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Reporting compliance with CMA Order

  • United Kingdom
  • Pensions

05-10-2020

In 2019, in response to concerns about the fiduciary management and investment consultancy markets, the Competition and Markets Authority issued an Order which, for most purposes, came into force on 10 December 2019.  It requires trustees of the majority of schemes to competitively tender fiduciary management services and set strategic objectives for investment consultants.   

The Order provides that it will cease to apply if its requirements are replaced by regulations. DWP intended to issue replacement regulations applying to trustees of occupational pension schemes this year. The regulations were issued in draft but, as a result of Brexit and the pandemic, it has not been possible to progress them, and DWP has now confirmed that they will not become law before 2021.

This is significant because the CMA Order contains reporting obligations which will need to be complied with by 7 January 2021.  It was originally anticipated that these obligations would be replaced with provisions in regulations, but that will not now happen before the January 2021 deadline.

This means that trustees need to take action to ensure that they have complied with the provisions of the Order that apply to them, and that they make the necessary reports on time.

Which schemes need to take action?  

The majority of schemes are within the scope of the CMA Order.  There are, however, some exemptions including unregistered schemes, certain overseas arrangements, some very small schemes, public sector schemes (although there has been some uncertainty about this) and master trusts where a firm providing both investment consultancy services and fiduciary management services is also the scheme strategist or scheme funder.

In addition, the Order does not apply to trustees where the services they receive are from a trustee, a company owned by the trustees, the principal employer, or an employer which can act on behalf of all of the other employers in the scheme or a company in the same group as either.

So, if your scheme is within the scope of the Order, what action is required?

What do you need to do if the trustees use fiduciary managers?

The first step is to determine what percentage of scheme assets are managed under fiduciary management arrangements.  If it is (or would be, where you are entering into a new agreement) 20% or more, then the new competitive tendering requirements apply.

This means that, from 10 December 2019, any new agreement with a fiduciary manager that would result in 20% or more of scheme assets being delegated must be competitively tendered.  If there were existing fiduciary mandates in place on 10 December 2019 covering 20% or more of the scheme’s assets in total and they were not competitively tendered, they will need to be tendered within 5 years from the start of the oldest agreement or, if later, by 9 June 2021.  Trustees should consider now whether they need to run a tender by 9 June 2021 and, if so, start to plan for this process.    

Competitive tendering requires trustees to obtain bids from at least three providers.  The Pensions Regulator has set out guidance on how a tender process should be carried out and what trustees should do.  When they have completed the process, trustees should provide the successful manager with written confirmation that they have been selected as a result of a competitive tender process.

What do you need to do if the trustees use investment consultants?

With effect from 10 December 2019, trustees must not enter into a new contract or obtain services under an existing investment consultancy agreement unless they have set strategic objectives for the investment consultant.  

Investment consultancy services for these purposes include advice in relation to:   

  • investments that may be made or retained by or on behalf of the trustees
  • any matters in respect of which the trustees are required by law to seek advice in relation to drafting their statement of investment principles
  • strategic asset allocation and
  • manager selection.

The Order does not really give any information about how to set strategic objectives or what they should be.  However, guidance from the Pensions Regulator should provide trustees with some help on this.   

Reporting to the CMA

The reason that trustees need to take particular note of these requirements now is that, where the Order applies to them, they will need to submit a statement to the CMA by 7 January 2021 confirming that they have complied with their obligations under the Order. 

The Order sets out what this compliance statement should look like.  It does not need to contain a great deal of detail, but must state which parts of the Order the trustees have complied with and over what period.   

Trustees must also provide the CMA with a signed certificate at the same time, stating that the compliance statement has been prepared in accordance with the Order and that they have complied in all material respects with the requirements of the Order and reasonably expect to continue to do so.  There are specific requirements for the signing of this certificate, which trustees should note.

More generally, if trustees are aware of any failure on their own part to comply with any part of the  Order, they must report that non-compliance to the CMA within 14 days of becoming aware of the failure, and provide a brief description of the steps taken to address it.

Penalties

The CMA can give directions to anyone to take any necessary actions to comply with the Order, and has power to bring proceedings against a party who has not complied with it.  It is also possible that a failure to comply with the Order might result in the Pensions Regulator considering that trustees do not have adequate internal controls in place.

Next steps

Trustees need to consider now whether they have obligations under the CMA Order, whether they have complied with them, if so, and what steps they need to take to ensure that a compliance statement and certificate is submitted to the CMA by 7 January 2021.

Trustees should also consider whether they have to run a competitive tender for their existing fiduciary management arrangement(s) by 9 June 2021 and, if so, they should start to plan for this. 

If you would like any help in working out how these requirements might affect your scheme, please get in touch with your usual Eversheds Sutherland contact or contact Mark Latimour or Simon Daniel.