were
to simplify benefits and address the issue of have reached an agreement with British Airways, guidance for trustees which sets out contingency
hoping for.
GMP equalisation in one go, avoiding the subject to Court approval, to settle the long-running plans that they ought to have in place to ensure a
complexity and costs associated with running dispute over pension increases under APS. A smooth transition into a PPF assessment period
Section 4 of the guidance sets out a 10 stage
dual member records. However, the process one-day hearing to seek the High Court's approval and to minimise the distress for members should
process for implementing GMP conversion.
itself is far from simple and a number of issues is due to take place in the first week of July. the need arise.
It also highlights many of the legal and practical still need to be ironed out. Therefore, most
schemes thinking of pulling the trigger on GMP The guidance focuses on the need for trustees to
issues that will need to be considered as part of the Comment: Although this news is likely to
conversion are likely to keep the safety catch take action now to ensure:
process. This includes: have been well received by APS members, it
on until there is greater clarity on these points. ••that they have access to scheme documents and
••deciding whether to convert the benefits of all means we will not benefit from the Supreme
Court's analysis of the 'proper purpose' member data, and
members at the same time
principle and the extent to which trustees ••that pensions can continue to be paid
••the factors that trustees should consider when The end of the roll out of automatic enrolment have a role in shaping the benefits payable
setting the assumptions to value members' under their scheme.
In April, the minimum automatic enrolment in the event of the sponsor’s insolvency.
benefits, and
contribution rates increased to 8% of qualifying
••deciding how to deal with active members and earnings, with at least 3% being payable by an
members with a final salary link. individual's employer. This is the last scheduled step New single financial guidance body named Comment: The guidance draws on the PPF’s
up in the minimum contribution rates and all eyes experience of helping schemes in distress and
On 6 April 2019, the new single financial guidance highlights the need for trustees to take action
Whilst it provides a helpful summary of the will be on the impact that this has on opt-out rates.
body was officially named the Money and in good times to ensure that they are prepared
conversion process the guidance leaves a lot of Pensions Service (MPS). References to The
questions unanswered, pointing trustees instead to should the worst happen in order to minimise
Comment: This marks the end of the Pensions Advisory Service (TPAS) in existing the distress for their members.
their legal and actuarial advisers. pensions legislation have been updated to refer
beginning for automatic enrolment. Attention
will now turn to how the automatic enrolment instead to the MPS.
The guidance indicates that the DWP is
considering changes to the conversion legislation, requirements should evolve in future to
but it does not identify the changes that are likely maximise coverage and to ensure that
Comment: Where schemes sign post
to be made or when these can be expected. individuals are saving enough.
members to TPAS or to the Money Advice
Service they will need to update member
There is also no clear indication of when we can communications to reflect this.
expect HMRC to confirm its view on the various
tax issues associated with GMP conversion (and
GMP equalisation, more generally).06 PENSIONS PLANNER MAY 2019 HERBERT SMITH FREEHILLS
Timeline
May 2019 1-3 July Summer 2019 Summer/Autumn 2019 1 Oct 2019
Regulator powers – Pension increases Equalisation – CJEU's Pensions Bill – Next Investment – deadline
ITV's appeal against – APS trustees' judgment in Safeway v Queen's speech, which for compliance with
imposition of financial application for approval Newton appeal regarding is expected to include a new investment
support direction set of proposed settlement scope to equalise Pensions Bill, due disclosure requirements
to be heard by Court with BA in pension retrospectively expected (including need to
of Appeal increases dispute to be set out policy on ESG
heard by High Court factors)
11 June 2019 17 July 2019 Aug/Sept 2019 30 Sept 2019
Investment – CMA Order Accounting – Date by Scheme funding – TPR due Master trusts –
implementing remedies which Government's to consult on framework authorisation process
following its investment response to CMA's and principles which will for existing master trusts
consultants and fiduciary recommendations on underpin new DB funding concludes (except where
management market changes to audit industry Code of Practice six week extension has
investigation must be is due been granted)
made by this date
2019HERBERT SMITH FREEHILLS PENSIONS PLANNER MAY 2019 07
2019 Early 2020 Spring 2020 6 Oct 2020 By end of 2021
Dashboard – work on FCA/HMT – review of Scheme funding – TPR State pension – State Investment – LIBOR
creation of online pension Financial Advice Market due to consult on new pension age for men due to be discontinued
dashboard continues Review outcomes scheme funding Code and women reaches
expected of Practice age 66
31 Oct 2019 2019 6 April 2020 1 Oct 2020 2020
Brexit – latest date Scheme funding – EIOPA Insolvency – HMRC Investment – date Scheme funding –
by which UK is conducting bi-annual set to become a from which trustees of new DB funding Code
currently due to pension scheme stress secondary preferential schemes with money expected to come
leave the EU (subject tests with assistance of creditor on corporate purchase benefits (other into force
to any transitional national regulators in EU insolvencies that occur than AVCs) must publish
arrangements or further member states on or after this date new SIP implementation
extensions that may statement
be agreed)
2020 202108 PENSIONS PLANNER MAY 2019 HERBERT SMITH FREEHILLS
In the spotlight
Next three months CMA Order on fiduciary management HM Treasury has also indicated that it will consult
on the CMA's recommendation that the FCA's Action: The Government is under pressure to
New Corporate Governance Code The Competition and Market Authority (CMA) is take decisive action. Trustees and sponsors
perimeter guidance is extended to cover services
required to implement remedies following its should maintain a watching brief.
The 2018 UK Corporate Governance Code, which provided by investment consultants. However, it
investigation of the investment consultancy and
applies for financial years beginning on or after has not committed to a timetable for this.
fiduciary management markets by 11 June 2019.
1 January 2019, is a complete rework of the 2016
edition and contains a range of new requirements
Three to twelve months
The CMA has published a draft Order for Action: Trustees looking to appoint a fiduciary
for both corporate behaviour and reporting. consultation, which would require: Trustees required to confirm policy on ESG
manager should await the Regulator's
considerations, stewardship and engagement
••trustees to undertake a competitive tender guidance before proceeding. Those whose
The revised Code is designed to help ensure the
before they award a fiduciary management scheme already has a fiduciary manager in A series of measures to clarify and strengthen
highest standards of corporate governance. It
mandate of 20% or more of their scheme's place will need to decide on the most suitable trustees' investment duties, in particular, to require
focuses on the importance of long-term success
assets for the first time time to conduct a tender process. trustees to demonstrate how they take account of
and sustainability, addresses issues of public trust
environmental, social and governance (ESG)
in business and aims to ensure the attractiveness ••trustees to run a competitive tender within considerations which may have a financially
of the UK capital market to global investors. five years of a fiduciary manager's appointment
Government considers calls for shake-up of material impact on scheme investments are set to
(where they have been appointed without one) come into force later this year.
There are some key new requirements in the Code audit sector
or within two years of the Order being made,
relating to corporate culture, director whichever is later The CMA has called for a major shake-up of the By 1 October 2019, schemes that are required to
independence, remuneration, whistleblowing, audit sector. This comes hot on the heels of the
••investment consultants to separate marketing of produce a Statement of Investment Principles (SIP)
workforce engagement and significant shareholder damning findings of the Kingman Review and the
their fiduciary management service from their (ie those with 100 members or more) will be
votes against a board resolution. Listed companies recommendations of a major report published by
investment advice, and required to update their SIP to set out:
are required to set out how they have applied the the Business Select Committee.
principles set out in the Code and explain any ••fiduciary management firms to provide better ••how they take account of financially material
deviations from these. and more comparable information on fees The CMA is recommending: considerations, including but not limited to ESG
and performance. considerations, such as climate change, and
The first reporting against the new Code will be ••separation of audit from consulting services
••their policies in relation to the stewardship of
required in 2020, unless companies choose to Most of these requirements would come into force ••mandatory ‘joint audits’ to enable firms outside investments, including their approach to
adopt it early. six months after the Order is made. the Big 4 to develop the capacity needed to audit engagement and the exercise of voting rights.
the UK’s biggest companies, and
Action: Trustees should check how their asset The Pensions Regulator is due to consult on Trustees of money purchase schemes will also
••the introduction of statutory regulatory powers
managers plan to take account of the new guidance for trustees on running competitive need to update the SIP in relation to their default
tenders and to support the CMA's other remedies to increase the accountability of companies’
Corporate Governance Code in their asset audit committees. strategy to set out how they approach these issues
selection and in their engagement activities. during the summer. The DWP has also confirmed in respect of their default arrangement.
Trustees should also monitor the extent to that it will introduce regulations to replace the final
Order in 2020. The Government has committed to responding to
which scheme sponsors adopt these practices. the CMA's recommendations by mid-July. As well as updating their SIP, trustees should also
consider how their policy on ESG considerations,HERBERT SMITH FREEHILLS PENSIONS PLANNER MAY 2019 09
stewardship and engagement should be reflected HMRC a secondary preferential creditor in respect We would expect the new Code to reflect the reasons of political expediency (although nothing
in their mandates with asset managers and how of certain taxes payable by employees and Regulator's tougher approach by making more in politics can be taken for granted at present).
they will monitor this. customers. This change will apply to corporate explicit what the Regulator expects and providing When it is delivered, the Queen's speech is
insolvencies that occur on or after 6 April 2020 clear grounds for regulatory intervention where expected to include a Pensions Bill, which it is
The original consultation on these new measures and it will mean that HMRC will move above these expectations are not met and the Regulator anticipated will:
suggested that trustees would be required to take floating charge holders and unsecured creditors is not satisfied with the justification for this.
••include measures to strengthen the powers of
account of members' views on ESG considerations (including pension schemes) in the priority order
for recovering debts on insolvency. the Pensions Regulator
in future. However, in its response to the In particular, we expect the new Code to set out
consultation, the DWP clarified that trustees will more clearly what the Regulator considers to be ••put in place an authorisation and regulatory
not be required to do this. Instead, they will simply The Government is proposing that HMRC's appropriate in terms of: framework for DB consolidators
be required to set out their policy on taking account preferential treatment should extend to the
recovery of tax debts for PAYE (including student ••the assumptions used to value a scheme's ••facilitate Royal Mail's plans to establish a
of non-financial considerations, such as members'
loan repayments), employee NICs, Construction technical provisions and to underpin its collective DC scheme
views, in their SIP, to the extent that they have one.
Industry Scheme Deductions and VAT that are due recovery plan
••introduce new powers to require scheme's to
The updated SIPs will need to be posted on a at the commencement of the insolvency. It is ••the length of a scheme's recovery plan, and provide data to the pension dashboards, and
website that can be accessed by interested estimated that this will result in HMRC recovering
up to £185m per year in additional taxes. ••what it means for schemes to be treated fairly ••address deficiencies in the GMP conversion
members of the public as well as scheme members.
compared with a company's shareholders. legislation.
From 1 October 2020, trustees of money purchase Action: Trustees should assess the impact This is in line with the approach adopted in the It is also expected that the Bill will contain
schemes will also be required to publish a that this may have on the amount that their Regulator's 2019 annual funding statement (see measures to require trustees to set a long-term
statement confirming the extent to which they scheme would stand to recover in the event Quarter in review). That said, we expect that the objective for their scheme.
have followed their SIP during the previous scheme of their sponsor's insolvency and on the Regulator will seek to maintain some flexibility by
year and explaining any changes made to it. protection afforded by any contingent assets adopting a "comply or explain" approach to the To find out more about what we can expect to be in
granted to their scheme. expectations set out in the new Code. the next Pensions Bill and the key provisions to look
Action: Trustees should revisit their policy out for, check out our blog.
on taking account of ESG factors and their New DB funding Code due in Spring 2020 Action: Trustees and sponsors should keep
approach to stewardship in light of these new
A new Code of Practice on funding defined benefit track of the consultations on the new Code as Action: Trustees and sponsors should maintain
requirements and discuss the implications of
(DB) schemes is due to be introduced in 2020, they will reveal the Regulator's approach to a watching brief. Points to look out for are the
this with their investment advisers and
with a two stage consultation process set to begin funding matters and how this may impact specific terms of the Regulator's new powers,
asset managers.
during the course of this year. The first stage of future funding negotiations and those that are any funding requirements linked to a scheme’s
the consultation will focus on the principles and currently ongoing. long-term objective and the nature of the
HMRC set to become preferential creditor on framework that will underpin the new Code. regulatory framework for consolidators.
corporate insolvencies This is due to take place in August/September Pensions Bill expected in next Queen's Speech
2019, with a further consultation on the draft Code
HM Treasury has confirmed that the Government itself set to follow in Spring 2020. It looks increasingly likely that the next Queen's
intends to change the insolvency laws to make speech may now be delayed until the autumn for10 PENSIONS PLANNER MAY 2019 HERBERT SMITH FREEHILLS
In the spotlight (continued)
Master trust authorisation process nears On the horizon It is unclear precisely what data schemes will be
completion required to provide to the dashboards and in what Action: Trustees, employers and insurers need
Pensions dashboard given the green light to review existing agreements that refer to
format. Therefore, it is not yet possible to assess
38 master trusts have applied for authorisation LIBOR to establish whether an alternative
The Government has signalled its support for the how much of an additional burden this will place
from the Pensions Regulator under the new benchmark should be substituted.
creation of a non-commercial online pension on schemes.
authorisation and supervision regime. A list of those Consideration should be given to using
dashboard by the pensions industry. Development
schemes that have been granted authorisation can alternative benchmarks in future agreements.
of the dashboard will be overseen by an industry
be found on the Regulator’s website. Action: Trustees should track the Trustees should also check with their
steering group which is to be formed by the new
development of the dashboard and the scheme's actuary whether this has
Money and Pensions Service.
The Regulator has six months from the date of a legislative requirements related to it, with a implications for any assumptions used for
scheme's application to grant or refuse particular eye on the legal requirements funding purposes (eg where assumptions are
Although it is likely to be several years before a
authorisation. Therefore, by mid-November we regarding the data that will need to be derived from swap rates).
fully-fledged dashboard is launched, the
should have a clear picture of which DC master provided and who may be liable if incorrect
Government's consultation response indicates that
trusts will continue to operate. information is provided to users.
work will begin on a prototype during the course of
this year. The Government has also given its
44 schemes have signalled that they intend to exit
backing to the development of commercial
the market and they will be joined by any schemes LIBOR set to be discontinued
dashboards which would operate alongside the
that are not granted authorisation. The Regulator is
industry dashboard and make use of the same data. LIBOR is due to be discontinued as an interest rate
overseeing the orderly exit of these schemes.
benchmark by the end of 2021. This reflects the
Initially, data will be provided to the dashboards on fact that LIBOR has become a less meaningful
Action: Employers that use a master trust that a voluntary basis. However, the Government has benchmark in recent years and that it is vulnerable
has not applied for, or that fails to obtain said that it will legislate to require all workplace to manipulation. In April 2017, the Working Group
authorisation, will need to act quickly to put in pension schemes to provide data to the on Sterling Risk-Free Reference Rates, identified
place an alternative scheme for the future to dashboards. This requirement is likely to be phased SONIA as the preferred sterling interest rate
ensure that they continue to comply with their in over the next three to four years with master benchmark for use in bond, loan and derivatives
automatic enrolment obligations. trusts and providers of contract-based DC markets and the transition to SONIA is underway.
schemes expected to be amongst the first to be
required to supply member data.
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The contents of this publication, current at the date of publication set out in this document, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your circumstances should always be sought
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©Herbert Smith Freehills LLP 2019HERBERT SMITH FREEHILLS PENSIONS PLANNER MAY 2019 11 Notes
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