11: Pension law – what to expect in 2020?
In this blog we take a look at the issues that trustees and employers of occupational Defined Contribution (DC) and Defined Benefit (DB) schemes may be dealing with during 2020.
Pension Schemes Bill
The Pension Schemes Bill (covered in a previous blog here) was reintroduced by the government into the House of Lords on 7 January 2020 in much the same form as the Bill initially introduced in October 2019. The Bill sets out new and expanded powers for the Pensions Regulator including new criminal offences for avoiding employer debt, a commitment to pension dashboards and requiring trustees to provide pension related information to dashboards, and to create a framework for collective money purchase schemes, a new style of pension scheme under which risk is shared more equally between workers and employers.
The Bill also introduces new funding duties on trustees of DB schemes which should also enable the Pensions Regulator to start its long awaited two-stage consultation on its new Code of Practice on funding DB schemes which it had been delaying due to the previous political uncertainty. The focus will be on clearer funding standards in respect of the prudence of technical provisions, the appropriateness of recovery plans and the role of contingent assets.
The Lloyds Bank decision in 2018 required affected schemes to adjust benefits built up between 17 May 1990 and 6 April 1997 for the unequal effect of GMP. A further hearing in Lloyds is currently listed for the end of April / beginning of May and it is hoped that this will give trustees guidance on the extent of their obligations (if any) to take action in respect of benefits transferred out of their schemes in the past.
In addition, guidance from HMRC on the tax issues relating to GMP conversion is expected in the beginning of the year, given the intended December date is now passed. This should give trustees some clarity on protection and lifetime and annual allowance tax issues that are currently causing many DB schemes to keep their power dry on GMP conversion as a solution to GMP equalisation.
It is anticipated that further industry led best practice codes may also give more practical administrative guidance on these points when they become clear.
End of RPI?
A consultation is expected in January 2020 on whether to align the Retail Prices Index (RPI) with the Consumer Price Index including housing costs (CPIH) should be made between 2025 and 2030. CPIH is generally around 0.7% to 1% below the value of RPI, which means that aligning RPI with CPIH could have a material impact on the calculation of DB scheme benefits, liabilities and on future returns from RPI-linked investments.
In September 2019, Sajid Javid, Chancellor of the Exchequer, announced that he had accepted in principle the proposal made by the UK Statistics Authority (UKSA). The government hopes to publish a joint response in conjunction with the UKSA before the 2020 Spring Statement.
SIP Implementation statement
From October 2019 trustees of occupational schemes have been required to set out in their statement of investment principles (SIP) their policy on financially material considerations (including ESG) and stewardship.
From October 2020, trustees of certain DC schemes (broadly those with more than 100 members) will be required to include an ‘implementation statement’ setting out the extent their SIP has been followed during the scheme year and to publish their SIP on a publicly available website and in their schemes annual report.
DB scheme trustees will need to include further information in their SIP on the schemes stewardship policy and their policy in relation to asset managers.
DC scheme changes
The government’s drive to simplify, speed up and improve transparency in relation to DC schemes is likely continue. Consultation on greater standardisation of the structure, design and content of benefit statements ended in December 2020 and amendments to the disclosure regulations could be tabled during 2020. In November 2019 the government indicated it would continue to monitor the quality of DC scheme value for money statements during 2020 and may review legislation around transaction costs and charges.
Safeway v Newton
Following the ECJ decision published on 7 October 2019, a further hearing in the Court of Appeal has been listed for 2 July 2020. The ECJ held that EU law prevents a pension scheme from increasing normal pension ages (which is generally held to mean benefits are reduced) with retrospective effect in order to achieve sex equalisation, unless such action is objectively justified. This is so even where it is permitted under national law and the rules governing the relevant pension scheme expressly permit retrospective changes.
The ECJ’s judgment followed a Court of Appeal decision that overturned the long standing position that retrospective reductions to normal pension ages to achieve equalisation are not possible, and held this would be possible if the scheme’s rules expressly permit a retrospective change. The Court of Appeal will now re-decide the matter on the basis of the ECJ’s judgment and will hopefully consider objective justification. The facts in Safeway are relatively unusual, but schemes that have relied on an express power under their rules to make retrospective changes to increase normal pension ages may wish to seek legal advice on the changes.
DB consolidation / superfunds
Although DB consolidation / superfunds were a notable omission from the Pension Schemes Bill, there may be a further response to the consultation on the framework for the regulation of DB superfund / consolidation schemes which closed in February 2019. Consolidation is seen as an alternative option for DB schemes to move whole scheme funding liability from sponsoring employers to a third party while retaining or improving financial security for scheme members.