Pensions Insight: August 2022

In this edition of our Insight, we cover all of the key pension’s developments in August and the beginning of September.

This includes the high court’s dismissal of the RPI judicial review application made by the BT, M&S and Ford pension schemes; a round-up of Pensions Regulator news; the DWP consultation on public sector exit payments; the prosecution of two former trustees; and the latest news on pensions dashboards.

High court dismisses RPI judicial review application

The high court has dismissed the application made by the trustees of the BT Pension Scheme, the Ford Pension Schemes and the Marks and Spencer Pension Scheme seeking judicial review of the Government’s and the UK Statistics Authority’s (UKSA) decision to effectively replace the Retail Prices Index (RPI) with the Consumer Prices Index including owner occupiers’ housing costs (CPIH) from 2030 (see our In depth article on the Government’s and UKSA’s November 2020 consultation response which confirmed that UKSA’s planned reform of RPI which would align it with CPIH would go ahead as from February 2030 with no compensation for index-linked gilt holders).

The schemes challenged the decision on three principal grounds, all of which failed.

1. That the UKSA’s RPI decision was unlawful as it was not within scope of its power to amend RPI under the Statistics and Registration Service Act 2007. The court found that the UKSA does have the power to amend RPI with no ‘express constraints’ and may rectify any identified ‘flaws’ with RPI through either an alternative index or by including methods used in current indices such as the CPIH.
2. The UKSA and the Chancellor failed to take account of the effect that the decision would have on those who hold RPI index-linked gilts and bonds and who are entitled to index-linked pensions (referred to as legacy users). The court rejected both arguments under Ground 2. The UKSA’s statutory functions were not to consider competing interests of the many societal and economical ‘winners and losers’ of the RPI decision but to look at the statistical quality of RPI and its suitability as a measure of inflation. The Chancellor was found to have considered more than adequate briefings on the impact of the decision on legacy users when deciding that compensation would not be provided from public funds.
3. The UKSA and the Chancellor failed to properly consult the public on the RPI decision and legacy users on compensation respectively. The court noted that there could not have been a requirement for the UKSA to consult given the finding that the UKSA’s statutory functions did not include accounting for the impact of the decision. In any event the argument would not have been successful because all three reasons why the claimants argued that the UKSA would have been legally required to consult failed. As regards the Chancellor and consultation, the claimants could not demonstrate that the Chancellor was legally required to consult legacy users and, furthermore, consultees had made ‘extensive representations’ on the matter which had been considered by the Chancellor.

The court also confirmed that a cessation clause in gilts issued from 2005 that protects them from being linked to a different index whilst RPI continues to be published will not be triggered by the planned change in RPI – after the change is implemented, RPI will still be published.

The decision to reject the application was perhaps expected. We now have confirmation that the reform will go ahead in 2030 as planned (subject of course to the judicial review decision being appealed) and as we have previously noted, given the change will have a significant effect on many DB pension schemes, trustees and employers should ensure they address the impact in plenty of time before its implementation.

Pensions Regulator round-up

Blog on Regulator’s expectations in respect of refinancing

The Pensions Regulator’s refinancing blog covers refinancing risks and what the Regulator expects of trustees and sponsoring employers now that refinancing returns to a more normal position following the pandemic set against the backdrop of a ‘challenging and inflationary financial climate’.

Areas of consideration: It notes six areas of consideration for employers and trustees on refinancing in respect of which there may be changes or effects that could individually or together significantly impact the employer covenant – interest costs and fees, debt structure, security/ guarantees, financial covenants, restrictive covenants, and counterparty.

Expectations are simple: The Regulator’s expectations are noted as being straightforward – trustees and employers must understand the implications of refinancing on the pension scheme and the employer covenant and any detriment must be mitigated so far as possible.

Understanding means going further than the ‘basic quantum of debt’ to include the areas of consideration referred to above and any other relevant factor.

Debt transactions: As well as refinancing, trustees must also consider debt transactions which move control over current lending from one counterparty to another.

Requirement for effective engagement: The blog reiterates the need for effective engagement between trustees and employers noting the need for trustees to engage early with management before any refinancing and reminding employers of the need to share relevant information with the trustees in a timely manner. Trustees should also look at debt covenants and refinancing within their monitoring, information sharing and contingency planning frameworks.

Blog on importance of asking investment strategy questions

The Regulator has also published a blog on asking investment strategy questions – the strategic and operational questions that investment consultants at the Regulator often ask (or would like to ask) trustees and the strategy conversations that are topical at the minute (for example, liquidity management in maturing schemes and LDI collateral call handling).

The blog highlights the importance of reviewing investment risk management and arrangements in an ongoing way and to take appropriate steps after doing so, working with advisers to effectively manage risk. It is an interesting read for trustees in the current economic and investment environment.

Former trustees plead guilty to making illegal loans

The Regulator has announced that two former trustees have admitted to making illegal loans from the scheme to its sponsoring employer. In a press release on 17 August 2022, it noted that Andrew Kyprianou, company director of Eastman Staples Limited, and Colin Werb, also a trustee, had pleaded guilty to two counts of making prohibited employer-related investments.

Leeds Crown Court heard that between 2017 and 2018 both men paid £236,000 from the Eastman Machine Company Limited Superannuation Scheme to the company unlawfully and contrary to section 40(5) of the Pensions Act 1995. Both men were released on bail to appear for sentencing on 7 October 2022. The pair were also charged with providing false or misleading information to the Pensions Regulator.

An updated version of the Regulator policy document on how it intends to prosecute criminal offences was published in May 2022 for consultation. You can read more about the consultation here.

Legislation and consultations

DWP consultation on public sector exit payments

On 9 August 2022, the DWP published a consultation on the administrative controls process for exit payments and guidance on approvals. This follows the introduction and subsequent removal of a £95,000 cap on public sector exit payments back in November 2020 and March 2021 respectively (see our Insight).

The Government wishes to ensure that exits and severance payments are subject to a robust process taking into account value for money and other alternatives. At the time the cap on exit payments was removed the Government indicated its intention to deal with ‘unjustified’ exit payments and this consultation is geared towards this policy intention.

The proposal is to widen the approvals process and introduce more reporting obligations which will help reduce the overall use of large exit payments and improve the decision-making process. Those exit payments above £95,000 will be subject to approval from central government and additional reporting requirements to HM Treasury.

PDP consultation on standards closed on 30 August 2022

The Pension Dashboard Programme’s consultation on the draft standards and guidance for pensions dashboards closed on 30 August 2022. The PDP stated in its press release on 17 August 2022 that they hope the pensions industry provide as much feedback as possible on the standards and supporting guidance for pension dashboards. Chris Curry, Principal for the PDP, said that “the standards provide the foundations for dashboards, and it is vital that they contribute everything needed to connect to the ecosystem properly”.

The consultation was launched on 19 July 2022 and featured three webinars to support respondents. The PDP noted that authority had been delegated to the Money and Pensions Service to set the standards for pensions dashboards as set out in the Pensions Schemes Act 2021. The PDP raises that these standards would be mandatory requirements for qualifying pensions dashboards.

The response to the consultation and the final standards documents will be published by the PDP in the Winter of this year. More information on the PDPs consultation can be found here.

Consultation launched on NHS pension changes to reinforce winter workforce

The Government launched a consultation on 28 August 2022 on changes to the NHS Pension Scheme that would make it easier for retired and partially retired NHS staff to return to the workforce.

Since March 2020, certain retire and return rules in the pension scheme have been suspended to allow retired staff to return to work or increase their working commitments without having the payment of their pension benefits suspended.

The measures are currently set to run until 31 October 2022 and this consultation will gather views from the public and stakeholders on whether to extend the measures to 31 March 2023. Steve Barclay, Health and Social Care Secretary, commented that “the Government are now consulting on extending temporary changes to the NHS pension scheme, which have so far allowed highly skilled retired staff to return to the workforce without having their pension benefits affected”.

Consultation on climate risk governance and reporting requirements for LGPS

On 1 September 2022, the government published a consultation on proposals to require Local Government Pension Scheme administering authorities to “assess, manage and report on climate-related risks, in line with the recommendations of the Taskforce on Climate-related Financial Disclosures”.

The proposals are based on the climate-related requirements for private occupational pension schemes (see our Insights (1), (2), and (3) for relevant background) adapted to account for specific features of the LGPS. The requirements would apply as from the financial year 2023/24 and will contain obligations in respect of: governance (oversight, assessment, and management); identification of risks and opportunities and assessment of their impact on funding and investment strategies; carrying out two sets of scenario analysis; risk management of risks and opportunities; reporting annually on four metrics; setting targets for one metric; and publication of an annual Climate Risk Report.

The Pension Protection Fund

Latest PPF 7800 Index report shows funding has decreased

The latest PPF 7800 index update setting out the estimated funding position on a section 179 basis as at the end of July 2022 of the eligible 5,215 DB schemes shows that:

• the aggregate surplus of these schemes decreased over the month to £254.3bn from a surplus of £267.9bn at the end of June 2022;
• the funding ratio decreased from 120.1% at the end of June 2022 to 118.2% at the end of July; and
• the aggregate deficit of the schemes in deficit increased to £29.8bn from £25.3bn at the end of June 2022.

FCA: 101 firms now in scope of new emergency asset retention rules for British Steel Pension Scheme transfer advice

In April 2022, the Financial Conduct Authority introduced emergency rules to prevent firms who had advised members of the British Steel Pension Scheme to transfer their benefits out of the Scheme from disposing of assets to avoid paying compensation. Under the emergency rules, 101 firms had fallen within scope and were mandated to complete regular financial resilience assessments.

The FCA announced in August 2022 that following the period where the firms had to complete an initial financial resilience assessment, 26 had failed and were now subject to an asset restriction. The FCA have made clear that this number may change as the firms must complete assessments every month or immediately following any material change in their financial circumstances.

PASA updates dashboard data guidance

The Pension Administration Standards Association has published updated guidance on dashboard data matching.

In a statement made on 23 August 2022, PASA has updated the guidance which it originally issued in December 2021 to assist schemes in choosing a data matching convention ahead of the introduction of mandatory dashboard requirements next year. PASA added two new chapters including a ‘Call to action, next steps and links to other PASA Guidance’. The call to action sets out PASA’s expectation that ‘all schemes should now be engaging on this important topic’. The guidance emphasises the importance of having accurate scheme data and a collaborative relationship between administrators, technology providers and wider data specialist providers.

For more on PASAs dashboard guidance, the full paper can be found here.

Pensions Advisory Group publishes questionnaire on pensions and divorce guidance

In an email dated 24 August 2022, the Pensions Advisory Group (PAG) have invited interested parties to respond to its questionnaire on their ‘pensions and divorce’ guides. The two reports, a guide to the treatment of pensions on divorce and a survival guide to pensions on divorce, were originally published in July 2019 and 2021 respectively. PAG are looking for external input to help assist in updating these guides.

The deadline for responding has been set for 30 September 2022 and PAG look to conclude their work by the end of October 2023.

The questionnaire has been made available online along with a blog post setting out the aims of the project.

DWP announces new Pensions Ombudsman

Following his endorsement by the Work and Pensions Select Committee, the Department for Work and Pensions has announced the appointment of Dominic Harris as the new Pensions Ombudsman. Mr Harris is due to take up position on 16 January 2023.

Guy Opperman, the minister for Pensions, has said that he is pleased to announce him as the new Pensions Ombudsman and that he was the ‘ideal candidate to lead the service’.

You can read more about Mr Harris’ appointment here.