Published by Jane Ralph on
Estimated reading time: 7 minutes
2018 will no doubt be most fondly recalled for events outside the world of pensions – whether that’s the progression (or otherwise) towards a ‘Brexit’ deal, developments in the US - North Korea relationship, or the football World Cup in Russia.
Whilst all of this and other world-changing events were going on, the pensions industry was embarking on its own journey into unchartered territory as it continues to develop to ensure it remains fit for purpose. Jane Ralph considers the biggest pensions news stories that broke during 2018 and how she expects some of them to shape what sponsors, trustees and providers will be doing well into 2019.
Colossal pressure was put on the Pension Protection Fund (PPF) during the year as more and more companies – including some significant high-street names – succumbed in their perennial struggle to survive financially. We also saw unprecedented activity in bulk annuity markets resulting in a record-breaking year for pension transactions.
Supervisory bodies including The Pensions Regulator (TPR), the Financial Conduct Authority (FCA) and the parliamentary Work and Pensions Committee continued to cast a beady eye on occupational schemes, resulting in closer, and ever-expanding scrutiny of funding, corporate accounting and transfer advice.
Like any review of the year, to cover absolutely everything that happened in 2018 would be challenging, so I will focus on a handful of topics, reducing others to mere passing references.
With Easter already on the horizon, the Department for Work and Pensions (DWP) unveiled its White Paper to the world – promising a fresh new look at the way occupational pensions operate in the UK.
Additional powers for TPR were consulted on later in the Summer (see below), and TPR is now working on an updated Code of Practice which will set out how prudence can be demonstrated in a scheme funding context. TPR will consult this year on how “prudence and appropriateness” might be defined to provide better balance for employers, trustees and members.
The DWP is expected to consult later this year on a legislative framework for, and raising awareness of, the potential benefits of consolidation of defined benefit schemes.
The DWP did however rule out measures overriding pension increase provisions in schemes’ trust deed and rules, though will “continue to monitor developments in the use of inflation indices”. Following on from the Barnardos and BT cases, we expect more developments in this regard.
Contrary to some commentators’ expectations, there was no mention of CDC schemes in the pensions White Paper despite the Royal Mail having agreed in principle with the Communication Workers Union (CWU) that employees would gain access to CDC pension benefits, once the legislative barriers had been removed.
Since then, we have seen the Parliamentary Work and Pensions Committee conduct its own review before the Government eventually published a fairly wide-ranging consultation on how it might make CDC schemes happen – labelled by some as the next great pensions revolution.
Though our focus may have been on the White Paper and the first shoots of CDC schemes, the early part of the year also saw Carillion and Toys R Us go into administration – the former leaving behind around £600m of unfunded pension liabilities.TPR was in court going toe-to-toe with Box Clever over whether TPR was right to issue a Financial Support Direction to ITV plc (it was, it turns out). Meanwhile BT were in court battling over which inflation index was best – RPI or CPI. This wasn’t the last RPI vs CPI question to be asked in 2018, not least because the BT case is expected to go to appeal…
Arguably, the biggest story (and certainly one of the largest headaches) of the year came to a head in late May 2018. The General Data Protection Regulation (GDPR) came into force across Europe – with little to no lead-in time (though, in fairness, ample warning!)
Pension schemes, advisors and trustees grappled with data mapping, privacy notices and data protection policies. This particular journey is far from over – it may never be – as we all have ongoing responsibilities to process personal data in an open and transparent manner, developing our cyber-security systems as fast as hackers and phishers can develop theirs.
In the White Paper (see above), the Government said it intended to strengthen TPR’s powers in relation to corporate transactions, with a particular eye on those who “deliberately put their pension schemes at risk”. Expanding on this, the DWP launched a consultation: “Protecting defined benefit pension schemes – a stronger Pensions Regulator”, in which it proposed additional responsibilities for trustees and employers to inform TPR (via a “statement of intent”) of certain planned corporate activities before they actually occur.
Furthermore new standalone powers will eventually give TPR the ability to compel a person to “attend an interview and explain any facts, events or circumstances” relevant to TPR’s investigations.
TPR will be given the power to “inspect records, documents and electronic devices” of relevant parties, and an expanded “Notifiable Events” framework will lead to more mandatory reports to the regulator about corporate transactions.
And, where a sponsoring employer intends to enter a “relevant business transaction”, a declaration of intent must be agreed with the DB scheme trustees and submitted to TPR before the transaction is formalised.The most eye-watering proposal of all was to increase the potential monetary fines for non-compliance – for misleading TPR, or for non-compliance with Scheme Funding regulations – to £1 million. A new criminal offence will be introduced for “wilful or grossly reckless behaviour” in relation to a DB scheme, or for failure to comply with a Contributions Notice issued by TPR.
The tax year started in April with the planned step up in minimum contributions for auto-enrolment, and new rules for multi-employer schemes allowing the triggering of a debt to be deferred if one of the participating companies ceases to employ active members.
Pot-follows-member was all but abandoned shortly after this (though the Pensions Dashboard is still very much a live project). And the Supreme Court ruled on ‘what is a worker’ in the Pimlico Plumbers case.
CVAs seem to be flavour of the month / year / decade – House of Fraser being one of the latest firms to explore the possibility with the PPF (albeit to no avail after the company went into administration and entered PPF assessment anyway). In a-not-unrelated development, the PPF published CVA guidance for firms in the middle of the year.
The PPF is now having to review its rules for calculating pension scheme members’ compensation after the European courts ruled that the £39,000 compensation cap was incompatible with the requirement that such an insurance arrangement must provide at least 50% of the benefits that would have been expected if the sponsoring employer had not gone bust.
Somewhat more predictable was the outcome of Dominic Chappell’s challenge of his criminal conviction for failing to provide TPR with the information it needed in relation to the collapse of BHS.
The Second BHS scheme (BHS2) – the £800m ‘remnants’ of the original BHS scheme that did not transfer to the PPF completed a buyout in the Autumn.
The Equitable Life saga – dragging on since 1999 – looks to be nearing a long-overdue conclusion as its with-profits policies are transferred to Reliance Life, and members’ fund values enhanced.
Half year data shows 2018 to be a very busy year for bulk annuity business. Expectations based on this and further substantive deals (Airways Pension Scheme and BHS2 Pension Scheme) result in expectations that over £20bn of business will be placed in 2018 with similar levels predicted for 2019.
As we trundle into the latter stages of 2018 – noting that the year isn’t over yet – there is still plenty happening despite a very quiet Budget speech from a pension point of view!
It is clear many members (perhaps over 100,000) took advantage of the ability to completely re-shape their DB pension benefits by opting to transfer out of their DB scheme. Whilst many members will have been satisfied with the transfer, it became clear from press reports, FCA investigations and the spotlight placed on the issue by the Work and Pensions Select Committee that a lot of individuals were receiving inappropriate advice, leading to cries of the next pensions mis-selling scandal.
The second policy statement from the FCA to address this was issued in October raising the minimum standards of advice and widening the factors to be taken into consideration. However it kicked into 2019 one of the most contentious issues it consulted on: whether to ban contingent charging models. As such the demand for, and debate about, DB transfer values and IFAs’ role in facilitating them will continue well into 2019 and beyond.
The cat was really put amongst the pigeons (despite being let out of the bag many, many moons ago) when a High Court ruling confirmed what we expected all along – that formerly contracted-out DB pensions do have to be equalised “for the effects of” Guaranteed Minimum Pensions (GMPs) – the only questions being how? And when?
The case considered several different methods for equalising and it is expected that the DWP will shortly update its guidance last issued in 2013 to spell out how affected ongoing schemes should proceed. In the meantime, sponsoring companies are considering the costs – in particular (and for many in the very near term) what the impact on their corporate balance sheet might be. And with auditors being reminded by their own governing bodies of the need to be robust in pension audit (following some discrepancies earlier in the year) they are expecting to see detailed calculations rather than a broad brush estimate.
State Pension Age finally equalised at 65 for men and women in October and now is set to increase to 66 and 67 over the next 10 years, with further increases inevitable as life expectancies continue to grow…or do they? The ONS has published figures suggesting that increases in life expectancy has slowed dramatically and in some areas of the UK stopped altogether. Could 2018 be the turning point? Time will tell.