Pensions: what’s new this week - 30 January 2023
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Welcome to your weekly update from the Allen & Overy Pensions team, covering all the latest legal and regulatory developments in the world of workplace pensions.
This week we cover topics including: TPR correspondence on LDI: possible new notifiable event?; Government response on adequate pension provision; Government maintains auto-enrolment earnings thresholds; Consultation on ‘fire and rehire’ Code of Practice; High Court guidance on interpretation of ‘making good’ and ‘determining’.
TPR correspondence on LDI: possible new notifiable event?
A letter from the Pensions Regulator (TPR) to the Work and Pensions Select Committee (WPC) has been published, discussing the action TPR is taking in relation to the use of liability-driven investments (LDI) by DB schemes, following market instability in autumn 2022.
Reflecting previous statements, the letter outlines increased financial buffers that have been implemented across the industry to improve resilience. TPR is actively considering how to expand its collection of data on LDI arrangements and liquidity buffers, and the letter outlines some of the associated challenges and considerations. The letter suggests that one way of obtaining real-time data may be to introduce an additional notifiable event, requiring schemes to disclose the status of their LDI arrangements if the buffers are eroded beyond set thresholds. TPR is discussing with the DWP the possibility of introducing a notifiable event along these lines; if this is taken forward, schemes would be encouraged to comply on a voluntary basis until legislation is in place.
TPR will also ‘look at the regulatory architecture and see what changes need to be made for more effective oversight and regulation’. The letter flags that TPR sees its Annual Funding Statement 2023, due to be published in the spring, as an opportunity to reiterate its views on minimum levels of resilience and comment on future changes, if any. It will also include guidance on the governance processes needed where schemes have leveraged LDI arrangements (for example, to enable them to react in good time to market events).
A letter from the FCA to the WPC has also been published, echoing a number of TPR’s messages.
Government response on adequate pension provision
The government has published a response to a report by the WPC on various issues related to ensuring people have adequate savings for retirement and improving saver outcomes. The response includes updates on a number of anticipated developments, including:
- in relation to auto-enrolment (AE):
- The government is committed to implementing proposals to lower the minimum age for AE to 18 and remove the lower limit of the qualifying earnings band ‘in the mid-2020s’. Increases to minimum contribution rates will be considered after this.
- The government does not currently see any need to alter the definition of ‘worker’ (used to determine who is eligible for AE) to better cover gig economy workers.
- The government will not bring self-employed people under AE requirements (or similar arrangements) but will continue to explore how they can be encouraged and enabled to save.
- The government aims to consult ‘soon’ on permitting multi-employer and master-trust collective defined contribution (CDC) schemes to operate either on a sectoral basis or more widely.
- The government does not support proposals to automatically book Pension Wise advice appointments for members.
- TPR, the government and the Information Commissioner’s Office (ICO) are working to address barriers to pension schemes communicating with members due to legislative restrictions on ‘direct marketing’.
- The government is considering how to address the challenge of small deferred pots.
- The government is working to develop an appropriate definition of the gender pensions gap and build an evidence base to inform future policy outcomes.
Government maintains auto-enrolment earnings thresholds
The government has announced that for 2023/24 the auto-enrolment earnings trigger and the qualifying earnings band will remain at their current levels (GBP10,000 and GBP6,240 to GBP50,270 respectively). The announcement repeats the commitment mentioned above to remove the lower earnings limit in the ‘mid-2020s’, subject to discussions with employers and other stakeholders on the right implementation approach, and finding ways to make these changes affordable. It notes that this does not pre-empt any annual thresholds reviews in the interim.
Consultation on ‘fire and rehire’ Code of Practice
The government is consulting on a draft statutory Code of Practice for employers seeking to change employment terms and conditions, where it is envisaged that employees might be dismissed and re-engaged on new terms to implement the change (commonly known as ‘fire and rehire’). In the pensions context, this will be relevant where employers consider using fire and rehire to implement changes to employees’ contractual pension entitlements.
The Code includes practical guidance intended to clarify the steps employers should take in this scenario, for example careful examination of business plans and alternatives in light of the impact on employees; considering feedback; factors to consider; and communicating with employees. The purpose of the Code is to ensure that an employer takes all reasonable steps to explore alternatives to dismissal and does not use threats of dismissal to put undue pressure on employees to accept new terms, instead of seeking to find an agreed solution.
A failure to observe the Code will not, by itself, render anyone liable to proceedings, but the Code will be admissible in evidence in proceedings before a court or employment tribunal, and any provision of the Code which is relevant to those proceedings must be taken into account. Employment tribunals will have the power to increase an employee’s compensation by up to 25% if an employer unreasonably fails to comply with the Code. They could also decrease any award by up to 25%, where it is the employee who has unreasonably failed to comply. The consultation closes on 18 April 2023.
High Court guidance on interpretation of ‘making good’ and ‘determining’
The High Court has given directions on the interpretation of certain provisions in a scheme’s rules: Railways Pension Trustee Company Ltd v Atos IT Services UK Ltd and another. While a number of questions in the case were specific to the scheme involved, some of the reasoning on interpretation may be relevant to other schemes.
The rules in question involved requirements for members and employers to make contributions where there was a funding shortfall. One question was whether reference to ‘arrangements to make good’ a shortfall required the shortfall to be eliminated. The judge found that it this was not the case; if that had been intended, the rule could and would have used the words ‘in full’ (which were used in other sections of the scheme rules); here, the rule also included a reference to ‘the remaining shortfall’.
Another question was what power the rules gave the scheme actuary where issues (such as increases to contribution levels) were specified to be ‘as determined by the actuary’. The judge found that this did not mean the actuary was only required to engage in the mathematical calculation of an increase; the word ‘determine’ connotes an exercise of judgment and the discretion to decide that no increase would be made (although the judge accepted there may be an argument that ‘determine’ may have a different meaning in other contexts). The judge took into account the fact that the actuary not having a discretion in this case would lead to a ‘thoroughly uncommercial result’.
Schemes with rules which contain provisions relating to ‘making good’ deficits and/or parties ‘determining’ facts should consider this case when interpreting those provisions.