Pensions legislation and case law update: the latest developments over the last four weeks and week ended 16 July 2021

In this update we provide a round-up of the latest developments including two Court of Appeal decisions. The first upheld Britvic plc’s appeal that the words “or any other rate determined by the Principal Employer” allowed it to set a lower rate of pension increases.

In the second, the Secretary of State for Work and Pensions and the PPF v Hughes,  the Court upheld the PPF’s appeal in relation to its approach for determining compensation levels, but rejected the DWP’s appeal against the finding that the compensation cap amounted to unlawful age discrimination.

The update also covers the DWP response and Regulator guidance on the new climate change regulations, the DWP response on value for members and performance fees consultations, Pension Schemes Act 2021 commencement regulations, the Government response on the new contribution notice and information gathering powers regulations, the DWP’s consultation on ‘stronger nudge’ pensions guidance and an update on data protection and GMP conversion.

Britvic wins appeal in pension increase case: “any other rate” can include a lower rate 

In Britvic Plc v Britvic Pensions Limited, the Court of Appeal has ruled that the words “any other rate” in a pension increase rule should be interpreted as meaning “any other rate, whether higher or lower” rather than “any higher rate” as the High Court had decided. The scheme’s rules provided for pensions to increase in line with the retail prices index (subject to a cap of 2.5% of 5% dependent on the date of service to which the pension related) “or any other rate determined by the Principal Employer”. The decision also applied to the deferred pension provisions of the scheme. 

As with most cases regarding changes to the rate of benefit increases the decision is specific to the particular facts and background of the case but it does provide useful commentary on construction and the interpretation of pension scheme documents; the Court of Appeal deciding that the relevant wording in this case was “clear and unambiguous” naturally meaning higher or lower and, as there was “no basis for concluding that the drafter made a drafting mistake”, the Court of Appeal’s interpretation should be applied. This was despite the High Court’s interpretation being more consistent with the “admissible factual matrix and legislative background”. The Court of Appeal has given full effect to the words used in the rule.

PPF wins appeal on compensation levels, but DWP’s appeal rejected

On 19 July 2021 Court of Appeal published its judgment in the case of The Secretary of State for Work and Pensions and the Board of the Pension Protection Fund v Hughes. The case concerned the application of the European Court of Justice’s decision in the 2019 case of Hampshire v the PPF in which the Court held that the value of any PPF compensation payable to a member must be at least 50% of the value of the member’s full benefits in the ceding scheme. However, a separate issue of age discrimination was also raised.

In Hughes the High Court held in June 2020 that the PPF’s proposed solution to the Hampshire decision (making an actuarial assessment of whether the value of a member’s PPF compensation was at least 50% of the value of the ceding scheme benefits and making a one-off adjustment if necessary) was unlawful because (i) it was possible that a member might cumulatively receive less than 50% of his or her full scheme benefits (for example if he or she lived longer than assumed); and (ii) a similar assessment also needed to be made in respect of any spouses’ benefits payable on the death of a member (rather than simply including the value of any spouse’s benefits when determining the value of the member’s overall benefits). 

The High Court also held that the compensation cap – limiting the total amount of pension payable to members who were below normal pension age at the date of the employer’s insolvency – amounted to unlawful age discrimination.

The PPF appealed the decisions relating to its approach to the Hampshire decision. The Secretary of State for Work and Pensions appealed against the ruling on the compensation cap. 

The Court of Appeal has allowed the PPF’s appeal but rejected the Secretary of State’s Appeal. Therefore, subject to any of the parties appealing to the Supreme Court, the PPF (and schemes going through an assessment period or securing benefits outside of the PPF following an assessment period) can proceed on the basis of the PPF’s proposed approach subject to the disapplication of the compensation cap. 

DWP response to climate change governance and reporting consultation 

The Department for Work and Pensions has published its response to the consultation: Taking action on climate risk: improving governance and reporting by occupational pension schemes together with updated versions of two sets of regulations (the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 (SI 2021/839) (the Climate Change Regulations) and the draft Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions and Amendments) Regulations 2021, both of which will come into force on 1 October 2021) and draft statutory guidance.

The regulations contain a few technical drafting changes and the guidance has been amended a number of times to 'provide further clarity and support for trustees'.

Background

The regulations will require trustees of larger occupational pension schemes and authorised pension schemes to ensure that there is effective governance with respect to climate change including mandatory 'Taskforce on Climate-related Financial Disclosures' (TCFD) Reporting. (The TCFD published a report in 2017 making 11 recommendations for all organisations on the disclosure of climate-related financial risks and opportunities.) 

The changes will be introduced in stages. Large schemes with £5 billion or more in relevant net assets at the end of the first scheme year to end on or after 1 March 2020, authorised master trusts and authorised collective money purchase schemes will be targeted first with an intended implementation date of 1 October 2021 and a requirement to publish a TCFD report within 7 months of the end of the scheme year which is underway on this date. A link to the TCFD report must be included in the annual report and accounts produced for that scheme year. There will be a further rollout to schemes with £1 billion or more of assets the following year and a consultation in 2023 to decide on whether to widen the regime to smaller schemes as soon as 2024.

Requirements

Under the regulations trustees will be required to establish and maintain oversight of the climate-related risks and opportunities relevant to the scheme and, on an ongoing basis, identify and assess the impact of those risks and opportunities which they consider will have an effect over the short, medium and long term on the scheme's investment strategy and where relevant its funding strategy.

The statutory guidance notes that most trustees will use experts to undertake the underlying work to identify climate-related risks and opportunities, and to implement relevant investment strategies. However, trustees will need adequate knowledge and understanding given that ultimate responsibility rests with them.  

Regulator publishes climate-related governance and reporting consultation

The Pensions Regulator has published a consultation seeking views on two documents; (1) draft guidance that sets out the Regulator's proposed regulatory approach and expectations on the Climate Change Regulations; and (2) a new appendix to the Regulator's monetary penalties policy: breaches of the Climate Change Regulations. The consultation closes on 31 August 2021.

The Regulatory Guidance

The Regulatory Guidance is intended to 'complement' the DWP's statutory guidance and explains that, to determine whether trustees have satisfied their obligations the Regulator will be looking for 'clear evidence' that trustees: 

The Regulatory Guidance sets out within each section example steps that trustees are expected to take and what to report. It covers regulatory approach and penalties, other guidance that trustees need to be familiar with, the requirement for trustees to carry out relevant activities 'as far as they are able' and trustee knowledge and understanding.

Regulatory approach to enforcement and the monetary penalties appendix

The Regulatory Guidance explains that if a report is not published as required a mandatory penalty will be imposed. The minimum is £2,500 (but may be as much as £5,000 for professional trustees given the higher standards they should be held to) going up to £5,000 for individuals and £50,000 for other cases where there are multiple breaches. The Regulator will follow the approach in the monetary penalties policy and appendix and provides examples. The Regulator can also issue a compliance notice and a third-party notice, and has other powers such as a power to provide information and assistance.

Comments

The DWP's press release explains that the new requirements will mean that the UK will be the "first major economy to have put such requirements on the statute books". By October 2022, more than 70% of pension scheme assets under management and over 80% of members will come under the statutory provisions.

Schemes which will fall under the first part of the rollout should have already begun relevant preparatory work with those in the second part readying themselves for their implementation date. Other schemes not yet in scope should also be considering climate change as part of their existing obligations - the Regulator notes that trustees not subject to the new requirements may also wish to follow the Regulatory Guidance to "improve the governance and resilience of their schemes in relation to climate change". 

DWP consultation responses on improving DC member outcomes & performance fees & statutory guidance on VfM and reporting

The DWP has published the Government's response to two consultations; the response to the September 2020 consultation on draft regulations and statutory guidance relating to value for members (VfM) (see our earlier Insight) and the response to the March 2021 consultation – Incorporating performance fees within the charge cap (see our earlier insight):

Governance: Improving outcomes for members of defined contribution (DC) pension schemes consultation response

The Government has confirmed that it will go ahead with the proposed Occupational Pension Schemes (Administration, Investment, Charges and Governance) (Amendment) Regulations 2021 which will come into force in October 2021. These will require net investment return reporting for DC and hybrid schemes and for 'smaller' DC schemes to demonstrate that they offer VfM which is 'comparable to larger schemes'. Further details are provided below.

Investment: incorporating performance fees within the charge cap consultation response

The Government will bring forward changes to the Occupational Pension Schemes (Charges and Governance) Regulations 2015 so that for the purposes of calculating the charges that can be levied on members for a given charge year, performance fees can use a five-year moving average of accrued performance fees. 

Statutory guidance: VfM and reporting

The DWP has also published statutory guidance on completing the annual value for members assessment and reporting of net investment returns and statutory guidance on reporting costs, charges and other information on disclosure and administration regulations. 

Comment

Although the Government has acknowledged that not all small schemes are badly run, the 'value for member' changes are being introduced to accelerate the rate at which smaller schemes consolidate and wind up, because many do not benefit from economies of scale and have difficulties accessing services and investment strategies available to larger schemes. Those schemes that are within scope of the new VfM provisions will need to begin preparations in plenty of time to meet the relevant implementation date.

Pension Schemes Act 2021: second set of commencement Regulations

The second set of Pension Schemes Act 2021 (the PSA 2021) commencement regulations have been made (see our earlier Insight for details of the first set).

These regulations brought into force on 25 June 2021 provisions of the Act which bring regulations relating to the new Contribution Notice employer resources test within the list of regulations under the Pensions Act 2004 which are subject to the affirmative procedure (whereby the statutory instrument must be actively approved by both Houses of Parliament). This will include the draft Pensions Regulator (Contribution Notices) (Amendment) Regulations 2021 due to come into force in October 2021 (see our earlier insight update). 

Government response to the DWP consultation on new CN and information gathering powers draft regulations

The Government has responded to the DWP consultation on the two draft sets of regulations, the first relating to the new contribution notice (CN) 'employer resources' test (the ER Test) and the second to the extended information gathering powers of the Regulator which were introduced by the PSA 2021 (see our earlier Insight Update). Both sets of regulations are due to come into force on 1 October 2021. 

Contribution notices and the employer resources test

The draft Pensions Regulator (Employer Resources Test) Regulations 2021 set out the rationale and proposed approach for the ER test, one of the two new CN grounds being introduced under the PSA 2021, the other being the employer insolvency test. Under the ER Test the Regulator may issue a CN where there is an act (or failure to act) that reduces the resources of an employer to an extent that is material relative to the estimated section 75 debt due to the scheme. The Government's response confirms the structure of the ER Test:

Information gathering powers of the Regulator

The Pensions Regulator (Information Gathering Powers and Modification) Regulations 2021 were laid before Parliament on 28 June 2021. The consultation on the draft regulations ended on 29 April 2021. These confirm the content of interview notices, how the inspection powers might be used in multi-employer schemes and details of the penalty rates: (1) A fixed penalty of £400 with an escalating penalty of £200 for each day of non-compliance for individuals; (2) Non-individuals will have higher escalating rates starting at £500 on Day 1 increasing up to a daily rate of £10,000 on Day 20 and thereafter. 

The response notes that the Regulator will be producing policy guidance on its use of the powers, including in relation to criminal offences. Only minor drafting changes have been made to the final version of the regulations.

DWP launches consultation on draft Regulations implementing "stronger nudge" to pensions guidance

The DWP has published a consultation document, Stronger Nudge to Pensions Guidance, together with draft regulations requiring trustees and managers of certain schemes to ensure "individuals seeking to access, or transfer for the purpose of accessing, their pension flexibilities' (generally, defined contribution benefits) have received or opted out of receiving appropriate pensions guidance".

Trustees and managers are currently required to inform members that free and impartial pensions guidance is available, to remind members to consider taking independent advice, and to provide members with details on how they may access pensions guidance. However, for schemes in scope, the trustees and managers do not currently have to ensure that members have either opted out of receiving guidance or have received guidance and do not need to facilitate the booking of a guidance appointment.

If a beneficiary wishes to opt out of receiving appropriate pensions guidance, they must give an "opt-out notification" through a separate communication with the trustees (i.e. it cannot be given with their application to access their benefits or transfer them for the purpose of accessing or during the subsequent interaction with the trustees).

However, there will be no exemption for members with small pots.

Trustees must keep records of the receipt of confirmation from the beneficiary that they have obtained appropriate pensions guidance after having been nudged and any opt-out notification.

It is also proposed that the statutory transfer provisions in the Pension Schemes Act 1993 be amended so that trustees and managers would not be able to proceed with a statutory transfer application to which the nudge requirements apply until the member has either received appropriate pensions guidance or opted out.

The consultation closes on 3 September 2021 with the draft regulations expected to come into force on 6 April 2022.

Data protection update – EU assessment of adequacy of UK's data protection regime

In our 28 May 2021 Insight Update, we provided an update on the European Commission's (the EC) assessment of the adequacy of the UK's data protection regime – you may recall that a bridging mechanism has been in place since the UK departed from the EU on 1 January 2021 which permits personal data to move freely from the EU (and the EEA) to the UK, until adequacy decisions are adopted (see our insight). However, this was due to expire on 30 June 2021.

The EC has announced that it has adopted the two adequacy decisions which means that personal data can flow freely from the EU to the UK where it "benefits from an essentially equivalent level of protection to that guaranteed under EU law". The ICO has welcomed the news as it allows organisations to "carry on with data protection as usual". 

Both decisions contain a 'sunset clause' which limit their duration so that decisions will automatically run out four years after they come into force. After that time the adequacy findings can be renewed but only if the UK's data protection levels remain sufficient. Should the UK deviate from the current level during the four years the EC can intervene.

Data flowing from the UK to the EU or EEA (and from the UK to other countries where the EU has made an adequacy decision in relation to that country) continues to be allowed but the UK will keep this under review and could implement future restrictions. 

GMP conversion update: Private member’s bill and PASA guidance 

Private member’s bill

Margaret Ferrier, Independent MP for Rutherglen and Hamilton West, has tabled a private member’s bill, the Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill, in the House of Commons which makes provision for the amendment of pension schemes regarding the conversion of rights to a guaranteed minimum pension (GMP). 

Following the Lloyds judgment (Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank Plc & Ors [2018]) many pension schemes have been considering GMP conversion as a potential method to equalise benefits for the unequal effect of GMPs with the DWP producing statutory guidance in April 2019 on the use of the GMP conversion legislation. However, not all of the issues relating to GMP conversion have been fully addressed. 

The Bill is intended to amend and clarify the existing legislation and to 'reassure' schemes that they can use the methodology published in the DWP guidance. It is scheduled for its second reading on 26 November 2021. 

PASA guidance

The cross-industry GMP Equalisation Working Group, which is chaired by PASA (the Pensions Administration Standards Association), has published its guidance on GMP conversion.

The guidance explains how simplification can be achieved without a significant impact on members in many cases. Also included in the guidance are examples of how GMP conversion has been used in practice with explanations of how organisations addressed the issues which they faced during the process.