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Pensions Issues for Life Sciences Newsletter – September 2016

  • United Kingdom
  • Brexit
  • Pensions
  • Health and life sciences

09-12-2016

The UK Pensions landscape continues to change at a pace, both as a result of new legislation and regulation and recent events. In this article, we look at the impact of Brexit on pension schemes and some key developments affecting trustees and sponsoring employers of defined contribution (i.e. money purchase) pension schemes.

Recent developments

Brexit and pensions

Following the EU referendum result, it is likely to be some time before the terms of the UK’s future relationship with the EU are known.

In the short term, there is likely to be considerable investment volatility in light of the Brexit vote. The position will need to be monitored carefully. Trustees of occupational pension schemes, in particular, will need to consider quickly whether their scheme’s investment portfolio remains appropriate for a post-Brexit world. Scheme investments governed by the laws of another Member State or contingent assets based in the EU will need particularly close attention to ensure they remain appropriate and enforceable.

Also in the short term, Brexit is unlikely to have a significant impact on the legal and regulatory framework for UK pension schemes. However, it does open the door for UK legislation to deviate from EU requirements in the future (for example, in relation to the funding of defined benefit (“DB”) schemes, investment and scheme governance). Also, without the influence of the ECJ in the background, UK case law on matters previously the preserve of the EU, such as equal treatment and TUPE, may start to take its own domestic direction.

The macro-economic impact of Brexit and its impact on individual businesses is difficult to predict with certainty. It is likely to be determined, to a large extent, by the nature of the UK’s ongoing relationship with the EU as well as any trade deals that the UK enters into with countries outside of the EU (such as the US and China). Trustees of DB schemes need to be alive to any deterioration in the financial strength of the business standing behind their schemes and corporate sponsors need to be prepared to address trustees’ concerns in this regard.

The most pressing action points for corporate sponsoring employers and trustees as a result of the Brexit vote are likely to be as follows:

Corporate sponsors should assess the potential impact of Brexit on their business and on their pension scheme and prepare appropriate contingency plans for this.

Trustees should consider the suitability of their investment portfolio post-Brexit and what steps they can take to mitigate the impact of continued volatility on investment markets on their scheme.

Trustees should reassess the strength of the financial covenant standing behind their scheme in light of Brexit (including any contingent security granted to the scheme) and take steps to mitigate the risk of any material weakening in this.

Trustees and corporate sponsors should consider the need to send a communication to scheme members to reassure them about the steps that they are taking to mitigate any risks to the scheme arising as a result of Brexit.

Further information about Brexit can be found on our Brexit hub.

Regulator’s DC Code of Practice and “how to” guides

The Pensions Regulator has issued a revised Code of Practice 13, relating to money purchase pension benefits, which came into effect on 28 July 2016. The new Code applies to trustees of all occupational trust-based pension schemes with two or more members which offer money purchase benefits, including:

defined contribution (“DC”) (i.e. money purchase) schemes;

DC sections within schemes that offer mixed benefits (e.g. a scheme with both a DB and DC section); and

money purchase benefits resulting from additional voluntary contributions.

The new Code sets out the Regulator’s expectations of trustees and what is required of them to comply with legislation, including the most recent changes in law. The new Code is shorter than the previous version, and it has been simplified, with an increased focus on legislative requirements.

The Code covers issues such as assessing value for members, designing and monitoring DC investment strategies and the need for diversity on trustee boards.

The Regulator has also issued six “how to” guides to help trustees implement the new Code and meet the new governance standards in practice. Much of the material that might otherwise have been included in the new Code is set out in these guides. Aside from the obvious challenge of navigating around this guidance, one of the key issues is that the line between practical suggestions and minimum regulatory expectations is not always clear.

The Regulator also produced a "self-assessment template" tool to help trustees assess their scheme against the standards in the new Code. The Regulator has also issued a final updated compliance and enforcement policy for occupational DC schemes, describing its expectations for compliance with legislation and how it will enforce the law.

It is clear that the standards expected of trustees of schemes with money purchase benefits are rising, and trustees of such schemes need to engage with the new Code and, where relevant, make any required changes.

The new Code can be found on the Regulator’s website here Links to the “how to guides” are in the section of the Code headed “The purpose of this code of practice”.

Chair’s annual governance statement

Trustees of occupational pension schemes that provide money purchase benefits must (except where the only such benefits are Additional Voluntary Contribution benefits) produce an annual governance statement signed by the chair of trustees, as part of their scheme’s annual report and accounts. Broadly, this statement needs to describe and explain how the trustees have discharged the new DC governance requirements. The statement must be published within seven months of the end of the scheme year.

The Pensions Regulator has already demonstrated that it is prepared to fine trustees who do not comply with this requirement. In June 2016, the Regulator reported that it issued its first fine against trustees for failing to produce a chair’s governance statement. The trustees received the minimum mandatory £500 fine after they notified the Regulator of the breach and quickly took action to prepare the required statement.

More recently, in August of this year, a professional trustee company was ordered to pay three £2,000 fines for failing to prepare annual governance statements in respect of three separate schemes. The maximum fine was imposed because the schemes had a professional trustee and there were no mitigating factors.

Automatic re-enrolment

It is nearly four years since the automatic enrolment requirements were introduced, and more employers are now approaching their first automatic re-enrolment date.

The process for automatic re-enrolment is broadly the same as the automatic enrolment process. However, there are some subtle but significant differences that employers need to be aware of (for example, employers cannot use postponement in connection with re-enrolment).

There are a number of actions that employers need to take in connection with their first re-enrolment date, including

  • selecting the re-enrolment date;
  • assessing who is eligible to be automatically re-enroled; deciding whether to apply new exemptions from auto-enrolment;
  • testing payroll software;
  • preparing re-enrolment communications; and
  • submitting a declaration of compliance to the Pensions Regulator.

For more information, please click here.

On the horizon

Capping DC early exit charges

The UK Department of Work and Pensions (“DWP”) and the UK’s Financial Conduct Authority (“FCA”) each issued proposals at the end of May 2016 to introduce a cap (from April 2017) on early exit charges imposed by providers of DC pension arrangements.

The proposed level of the cap is 1% for existing pension arrangements, and nil for any new pension arrangements entered into after the new provisions come into effect.

In relation to contract-based, personal pension schemes, the obligation to comply with the cap is placed on the pension provider. For trust-based schemes, the obligation will rest either on the scheme’s trustees / managers or on service providers, depending on whether the cap derives from the scheme’s rules or from contractual arrangements entered into with third parties.

The DWP warns that trustees / managers must be vigilant to ensure that excessive charges are genuinely capped, rather than simply displaced.

More generally, the DWP invited interested parties to provide further evidence (by 16 August 2016) on the application of such exit charges in relation to occupational pension schemes, including how common such charges are, how they are calculated and how they are imposed.

For further information, please click here.

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