Estimated reading time: 7 minutes
From Bauer to RPI via the Budget and Brexit (again) – Head of Pensions Research, Tyron Potts, maps out an ‘A to Z’ of everything you may have missed in the world of pensions this winter.
Bauer – CJEU on PPF benefits
The Court of Justice of the European Union has ruled in the case of the Pensions-Sicherungs-Verein VVaG (PSV) v Günter Bauer, in which it considered whether pensions lifeboat funds, such as the German PSV (and, by extension, the UK’s Pension Protection Fund (PPF)), are required under EU law to fully compensate accrued occupational pension benefits on employer insolvency.
In particular, whilst a 2018 case (Hampshire) had concluded that at least half of members’ accrued benefits be covered, the Advocate General for the CJEU had given an opinion in the Bauer case that the relevant EU Directive did not specify a proportion to be covered. Therefore each EU Member State should be required to protect all accrued occupational pension benefits. This could potentially have increased the PPF’s liabilities by “tens of billions”.
However, the CJEU itself took a more pragmatic view, saying member states are obliged only to ensure compensation reductions are not “manifestly disproportionate” – meaning they must not be applied where individuals’ income levels are below standardised “at risk of poverty” thresholds.
Extensive changes to PPF compensation should not therefore be required as a result of the Bauer judgement. The PPF said it will consider the implications further with the Department for Work and Pensions (DWP).
Brexit impact on pensions
According to a survey by the Pensions and Lifetime Savings Association (PLSA), almost nine in ten workplace pension fund trustee boards have discussed the potential impact of Brexit on their schemes. One third of schemes surveyed thought that Brexit would have a negative impact on the value of their assets.
The PLSA lists six key actions for schemes to mitigate Brexit-related risks. These include reviewing asset allocations and currency hedging strategies; reviewing sponsor covenants; and seeking professional advice.
"...almost nine in ten workplace pension fund trustee boards have discussed the potential impact of Brexit on their schemes."
Budget 2020 pension changes
Sajid Javid, the Chancellor of the Exchequer, has announced that the first Budget of the new parliament will take place on 11 March 2020.
Forming part of the Conservative party manifesto for the General Election, it is widely expected that the Budget will incorporate the Treasury’s review of the impact of Tapered Annual Allowance on NHS consultants and may therefore propose changes to pensions tax rules for the 2020/21 tax year.
Pension Schemes Bill
Following confirmation in the Queen's Speech, the Pension Schemes Bill was re-introduced to the House of Lords in the New Year. The content of the Bill is broadly identical to the Bill that had to be dropped when Parliament was suspended for December’s General Election.
The Act, when it comes into force, is intended to:
- Strengthen the powers of The Pensions Regulator (TPR) and create new criminal offences, "including putting lengthy jail terms on the table for reckless bosses who plunder people’s pension pots". This will include fines of up to £1 million and prison sentences of up to seven years for the worst offenders.
- Give TPR new powers to obtain information about the scheme and sponsoring employers on request.
- Provide clearer scheme funding requirements for defined benefit (DB) schemes, and strengthen the TPR’s related powers. TPR is expected to consult in March on the high-level principles of a new Code of Practice No. 3 on DB scheme funding.
- Provide a framework for the pensions dashboards to operate.
- Legislate to allow the creation and regulation of Collective Defined Contribution (CDC) schemes.
- Set out the circumstances under which a pension scheme member will have the right to transfer their pension savings to another scheme.
The Bill’s second reading in the House of Lords and the start of formal scrutiny of its content is currently scheduled for 28 January 2020.
General Levy increases
The Department for Work and Pensions (DWP) is proposing to increase its General Levy and is seeking views on how to phase in these increases. The General Levy on occupational and personal pension schemes effectively funds the activities of TPR, The Pensions Ombudsman (TPO) and some of the activities of the Money and Pensions Service (MaPS).
In 2013, the General Levy fund was in surplus by just over £24m, but it now has a deficit which is projected to increase to £50m by 2020. According to the DWP, the levy increase is necessary because of the significant recent changes in the pensions industry and regulatory landscape, as well as increased demand for guidance and dispute resolution. The DWP also cites a commitment to strengthen TPR’s powers as increasing regulatory costs.
The DWP has set out four options. The first of which is a "holding increase" of 10% in April 2020, with further increases from April 2021 informed by a wider review of the levy. The DWP is also considering phased increases over varying periods ranging from three to ten years – with resulting levy increases of between 185% and 245%.
PPF: 2020/21 levy rules and changes
Following a consultation in October 2019, the Pension Protection Fund (PPF) has released its final levy rules for 2020/21 – and has confirmed that there will be no substantive changes to the levy calculation this year. This is the final year of the current “triennium”, so the PPF will consult on material changes next year – noting that next year will also see the return of Dun and Bradstreet (D&B) as insolvency score provider (see below).
The PPF expects to collect £620 million in PPF levies in 2020/21. This is an increase on the expected £575 million in the current levy year, and reflects a deterioration in average scheme funding levels due to market conditions. On average, invoices will therefore be around 8% higher than in 2019/20, although the impact on individual schemes will depend very much on specific circumstances.
"The PPF expects to collect £620 million in PPF levies in 2020/21. This is an increase on the expected £575 million in the current levy year, and reflects a deterioration in average scheme funding levels due to market conditions."
|Item||Key dates and times|
|Monthly Experian scores for the 2020/21 risk-based levy||30 April 2019 to 31 March 2020|
|Submission of scheme return data on TPR’s Exchange||By midnight on 31 March 2020|
|Certification of contingent assets and asset-backed contributions||By midnight 31 March 2020 (hard copy documents by 5pm)|
|Certification of Deficit-Reduction Contributions||Online by 5pm on 30 April 2020|
|Certification of full block transfers||Online by 5pm on 30 June 2020|
|Invoicing starts||Autumn 2020|
PPF: Insolvency scoring (D&B)
The PPF has issued a consultation on the switch from Experian to Dun & Bradstreet (D&B) as its insolvency score provider from 2021/22. Alongside the consultation, the PPF have released a “beta version” of the new D&B insolvency risk portal. In order to access D&B score(s) for sponsoring employer(s) in the future, trustees will need to set up an appropriate online account. The PPF has issued automated emails to existing Experian portal users.
Small changes to the model and differences in the collection of data may result in material changes in scores under D&B compared with the Experian model. Trustees should therefore liaise with their advisers to understand the impact of the change on future PPF levies.
In the meantime, the PPF has said that it expects around two-thirds of companies to see a change in levy band. Larger companies are more likely to see a worsening in score and smaller companies an improvement.
RPI – an update
Following a review of the Retail Prices Index (RPI) published by the House of Lords in 2019, the Government proposed significant changes to the calculation of the index bringing it in line with the Consumer Prices Index including owner-occupied housing costs (CPIH). CPIH is expected, on average, to be around 1% per annum lower than RPI inflation and could materially affect the cost of providing DB pensions for some schemes.
The Treasury has since confirmed that a consultation on the proposals will be launched at March’s Budget, rather than in January as it had originally planned.
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