From the introduction of the master trust authorisation regime, the beginnings of a collective defined contribution scheme to warning of a mis-selling scandal around DB transfers and several key rulings in the courts that impact pensions, 2018 has been anything but quiet. Natalie Tuck looks back on the year.
Under a new regime
The long-awaited Master Trust Authorisation Regime came into effect in October, giving schemes six months to apply for authorisation to operate in the market. Master trusts that wish to remain running have to apply for authorisation to ensure they are “fit and proper”, meeting standards across five key areas including systems and processes, strategy and financial sustainability. However, over October, there was just one master trust that applied for authorisation, Lifesight by Willis Towers Watson. TPR believes the slow uptake is an indication of how seriously the schemes are taking the new regime. The new regime will ultimately bring about consolidation in the market. The regulator expects 30 master trusts to exit the market in total; prior to the regime the regulator identified around 90 schemes in operation.
Warnings of a mis-selling scandal
Defined benefit pension transfers have been a dominating issue for the industry this year. The surge in popularity since the introduction of the pension freedoms has seen the number of people transferring rise from 5,056 in the 12 months to March 2016, to 34,738 in the same period to March 2018, according to the Financial Conduct Authority (FCA). However, it was the scandal surrounding the British Steel Pension Scheme that caused uproar. In February, it was revealed the scheme had processed £1.1 billion worth of transfers since March 2017, with the Work and Pensions Committee stating that members have been “shamefully bamboozled” following revelations of inappropriate advice. As a result, the FCA scrapped plans to remove the assumption for advisers that a defined benefit pension transfer is unsuitable. Despite this, transfers have remained popular amongst members, which has led to Ford Motor Company offering partial defined benefit transfers to members. More recently a new joint-venture, aimed at delivering long-term governance solutions to transfers, has signed up several firms committed to creating a “more consistent” and reliable transfer experience for consumers.
The courts have had a busy year when it comes to pensions. Both BT and Barnardo’s sought to change the indexation of their pension payments to the consumer price index from the retail price index. However, both were unsuccessful. In November, the Supreme Court ruled that Barnardo’s must use RPI as its measure of inflation in regard to pension payments. October saw another landmark ruling for pensions, when the High Court ruled that Lloyds Banking Group must equalise guaranteed minimum pensions (GMPs) for men and women, clarifying the issue for the rest of the industry. In another ruling, the Pension Protection Fund was told by the Court of Justice of the European Union that it must pay at least 50 per cent of members’ pensions’ entitlement to individuals whose employers have fallen into the fund. Currently, employees who have not yet reached pension age are entitled to up to 90 per cent of their accrued benefits, but are not offered inflationary increases; for this to fall below 50 per cent would be illegal, the ECJ said.
Back on the agenda
The former Pensions Minister, Ros Altmann, famously put the development of collective defined contribution (CDC) schemes on the backburner in October 2015. However, in late 2017 the Work and Pensions Committee launched a consultation on the schemes. A year later, and the Royal Mail has said it is committed to developing the UK’s first CDC scheme. It has been working closely with the Department for Work and Pensions in order for the government to implement the necessary legislation to allow such schemes to operate. In November, the DWP launched its consultation on CDC schemes, proposing that all schemes should be subject to a charge cap of 0.75 per cent, the same level as for DC schemes, to “protect the investments of members and ensure costs are controlled”. It also says that CDC schemes will be required to engage in annual independent valuations once they have been authorised to try and protect members and ensure that schemes are sustainable. Furthermore, CDC trustees will have to complete a fit and proper persons test.
With pensions regulated by two separate bodies, it is perhaps not surprising that the two work closely together. At this year’s Pensions and Lifetime Savings Association Annual Conference, the two went a step further and published a joint strategy aimed at strengthening their relationship, and taking joint action to deliver better outcomes for pension savers and those entering retirement. The strategy identifies key issues that contribute to the prospect of people not having adequate income in retirement. To tackle the main drivers of this harm, the FCA and TPR set out a vision for the pensions sector over the next five to 10 years. This includes making clear their areas of priorities and how to address fundamental changes in the sector. Earlier this year, the two joined forces to launch a scam awareness campaign. The ScamSmart advertising campaign targets savers aged between 45 and 65, which the regulators say is the most at risk group.
The same guy running the show
Minister for Pensions and Financial Inclusion, Guy Opperman, managed to hold onto his post in 2018. Opperman appears to have settled into the role well, and in a speech to delegates at the Pensions and Lifetime Savings Association Annual Conference, detailed his plans for the industry. He plans to have new pensions legislation by summer 2019 and has started the process of bidding for legislation for the next Queen’s Speech. This, he explained, is why he is launching as many consultations as he can by Christmas. However, Opperman has had to deal with several different bosses in 2018. As the bells rang in the New Year, the position of Work and Pensions Secretary belonged to David Gauke, but he was moved to the Ministry of Justice just eight days into the year. He was replaced by Esther McVey, who lasted until November, but resigned over the Brexit deal. Former Home Secretary, Amber Rudd, has recently taken over the reins, but how long she lasts remains to be seen.
The dithering dashboard
Having collaborated to develop a prototype of a pensions dashboard in 2017, the industry has been somewhat dismayed at the lack of progress made with the project in 2018. The Department for Work and Pensions took over the project in October 2017, but by 2018 there were fears the then Work and Pensions Secretary, Esther McVey, wanted to “kill off” the project. She later stated that she backed an “industry-led” dashboard, and Pensions Minister Guy Opperman later told the industry to “get on with it”. In Chancellor Philip Hammond’s 2018 Budget, an additional £5 million of funding to support the launch of the dashboard was given. He said that the DWP will work closely with the pensions industry and with financial technology firms to help make the dashboard a reality. Along with the 2019-2020 funding, it was also confirmed that the DWP will consult on the detailed design for the dashboard.
Investment consultants and FMs under the spotlight
The Competition and Markets Authority has been busy undertaking its review of the investment consultancy market this year. After publishing several updates throughout the year it published its interim report in July. The CMA stopped short of proposing any far reaching changes, but pension funds will be required to run a competition tender when choosing their first fiduciary manager, one recommendation amongst many. The CMA identified a number of competition problems; for example, around half of pension schemes choose the same provider for fiduciary management that they use for investment consultancy. However, a group of delegates at the XPS Group Annual Conference said the changes had not gone far enough, as they do not believe the remedies will do enough to make the market more efficient. Despite this, the big three consultancies, Mercer, Aon and Willis Towers Watson (WTW) criticised the data used by the CMA in its investigation, which led to the CMA updating its results, but the big three have since reiterated their criticism.
All about the member
This year has seen a renewed focus on the pension scheme member, with fresh ideas to get people saving more, and how members can be supported in the decumulation stage. The Pensions and Lifetime Savings Association, for example, proposed introducing national retirement income savings targets to give people a greater understanding of what they need to save for retirement. Nest is also trialling a sidecar savings product with Timpson. Under the sidecar model, contributions paid into the combined account structure are distributed between an emergency savings account and a pension pot. Once the emergency account reaches the ‘savings cap’, all contributions will then start ‘rolling’ into the pension pot. In terms of the decumulation phase, in April the Work and Pensions Committee proposed default pathways for pension providers offering drawdown, which it wants to be in place by April 2019. June saw the publication of the Financial Conduct Authority’s Retirement Outcomes Review, which proposed wake-up packs at 50, investment pathways for those in drawdown, and annual statements for those that have accessed their pension pots.
A clearer, quicker, tougher TPR…still criticised by Frank Field
The Pensions Regulator has continued with its clearer, quicker, tougher stance, launching its corporate plan for 2018-21 in May. Following criticism over its lack of action concerning the BHS pension scheme in 2017 by Work and Pensions Committee chair, Frank Field, the regulator has become more proactive in making public its regulatory action. This year has seen the regulator takes several companies and individuals to court in connection with their pension scheme arrangements. It also recently published statistics on the number of trustees that are completing their duties earlier, thanks to engagement by the regulator. All that however, hasn’t stopped criticism from Field; this has included accusing the regulator of “modest KPI targets” in its corporate plan. He also criticised TPR’s leadership in the wake of the collapse of Carillion, stating that he questioned the leadership of TPR after its chief executive gave evidence to the Committee in the wake of the Carillion disaster. TPR’s chief executive Lesley Titcomb announced at the end of May that she will be stepping down from the role in February 2019, to be replaced by Charles Counsell.
The long-awaited defined benefit white paper was published in early March, and with it were a flurry of proposals to reform DB pensions. In the paper, the government confirmed its plans to legislate to criminalise wilful pension scheme neglect. As part of its plans to crack down on those that neglect their company’s pension schemes the paper also revealed plans to give The Pensions Regulator more powers. Under the proposals, TPR will be able to allocate punitive fines for those who have deliberately put their scheme at risk and will see the introduction of legislation to introduce greater information-gathering powers including the power to compel any person to submit to an interview, the power to issue civil sanctions for non-compliance and an inspection power. A consultation on this closed in August and the government is yet to respond.