Archive for December 2019

Alan Collins

As the year draws to an end, I find myself reflecting on a strange 12 months for pensions; with a bit of planning blight in terms of substantive new law and policy, due to Brexit, but still several important developments. My main take-aways are as follows:

Those who can see the hills are running for them

Risk transfers, i.e. buy-ins and buy-outs for defined benefit pension schemes, are inexorably rising. The amount of assets transferred to insurers has broadly doubled year-on-year over the last three years and is expected to exceed £40 billion by the year end. 2019 has been notable for several mega-deals; e.g. National Grid, Telent and Rolls Royce.B

For well-funded schemes which have taken financial risks off the table, there is very little upside in continuing when an exit route is affordable. After all, securing benefits with an insurer represents “job done” for trustees and sponsors.

While doubling again in 2020 seems unlikely, it is clear that risk transfers will provide some major pension stories over the next twelve months.

The need for member engagement is growing

As schemes mature, the proportion of members in the retirement “zone” (currently 55+) is rising and more and more members are seeking regular quotations of their benefits. Also, a recent survey by the Office for National Statistics indicated that pensions has overtaken household property to become the largest component of household wealth. For many schemes I am involved in, the average value of a member’s benefit is often in excess of £100,000.

So, how do members take the important decisions around their retirement? For me, access to timely, accurate and understandable information is of key importance. Technology is developing all the time and members can now do much better than the “paper-only” methods of old.

I also think the tide is turning on “accessibility to advice” for pension scheme members. Trustees have historically shied away from having “on tap” advice available to members, but there is a growing recognition that a member adviser is a useful addition the suite of scheme advisers.

Another topical issue, which is unlikely to go away any time soon, is whether trustees should offer their defined benefit pension scheme members a ‘partial’ transfer option – allowing them to retain some of the guarantees associated with DB pensions whilst also having complete freedom and choice over the part of their benefits they transfer to the own personal arrangement.

CMA review and ESG has increased documentation, but what else will it change?

There were some much talked-about changes brought in following the Competition and Market Authority’s review of the investment consultancy and fiduciary management industry. Investment consultants now need to have objectives set for them by trustees and fiduciary mandates need a one-time open market tender (if not done already). 

Environmental, Social and Governance (ESG) issues were also a hot topic and, with further changes still to take effect and the ‘Greta Thunberg effect’, will continue to be so.

All schemes should have updated their Statement of Investment Principles to set out their policy on ESG matters. Investment managers were also falling over themselves to extol their “green” credentials.

Time will tell how much change will come about as a result – so far, there has been a lot of box-ticking.

The Regulator is sharpening its stick

With Parliament being somewhat “distracted” for most of the year, there was little progress on pension regulatory matters. The long-awaited Pensions Bill made it into not one, but two, Queen’s speeches and looks all set to progress next year. The Bill will include, amongst other things, greater powers for The Pensions Regulator and possible jail sentences for reckless employers who fail to look after pension schemes.

Consultation on the new defined benefit scheme funding code is expected early in 2020. It is likely to involve ramping up the pressure on under-funded schemes, seeking shorter recovery plans, more conservative investment strategies for maturing schemes, avoiding “covenant leakage” and the development of longer-term “end-game” plans for all schemes.

The time for talking about GMP equalisation is over

And, finally, a “current issues” article on defined benefit pensions would not be complete without some comment on GMP equalisation (GMP-E). We (and I should really say I) have gone through the eye-rolling, the denial, the “wait and see” and the “mañana”. Time is up for all of these approaches and work really needs to start in earnest in sorting out the relevant data and amending the member benefits.

Look out for the HMRC guidance due to be published in January.

Given the levels of fees that some service providers are quoting for GMP-E work, it will also be interesting to see whether some trustees put projects out to tender rather than just telling the incumbent advisers to get on with it.

John Wilson

On 19 December 2019, the Queen’s Speech was delivered to both Houses of Parliament. It sets out the Government’s legislative priorities for the 2019-20 parliamentary session.

Background briefing notes include details of the reintroduced Pension Schemes Bill, which was first announced in the last Queen’s Speech in October 2019 but fell with the dissolution of Parliament earlier this month.

The following measures are included in the Bill (all substantive proposals were in the original version too):

  • New powers for the Regulator. These include ‘lengthy jail terms on the table for reckless bosses who plunder people’s pensions pots’.
  • Scheme funding. Measures regarding Defined Benefit (DB) scheme funding, including additional Regulator powers.
  • Collective defined contribution schemes. A new pension scheme design to give greater choice for employers and enable people to adequately save for retirement and better predict their income in later life.
  • Pensions dashboards. Establishing the framework for the creation of pension scheme dashboards that will “allow people to access their information from most pensions schemes in one place online for the first time”. The Pensions Regulator will have the power to ensure schemes provide information to populate the dashboards.
  • Scheme transfers. Revisions to the rules to help combat pension scams.
  • Pension Protection Fund (PPF) compensation. Changes to compensation rules to ensure the regime works as originally intended and to respond to the decision in Beaton v The Board of the Pension Protection Fund [2017]. It will be interesting to see if there is further tweaking in light of this week’s decision of the Court of Justice of the European Union in the Bauer case.

A draft of the Bill has yet to be published but, for further information, see –

https://www.gov.uk/government/publications/queens-speech-december-2019-background-briefing-notes.

Employers and trustees may want to start discussion with advisers on the prospective changes to the scheme funding regime. Employers should be aware of the Regulator’s new ‘moral hazard’ powers which, even now, could impact on the nature and timing of corporate activity.

John Wilson

The PPF published its final levy rules and guidance for the 2020-21 levy year on 16 December 2019.

You can find them here: https://ppf.co.uk/levy-payers/levy-2020-21.

The key elements to note are:

  • The PPF confirmed the total levy it expects to collect at £620 million.
  • The 2020/21 rules are little changed from 2019/20, and are broadly in line with the proposals set out in September’s consultation.
  • The PPF also published revised guidance on contingent assets, which remains largely as consulted on but reflects comments received.
  • The PPF has set out the basis on which a small number of significantly affected levy payers, most likely to be SMEs, can ask for an adjustment of their insolvency risk score, where a GMP equalisation adjustment is the sole reason they are reporting a loss rather than a profit in their accounts.

While we feel it is important to draw the rules and guidance to your attention, our full Client Alert will not be published until later this week because there is a prospective development that may mean the final levy rules are not so ‘final’.

The Bauer case

Mr Bauer had been granted several occupational old-age pension benefits by his former employer, including a pension paid through a supplementary occupational pension institution (PKDW) and a monthly pension supplement paid by his former employer.

In 2003, PKDW, experienced financial difficulties and was authorised by the relevant German national authorities to reduce the amount of the pensions paid.

Under German law, Mr Bauer’s former employer was then obliged to ‘offset’ this reduction in his benefits. However, in 2012, the employer entered insolvency proceedings.

PSV (an insolvency insurance institution for occupational pensions) informed Mr Bauer that it would assume responsibility for the payment of the monthly pension supplement and a Christmas bonus that was also due. However, PSV would not assume responsibility for the offset mentioned above.

Mr Bauer disputed this refusal and several questions were then referred to the CJEU by the German national court. In essence, the German Court asked whether the German Government via the PSV had to compensate Mr Bauer for the top-up payment that his ex-employer paid to cover the pension benefit reduction.

The answer directly impacts the level of protection that must be provided to individuals in respect of their pension rights on the insolvency of their employer / former employer under Article 8 of the Insolvency Directive (2008/94/EC).

And the Court of Justice of the European Union is expected to deliver its judgment on 19 December.

Watch this space …

Brendan McLean

ESG is on the agenda

There has been a growing demand on UK defined benefit pension schemes to consider environmental, social and governance (ESG) factors. Since October 2019, trustees need to set out how they take account of those issues in their statement of investment principles (SIPs).

This has led to investment managers adjusting their funds to meet the new requirements and satisfy the needs of trustees on considering ESG. However, defining ESG is open to debate. Different individuals have a different view on what it means, which could give rise to ‘greenwashing’, the term used to describe investment managers veiling their funds as greener than they truly are.

To combat this potential issue, the European Parliament has voted on new disclosure requirements for sustainable investments. Also, the Investment Association in the UK has released a framework to try to prevent confusion around responsible investment stemming from inconsistent use of terms and phrases. We believe this will naturally make it harder for managers to greenwash their funds, giving investors more confidence to invest in genuine sustainable funds.

Data issues

A potential issue caused by the increased disclosure requirements is the reliance on ESG data to ensure managers consider sustainability risks and opportunities. Currently, the main ESG data providers have vastly different methodologies for scoring companies, resulting in a wide range of results. One provider may score a firm highly and another, using a different scoring metric, may score it lower. We feel it is important for the ESG data providers to score firms consistently and recognise that the new classification system should help.

Investment managers place a heavy reliance on ESG data, which increases pressure to provide overly positive results for a higher score. Many ESG metrics are currently not audited in the same way as financial information, so it is easier for firms to inflate their ESG credentials. We would hope regulations will prevent this from happening.

No overnight fix

We feel the most important thing pension schemes can do to ensure they are really investing in line with their own sustainability objectives is to discuss the topic more frequently and understand what their aims are. We are pleased to see ESG and sustainability aims are a more common feature of trustees’ meeting agendas. While the change won’t happen overnight, we feel that over time, as more people become aware of the benefits of considering sustainability, it will get much more attention.

Alan Collins


2020 will definitely see progress being made towards a new funding code for defined benefit schemes. The Pensions Regulator has recently made clear that, despite numerous delays to date, consultation on the code will likely begin in January of next year.

Armed with new powers, the new code and its “clear, quicker, tougher” approach, the Regulator’s presence will loom large for many trustees. So, how then, will trustees keep the regulatory “wolf” from the door. 

Top tips

Here are some of my top tips and recent experiences.

1. Recognise and document your long-term objective

For all but the very largest of closed schemes, the end-point will be some form of insurance arrangement (consolidate or buyout).  It is therefore important, as schemes mature, to put a greater focus on this end-point and estimate how long it will take to get there. This will likely mean contributions continuing even after the scheme has a surplus on the ongoing (technical provisions) basis. 

So, trustees should get to know how long the path to buyout is and plan out their strategy to get there (including any investment de-risking along the way). Developing contingency plans with agreed actions for good and bad outcomes will also be very worthwhile.

2. Use an Integrated Risk Management approach to manage and monitor covenant, funding and investment.

Most schemes regularly review funding levels, investment performance and (perhaps less frequently) sponsor covenant. Often, however, these three strands are looked at in insolation and not part of a single “package”. To meet long-terms objectives, it is important to manage all of these risks together.  

I have found it helpful to collate some key metrics for each area into a single one-page dashboard. This allows trustees to review overall progress and importantly review the need to take any action. Funding and investment metrics should be readily available, and it is worth engaging with the sponsor to get regular updates on key metrics in their business – they will be monitoring these so it should be easy to get hold of them to help trustees do the same.

3. Get-together more often

For me, the days of a “once a year” meeting and nothing much in between are gone. With volatile financial markets and the potential for fast-changing outlooks for sponsor covenants, schemes are “businesses” which need more regular attention. 

In my experience, most scheme trustees would now expect to arrange some sort of meeting on at least a quarterly basis to review investment performance, funding progression and administration matters. These meetings need not be long and, with improving technology, need not be face-to-face either. Agendas can also be structured to allow advisers/providers to attend in part.

4. Make sure the basics are done

It sounds obvious, and maybe it is, but getting the basics right is important. Trustees should be making sure that:

  • Data is clean, complete and up-to-date.
  • Conflicts (and potential conflicts) are documented and discussed.
  • Scheme documentation is complete and consolidated.
  • Trustee Knowledge and Understanding is up to date, documented and future training is scheduled in.
  • Investment compliance is up to date (ESG, Investment Objectives documented).
  • Scheme business plans and risk registers are “live” documents, not just pages that gather dust between meetings.
  • Future project work is factored in e.g. GMP equalisation.
  • Be up-front if your scheme doesn’t fit with the ideal expectations of the Regulator

Back in the day, a recovery plan of over 10 years was a warning “flag” that often triggered some regulatory scrutiny. That was all washed away with the more employer friendly “sustainable growth objective”. The new funding code is likely to view 7 years as the benchmark recovery period. Indeed, I have already seen the Regulator gather information for schemes where the current recovery period is above that threshold.

However, it is also fair to say that many schemes, for many reasons, will have longer recovery plans that the Regulator will now view as appropriate e.g. charities, schemes with weaker sponsors.

Here, it is important for trustees to examine and clearly document the rationale for a longer recovery period. If affordability is shown to be constrained, it is likely that a longer recovery period should go hand in hand with a more cautious investment strategy. Taking risk on your sponsor (as demonstrated by a longer plan) should not be compounded by a higher risk investment strategy that the sponsor cannot afford to underwrite.

For me, a well set out and justifiable longer recovery plan with a cautious investment strategy is far better than over-optimistic actuarial basis and a “wing and a prayer” investment strategy which give the misleading impression of achievability.

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