At the beginning of 2019, we flagged uncertainty around how or even whether Brexit would be delivered. At the start of 2020, we finally seem to have some more clarity on this issue. Will 2020 finally be the year that the UK leaves the European Union? And will this free up parliamentary time to focus on crucial domestic issues such as pensions, savings and an ageing population?
This Insight provides an overview of nine key developments that will hit the headlines in the pensions industry in 2020, examines some of the bigger picture trends that will attract attention and looks at what happened to the key issues we highlighted at the beginning of 2019.
Key developments in pensions in 2020
1. Brexit finally meaning Brexit
At 11pm on 31 January 2020, the UK will very probably leave the European Union. Unlike at the beginning of 2019, the government now has the parliamentary majority to deliver on this Brexit promise.
What will this mean for pensions in the UK? At the beginning, not very much - the UK will enter into a transition period that will see EU laws and rules continue to apply. The transition period is currently scheduled to last until 31 December 2020. It is this date (or the end date of any extension to the transition period) that will be of greater consequence for trustees and employers than the end of January, as this potentially marks the point in time from which we begin to diverge from EU legislation and the European regulatory framework for pensions and financial services.
In preparing for this, trustees need to consider the issues that could become relevant to their schemes (e.g. are there investments in EU-domiciled pooled funds? Does the scheme pay benefits to non-UK bank accounts for overseas members? Are there any cross-border issues?) and be ready to act quickly if required.
2. The return of the Pension Schemes Bill
All the way back in October 2018, Guy Opperman MP, the government minister responsible for pensions, stated his intention to deliver a "very substantial" bill addressing multiple areas of pensions regulation in the summer of 2019. Summer gave way to autumn, but the Pensions Schemes Bill 2019-20 was finally laid before the House of Lords on 15 October 2019. Then, like most unfinished parliamentary business, the Pensions Schemes Bill 2019-20 was lost when parliament dissolved ahead of December 2019's general election.
Gone, but not forgotten. In its place, a new Pensions Schemes Bill 2020 was promised in the Queen's Speech and has now been introduced into the House of Lords. As expected, it covers the same areas as the original bill:
- collective defined contribution;
- changes to the defined benefit funding regime and greater powers for The Pensions Regulator ("TPR"); and
- pensions dashboards.
In addition, it includes similar miscellaneous provisions on administration charges, transfers and the Pension Protection Fund ("PPF").
Anyone who spent time reviewing its predecessor will be relieved to know that the Pensions Schemes Bill 2020 is not materially different from its predecessor. There are, however, some changes between the 2019 and 2020 bills. We are reviewing these and will be sending out an Insight on the new bill soon.
3. Consultation on aligning RPI with CPIH
In January 2020, HM Treasury is expected to issue a consultation on aligning the Retail Prices Index ("RPI") measure of inflation with CPIH (a variant of the Consumer Prices Index that includes an estimate of owner occupiers' housing costs). For some time, the United Kingdom Statistical Authority ("UKSA") has expressed concerns with the current composition and use of RPI.
Under existing legislation, the UKSA is required to obtain the Chancellor's consent to any change to the RPI that is 'fundamental and materially detrimental' to the holders of certain index-linked gilts (the last of which are due to expire in 2030).
HM Treasury's consultation will ask:
- whether the proposed change in RPI should be made before 2030; and
- if so, when, between 2025 and 2030, a change should be made?
It is expected that HM Treasury's consultation will be followed by a response published by the UKSA before the Chancellor's March 2020 Spring Statement (and the end of the financial year).
4. TPR to revise code of practice on funding for defined benefit schemes
Political turbulence and a delay to the Pension Schemes Bill has resulted in delays to the development of pensions regulation. For example, the pensions industry had expected that TPR would launch a formal consultation on revising its Code of Practice 3 on funding defined benefits in spring / summer 2019. This now expected in the first half of 2020.
Areas of focus for TPR are likely to still be:
- the length of recovery plans;
- whether to incorporate appropriate ratios of dividend payments to scheme contributions; and
- how trustees should approach quantifying the strength of sponsoring employers' covenants.
It is likely that the timetable for the updated Code of Practice going into force will be shaped by the Pension Schemes Bill 2020. On this basis, employers and trustees will probably be subject to the new rules at the end of the year or the beginning of 2021.
5. A single Code of Practice from TPR
Code of Practice 3 on funding defined benefits is not the only TPR code that will attract attention 2020. TPR are committed to reviewing all of their codes of practice with the ultimate goal of combining the content of the 15 current codes of practice into a single, shorter code.
This follows the implementation of the IORP II Directive into UK law under the Occupational Pension Schemes (Governance) (Amendment) Regulations 2018 (the "Governance Regulations"). The Governance Regulations focus on requirements to establish an effective system of governance. The Governance Regulations build on the previous requirement for trustees to maintain adequate internal controls.
TPR's initial focus will be on codes of practice 9 (internal controls) and 13 (defined contribution code). As part of its revisions, TPR will set out the features of effective governance that should apply to all types of pension scheme. Trustees will need to be able to demonstrate that they have an effective system of governance within 12 months of publication of the updated codes. Of course, basic trust law and principles of good governance ought to mean that this is not a great leap (indeed it may not require any material change at all for most well run schemes).
6. Duties on trustees on procuring investment consultancy and fiduciary management services
In 2018, the Competition and Markets Authority ("CMA") carried out an extensive review in to the supply and acquisition of investment consultancy and fiduciary management services in the UK. The CMA found competition problems in both markets and set out a series of reforms to deal with these issues (contained in the CMA's Investment Consultancy and Fiduciary Management Market Investigation Order 2019 (the "CMA Order")).
The CMA Order was followed at the end of 2019 with a Department for Work and Pensions (DWP) consultation and draft legislation (the Occupational Pension Schemes (Governance and Registration) (Amendment) Regulations 2019) aimed at aligning pensions legislation with the requirements of the CMA Order.
Once in force, the draft regulations will:
- bring the CMA Order into pensions law insofar as it requires trustees of occupational pension schemes (subject to certain limited exceptions) to carry out a tender process for fiduciary management services and set objectives for their investment consultants; and
- enable TPR to oversee the requirements and ensure a more joined-up and efficient compliance.
The draft regulations are likely to be laid before Parliament this month (and will thus become the Occupational Pension Schemes (Governance and Registration) (Amendment) Regulations 2020). These regulations are due to come into force on 6 April 2020 (but it is worth noting that the CMA Order has legal effect and so trustees, fiduciary managers and investment consultants have had to ensure their practices are in line with the CMA Order's requirements since 10 December 2019).
7. Consultation on the next PPF triennium
Whilst the Pension Protection Fund consults on its levy rules annually, the structure of the levy is determined on a triennial basis (i.e. once every three years). Next year marks the start of the PPF's fourth triennium. On 19 December 2019, the PPF launched a consultation on a new methodology for calculating PPF levies with effect from 6 April 2021.
The PPF is going back to the future in partnering with Dun & Bradstreet ("D&B") for the calculation of the levy. It is not, however, going back to the original D&B methodology. Instead, D&B is expected to employ a methodology that is similar to the current approach used by Experian, but with certain key differences.
The most relevant change will be a recalibration of the scorecards used under the new methodology, which will mean increased levies for larger employers, with corresponding decreases for some smaller entities and not-for-profits. More generally, the PPF expects that a third of schemes will see a similar amount of levy, with almost half of schemes seeing a lower levy. One in five schemes (particularly schemes with employers on scorecard 1 (i.e. large employers)) is expected to see a levy increase.
The consultation closes on 11 February 2020.
8. SIPs and Implementation Statements
Various requirements will apply to trustees from 1 October 2020. The specific type of requirement will depend on the type and size of scheme in question.
Trustees of 'relevant schemes' (broadly, occupational defined contribution schemes) with more than 100 members will be required to:
- include an implementation statement in the scheme's annual report and accounts:
- setting out the extent to which the scheme's statement of investment principles ("SIP") has been followed;
- explaining and giving reasons for any changes made to the SIP during that year; and
- a description of voting behaviour by or on behalf of trustees (including the most significant votes cast during the year) and any use of a proxy vote; and
- update the section in annual benefit statements signposting the availability of online information to cover the implementation statement.
The implementation statement for schemes that are non-relevant schemes will be confined to stewardship matters. Trustees of such schemes that are required to publish a SIP will be required to publish these annual report stewardship and voting statements on a publicly available free to access website. Trustees of non-relevant schemes will, however, be able to rely on transitional provisions giving them until 30 September 2021 to publish these statements online.
9. Increased flexibility for the NHS Pension Scheme
In November 2019, NHS England announced that it would cover pension tax charges incurred by doctors doing extra shifts. The 'tapered' annual allowance, which restricts pensions tax relief for the UK's highest earners, has been particularly problematic for senior NHS doctors. NHS England's announcement was a stopgap to avoid a staffing shortage in winter.
The longer term fix will allow NHS staff, from 6 April 2020, to limit pension accrual in increments of 10% and enable employers to recycle their unused pension contributions back into the individual's salary.
Trends in pensions in 2020
As well as the specific key developments outlined above, some broader trends will attract plenty of commentary and will shape future developments in pensions law and regulation.
Increased focus on Environmental, Social and Governance ("ESG") issues
Will 2020 be the year that ESG goes mainstream across the pensions industry?
Ethical investment options have been available for members of many defined contribution schemes for a number of years. But, despite increased interest from trustees, members and even employers in ESG investment issues, there hasn't been a material shift in investments for defined benefit schemes. The decision in Cowan v Scargill  Ch 270 is one reason for inertia - the decision made clear that pension trustees have a duty to act in best financial interests of scheme beneficiaries.
Standing still may not, however, be in the best financial interests of scheme beneficiaries. At the end of December 2019, the Governor of the Bank of England, Mark Carney, gave a key note speech stating that companies and investors needed to take action now as when the result of extreme weather events became obvious, "it will be too late to do anything about it".
It is important to note, however, that this is not a change in the law and does not necessarily need to change a scheme's approach to investment: it's a reminder that trustees and their advisers should apply the established and well known law and principles to the changing circumstances which face them.
Financial technology and pension scheme data
London is one of the global hubs for the development of financial services technology ("FinTech"). In 2019, London recorded more FinTech deals than either New York or San Francisco. The UK has the second largest level of FinTech investment by deal size, with over $2 billion recorded in 2019 (more than double the level in third place Germany).
As venture capital and start-up culture wash over the Square Mile, what impact will this have on pensions? Although slower on the uptake than consumer banking brands, FinTech will move up the agenda in the pensions industry with the development of pensions dashboards.
Pensions dashboards will be the consumer face of a data-driven revolution in pension savings. Dashboards will be underpinned by a shared digital architecture and a common governance and security framework. Put simply, it will give members easy access to their data and potentially provide them with more user friendly platforms for them to engage with their savings. Financial service providers (including FinTech challengers) will be keen to use this information to provide a wider range of services and an improved member experience.
Compulsory data provision by pension schemes will be introduced on a staged basis according to scheme size, with large defined contribution schemes likely to be staged first. In terms of timescale, most schemes will be expected to provide data via dashboards within a three to four year timeframe. In advance of compulsory data provision, the DWP hopes that large DC schemes will provide data via dashboards on a voluntary basis over the coming year.
Member engagement and workplace financial education
In October 2019, the Pensions and Lifetime Savings Association ("PLSA") launched its Retirement Living Standards guide. The stated intention behind the guide was to help people to picture the type of retirement they want and to understand how much it would cost to fund it. Another goal was to tackle two interrelated problems - a low level of saving for old age amongst a sizeable percentage of the population and a lack of understanding and trust in pension savings.
These are not new issues. Trust has been an issue at least since the pensions industry was tainted by association from scandals dating back to the late 1980s and early 1990s (e.g. the mis-selling of personal pensions and the Maxwell pension scandal). The retreat of defined benefit pension saving in the private sector is the main factor behind low levels of saving. Workplace pension reform and, with it, automatic enrolment were policy responses aimed at increasing participation by nudging people into pension saving.
One way of attempting to deal with both problems is to focus on member engagement in pension savings and workplace financial education. There has been increased focus on the impact that financial worries have on employee wellbeing. Expect to see more on this as both pension managers and HR executives focus on improving communications and understanding.
What happened to the key issues we highlighted for 2019?
At the beginning of 2019, we highlighted nine key issues that were expected to dominate the pensions industry. Where did we get to by the end of the year?
- Brexit means Brexit, but what will it mean for pensions? Brexit still means Brexit, it was just delayed until 2020 (probably). It will be the second half of 2020 at the earliest until we know how much of an impact Brexit will have on pensions once the transition period comes to an end on 31 December 2020.
- A 'very substantial' Pensions Bill 2019-20 - The Pension Schemes Bill 2019 - 20 came and went last year, a legislative casualty of the end of year general election. Although the Pension Schemes Bill 2019 - 20 covered some interesting areas, it wasn't quite as substantial as had been initially expected. Similar policy areas to those set out in last year's bill will be covered in the Pension Schemes Bill 2020.
- TPR to revise code of practice on funding for defined benefit schemes - in line with the delays to the Pension Schemes Bill, TPR has not yet consulted on its revised code of practice on funding for defined benefit schemes. As outlined above, this is now expected in the first half of 2020.
- Launch of the Single Financial Guidance Body - the Single Financial Guidance Body assumed responsibility for financial guidance on 1 January 2019. In April 2019, it was rebranded as the Money and Pensions Service. The first substantive policies and documentation from the Money and Pensions Service are expected in the first half of 2020.
- IORP II amending regulations come into force - The Occupational Pension Schemes (Governance) (Amendment) Regulations 2018 went into force on 13 January 2019. These regulations updated duties for occupational pension scheme trustees to establish and operate 'internal controls', with a new requirement for the establishment and operation of 'an effective system of governance'. We will continue to see the impact of this legislation as TPR revises its codes of practice in 2020.
- New provisions come into force on SIPs and stewardship and financially material considerations - new requirements on investment governance and disclosure of information came into force on 1 October 2019.
- Will 2019 be the year that guaranteed minimum pensions are equalised? For most schemes, the answer was a resounding no. Guaranteed Minimum Pension (GMP) equalisation continues to be a big issue for pensions in the UK, but most trustees (and their advisers) are holding out for more detailed guidance before taking the plunge.
- Going Dutch with collective defined contribution schemes - the Royal Mail continues to push for collective defined contribution ("CDC"). A legislative framework for CDC was also set out in the Pension Schemes Bill 2019 - 20. So was 2019 the year that CDC went mainstream? No, not quite. Perhaps interest will develop once the legislation is in place and guidance has been published. It may also take a successful roll out by the Royal Mail before any other employers decide to dip their toe in the collective ambition waters.
- TPR announces authorised master trusts - how many will be left? At the beginning of 2019, a total of 90 master trusts had been identified by TPR and only one application for authorisation had been submitted. Once the dust settled, a total of 38 master trusts had applied for and obtained authorisation from TPR.