In the latest edition of our Pensions Bulletin, we give a snapshot of some recent pensions developments from a legal perspective. These include:
Please get in touch with your usual Taylor Wessing pensions contact if you would like to discuss anything you have seen in the Bulletin.
A new Government, a new Pension Schemes Bill and a Pensions Review
The new Labour Government has moved forward with many pensions measures, with the surprise inclusion of a new Pension Schemes Bill in July's King's Speech, though much of it is a continuation of the previous Government's work. The Bill is to include measures to:
- allow the consolidation of small deferred pension pots so that people do not lose track of their pensions
- require trust based DC pension schemes to satisfy a standardised test to demonstrate that they are delivering value. It is anticipated this will lead to consolidation in the market, leaving a small number of well performing, well governed schemes that are able to produce better saver outcomes and lead to more productive investment of funds. The FCA is to ensure that a similar framework is in place for contract based schemes to drive consistency in the market (and the FCA has just launched a consultation on a new value for money framework for savers invested in default arrangements of workplace DC pension schemes and relates to rules for FCA regulated firms that operate such arrangements)
- require occupational pension schemes to offer retirement products to members when they retire, including default investment options. The idea behind this is to improve saver outcomes, lead to assets being invested for longer and to increase the potential for investment in productive assets, to boost the UK's general economic growth
- facilitate consolidation in the defined benefits market through commercial superfunds to offer better protection for members from the risks of losing part of their pension benefits if their employer becomes insolvent
- to confirm that the Pensions Ombudsman (PO) is a 'competent court' for the purposes of s91 of the Pensions Act 1995. This has caused issues in disputed recovery of pension overpayment cases where, for technical reasons, trustees generally, at present, need to obtain a county court judgment to enforce recovery even if the PO has decided in favour of that recovery. This is a welcome move and will save pension schemes time and money when it comes to enforcement in these cases.
Pensions Review
Soon after the King's Speech, the Chancellor announced a 'landmark' Pensions Review to 'boost investment, increase pension pots and tackle waste in the pensions system'. The key focus is on DC workplace schemes and the Local Government Pension Scheme and how to encourage investment of pension scheme funds in the UK economy, predominantly in productive assets, with the aim of producing better returns for pension pots. The ways being investigated to do that are through consolidation, trying to facilitate an investment shift and though a review of the Local Government Pension Scheme and how its £360 million might be made into an 'engine for UK growth'.
The work will be in two phases. The first, focussing on investment, will be led by the first ever joint Treasury and DWP minister Emma Reynolds (Minister for Pensions). The second, later this year, will consider further steps to improve pension outcomes, increase investment in UK markets, and will include assessing retirement adequacy.
The precise content of both the Pension Schemes Bill and the Pensions Review are still a little vague (though the terms of reference for the first phase of the Pensions Review have now been published). They do not refer to various workstreams the industry was waiting for progress on under the previous Government, such as auto enrolment, though it is possible these areas will be looked at as part of the Pensions Review (more likely in the second phase). The terms of reference do clarify that ongoing policy developments in relation to workplace defined benefit schemes will remain separate from the Review. There is nothing for schemes to do as yet, but pensions are clearly a priority for the new Government.
Amending pension schemes – BBC and Virgin Media appeals dismissed
In June 2023 and August 2023 we reported on some important cases that dealt with amendments to pension schemes (the Virgin Media case and the BBC pensions case respectively). Both have recently had their appeals rejected in the Court of Appeal.
The BBC Case
The Court of Appeal has upheld the High Court decision that the scheme's amendment power cannot be used to change future service benefits or member contributions unless one of the conditions in the amendment power is satisfied (which means that the BBC can only make such amendments in very restrictive circumstances). The decision largely turned on the meaning of 'interests' in the scheme's amendment power, which was deemed to capture not only past service benefits but also the linkage of those benefits to future salary and members' rights to future service benefits. The decision is binding only on the parties to the case and turns on the specific wording of the BBC scheme rules but will have implications for schemes with similar amendment powers.
The BBC has already said online that it is considering its future options as a result of this decision but that it will not be appealing it.
Trustees should take legal advice if there is any doubt as to how their amendment power works before making any change to their rules.
The Virgin Media Case
Of wider significance is the Virgin Media appeal in which a specific point was considered. This was whether the requirement to have a section 37 certificate (as it stood in 1999, the date of the scheme amendment in question) related to amendments to section 9 2(B) rights for future service, rather than just past service benefits. The Court of Appeal has now confirmed that it did. The decision illustrates the significant problems arising for schemes that were contracted out on a reference scheme basis between April 1997 and April 2016, not least in trying to identify if there are any issues that need to be dealt with as regards scheme amendments during that period.
One solution to this situation would be for the Government to legislate to retrospectively remove the need for a certificate as long as the reference scheme test continued to be met, but it is not clear whether the Government has any appetite to take this forward.
TPR issues updated guidance on superfunds with a focus on capital release and flexibility
In the August 2023 edition of our pensions bulletin we reported on TPR guidance in relation to superfunds. This guidance has been updated in three key respects:
Capital release
The previous version of the guidance only allowed capital to be released when benefits were bought out; the new version allows capital release up to twice a year when the total assets exceed the minimum capital adequacy expectations set out in the guidance. That level is said to be set to 'encourage a thriving and competitive superfund market' while still maintaining a 99% probability of meeting members' benefits (which is in line with DWP tolerance limits).
Further protections are in the form of mechanisms to ensure dates for capital release are not picked when markets are high, and a formal governance structure will apply to release of capital.
Standalone principle
Previously the guidance stated that when a scheme transfers to a superfund, fresh capital should be provided to a level so that capital requirements would be satisfied as if that pension scheme was considered in isolation. This 'standalone' test no longer applies as long as the superfund as a whole is funded above a level at which capital might be released.
Superfunds or Capital backed assets on reduced capital adequacy
Where a scheme employer becomes insolvent and there are not enough assets to buyout members' benefits in full or the scheme cannot enter a superfund or a capital backed arrangement on full capital adequacy terms, then the standard capital adequacy requirements may now be relaxed. In these circumstances the trustees must still be 'confident' that the transaction is in members' best interests and that even on the lower capital adequacy basis the level of benefits members might receive would represent a material improvement from buying out with an insurer on PPF + benefit levels.
This additional flexibility is clearly designed to facilitate more consolidation in the market and an increase in available authorised providers.
TPR's defined benefit funding code laid in Parliament
TPR's Funding Code for defined benefit (DB) schemes, which sets out the expectations around compliance with the final DB funding regulations (applicable to scheme valuations with effective dates on or after 22 September 2024) was finally laid in Parliament at the end of July. Some schemes will have valuations which will be subject to the new regulations before the Code takes effect, though TPR has said that the draft Code gives a clear indication of what it intends the final version should be and that if there any changes to it before being finalised due to the Parliamentary process, then TPR will take that into account when assessing valuations done during this interim period.
The Code has been amended to align more closely with the flexibilities that were built into the final funding regulations and/or in response to some concerns expressed in relation to the draft Code, for example in relation the approach to determining when schemes are expected to reach 'significant maturity' and making it clear that trustee investment decisions are not constrained by the notional investment allocation in the funding and investment strategy (though TPR would still expect the two to be aligned in most instances in practice).
As part of its regulatory approach, TPR will adopt a twin track valuation approach – those that satisfy a set of criteria (representing TPR's view of tolerable risk) will fall into the 'Fast Track' and will be less likely to attract scrutiny from TPR. On the other hand, schemes taking the 'bespoke' route will be able to adopt a more scheme specific approach as long as legislative requirements are met. That might apply if the scheme cannot meet the Fast Track parameters – eg because of employer circumstances. TPR has said it will be publishing more detail on this.
Further materials in relation to the funding framework, such as template documents and guidance are also yet to be finalised and are expected in the Autumn.
There is much detail for DB schemes to familiarise themselves with in a very short timescale, particularly for schemes whose valuations are in the near future. Trustees and employers should consult with their advisers as soon as possible so that they understand what will be expected under the new regime and can prepare accordingly.
