MORAL HAZARD: PENSIONS BILL PROVISIONS AND PENSIONS REGULATOR DRAFT CODE CONTENT
The Government has issued a response to the April 2008 consultation (see our May 2008 briefing) on the proposals to change the Pensions Regulator's moral hazard powers (contribution notices and financial support directions). The changes have now been tabled as amendments to the Pensions Bill.
The major changes affect contribution notices: a new "material detriment" test (where actions or failures have a materially detrimental effect on the likelihood of members receiving their benefits); the removal of the "lack of good faith" requirement; a revised test of reasonableness; and a proposed new code of practice from the Pensions Regulator, for which the Pensions Regulator has issued draft content. There are also changes in relation to bulk transfers and the test for imposing financial support directions.
The principal amendments are to have retrospective effect from 14 April 2008. Otherwise the changes will come into force when the Pensions Bill receives Royal Assent, except for the new material detriment test, which will take effect when the Code comes into force. The Regulator's statement of 25 April on how it would operate its powers in the interim will continue to have effect until the new legislative provisions come into force.
For further details see our briefing issued earlier this month.
PENSIONS REGULATOR'S CONFLICTS OF INTEREST GUIDANCE: FINAL VERSION PUBLISHED
The Pensions Regulator has published the final version of its guidance for trustees and employers on conflicts of interest. The draft version was issued for consultation in February 2008 (see our briefing of March 2008).
Whilst there are some changes of drafting to the five key principles and to the guidance generally, the overall message remains fundamentally the same as in the draft version. The main changes include the following.
- As a result of respondents' comments the guidance has been shortened, and some of the former repetition removed. A separate, abridged version of the guidance has also been issued, summarising the key principles and some of the questions trustees should be asking themselves. However, in its consultation report the Regulator states that it would expect all trustees who read the summary version to read it in conjunction with the main guidance, a view with which we agree.
- The Regulator's expectation that trustees should seriously consider obtaining independent legal advice when seeking to manage a non-trivial conflict of interest and act on this advice remains unchanged, but the number of references to this in the guidance has been reduced in response to comments made.
- A number of respondents were concerned that the draft guidance overemphasised the risks of having trustees who also hold senior positions within the employer, suggesting that this could result in trustee resignations. The guidance has been updated, and the consultation report notes: "it is not the regulator's view that such appointments are inappropriate, merely that the likelihood of a non-trivial conflict increases and thus such appointments need to be managed accordingly. Of course, in extreme cases, there will be circumstances when the nature of the conflict is so acute or pervasive that resignation (or avoidance) may be the only appropriate course of action".
- Concern was raised that the guidance was DB-specific, so there are now more references to DC schemes and DC case examples, but the Regulator emphasises that all the principles and much of the detailed guidance are relevant to both DB and DC schemes.
- Conflicts of interest policy: formerly Principle 2, this is now Principle 5, in response to comments that the conflicts policy should be the last step of the cycle, once other principles have been addressed. The policy should be regularly reviewed: the final guidance now states: "Internal controls, including those relating to conflicts, should be reviewed at least on an annual basis, or sooner if relevant changes occur, for example a change in control of the employer".
- Options for managing conflicts of interest: the Regulator confirms that neither the appointment of an independent trustee nor any other course of action is a panacea for conflicts management. A new additional option is conflict management at the 'employer end' (e.g. trustees who also hold positions within the employer withdrawing from employer negotiations which may impact on the pension scheme). The section on withdrawal from discussions and the decision-making process remains, but the statement in the draft guidance that a trustee should always withdraw from discussions about his own remuneration and neither vote on them nor be counted as part of the quorum has been replaced by a statement that "trustees must seek to manage any perceptions that such a transaction could unduly influence the decisions of the trustees".
- There are one or two small changes to the sample declaration of interests in Appendix C: the list of directorships should indicate whether there is any association with the scheme; and directors should indicate shareholdings in associated companies (as opposed to companies generally); and the sample conflicts policy in Appendix D includes a longer list of possible areas that could give rise to conflicts.
The Regulator intends to update the guidance in light of experiences from case work and trends identified in its annual governance tracker survey. It now hopes to see "a marked improvement in areas of conflicts management, for example it is acknowledged that the production of a conflicts policy plays an important role in communicating important messages to trustees, but still very few schemes have yet to put a formal policy in place".
PENSIONS REGULATOR CONSULTATION ON TKU
The Regulator has issued for consultation a revised draft code of practice on trustee knowledge and understanding and three scope guidance documents (for DB schemes with DC arrangements; DC schemes; and a new version for fully insured DC schemes with 12-99 members). Consultation closes on 31 December 2008.
The Regulator is of the view that TKU should remain as an individual trustee requirement; it was suggested by the deregulatory review that the requirements should apply to the trustee board as a whole, so that it would be sufficient for only one individual on the board to have the relevant knowledge and understanding on each issue.
The proposed changes to the code include:
- strengthening the importance of delivering effective learning
- how the Regulator will check up on TKU.
The scope documents have been tidied up and reordered, and changed to reflect:
- the importance of good administration
- the Personal Accounts regime
- developments in investments and buy out
- employer covenant issues
- recognising the possibility of wind up and preparatory steps.
UPDATING THE MYNERS PRINCIPLES: GOVERNMENT CONSULTATION RESPONSE
HM Treasury, the DWP and the Pensions Regulator have published a response to their joint consultation on updating the Myners principles on institutional investments (see Pensions Update, April 2008). The consultation document generally endorsed the NAPF's November 2007 review of the Myners principles (see Pensions Update, November 2007).
The government reported that the majority of respondents supported its proposals. In particular, respondents supported the proposal to reduce the number of principles from ten to six higher-level, less prescriptive, principles, suggesting only minor drafting changes. The government has made a small number of changes of emphasis but the substance of the proposed principles remains unchanged. The proposed updated principles are:
- effective decision making - decisions must be taken by those with the necessary skills, knowledge, advice and resources; trustees should have sufficient expertise to be able to evaluate and challenge the advice they receive, and manage conflicts of interest
- clear objectives - investment objectives must be determined by reference to each scheme's liabilities, strength of employer covenant and attitude to risk
- risk and liabilities - trustees should take account of the form and structure of their scheme's liabilities, including the strength of the employer covenant, the risk of employer default and longevity risk
- performance assessment - trustees should arrange formal performance measurement of investments, fund managers and advisers and periodically review their own effectiveness as a decision-making body and report on this to members
- responsible ownership - trustees should adopt the Institutional Shareholders' Committee (ISC) Statement of Principles on the responsibilities of shareholders and agents; explain their policy on responsible ownership in their statement of investment principles and periodically report to members on the discharge of these responsibilities
- transparency and reporting - trustees should communicate with stakeholders on investment management, governance and risk, including performance against stated objectives and should regularly report to members in the form they consider most appropriate.
The principles will be linked to "a body of higher quality, more selective and more accessible guidance and trustee tools" (see Appendix A to the response).
The Investment Governance Group (IGG), a joint government and industry body to be co-sponsored by HMT and the DWP and chaired by the Pensions Regulator, will be set up to "own" the updated principles, monitor their effectiveness and recommend improvements. Among the issues it will be asked to consider are:
- brief and practical guidance on the location and content of reporting by trustees (without inhibiting trustees' flexibility to inform members in the manner they think most effective
- the need to update the Myners principles for defined contribution schemes
- how to implement them more effectively for small schemes and
- how to update the guidance for the LGPS.
The principles will continue to be enforced by way of a voluntary "comply or explain" framework.
ROLE OF ACTUARY IN SCHEME FUNDING - COURT OF APPEAL DECISION IN ALLIED DOMECQ
The Court of Appeal has upheld the judgment of the High Court in Allied Domecq (see Pensions Update, January 2008) that the scheme actuary had unilateral power to set the contribution rate under the scheme rules without obtaining the agreement of the principal employer (Allied Domecq (Holdings) Ltd -v- Allied Domecq First Pension Trust Ltd and another [2008] EWCA Civ 1084).
The main issue was whether the rates of contribution under the scheme rules were "determined by the actuary without the agreement of the employer". If they were, then under the statutory scheme funding requirements the scheme actuary would be required to provide a special certificate confirming that the rates of contribution agreed by the trustees and employer were no lower than the rates he would have provided for if he, rather than the trustees, had the responsibility for making the decisions.
The scheme rules provided for both ongoing contributions and contributions in relation to past service deficit to be determined by the scheme actuary. In the case of ongoing contributions the trustees would then determine the respective proportion of contribution from each participating employer at such intervals as the trustees and principal employer agreed. In the case of deficit contributions the actuary would certify the proportions in which employers would pay, within such period as the trustees may, on the advice of the actuary, agree with the principal employer.
The Court of Appeal upheld the High Court's decision that both rules provided for the rates of contribution to be determined by the scheme actuary; and the special certificate would be required. The second limb of each rule was separate; so the power of the actuary to determine contributions was not affected by the right of the trustees to apportion contributions among employers or, with principal employer agreement, to set the time period for the past service deficit contributions. The appeal court held that this time period referred to payment of contributions payable by each individual employer; the period for payment of the aggregate amount payable by the employers collectively was governed by the (then) minimum funding requirement provisions of the Pensions Act 1995, with which the rule could not conflict.
INDIRECT SEX DISCRIMINATION - EAT RULES ON CORRECT POOL OF COMPARATORS
Pike -v- Somerset County Council was an indirect sex discrimination case brought by a female part-time teacher. The EAT held that the employment tribunal (ET) had applied the wrong pool of comparators and had therefore been wrong to strike out the claim.
The employee took ill-health early retirement in December 1993, receiving a pension from the Teachers' Pension Scheme (TPS). In January 1994 she returned to part-time teaching. At that time the TPS rules permitted only full-time teachers to rejoin the scheme post-retirement. She brought an equal pay claim on the grounds of indirect sex discrimination (because more part-time teachers were female) before the ET as the claimant in a test case involving 74 teachers.
The ET had accepted the respondents' submission that the appropriate comparator was the whole of the membership of the profession to which the TPS applied, and struck out the claim on the basis that the employee had failed to show that the rule in issue had a disparate adverse effect on female employees. The employee appealed.
The EAT allowed the appeal, holding:
- the ET should have disregarded those members of the workforce who had no interest in the benefit in question, i.e. all those under retirement age and working; the correct pool of comparators were returning teachers; the disadvantaged group within the pool were part-time workers and the advantaged group were full-timers
- the employee had succeeded in demonstrating that the exclusion of returning part-time teachers from the TPS had a disparate adverse effect on female employees.
The matter was remitted back to the ET for hearing.
LGPS BROAD COMPARABILITY TEST: GAD CLARIFICATION OF "MINIMUM PENSION AGE"
The Government Actuary's Department (GAD) has issued a note clarifying the definition of "minimum pension age" for the purpose of certifying that a contractor's scheme is broadly comparable to the Local Government Pension Scheme (LGPS).
One of the requirements for broad comparability is that the minimum pension age (referred to in LGPS guidance as the critical retirement age (CRA)) in the contractor's scheme will be no higher for any individual than it would have been had the individual remained in the LGPS. The note clarifies how a member's CRA is determined (this varies according to the date of first joining the LGPS) and gives details of relevant regulations and GAD guidance.
The stated reason for issuing the note is to ensure that contracting authorities and contractors are aware that it is the contracting authority's responsibility to provide contractors either with accurate details of CRAs for all transferring members, and/or with sufficient information to enable the contractor's scheme to determine those CRAs themselves. A GAD passport certificate will be valid only if this information is provided.
The note states that a copy of it should be appended to all LGPS passport certificates issued before 6 October 2008 when they are presented to contracting authorities on bidding for work and that contracting authorities should not accept any passport issued before that date unless it has the note appended to it.
LGPS: RESPONSES TO CONSULTATION ON ADMITTED BODY STATUS PROVISIONS
The Department of Communities and Local Government (DCLG) has published the response to its informal consultation on the admitted body status provisions (ABS) in the Local Government Pension Scheme (LGPS).
The consultation document, published in January (see Pensions Update, February 2008), outlined three possible approaches for dealing with concerns about implementation of the ABS provisions (providing revised guidance, updating guidance and making minor regulatory changes and making broader regulatory changes without upsetting the key policy basis of ABS). Most respondents agreed that these approaches would help address those concerns, with a third of respondents considering that a mixture of the three approaches would be required.
The current guidance, Local Government Act 1999: Part 1: best value and performance improvement was last updated in 2003. Most respondents agreed that revised guidance which included clarification of the purposes of the legislation would help improve understanding of ABS.
Only half of the respondents thought that making minor regulatory amendments set out in option 2 (including a provision to refund any surplus at the end of a contract to a contractor and requiring annual actuarial monitoring of contracts) would improve the existing ABS framework.
The DCLG now intends to work with stakeholders to develop substantive guidance dealing with the key issues contained in the report and to develop final proposals incorporating any necessary regulatory amendments for future consultation.
PPF LEVY
2008/09 Levy
The PPF has published on its website information about 2008/09 pension protection levy invoices, which schemes should now have started to receive. This includes links to explanatory information which will be included with the invoice and a link to a new feature on the PPF website: a Queries and Reviews page containing information on how to query the invoice and/or appeal a scheme's failure score(s) with D&B.
2009/10 Levy
The PPF has also issued its 2009/10 Pension Protection Levy Consultation. It states: "The Board considers the proposals contained in this document to be firm ones, made in the light of previous consultation, and does not anticipate substantial change. Any comments on this document received by 23 October will, however, be considered".
The document confirms the policy direction established in the August 2007 consultation (and the November 2007 consultation response), which outlined the PPF's proposals for calculating the 2008/09 and 2009/10 levies. However, the PPF is seeking views on how some of that policy is carried through to 2009/10. The document also states that, from November, the Pensions Regulator's Exchange service will be live for certificates for contingent assets, deficit reduction contributions and block transfers.
Forthcoming Consultation: Long-Term Levy Proposals
The PPF has announced a forthcoming three-month consultation on the levy from 2011/12, to build on the August 2007 consultation about how the levy can reflect the long-term risk to the PPF. The main aim will be to achieve greater fairness in the way levy is calculated. The PPF will propose to:
- add a component to the risk-based element of the levy to reflect a scheme's contribution to the long-term risks that PPF faces, even from well-funded schemes; this will include taking into account a scheme's investment strategy and credit risk over time
- provide the potential to reduce the scheme-based element of the levy, and
- offer greater year-on-year stability in individual invoices, because the levy will become less sensitive to short-term changes in insolvency ratings and levels of underfunding.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
