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Pensions: What's new this week - 30 November 2020

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30 November 2020

Each week the Allen & Overy Pensions team, rounds up the latest legal and regulatory developments in the world of occupational pensions. Contact us if you would like to receive our podcast summary, or our full briefing by email, at the start of each week.

Read the latest edition of 'What's new this week' below to find out more information on the stories that matter to you. 

RPI to be reformed from 2030

Proposed reforms to the Retail Prices Index (RPI) will not take place before 2030, following a consultation earlier this year. The UK Statistics Authority had proposed to bring the methods and data sources of the Consumer Prices Index into RPI, including owner occupiers’ housing costs (CPIH); this would require the consent of the Chancellor of the Exchequer if it was to be implemented before 2030. 

The consultation response explains that the Statistics Authority is proceeding with its plans to align RPI with CPIH and will discontinue supplementary and lower level indices of the RPI at the point when this proposal is implemented (it will provide supporting guidance for the latter). However, the Chancellor has withheld his consent to an earlier implementation of the main RPI reform, meaning that this will not occur before 2030 – the Statistics Authority has said that it would be able to implement the change in February 2030. The government has stated that it will not offer compensation to the holders of index-linked gilts.

For members whose benefits are linked to RPI, the change is likely to result in reduced benefits over the course of their lifetime. At a scheme level, the impact will vary depending on scheme rules and on the details of their liability matching strategy. Schemes in which some or all liabilities are linked to CPI and which have hedged liabilities with RPI-linked gilts or derivatives, for example, could see the total value of their assets fall without a corresponding decrease in their liability values, leading to a deterioration in funding position. Trustees should seek professional advice on how their scheme may be affected, and should check whether their scheme rules include any relevant triggers for reviewing the index in light of these future changes.

Reminder and clarification: CMA compliance

Trustees of most schemes are preparing to submit an annual compliance statement and signed certificate to the Competition and Markets Authority (CMA) under rules introduced in late 2019. Under these rules, trustees are required to set strategic objectives for investment consultancy providers and, if they use fiduciary management services, to run competitive tenders. The compliance statement and certificate must be completed after the end of the annual reporting period (9 December) and supplied to the CMA by 7 January 2021 (more information here)

In correspondence with the CMA, we have obtained two additional helpful clarifications: first, the CMA is happy to receive documents with electronic signatures. Secondly, the Order places trustees in the position of having to confirm that they have complied with the prohibition on appointing fiduciary managers without running a competitive tender process, whether or not they have actually appointed any fiduciary managers. The CMA has asked that trustees add a comment in the certificate to confirm (where relevant) that they have complied with this element through not having appointed any fiduciary managers.

Latest revaluation order

The latest annual revaluation order sets both the higher and lower revaluation percentage at 0.5% for the period from 1 January 2020 to 31 December 2020. These annual Orders set out the statutory minimum level of revaluation for pension benefits (excluding guaranteed minimum pensions) for deferred members where the final salary method of revaluation is used. The Order takes effect from 1 January 2021.

Liability for wrongful trading: government reintroduces temporary ‘suspension’ 

Earlier this year, the government introduced a number of easements via the Corporate Insolvency and Governance Act 2020, including time-limited provisions ‘suspending’ directors’ liability for wrongful trading, and easements for company meetings.

The government has now acted to reintroduce temporary relief for directors in relation to liability for wrongful trading (the previous easement expired at the end of September). New regulations state that a court is to assume that a director is not responsible for any worsening of the financial position of the company or its creditors during the ʽrelevant periodʼ, which began on 26 November 2020 and ends on 30 April 2021 (note some exclusions apply). As with the previous suspension, the requirement to notify the Pensions Regulator (TPR) under the notifiable events regime is unchanged (ie where the employer has received advice that it is trading wrongfully, or where a director knows that there is no reasonable prospect that the company will avoid going into insolvent liquidation). Where this advice is given or the relevant knowledge has arisen, this would still trigger a requirement for the sponsor to notify TPR.

FRC review of corporate governance reporting

The Financial Reporting Council (FRC) has published an analysis of reporting against the UK Corporate Governance Code, noting its disappointment with the response to the new Code. 

As a reminder, the Code states that only basic salary should be pensionable, and that pension contribution rates for executive directors, or payments in lieu, should be aligned with those available to the workforce. The FRC’s research indicated that only 32% of companies had aligned all their executive director pension contributions with the workforce. The FRC is also concerned that some companies declined to disclose the workforce pension contribution rate; others claimed full compliance with the Code but did not demonstrate compliance with the pension requirements. 

Same-sex survivor benefits

The Pensions Minister has confirmed that the government will update the Equality Act to reflect the Supreme Court decision in Walker v Innospec (read more here). This relates to an exception in the Equality Act that permitted the survivor pensions of same-sex spouses and civil partners to be calculated only by reference to the member’s service from 2005 – the court held that this was contrary to EU law and the provision was to be disapplied. The government is planning to update the legislation to reflect the disapplication of the exemption ‘as soon as a suitable opportunity arises’. 

Government taskforce publishes stewardship recommendations

The government-led Asset Management Taskforce has published a report on putting stewardship at the heart of sustainable growth. One of its key objectives is to strengthen how stewardship works in practice throughout the investment chain and across different asset classes. Pensions-specific recommendations include:

  • Support for a new steering group to explore how to embed a focus on long-term factors, including stewardship, in relationships between asset owners and investment managers.
  • A requirement for pension schemes to explain how stewardship policies and activities are in members’ best interests (with a recommendation that TPR issue guidance on how trustees might evidence this).
  • The creation of a Council of UK Pension Schemes to support higher standards of pension stewardship.

‘Productive’ investment by pension schemes

Her Majesty’s Treasury (HMT), the Bank of England and the Financial Conduct Authority (FCA) are convening an industry working group to facilitate investment in ‘productive finance’ (that is, investment that expands productive capacity, furthers sustainable growth and can make an important contribution to the economy, such as research and development, technologies and infrastructure). The working group will consider potential fund structures for viable investment in long-term assets which meet the demands of a wide range of investors, including defined contribution pension schemes. 

The government has also published a National Infrastructure Strategy detailing its plans to transform the UK’s infrastructure networks. The strategy document notes that the government wants its new National Infrastructure Bank to work closely with pension schemes and the institutional investor market to explore opportunities for expanding pension fund investment in UK infrastructure.