From 2023 Pension schemes and providers must comply with new legislative duties for the pensions dashboard.
They are required to make their members’/customers’ pension data available.
The aim of the pensions dashboard is to enable individuals to find their pensions, through schemes and providers making as many definitively positive matches as they can.
Therefore, schemes and providers need to soon decide how they want to digitally compare and match ‘find requests’ from users of dashboards against all the records they hold.
This new Guidance from PASA will help schemes make initial progress with their dashboards preparations by deciding how to match and improve data accuracy.
This Guidance also contains useful practical case study examples.
Good “Value for Members” or wind-up
The Occupational Pension Scheme (Administration, Investment, Charges and Governance) (Amendment) Regulations 2021 (the 2021 Regulations) has introduced the following two new requirements for trustees and managers of relevant occupational pension schemes:
1- to calculate and state the return on investments from their default and self-selected funds, net of transaction costs and charges; and
2- to demonstrate that their schemes deliver value for members (VFM).
Both the statutory guidance (the Statutory Guidance) and the Pensions Regulator’s value for money guidance (the TPR VFM Guidance) offer a support to trustees and managers of relevant occupational pensions schemes dealing with these new requirements.
Reporting net investment returns
The 2021 Regulations require that, from 1 October 2021, trustees of all relevant pension schemes[1], no matter what their asset size is, are required to calculate and state the return on investments from their default and self-selected funds, net of transaction costs and charges.
The trustees must record this information in their annual chair’s statement and publish it on a publicly accessible website.
The aim of this requirement is to help members understand how their investments are performing.
The Statutory Guidance suggests how information could be displayed for different member age groups and different charging structures and includes useful examples.
VFM assessment
For each scheme year ending after 31 December 2021, trustees of relevant schemes with a total asset under £100 million (known as specified schemes), which have been operating for 3 or more years, must demonstrate that their schemes deliver VFM.
If they are unable to demonstrate this, they need to consider winding up their scheme and transferring their members to a different scheme that provides good value for members.
To demonstrate that their schemes deliver VFM, trustees of relevant schemes have to carry out an assessment which must involve a comparison against three other schemes.
We have set out below a road map to help the trustees of a specified scheme navigating through this new requirement.
[1] A ‘relevant scheme’ is defined by Regulation 1(2) of the Occupational Pension Schemes (Scheme Administration) Regulations 1996. This definition includes most schemes that provide money purchase benefits while excluding defined benefit schemes.
The three broad factors
When trustees of specified schemes complete the VFM assessment, they need to consider the:
• costs and charges assessed relatively, based on comparison with at least three other pension schemes;
• net investment returns assessed relatively, based on comparison with at least three other pension schemes; and
• administration and Governance assessed on an absolute basis within the pension scheme itself.
In accordance with the Statutory Guidance, for the purposes of assessing costs and charges and net investment returns, each specified scheme must compare itself with three “comparison schemes” which should be:
1- an occupational pension scheme which on the relevant date[2] has total assets of £100m or more; or
2- a personal pension scheme which is not investment regulated under the Finance Act 2004.
The 2021 Regulations also requires that trustees of specified schemes have had discussions with at least one of the comparator schemes about a potential transfer of the members’ rights if the specified scheme is wound up.
TPR publishes an updated list of authorised master trust schemes that trustees of specified schemes may want to consider when choosing comparison schemes. However, trustees are free to select their own comparison schemes.
Differently from the costs and charges and the net investment returns, the administration and governance assessment does not require a comparison.
However, for the VFM assessment, the Administration Regulations (as amended by the 2021 Regulations) lists the following 7 different key metrics that must be considered and assessed:
1. Promptness and accuracy of core financial transactions: trustee should have effective methods to control the risk of delays and inaccuracies in processing financial transactions and reconcile and rectify errors.
2. Quality of the records kept by the trustees or managers: trustee should have reliable, accurate, secure data and processes in place to review records in order to deliver value for scheme members.
3. Appropriateness of the default investment strategy: including the quality of decision making and governance in relation to the strategy.
4. Quality of investment governance: trustees have responsibility for securing the proper management of the scheme’s assets and good scheme investment governance.
5. Level of trustee knowledge and understanding and skills to operate the scheme effectively: to demonstrate compliance with the new requirement, trustees should include reference to (i) whether sufficient time is spent running the scheme, (ii) diversity of the trustee board, (iii) quality of leadership and effectiveness of board decision making (iv) trustee continuous learning and development and (v) quality of working relationship with employer and third parties.
6. Quality of communication with the members: trustees have to demonstrate their compliance with statutory obligations and explain the quality and timeliness of information in various areas.
7. Effectiveness of the management of any conflicts of interest: pensions scheme should have a conflict of interests policy and controls in place to ensure conflicts are correctly declared.
The Statutory Guidance is clear that, trustees of schemes that do not provide good VFM, need to look to wind up their schemes and transfer the rights of their members into a larger occupational pension scheme or personal pension scheme or set out an immediate action to make improvements to their schemes.
[2]A relevant date is the date on which the trustees obtained audited accounts for the scheme year that ended most recently.
How HPW can help you
The government’s expectation is that members should rely on a well-run scheme that delivers optimal VFM over the long term.
If this is not achievable, members should be expected to be transferred to a different scheme which can offer this optimal VFM.
HPW can help you in different ways.
Understanding the new requirements in this area
We can explain to you the background and the legislative requirements. We can make sure you understand your duties and comply with them.
Net investment returns & VFM assessment
We can guide you through all the requirements to complete your net investment returns and your VFM assessment and we can make sure this is done in the most efficient way.
Improvement or consolidation
If, after completing your VFM assessment, you believe that you are not able to offer VFM, we can help you set out an immediate action to make improvements to your scheme or, alternatively, winding up your scheme and transfer the rights of your members into a larger occupational pension scheme or personal pension scheme that can offer good VFM.
Please get in touch with us if you wish to discuss this further with us.
TPR – the new single code of practice
Easy to use, accessible and clearer: the new single online code is the place where everyone can find all the information currently contained in 10 codes of practice for the Regulator.
The new code has the potential to bring together codes, guidance and the Trustee Toolkit.
The table below shows which codes of practice are being replaced by the new code.
Expectations, requirements or statements of the law?
It’s important to bear in mind that the codes of practice set out TPR’s expectations for the conduct and practice of those who must meet the requirements set in pensions legislation but they are not statements of the law, except in certain circumstances set out in legislation.
However, even though in most cases there is not a specific penalty for failing to follow a code of practice, TPR may rely on codes of practice in legal proceedings as evidence that a requirement has not been met and the court must take a code of practice into account when considering their verdict.
Governing bodies
The new code is addressed to various pension professionals and, to provide consistency, a new term has been used: governing bodies. This new term groups trustees or managers of occupational pension schemes, managers of personal pension schemes, and scheme managers and pension boards of public service schemes.
However, as some expectations are applicable only to specific audiences (for example the trustees) and not the generic “governing bodies”, the code also uses the specific term when relevant.
We have listed below the different areas introduced or receiving greater detail in the new code.
1-Internal control – Own risk assessment (ORA)
There is no secret, a well-run scheme is a scheme with robust internal controls.
Policies, processes and procedures (that together form the internal control of a scheme) that work correctly and are regularly checked and adjusted to the changing needs are a guarantee for a smooth running of a scheme.
If yours is a private sector scheme with 100 or more members, you, as a governing body, have the new requirement to carry out and document an ORA.
What is an ORA?
The ORA will identify the key governance risks facing your scheme and the governing body need to use the findings:
·In the management of your scheme and the decision-making processes;
·to adjust existing processes and procedures or create new ones; and
·to identify the areas of work that you need to undertake.
Areas covered by the ORA
The Regulator requires that the governing body carries out an ORA that is proportionate to the size, nature and complexity of its scheme.
The areas that should be covered when carrying out an ORA are set out below.
Documentation
The governing body should:
ensure the ORA is in writing
provide the ORA documentation to all members of the governing body
ensure the ORA documentation is available on request
make sure the chair of the governing body signs off the ORA
The governing body should record:
the date on which the ORA has been prepared
the date on which the next ORA will be prepared
details of any interim reviews or updates that the governing body has carried out or plans to carry out
The ORA documentation should cover:
how the governing body has assessed the effectiveness of each of the policies and procedures covered by the ORA
whether the governing body considers the operation of the policies and procedures to be effective and why
The Regulator states that, to meet their expectations, the ORA should consider the effectiveness of, and risks arising from, each element listed below.
Policies for the governing body
How the governing body is integrating risk assessment and mitigation into the management and decision-making processes.
The operation of policies relating to the:
Risk management policies
The operation of policies to identify and assess risks facing the scheme.
Continuity planning for the scheme and, where applicable, how it has performed.
The internal control policies and procedures for the scheme.
Management of potential internal conflicts of interest, and those with participating employers and service providers.
The prevention of conflicts of interest where the employer and governing body use the same service provider.
Investment
The scheme’s investment governance processes.
How investment performance is reviewed and monitored.
How the governing body assesses investment risks relating to climate change, the use of resources and the environment.
How the governing body assesses social risks to the scheme’s investments.
How the governing body considers the potential for depreciation of assets arising from regulatory or societal change.
How the governing body assesses the protection mechanisms available to the scheme, including how these might apply and the risks of them not functioning as intended.
How the governing body ensures the security of assets and their liquidity when they are required.
How the governing body assesses the protection of member benefits in the event of the insolvency of a sponsoring or participating employer, or a decision to discontinue the scheme.
Additional investment matters for DB schemes
How the governing body assesses the scheme's funding needs with reference to its recovery plan.
How the governing body assesses the specific risks relating to the indexation of benefits provided by the scheme.
Administration
How the governing body assesses the risks associated with the scheme’s administration with particular reference to financial transactions, scheme records and receiving contributions.
Action the governing body takes to manage overdue contributions considering the degree to which they represent material amounts or delays.
Payment of benefits, where applicable
How the governing body assesses operational risks, focusing on the risk to members and beneficiaries relating to record-keeping and payment of benefits.
The governing body’s management of risks relating to circumstances where accrued pension benefits may be reduced, under which conditions and by whom.
The governing body’s management of the risk of member benefits being reduced or altered, including on the insolvency of a sponsoring or participating employer or the cessation of the scheme.
We have also set out below a chart which we hope will help you to navigate this new requirement.
2- Cyber security
Cyber security is a topic already addressed by the Regulator but the single code now places direct expectations on security and maintenance of scheme data.
The expectations will apply only to certain schemes (yet to be determined), but the Regulator strongly encourages all schemes to adopt as many of the expectations as possible.
3- Environmental, social and governance (ESG)
As concern about climate change and social responsibility grow, the new code introduces the following two modules that address matters in these areas:
1- Stewardship focuses on the governance responsibilities that come with financial investments; and
2- climate change and the risks and opportunities it presents.
4- Financial transactions
The new code also introduces a new module on financial transactions which contains expectations that apply to DB, DC, or hybrid schemes.
The new code is not in force yet but, if you want to have a look at the early version, please click here.
Single code of practice – all the information in one click
The transformation should happen around summer 2022 when the existing 15 codes of practice from the Regulator will be transformed into only one new online code which provides all the information on scheme governance and management.
The hope is to create a clearer and more accessible single code of practice.
The full draft of the new code of practice is available here.
The Regulator held a consultation from March to May 2021 and the responses provided challenges and ideas with an extensive range of views from different areas of the pensions industry.
The majority of the requirements introduced by the code apply to schemes with 100 or more members. However, it is essential that also schemes with fewer than 100 members have an effective system of governance in place which is proportionate to their size, nature, scale and complexity of activities.
The key issues raised by the consultation are:
Common expectations
Intended audience for modules
Use of the ‘governing body’
Unregulated investments
Own risk assessment
David Fairs, TPR’s Executive Director of Regulatory Policy, Analysis and Advice, said: “I’m confident the feedback received during our new code consultation will help ensure the final version provides a clear, up-to-date and consistent source of information on scheme governance.”
If you want to see an early version of the web-based code click here
TPR climate adaptation report
At the end of October 2021, the Pensions Regulator (the Regulator) published a report about climate adaptation.
The report shows (i) the risks from climate change relevant to occupational pension schemes and (ii) how the Regulator addresses them.
From the report it appears that pension schemes do not give enough consideration to climate change risks which is negatively reflected in their investment performance.
What are the climate-related risks for occupational pension schemes?
There are three different types of risks that can occur because of climate change and these are:
Physical risks: which are the risks connected with the average temperature going up (for example flooding or fires that threaten physical assets and disrupt supply chains);
Transitional risks: these risks may arise because of the change towards a low-carbon economy; and
Litigation risks: these are potential risks that pension schemes may face if they fail to adapt to physical and transitional risks.
What are the Trustees’ requirements in relation to climate-change?
Some trustees of occupational pension schemes have to:
prepare a Statement of Investment Principles (SIP) which:
should include a policy on environmental considerations including climate change, which they consider financially material;
must include trustees’ stewardship policy of the rights attaching to the investment and trustees’ policy on how non-financial considerations are considered when investment decisions are made; and
should explain the trustees’ policy on engaging with asset managers.
produce the Implementation Statement where they have to describe how they have put SIP policies into practice if their scheme provides money purchase benefits; and
under the Pension Schemes Act 2021, which adapts the recommendations for trustees from the Taskforce for Climate-related Financial Disclosures (TCFD), (i) have an oversight of climate-related risks and opportunities (ii) work out the scheme’s carbon footprint by calculating the greenhouse gas emissions of the investment portfolio and (iii) set a climate-related target and publish a report on their work.
The Regulator’s approach
The report clearly shows that there are too many climate change related risks and that not enough trustees of both Defined Contributions (DC) and Defined Benefits (DB) schemes are paying enough attention to these risks.
The way the Regulator is planning to address this problem is to engage with the pension schemes. The Regulator’s plan is:
to set clear expectations so the standards required are clear and easily adopted;
identify climate change risks early by, for example, carrying out a thematic review on scheme resilience to climate-related scenarios or recommending trustees sign up to the 2020 UK Stewardship Code;
to improve compliance through supervision and enforcement; and
to work with their regulatory partners and stakeholders to guarantee a more comprehensive and consistent approach.
New Guidance from the Regulator on how to halt suspicious transfers
The Pensions Regulator (TPR) has published a new Guidance for trustees, pension managers and administrators on checking, proceeding with and refusing transfer requests from scheme members.
From 30 November 2021, as part of the due diligence process for transfer requests, both trustees and scheme managers have the duty to make specific checks before dealing with transfers. The checks to be carried out will determine which conditions apply to the transfer and whether a statutory transfer can proceed.
First condition: The receiving scheme is listed in the transfer regulations
Is the receiving scheme one of the following?:
a public service pension scheme (schemes established by a public authority for civil servants, armed forces, health service workers, teachers, judiciary, police, firefighters and local government workers)
a collective defined contribution (CDC) scheme that has obtained authorisation and is included on the list which TPR will publish
If, beyond reasonable doubt, the receiving scheme is one of those listed above, the transfer can proceed without any further checks.
The member must receive confirmation that the receiving scheme is one of the types described above no later than the date at which it is confirmed to the member that the transfer has been made.
Second condition: Check for an employment link, overseas residency and red and amber flags
Where the receiving scheme is not one of those described in the first condition, it must be considered whether the second condition is met. This may require further checks to assess the level of risk to the member. It may be the case that, from previous checks on the receiving scheme, it is concluded that the transfer is low risk and therefore the second condition is met.
The table below lists the red and amber flags mentioned in the Guidance:
The Guidance contains useful paragraphs on:
1- how to collect relevant information;
2- how to carry out due diligence;
3- how to direct members to mandatory guidance from MoneyHelper; and
4- when to refuse a transfer.
The Guidance also includes this helpful "Transfer process decision" tree to aid decision-making on the various checks.
Source: The Pensions Regulator – Guidance on Dealing with transfer requests (Appendix 1)
PASA GMPE Anti-franking Guidance
To add some complexity to the already challenging GMPE, there is also the anti-franking test to consider.
What is anti-franking?
The purpose of anti-franking is to ensure that, except in limited circumstances, the revaluation applied to GMPs in deferment cannot be offset against a member’s other benefits.
Anti-franking applies directly to members who leave before normal pension age and then retire at normal pension age, and to members who leave active service at or over normal pension age (subject to certain additional conditions set out in the Pension Schemes Act 1993). However, the preservation requirements for members taking early or late retirement to receive benefits at least equal in value to those they would have received had they retired at normal pension age means it may have an indirect effect on other members as well.
Where anti-franking applies, an “anti-franking minimum pension” underpins the member’s scheme pension and this can result in pensions in payment being “stepped up” when a member reaches their GMP age (60 for women; 65 for men), or at retirement when a member remains in active pensionable service after their GMP age.
It is unusual for scheme rules to prescribe how anti-franking tests should be applied and this has resulted in different techniques being used. A scheme’s past practice will usually dictate how anti-franking will be approached for the purposes of equalisation.
PASA’s approach
In September this year, PASA published their Anti-franking Guidance which aims to help trustees to understand how anti-franking should be applied for equalisation purposes.
The Guidance describes three potential techniques for applying anti-franking in the GMPE project:
1- Ring-fence (90-97) Technique
This technique was already set up in September 2021 by the PASA Methodology Guidance and, as its name suggests, it “ring-fences” 90-97 benefits.
In summary, this technique (i) complies with legislation and applies the anti-franking test to the member's whole (unequalised) benefit at the member's GMP Age or later date of retirement and (ii) compares member’s benefits which would have been payable for service in the period between 1990 and 1997 to the comparator in respect of the same period. If the comparison shows that the comparator would have had a higher benefit, then the member would be entitled to receive the uplift.
This technique requires schemes to hold three different pension streams (whole pension for true sex, true 90-97 and comparator 90-97).
2- DWP 2012 (Whole of Service Mixed Sex) Technique
In summary, this technique (i) complies with legislation and applies the anti-franking test to the member's whole (unequalised) benefit at the member's GMP Age or later date of retirement and (ii) compares this total pension to a pension calculated as follows:
- The Pre90 element consists of the member's pension
- The Post90 element consists of the opposite sex's pension
- The anti-franking minimum at each age consists of the sum of the following components:
▪ The Pre90 minimum for the true sex. This will always include the member’s Pre90 pension at cessation date, and any applicable increase in Pre90 excess pension, but will only include increases on Pre90 GMP if the true sex has reached GMP age
▪ The Post90 minimum for the opposite sex. This will always include the comparator’s Post90 pension at cessation date, and any applicable increase in Post90 excess pension, but will only include increases on Post90 GMP if the comparator has reached GMP age.
3- Apportionment (Whole of Service Pure Sex) Technique
As explained in the Guidance, this technique:
complies with legislation and applies the anti-franking test to the member's whole (unequalised) benefit at the member's GMP Age or later date of retirement;
applies the anti-franking test to the opposite comparator's whole benefit (including Pre90 pension) at the comparator's GMP age or later date of retirement;
pro-rates the anti-franking step-ups in an appropriate manner for the 90-97 period only; and
compares the benefit for a member relating to 90-97 service only, with the member's step-up calculated in the previous step, with that for the equivalent pension for the comparator and, if the comparator would have a higher benefit, then an uplift will need to be provided to the member.
This method requires four streams (whole pension for true sex, true 90-97, whole pension for comparator sex and comparator 90-97).
Clearly, whatever technique will be used there will be an amount of data to collect and some calculations to perform and therefore it is recommended for all schemes to liaise with their pension administrator to discuss different options and outcomes.
PASA - GMPE Transfer Payments Guidance
The purpose of this Guidance published in August 2021 is to assist pension schemes and their advisers to equalise historic transfers and is divided in the following three sections:
1-role of transferring schemes in individual transfers;
2-role of receiving schemes in individual transfers; and
3-bulk transfers.
Role of transferring schemes in individual transfers
Transferring pension schemes may be required to pay a top up payment in respect of former members who had service between 17 May 1990 and 5 April 1997 (the Equalised Period) and transferred out. This would happen if the amount that was transferred would have been higher if GMP was equalised at the time the member transferred out.
The two points raised by PASA Guidance here are that (i) there is no statutory limitation period and therefore all historic transfers out which cover periods of pensionable service in the Equalised Period can theoretically be entitled to receive a top up payment and (ii) trustees need to be proactive when determining what to do in cases of historic transfers and transferring schemes need to take advice. Inevitably, there will be situations where the transferring schemes will be unable to discharge their liability for top up payments and will have to retain this liability.
PASA Guidance contains the following table which illustrates the necessary steps the transferring schemes have to undertake to discharge their liability and when this is not possible.
Role of receiving schemes in individual transfers
While the Guidance provides a step-by-step approach to transferring schemes dealing with historic transfers, it does not help in the same way for receiving schemes and, as the legal obligations remain uncertain, it suggests receiving schemes should seek legal advice.
In summary, from the Lloyds case, it appears that there is an obligation to comply with the Coloroll case which says that it is the receiving scheme that is required to make the top up payment if requested. If the receiving scheme is a DB scheme, it is expected that the scheme equalises the GMP awarded in respect of the transfer as part of its wider GMP equalisation exercise. However, if, instead, the receiving scheme is a DC scheme, it is likely that the top up payment will be offered by the transferring scheme and it is expected that the receiving DC scheme will accept the payment subject to a minimum level and with member consent.
Bulk transfers
Based on the Lloyds judgments, often the transferring schemes have no obligation to make top up payment to equalise benefits on bulk transfers and it is normally the receiving schemes that are expected to assume an obligation to equalise the correct GMP inequalities. It is essential for schemes to review the bulk transfer legal agreements to ascertain who may be liable to implement the GMP equalisation.
More clarity on GMPE– New PASA Guidance on member communications
It has been three years since the Lloyds case which required schemes to equalise for the effect of GMP. These three years have been characterised by uncertainties on how to undertake this project.
The Pensions Administration Standards Association (PASA), following Lloyds case number 1 in 2018, has set up working groups to help schemes with GMPE and in the last few months issued three new important pieces of guidance on member communications, historic transfer and antifranking.
PASA GMPE communications Guidance
One of the biggest challenges of GMPE is how to communicate something quite technical to schemes’ members in a simple and clear way.
In August 2020, PASA published the GMP Communications Guidance - Early Planning Stage guidance where, in summary, it set up:
how to approach communications;
some broad principles for communicating GMPE;
a useful Do’s and Don’ts section;
some practical things that schemes can do;
a ‘questions and answers for members’ section; and
a communication checklist to help schemes make sure all relevant documents are gathered and reviewed.
In September 2021, one year on from the Early Planning Stage guidance, PASA published the GMP Communications – Implementation Stage guidance designed to help schemes during the implementation stage of their GMPE journey.
This guidance:
contains the important principles for communicating (i.e. layering information, using different channels, providing only the information needed, avoiding jargon, involving others and being trustworthy);
puts the individual at the centre of what pensions schemes should do when drafting communications and encourage pension professionals to take a step back when it comes to communications and put themselves in non-pensions people’s shoes;
shows how to effectively time communications to members and consider legal requirements for informing members, the relevant timing, the expectations for future communications and when to communicate about past transfer values;
considers the different categories of members and what are the different messages to send across, including useful examples;
provides a checklist for planning the data to use in communications; and
also includes the communication checklist to help schemes to make sure all relevant documents are gathered and reviewed (checklist which is also included in the 2020 PASA Early Planning Stage guidance).
The two main messages the Guidance seems to put forward are that schemes must (i) plan efficiently their communications to members allowing sufficient time to plan and check everything and (ii) keep communications effective and simple.
New Guidance from the Regulator on how to halt suspicious transfers
TPR has just published a Guidance for trustees, pension managers and administrators on checking, proceeding with and refusing transfer requests from scheme members.
There are certain circumstances where a statutory transfer cannot proceed (red flags) or may proceed (amber flags).
The Guidance contains useful paragraphs on:
1- how to collect relevant information;
2- hot to carry out due diligence;
3- how to direct members to mandatory guidance from MoneyHelper; and
4- when to refuse a transfer.
The Guidance also includes this helpful "Transfer process decision" tree to halt suspicious transfers, where the condition one is that the receiving scheme is listed in the transfer regulations.
New requirements for the Chair’s Statement
The DWP has published new guidance for trustees of occupational defined contribution pension schemes (‘relevant schemes’) which came into effect on 1 October 2021 .
The publication sets out the following requirements and guidance for trustees:
1. Return on investments:
Calculate and state the return on investments from their default and self-select funds, net of transaction costs and charges. This information must be recorded in the annual chair’s statement from the first scheme year ending after 1 October 2021 and published on a publicly accessible website. Trustees are expected to include - as a minimum - the net return for the scheme year, although the Government is recommending that figures for net investment returns should also be shown dating back at least five years, or even 10, 15 or 20 years, if the data is available.
The additional disclosure is intended to help members understand how their investments are performing as well as enable trustees to carry out the new detailed value for members assessment (see below).
2. More detail for the ‘Value for Members’ (VfM) assessment
For the first scheme year that ends after 31 December 2021, and at intervals of no more than one year thereafter, trustees of relevant schemes with under £100 million of total assets must carry out a more detailed assessment of how their scheme delivers value for members. The assessment must include a comparison of reported costs and charges and fund investment (performance) net returns against three other schemes, and a self-assessment of scheme governance and administration criteria.
a. The costs and charges and fund investment (performance) comparison:
The guidance states that “comparator schemes” should be:
o an occupational pension scheme which on the relevant date (the date on which the trustees obtained audited accounts for the scheme year that ended most recently) held total assets equal to or greater than £100 million; or
o a personal pension scheme, which is not an investment-regulated pension scheme; and
o include a scheme that is different in structure to their own, where possible. For example, schemes not used for automatic enrolment should not limit their comparison to other such schemes.
When selecting the three comparator schemes the Regulations also require that trustees “have had discussions” with at least one of the comparator schemes about a transfer of the member’s rights in the event that the scheme may decide to wind-up (for instance because the trustees conclude that it doesn’t provide good value for members). The Government suggests that the trustees might find TPR’s list of authorised master trust schemes useful for this requirement.
b. Self-assessment for Administration and Governance
There are 7 key metrics that must be considered and assessed:
(i) Promptness and accuracy of core financial transactions
(ii) Quality of Record Keeping
(iii) Appropriateness of the default investment strategy
(iv) Quality of Investment Governance
(v) Level of trustee knowledge, understanding and skills to operate the pension scheme effectively
(vi) Quality of communication with scheme members
(vii) Effectiveness of management of conflicts of interest
The VfM assessment must be reported in the annual chair’s statement and published on a publicly accessible website, as well as be reported to the Pension Regulator (TPR) via the annual scheme return.
Trustees of relevant schemes with total assets of £100 million or greater must continue to assess and explain how the costs and charges of their scheme generally represent value for members in their chair’s statement.
3. Schemes in wind-up
Trustees of specified schemes will not be required to carry out the value for member assessment or report its outcome, provided they have notified TPR before the date by which they are required to prepare a chair’s statement. Trustees must however explain in the annual chair’s statement that wind-up is the reason why they are not complying with this duty. All other requirements for the chair’s statement continue to apply, i.e. trustees are still obliged to assess whether their costs and charges offer good value to members up until the point that wind up of the scheme is completed.
4. Action following the VfM assessment
If, having completed the assessment the trustees have concluded that the scheme does not provide value for members, the Government expects the trustees to look to wind up the scheme and transfer the rights of their members into a larger occupational pension scheme or personal pension scheme, or set out the immediate action they will take to make improvements to the existing scheme. The Government also states that if improvements (where applicable) are not made within a reasonable period - for example within the next scheme year - then trustees will be expected to wind up and transfer members benefits to another scheme.
Draft provisions for implementation of increased normal minimum pensions age
Members of pension schemes are not usually able to access their pension savings before the normal minimum pension age (NMPA).
The government is proposing to increase the NMPA from 55 to 57 with effect from 6 April 2028.
After this date the consultation said it might be possible for members protect the right to access pensions below the age of 57 (protected pension age or “PPA”) if:
· On 5 April 2023, the member had an unqualified actual or prospective right under the scheme to a benefit from an age less than 57;
· The scheme rules on 11 February 2021 included such a right for some or all of the members on that date; and
· The member had that right on 11 February 2021 or would have done had they been a member on that date.
HMRC is expected to issue guidance on what an unqualified right to draw benefit before age 57 means in practice. Broadly it would be a right under which individuals do not need the consent of any other person (such as an employer or trustee) before they can take their benefits at a particular age.
Note that in its response to the consultation, the Government is allowing a small window of opportunity for individuals to protect a pension age of 55. If an individual joins a pension scheme, by 5 April 2023, with rules that on 11 February 2021 already confer an unqualified right to take pension benefits below age 57, then that individual will also have the same PPA as other members in that scheme.
The legislation will be introduced in the Finance Bill 2021-22.
Proposed timetable for the Pensions Dashboard
The Pensions Dashboard Programme has published a proposed timetable by which pension providers will be required to connect to, and make pension information available to savers through, the dashboard.
It is proposed that the largest schemes will provide the information first (1,000+ memberships), then the medium schemes (100 to 999 memberships) and finally the small and micro schemes (99 or less memberships).
The largest schemes will start in April 2023 and this first stage could last up to two years. The second stage will not commence until the bulk of large schemes have been successfully completed (this would be unlikely to be before 2024). Timing for the third stage is yet to be determined.
The consultation closes on 9 July 2021, after which, the staging will be mandated for occupational pension schemes through DWP regulations. Those regulations are expected to be consulted on by the end of 2021 and to be laid before Parliament in summer 2022.