19 November 2020
- Protecting schemes from sponsoring employer distress
- Pension Schemes Bill at Report stage
- Fraud compensation levies to increase?
- Raising standards in the tax advice market
- Investment Association continues to squeeze excessive executive pensions
- PPF clarifies credit rating recalibration is only from 2022/23
- Carillion directors to be censured
On 12 November the Pensions Regulator published guidance urging trustees to prepare now for the possibility that their sponsors might face difficulties in these challenging times. In it the Regulator reminds trustees that they “are the first line of defence for savers and their pension schemes” and it is vital that they “remain alert, prepare, plan and are ready to act as the economic impact of global events develops".
Although there is nothing materially new in the guidance, it sets out clear expectations for trustees as we go into what are likely to be challenging economic circumstances in the coming months. These expectations also look to be more prescriptive than we have heard from the Regulator previously in a number of areas. For example, key points made in the guidance include recommendations that as part of best practice, integrated risk management trustees:
- Should adopt a fully documented IRM approach to their scheme with workable contingency plans and suitable triggers in place
- Should review and challenge financial forecasts and stress test assumptions as a part of the monitoring process
Where the sponsor is showing signs of financial distress, one of the many suggestions is that trustees should not wait for formal confirmation of a covenant downgrade at an actuarial valuation before taking mitigating action. If they have robust contingency plans with specific triggers, they can take action as soon as a threshold is met.
And where the sponsor is facing the prospect of insolvency, one suggestion is that trustees should take professional advice from specialist restructuring advisers to make sure that all options to protect the scheme’s position have been explored, before taking specific action.
There are five annexes to the guidance – and the first two are likely to be of particular practical use, with Annex 1 setting out useful considerations around who has statutory and contractual obligations to the scheme, and Annex 2 listing signs of corporate distress that trustees could look out for.
The guidance is accompanied by a blog by Mike Birch, the Regulator’s Director of Supervision.
The fact that the Regulator has considered it necessary to issue this guidance is a stark reminder of the expectations of trouble ahead for many industry sectors. The change in emphasis in some areas – for example around integrated risk management and a more pro-active approach to due diligence and action in the face of covenant deterioration – makes it clear that it has high expectations of trustees and their duty to protect their members’ interests.
Report stage and Third Reading of the Pension Schemes Bill took place on 16 November and despite the 30 or so amendments proposed by opposition MPs and those representing the Work and Pensions Committee the Government’s Bill remained intact.
Only four of these amendments were put to the vote and all were comfortably defeated. They were:
- The Select Committee’s suggestion that the DWP write to members every year within five years of being eligible to draw their benefits to offer them a guidance appointment with Pension Wise
- Proposals to adjust the employer debt legislation with the principal aim of giving relief to retired plumbers facing substantial personal liabilities as a result of participating in the industry-wide DB scheme for plumbers
- The Liberal Democrats’ proposed reinstatement of the House of Lords’ amendment in relation to the funding of open DB schemes
- The Labour Party’s proposal that would enable regulations to mandate occupational pension schemes to develop a strategy for ensuring that their investments and stewardship activities are aligning with the Paris Agreement goals and include an objective of achieving net-zero greenhouse gas emissions by 2050 or sooner
The debate did result in some further assurances being given by Guy Opperman. These included the following:
- On the funding of open DB schemes, that regulations will be framed “in such a way that schemes that are and are expected to remain immature, and have a strong employer covenant, continue to be able to invest in a substantial proportion of return-seeking assets”
- On pension transfers, that the Government’s proposals “puts trustees in the driving seat in relation to permitting transfers to proceed” and that the Government will continue to work with interested parties to ensure that the best possible regulations are delivered
- The possible restoration of monthly data on the use of Pension Wise
The Bill now returns to the Lords for consideration of the four amendments made there which were taken out in the Commons. Royal Assent could now well follow before the month is out.
This Pensions Bill has remained focussed from beginning to end, reflecting a number of factors, not least the cross-party consensus carefully cultivated by the pensions minister. But as important is that the Government had no ambition to expand on the topics covered (climate change risks being the exception). A substantial Commons majority has also enabled the Government to impose its will and ensure that the many Opposition amendments, probing or otherwise, have done little more than provide a backdrop for debate.
There is a Fraud Compensation Fund which can be traced back to the aftermath of the Maxwell scandal in the 1990s. It pays out to occupational pension schemes that have lost funds due to dishonesty where the employer has gone bust and the scheme itself has ‘failed’. The Fund is financed by a levy on occupational pension schemes of currently 25p per member, but for many years it wasn’t necessary to raise a levy as the claims were so few.
It is unclear whether the generation of fraudulent occupational pension schemes designed for “pension liberation” meet the conditions for a claim to be successful. So, the Board of the Pension Protection Fund, which runs the FCF, has taken a test case to the High Court to determine whether liberation schemes are eligible for FCF compensation. This may be important as the potential claims in the pipeline have been estimated as exceeding £350m which, if they came to pass, would presumably impose a huge burden on levy payers used to paying no more than about £5m pa in aggregate.
The judgment is very technical. The Court was asked six questions. Some key findings are that:
- These schemes can have a statutory employer, even if there are no employees in the normal sense of the word
- A scheme failure notice can still be issued even if there are not any employer pension liabilities in the conventional sense
- The trustee’s expenses, including HMRC scheme sanction charges, can potentially be covered by compensation, if attributable to the fraud
- If a scheme was set up as a sham, which is quite a specific thing in law, and which would preclude it being treated as an occupational pension scheme eligible under the FCF, then it could convert to a genuine occupational pension scheme later
The PPF has said that it will now work with the trustees of this test scheme and other similar schemes to process the applications for compensation that had been held up pending this judgment. However, it seems that a significant amount of investigative work will be necessary.
We have judicial confirmation that, at least in principle, it might be possible for pension liberation schemes to qualify for FCF compensation as part of the clean-up operation that moves in when the money has moved out. We also have judicial guidance about how the trustees of such schemes might go about shoehorning them into the statutory conditions to make a successful compensation claim.
For some years now the PPF has been building up the FCF through levies, in order to meet such claims, but it is not clear how much is currently in the pot. Whether the scale of successful claims will approach an amount requiring a transformational increase in the levy remains to be seen but we are not entirely on board with transferring this risk to honest schemes which are stressed enough anyway at the moment.
The case also exposes the very limited nature of the compensation available for pension fraud victims. The FCF was not originally designed to cover pension liberation. As a result of this case it is possible that the FCF will provide some compensation for some victims of last-generation frauds. But the victims of more recent generation frauds involving FCA regulated products are dependent on the Financial Services Compensation Scheme which is also not really designed to compensate for fraud.
Tax “advisors” may need to hold professional indemnity insurance in future as a result of HMRC’s call for evidence on the tax advice market (see Pensions Bulletin 2020/14), the results of which were published on 12 November.
This is the headline measure, on which there is to be a consultation next year, alongside the necessity of defining tax advice for this purpose. The Government also plans to take the following steps:
- Raise awareness of HMRC’s standard for agents – this standard applies to all tax agents who transact with HMRC and to any professional who advises or acts on behalf of others in relation to their tax affairs. It sets out HMRC’s expectations of such agents and professionals, covers standards of integrity, professional competence and due care, and professional behaviour and standards for tax planning. The Government also plans to review HMRC’s powers to enforce the standard
- Work with adviser professional bodies – to understand the role they play in supervising and supporting their members and raising standards in the profession
- Review options to tackle high costs to consumers of claiming tax refunds
The responses to the call for evidence supported the Government’s view that while most tax advisers are competent and adhere to high professional standards, some are technically incompetent, some are unprofessional, and some actively seek to exploit the tax system. The measures above are intended to address this concern.
The next steps in this process will be important. For example, a definition of “tax advice” (as distinct from “tax services”) that is initially created for the purpose of the mandatory PI requirement might get used for wider purposes. As the responses to the consultation made clear, it will be important to ensure that the intervention promised is proportionate and properly targeted at the problem areas.
In updated pay guidelines the Investment Association has continued to clamp down on executive pensions that (when expressed as a percentage of pay) are more generous than those available to the rest of the workforce.
For company years ending on or after 31 December 2020 the Association’s Institutional Voting Information Service will “red top” any remuneration report that includes executive pension contributions of 15% or more where the Remuneration Committee has not set out a credible plan to align the pension contributions of incumbent directors with the rest of the workforce by the end of 2022. The 15% ceiling is reduced from a figure of 25% in last year’s guidance (see Pensions Bulletin 2019/37).
And in a continuation from last year’s policy the Association will also “red top”:
- Any new remuneration policy that does not explicitly state that any new executive director will have their pension contribution set in line with the majority of the workforce
- Any remuneration report that shows that any new executive director or director changing role has pension contributions that do not align with the majority of the workforce
The accompanying letter sent to FTSE 350 companies notes that executives should not be isolated from the impact of the Covid-19 pandemic in a manner that is inconsistent with the approach taken for the general workforce. But the general trend to aligning executive pensions with the rest of the workforce was in train before the pandemic, and the reduction in allowable inconsistent contributions from 25% to 15% is another step in that direction.
The PPF has clarified that the recalibration of the credit rating insolvency risk scorecard proposed in its levy consultation (see Pensions Bulletin 2020/40) will not come into effect until the 2022/23 levy year.
This means that the first monthly score that will be impacted is that at the end of April 2021. As a reminder, the credit rating scorecard is being recalibrated based on insolvencies over the year to 31 December 2020. All the other D&B scorecards were recalibrated in time for the April 2020 score, based on insolvency experience before December 2019.
The consultation had been silent on the timing of the recalibration implementation. Whilst the certainty is welcome, there is an argument that the treatment of the credit rating scorecard for the 2021/22 levy year might now be inconsistent with other scorecards that have already been recalibrated for use in 2021/22.
When the credit rating scorecard is recalibrated for 2022/23 there may still be an element of inconsistency as the recalibration is being based on experience including insolvencies during 2020 – in contrast, the other scorecards were recalibrated based solely on experience before the start of 2020.
The Financial Conduct Authority has published a warning notice statement outlining the reasons a warning notice was given on 18 September to Carillion plc and certain previous executive directors and highlights the action the FCA intends to take in respect of the conduct summarised in the notice.
The FCA says that both acted recklessly and that a public censure is proposed, rather than a financial penalty.
This is not the first censure being faced by Carillion and follows on from a damning joint report by two of Parliament’s Select Committees in May 2018 (see Pensions Bulletin 2018/20).