KPMG Pensions Accounting, Assurance and Regulatory Round ...€¦ · Senior Manager T: +44 (0)20 7311 6642 E: [email protected]. Sarah Lacey. Senior Manager T: +44 (0)20 7311

Pensions Accounting,Assurance and Regulatory Round-Up

Private sector occupational pension schemes

—

March 2020

2© 2020 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Introduction

Anne RodriguezSenior Manager

T: +44 (0)20 7311 6642E: [email protected]

Sarah LaceySenior Manager

T: +44 (0)20 7311 3865E: [email protected]

Welcome to the most recent edition of our Pensions Accounting, Assurance and Regulatory Round - Up for private sector occupational pension schemes. This update covers a range of topics and considers developments from the Regulator, the DWP and the wider pensions industry.If you have any queries or would like to discuss any of the matters herein further, please do get in touch with your usual contact at KPMG, Anne or Sarah, or email us.

Contents Page

TPR: Guidance on COVID-19 3

Financial Reporting Council: Revised Ethical Standard 2019 8

The Pension Schemes Bill 11

TPR: Defined benefit funding code of practice – consultation 12

TPR: Future of trusteeship and governance – response to consultation 16

TPR: Guidance on record-keeping 18

Collective Defined Contributions (CDC) Schemes 19

GMP Equalisation 20

Protecting Defined Benefit Pension Schemes: Government response to consultation 22

Climate change risk, ESG and trustees’ investment duties 24

Competition & Market Authority’s Investment Consultancy and Fiduciary Management Market Investigation Order 2019 (the “CMA Order”)

31

Pensions Dashboards 34

News in brief 35

mailto:[email protected]?subject=Regulatory%20round-up%20-%20March%202020


TPR: Guidance on COVID-19

Recognising the unprecedented challenges posed by the current COVID-19 situation, on 20 March TPR issued two pieces of guidance for trustees introducing regulatory easements. The Regulator is monitoring the situation and working with government, regulators and others to assess the most immediate risks whilst reaching out to trustees, administrators and employers who are concerned about their schemes.

The first piece of guidance comprises an update for trustees, employers and administrators. In the face of the current situation, TPR highlight that trustees should focus attention on the key risks to members, namely benefit payments, scam avoidance, continued employer support and informed decision making, adding that regulatory response to administrative legal breaches will be fair and proportionate.

Risks are considered from a number of angles:

Regulatory expectations of trustees – trustees will be expected to assess the adequacy of their own business continuity plan and that of any outsourced function. Will, for example, scheme administrators be able to operate as they should if a proportion of their staff are unable to work due to sickness? An activity priority order should be developed including key processes such as payment of pensions and other benefits.

Protecting members from scams – market volatility may prompt members to consider transferring their savings putting them at risk from scammers. In a separate interview, TPR

urged trustees to direct members to ScamSmart / MaPS for guidance and to consider whether to restrict transfers for a period of time.

Administrators – payment of benefits should be prioritised. Trustees are asked to liaise immediately with TPR if they are unable to make benefit payments. After that, trustees should focus on processes needed for accurate benefits (such as investment of contributions). TPR acknowledge that some administrative activities will be affected, for example causing delays in issuing benefit statements. These themes are reiterated in further guidance issued on 2 April, noting that huge pressure is being placed on scheme administrators potentially leading to breaches occurring. Trustees are urged to work flexibly with administrators to ensure prioritised services are maintained, for example by altering operating procedures (such as allowing electronic signatures), maintaining higher cash balances and keeping non-critical requests to a minimum. The risk of scam activity is also raised. In turn, administrators should notify trustees of affected services and keep a record of non-priority queries to action once resources are available.

Employers – TPR note the strain which employers will inevitably face at the current time and state that they will take a ‘proportionate and risk-based approach’ to enforcement, helping employers to ‘get … back on track’. The guidance points employers to government information sources.


TPR: Guidance on COVID-19 (cont.)

Timing of regulatory communications, publications and events – regulatory initiatives have been suspended and events postponed or cancelled. One-to-one supervision will continue to enable contact with trustees, managers and employers. Several expected publications have been postponed including the consultation on the Single Modular Code. The DB funding code consultation remains open.

The second piece of guidance is directed towards trustees of DB schemes whose sponsoring employers may be facing corporate distress. The Regulator stresses the need for trustees to engage with the employer to examine their position and review contingency plans. Trustees should also assess scheme asset values and liquidity in the current market. Forecasting has become challenging but trustees need to ensure that they receive the best available information to ensure that the scheme is treated fairly as a key stakeholder in the business.

The guidance suggests lines of enquiry for the trustees, such as asking whether the employer has considered the impact of the situation on product demand, business continuity planning and cashflows. Financing considerations are noted with, inter alia, enquiry around available borrowings, key short term outflows and banking covenants. Consideration of whether the employer can benefit from any of the Government’s support measures is also noted. Trustees are encouraged to assess any other

support which may be available to them, such as contingent assets, in line with TPR’s existing Integrated Risk Management guidance.

Requests from the employer to defer deficit repair contribution (DRC) payments should be treated with caution – whilst making such a request is understandable in the current crisis, trustees need to ensure equitable treatment for the scheme.

TPR expect employers to be open with scheme trustees, providing adequate time and information for them to make a considered response.

The guidance suggests principles for trustees to keep in mind when considering delayed DRCs. These centre on establishing the need (looking at employer cashflows and ensuring other claims are not receiving undue priority), ensuring all parties are playing their part (support for the scheme should sit alongside other stakeholders, ie trustees should seek a fair share of any new security offered) and securing an end to any delays with a finite date and/or return to a normal business environment. Advice should be sought from legal and covenant experts and agreement given only to short term deferrals where further information is needed for any longer term decisions.

On 27th March, TPR issued three further pieces of guidance for employers and trustees.

The first of these, aimed at employers, looks at



DB scheme funding. As DB schemes are a significant stakeholder in the employer, the Regulator expects trustees to be given regular updates on the employer’s position and sufficient information to assess the impact on the employer covenant and any DRCs payable to the scheme.

TPR will include messages in its Annual Funding Statement (due at Easter) for those schemes undergoing valuations in this turbulent period. Regulatory easements will be announced (which will apply until June 2020) to allow for a pragmatic approach to be taken where trustees are being asked to agree to arrangements such as DRC reductions in response to the COVID crisis. However, any such agreements should be documented by the employer (in case of future dialogue with TPR) and should be justified as needed, allow for catch up payments, ensure mitigations are put in place for any detriment caused to the scheme (where possible) and the scheme is being treated fairly vis a vis other stakeholders.

Further guidance for trustees looks at DC investments. Whilst stressing that the guidance does not override any legislation or scheme governing documentation, it expects trustees to ‘do the right thing’ for members and aims to support trustees by highlighting good practice.

The guidance acknowledges that, although they are invested for the longer term, members may have suffered heavy losses and may make inappropriate decisions crystallising those

losses. There is also a danger of members opting out of schemes if earnings are reduced or if they are offered an attractive opportunity by scammers. TPR recommend trustees review their member communications highlighting these concerns.

The current market will present specific risks to portfolios and service providers which trustees will need to review and manage, for example improving diversification of the investments held. Consideration should be given to the level of exposure to counterparties and timing of proposed transactions.

Trustees will need to review scheme governance, in particular concerning continuity in the event of trustee unavailability, sub-committee operation, quora of meetings and authorisations. The trustees may wish to take this opportunity to review their longer term risk management arrangements and governance planning, investment strategies and ultimately whether their membership would benefit from a transfer of benefit provision to a larger arrangement.

The final piece of guidance from TPR is directed towards DB trustees, looking at funding and investment issues.

Key points can be subdivided into topic areas:

Schemes completing their valuations now

Despite current economic conditions, trustees are not expected to revisit valuation



assumptions however recent experiences should be taken into account when considering affordability of recovery plans. If more time is required to consider the employer’s and scheme’s position, no regulatory action will be taken for delays of up to three months.

Employers’ requests for easements

— Requests to suspend or reduce deficit repair contributions (DRCs)

Guidance builds on that given on 20 March. Trustees should be open to such requests for up to three months in general, although longer periods may be appropriate in certain circumstances and if underwritten by additional protections. Where sufficient information is not available, trustees should agree to requests for as limited a period as possible, particularly where significant sums are involved. Advice should be taken on whether to allow easements and on the appropriate method for so doing – such as amendment of the SoC, as the consequences will be different for each scheme, e.g. a wind-up may be inadvertently triggered if contributions are not received in line with the SoC. Affected contributions should be made good within the current recovery plan period. TPR commit to withholding regulatory action in respect of late reporting or non-payment of contributions in the next three months.

— Requests to suspend or reduce payments for future service

Such requests may raise additional issues such as limitations in the scheme rules.

— Payments to related entities or shareholders

Legally binding restrictions should be placed on covenant leakage to other stakeholders. Intra group payments may be an exception if needed to support group wide liquidity and going-concern status, though trustees should consider obtaining appropriate mitigations, such as guarantees or contingent assets.

— Requests to release security

Such a request should be considered in the context of the full facts of the case but is unlikely to be in the best interests of the scheme.

— Advice and governance

Trustees should consider advice and, in any event, fully document all decisions made.

— Employers of DB schemes provision of information to trustees

The employer should treat the scheme equitably and provide the trustees with all necessary and timely information.

Investments

Guidance around investments builds on guidance for trustees of DC schemes adding a recommended review of scheme cashflow requirements.



Transfer values

As a result of the increased risk of scam activity, trustees may consider suspending transfer value quotations and how this will be communicated to members. TPR will not take regulatory action in relation to suspended transfer activity for the next three months.

Regulatory approach

Those schemes under TPR’s 1:1 relationship-managed supervision may have already been contacted directly with focus directed to near-term risks. For other schemes, TPR will continue to take a risk based approach.

We will keep you updated on any further guidance in future editions of Round Up.


Financial Reporting Council: Revised Ethical Standard 2019

The Financial Reporting Council (FRC) published a Revised Ethical Standard (2019 ES) in December 2019 which replaces the 2016 Ethical Standard (2016 ES). The focus of the FRC continues to be on strengthening auditor independence and preventing potential conflicts arising from the provision of non-audit services by audit firms to audited entities.

Key changes applicable to Public Interest Entities

The FRC has moved away from the position under the 2016 ES, where the focus is on whether or not a proposed non-audit service is prohibited for Public Interest Entities (PIEs), to a list of permitted services which prescribes the only types of non-audit services which may be provided by audit firms to PIEs.

This list restricts services to:

— those that are required by UK/national law or regulation to be carried out by the auditor; and

— those which are closely related to the audit but could be provided by others (such as interim reporting).

All such services are subject to audit committee approval.

The 2016 ES introduced a 70% cap on the fees for non-audit services provided by audit firms to PIEs. Audit firms were required to comply with the cap from the fourth financial period

commencing on, or after 17 June 2016 – this means that we are now in the first period for which the fee cap will be monitored.

Key changes for new population of Other Entities of Public Interest

The 2019 ES also applies this list to a new category of entity: “other entity of public interest” (OEPI), which brings a large number of new entities into scope for the significant restrictions. Note that the fee cap and audit committee approval do not apply to OEPIs.

On 30 January 2020, the FRC published the definition of OEPI, which encompasses large private and AIM listed companies, large private pension schemes and Lloyd’s syndicates. The definition captures entities which the FRC deem to be of significant public interest to stakeholders.

For pension schemes it covers:

Private sector pension schemes with more than 10,000 members and more than £1 billion of assets, by reference to the most recent set of audited financial statements.


Financial Reporting Council: Revised Ethical Standard 2019 (cont.)

Key changes applicable to all audited entities

The 2019 ES also introduces changes which apply to all audited entities. The key changes are prohibitions on:

— the provision of internal audit services;

— secondments of staff;

— provision of services on the basis of acontingent fee;

— tax services that would involve acting as an advocate, regardless of whether the issue is material or not; and

— all services in respect of remuneration packages (in general and not limited to advice relating to quantum).

Internal audit

The 2019 ES prohibits the provision of internal audit services to any audited entities and/or significant affiliates. The revised standard also introduces a “cooling in” period for internal audit services to PIEs and OEPIs, meaning a new external auditor cannot have provided these services in the twelve months prior to the start of the first period for which they are external auditor. The new requirement will not be applied retrospectively.

Key dates

The 2019 ES is effective for accounting periods commencing on or after 15 March 2020, with the exception of the new restrictions relating to OEPIs which will be effective for accounting periods commencing on or after 15 December 2020.

The non-audit restrictions will apply from 15 March 2020 for PIEs, however ongoing services as of that date that were permitted under the 2016 ES will be subject to transitional provisions.

Engagements to provide previously permitted non-audit or additional services, entered into before 15 March 2020, and for which the firm has already started work, may continue until completed in accordance with the original engagement terms, subject to the application of appropriate safeguards.

However, any non-audit services entered into from 15 March 2020 must comply with the non-audit service restrictions in the 2019 ES.

The “cooling in” period required by Appendix B (b) (h) of the 2019 ES, which has been extended to include services relating to internal audit, will not have retrospective application.

The application of the permitted services list to OEPIs will become effective for periods commencing on or after 15 December 2020.


Financial Reporting Council: Revised Ethical Standard 2019 (cont.)

The FRC have indicated that for OEPIs, previously permitted non-audit or additional services, entered into before 15 December 2020, and for which the firm has already commenced work, may continue until completed in accordance with the original engagement terms, subject to the application of appropriate safeguards.

To read the Ethical Standard, refer to link below.

FRC Current Ethical Standard

Your usual KPMG Contact will be in touch shortly if the above applies to or will impact your scheme.

https://www.frc.org.uk/auditors/audit-assurance/standards-and-guidance/current-ethical-standards


The Pension Schemes Bill

The Pension Schemes Bill was introduced to the House of Lords on 7 January 2020. The Bill, as originally highlighted by the Queen’s Speech, aims “…To help people plan for the future, measures will be brought forward to provide simpler oversight of pensions savings. To protect people’s savings for later life, new laws will provide greater powers to tackle irresponsible management of private pension schemes.”

The main elements of the Bill are:

— Providing a framework for the establishment, operation and regulation of Collective Defined Contribution schemes (see later article);

— Strengthening the Pensions Regulator’s powers and the existing sanctions regime. This will include introducing new criminal offences, with the most serious carrying a maximum sentence of seven years’ imprisonment and a civil penalty of up to £1 million (see later article);

— Giving the Regulator powers to obtain the right information about a scheme and its sponsoring employer in a timely manner, ensuring that it is able to gain redress for pension schemes and members when things go wrong;

— Providing a framework to support pensions dashboards, including new powers for the Regulator which will include penalty fines, to compel pension schemes to provide accurate information to consumers. This will include provisions to amend the Pensions Act 2004 and to ensure relevant schemes comply (see later article);

— Creating regulations to set out circumstances under which a pension scheme member will have the right to transfer their pension savings to another scheme;

— Improving the defined benefit scheme funding system by requiring a statement from trustees on their funding strategy; and

— Amending the legislation for the Pension Protection Fund compensation regime to enable the Fund to continue to apply the compensation regime as intended and amend the definition of administration charges.

Industry reaction

Various industry commentators have welcomed the proposals. However, some disappointment has been voiced over the lack of any provision for a defined benefit consolidator or Superfund regime.

A consultation on the content of the Scheme Funding Code is expected to be published shortly and we will provide further information when available.


TPR: Defined benefit funding code of practice – consultation

In March 2020, TPR issued the first of a two part consultation on scheme funding. This first document looks at the framework of the revised provisions and the second will apply more detail about what the new Code and guidelines might look like. TPR are keen to understand any practical considerations and highlight any unintended consequences and also to form a view of ‘what good looks like’.

The proposals introduce a new framework aiming to achieve a balance between security of member benefits and affordability to the employer, building on already familiar themes such as integrated risk management and long term planning.

Compliance with the proposed new approach is not likely be overly onerous for a well-run scheme, but is intended to improve the governance of those schemes currently taking an excessive amount of risk with their funding position. The new framework will rest on a series of key principles:

Compliance and evidence

Trustees will be expected to understand their scheme specific funding and investment risks and evidence how these risks have been assessed as acceptable and managed, comparing any risk to a tolerated risk position and demonstrating mitigation / support available.

Long term objective (LTO)

Mature schemes will be expected to be resilient to

risk and have low dependency on the employer (a lower risk of requiring significant support).

Journey plans and technical provisions (TP)

Trustees should formulate a journey plan, linking to and aligning with Technical Provision (TPs), to a Long Term Objective (LTO) with decreasing investment risk.

Scheme investments

A scheme’s investment strategy should be aligned with its funding strategy and have sufficient security, quality and liquidity considering both expected and unexpected cash flows. At maturity the asset allocation should have high resilience to risk, a high credit quality and level of liquidity.

Reliance on the employer covenant

A reducing reliance on the employer is expected over time.

Reliance on additional support

Schemes will be able to take account of additional support in valuations, provided that the support is provided at the right level to mitigate risks taken, it is valued appropriately and is legally enforceable and realisable.

Appropriate recovery plan (RP)

Scheme deficits should be recovered as soon as they are affordable without compromising the sustainable growth of the employer.


TPR: Defined benefit funding code of practice – consultation (cont.)

Open schemes

The security of members’ benefits is equally important in both open and closed schemes.

A new regulatory approach: Fast track and Bespoke

Proposals in the consultation aim for greater direction to be provided, without being overly prescriptive. A twin track approach to valuation compliance is proposed – referred to as ‘Fast Track’ and ‘Bespoke’. It is hoped that this approach will provide greater clarity on the expected standards to trustees, employers and their advisers. Evidence supporting adoption of either route will need to be submitted to TPR as part of the new statement of strategy introduced by the Pensions Bill 2020. Schemes may switch between the two tracks at different valuations, recognising that scheme and employer circumstances may change over time.

Fast Track

The consultation document headlines the fast track approach as providing a streamlined route to compliance with the legislation comprising straightforward quantitative compliance.

If requirements are complied with, less evidence will be needed and minimum regulatory involvement can be expected.

The Fast Track route is relevant for schemes whose valuations comply with all aspects of TPRs requirements, which whilst not intended to be risk free, will represent a ‘baseline of tolerated risks’.

Bespoke

This option provides more flexibility for valuations of schemes who cannot or who are choosing not to adopt the Fast Track approach to incorporate scheme and employer specific circumstances.

However, valuations adopting this approach will need to be more fully articulated and evidenced and may involve more regulatory involvement.

There are varied reasons for not adopting the Fast Track approach and the Bespoke approach is equally compliant with the legislation. A higher level of regulatory involvement can be expected as schemes will have to demonstrate how and why their approach differs from Fast Track and how any additional risk is being managed. It is intended that Bespoke arrangements meet the key principles of the Fast Track standard whist allowing for additional flexibilities. For example, if additional risk on funding is accepted by trustees, there would be a need to demonstrate how that risk is managed which could involve, inter alia, putting contingent asset arrangements in place. TPR would expect such assets to be appropriately valued and be legally enforceable and accessible when needed.

Fast Track: key principles and options

Employer covenant

Balancing the needs of scheme members and the costs to employers is paramount. A higher degree of reliance on the employer may be justified, for example, for an immature scheme taking higher risks; the scheme then transitioning



to a lower dependence position over time. TPR’s second consultation will deal with the detail of this balance. Schemes with a stronger employer covenant may be in a position to take more risk.

The consultation looks at how covenant support should be integrated, recognising that visibility does not typically extend to beyond 3-5 years.

Assessment of the covenant is also considered looking at two options: the current ‘holistic’ approach or a simplified model resulting in a calculated value or metric. Retention of the current covenant grading system is proposed but views are sought on increasing the number of ratings.

Long term objective

The proposals indicate that, as they mature, schemes should seek to reduce reliance on the employer covenant and hold an asset portfolio which is resilient to risk. Once an LTO is identified, trustees can formulate a strategy to reach this ‘end game’ position whether that is to buy out, consolidate or run off the scheme. Views are sought on the definition of an LTO and assumptions relating to members benefits for those on the Fast Track route.

Journey planning and technical provisions

The 2020 Pension Schemes Bill requires technical provisions to align to the LTO. A journey plan sets out how schemes will achieve their destination LTO. This may not happen in a short timeframe. Technical provisions will not always match the LTO but should measure progress

along a smooth journey plan towards it and will reflect the discount rates and investment strategy along the way. Once a scheme is fully funded on a TP basis, TPR would expect schemes to invest in accordance with their journey plan to move themselves towards a position of low dependency on the employer, introducing a recovery plan only if a deficit arises on a TP basis. The consultation seeks views on an appropriate journey plan ‘shape’ for Fast Track TPs, how much covenant reliance should be embedded and how to express fast track TPs and derive guidelines.

Scheme investments

The consultation suggests that a scheme’s investment strategy and asset allocation over time should be broadly aligned with the funding strategy. Trustees will need to ensure that this strategy has appropriate security, quality and liquidity. TPR suggest proposals on how trustees may be able to demonstrate that risks in their investment strategy are supported. Options are outlined on a suitable reference point for measurement of investment risk, how to measure risk, and the definition of an acceptable level of risk at different scheme maturities and covenant strengths. Credit quality and liquidity guidelines for the Fast Track route are also considered.

Appropriate recovery plans

Affordability is key in considering recovery plans. TP deficits should be recovered as soon as possible whilst minimising the impact on employer growth. A balance is sought between risks to the scheme and flexibility for employers in



managing cash flows. Evidence of affordability constraints will be required where longer recovery plans are proposed. In such cases trustees will be expected to put in place suitable mitigations. Consultation responses are sought on appropriate recovery plan lengths and whether these should vary depending on the employer covenant.

Open schemes

Open schemes mature more slowly (or not at all) as compared to closed schemes. However, the accrued rights of members in open schemes should have as much security as those in closed schemes. The consultation proposes to treat past service liabilities (TPs) and future accrual separately with all schemes having the same LTO of funding based on low employer dependency once they are more mature. The consultation seeks views on the method of calculation of TPs and the cost of future service benefits for open schemes.

To conclude:

The consultation closes on 2 September 2020 (delayed by COVID-19; originally 2 June 2020). It will be followed by a second consultation later in 2020 which will incorporate feedback received in the current document. The revised Code is not expected to come into practice until late 2021.

The consultation has been broadly welcomed. However, it is acknowledged that much of the detail remains outstanding until the second part of the consultation is published. This includes

provisions relating to enforcement which will need to await the passage of the current Pensions Bill through Parliament. [see earlier article: The Pensions Bill]


TPR: Future of trusteeship and governance – response to consultation

TPR published a response to its consultation, the ‘Future of trusteeship and governance’, in February. With many more savers contributing to schemes, TPR is keen for governance standards to remain high. The consultation which covered three broad areas: trustee knowledge and understanding (TKU), scheme governance structures and DC consolidation. Schemes not meeting the required standards are expected to improve or exit the market.

TKU

TPR intend to update the TKU code ensuring it remains appropriate and consistent with other initiatives. Different requirements deriving from scheme type and trustee role will be recognised and broader considerations (such as ESG) included. Consultation is expected early 2021. Once the new guidance is bedded in, TPR intend to run a regulatory initiative on TKU.

A range of methods will be acceptable for demonstrating TKU rather than a mandated professional qualification, which could act to create barriers to participation and, hence, diversity and inclusion. Indicative annual CPD hours for ongoing training will be set at 15 hours for lay trustees and 25 for professional trustees (in line with current industry standards). Other suggestions put forward by consultation respondents included regulation of TKU on a ‘comply or explain’ basis, monitoring of Trustee Toolkit completion or declarations of compliance (potentially included in a Chair’s Statement or the scheme return).

TPR has reiterated its commitment to free trustee training and undertaken to improve the Toolkit

ensuring that it remains relevant, practical and fills in any subject specific gaps.

Responses also indicated concern over a lack of time and financial resources available to trustees in the performance of their roles, including training. To address this, TPR will run a targeted campaign to remind employers of their duty to provide sufficient time and resources.

Scheme governance structures

Recognising the benefits of diversity, TPR will form an industry working group to: define diversity and inclusion, deliver best practice guidance on board composition (making the most of the skills available) and practical tools to aid more diverse recruitment including promotion of the benefits of trusteeship and, to employers, the development benefits for employees. No requirement is planned for reporting on steps being taken to improve diversity; this will be looked at through TPR’s supervision and enforcement activity.

A proposal requiring professional trustees on every board was not popular, respondents citing concerns over cost, the additional burden and potential to reduce diversity. Many noted that TPR are able to appoint professional trustees where necessary, though some highlighted the benefits of experience and knowledge which a professional trustee can bring.

TPR have indicated that they will not take immediate action requiring appointment of professional trustees but, hoping that the APPT standards and accreditation will bring greater


TPR: Future of trusteeship and governance – response to consultation (cont.)

consistency in quality, will wait to evaluate the situation. The impact of market contraction is noted; fewer schemes meaning savers benefit from larger and better-run schemes.

No new requirements are proposed around sole trusteeship. TPR support the APPT code for sole trusteeship and will research into patterns and trends in the market.

DC Consolidation

The practicalities of DC consolidation were also considered, including winding up schemes with guarantees. Subject to tax concerns, assignment of benefits was the most popular solution with mixed responses as to the need for member consent. The suggestion that NEST should accept assigned benefits was also supported although NEST itself preferred to retain discretion and noted that schemes with guarantees are typically legacy schemes without an active employer and their acceptance would require a change in legislation. Responses noted that there may not be one optimal solution and care should be taken to avoid members losing any benefit of employers meeting scheme costs.

Overall, TPR consider that assignment of non-guaranteed benefits to a new trustee would be the better outcome for members. The aim is to get as many savers as possible into well run schemes but consolidation of well-run schemes will not be forced. In addition, the DWP are producing guidance looking at value for money and consolidation.

The costs of wind up raised concerns, fearing that

they could be prohibitive for small schemes, particularly where the employer was insolvent, although it was acknowledged that assignment,standardisation of policy terms and improvements in standards of legacy schemes would help. TPR accept that assignment might be only way to secure the best outcome for members of the smallest schemes. Loss of trustee oversight on individual assignment can be mitigated by effective communication. Where possible, TPR aim to take a pragmatic approach towards breaches during wind up.

TPR has outlined an action plan:

TKU:— Review and update TKU expectations in the code

and guidance — Review the Trustee Toolkit and identify areas for

improvement — Consult on changes to TKU code content and

update Trustee Toolkit in early 2021Scheme governance structures:— Establish an industry working group to develop

guidance and tools to support diversity and inclusion on boards

— Support the APPT in development of a code for sole trusteeship

— Undertake further research to identify divers for, and risks of, sole trustees

DC consolidation:— Monitor DC consolidation activity and work with

industry and the DWP to overcome barriers to consolidation

The response to the consultation highlighted may varied viewpoints. We await the updated Code and guidance to see the way forward ….


TPR: Guidance on record-keeping

In September 2019, the Pensions Regulator (TPR) published their revised guidance on record-keeping, cracking down on poor standards and reiterating trustees’ responsibilities in relation to scheme data. The need for data quality standards to be a regular agenda item for trustees’ meetings is emphasised together with the possibility of regulatory enforcement where standards are not met. The consequence of inadequate record-keeping on members is also noted.

Trustees are expected to review scheme data regularly and will need to report their findings to TPR as part of their annual return. Data reviews should be ongoing and a continuous improvement plan put into place where failings are identified. Records must be kept for a minimum of six years.

Common data requirements (such as NI numbers, names, dates of birth) and scheme-specific data requirements (such as scheme type and design, member status and key events during membership) are clarified. Public sector requirements, where requirements for data records are set out in legislation, are discussed separately.

The guidance makes clear that trustees should not rely on the statutory audit to inform trustees about data standards.

Further guidance is provided on data measurement. Trustees should have robust agreements in place with their administrators which set out responsibilities in this area together with service level agreements (SLAs) for performance including regular reporting on the

results of quality control checks.

Any consequent improvement plan put in place should set out expected outcomes, what needs to be done and include clear objectives with responsibilities and timeframes allocated to the scheme administrator where relevant. Data having the greatest impact on member benefits should be prioritised.

Trustees should also review their administrator’s performance against their contract. This may be achieved through ensuring that administrators’ procedures manuals are kept up to date and review of administrators self reporting against agreed SLAs.

TPR’s guidance also looks at trustees’ data requirements from the sponsoring employer, noting that payroll information will need to be transferred to the scheme and that this is most efficiently done electronically. Risks associated with cyber security and GDPR considerations are covered, ensuring that trustees put in place appropriate and proportionate controls to mitigate these risks.

In addition, trustees should have an up to date and tested business continuity plan in place. This can be scaleable according to the complexity of the scheme and it should cover the operations of any outsourced function.

The new guidance highlights TPRs current drive to improve scheme data standards. However, it contains nothing radically new, essentially reiterating processes which should already be in place in a well run scheme.


Collective Defined Contribution (CDC) Schemes

The Pensions Bill introduced into the Lords earlier this month contained provisions enabling the establishment of CDC (or Collective Money Purchase [CMP]) schemes. The provisions outlined add flesh to the bones as to how CDC may work with many of the requirements looking very familiar from MasterTrust requirements.

CDC is intended to be a ‘third way’ for provision of pensions benefits – with elements of DC and DB provision (though definitively classified as DC in nature by legislation).

Legislation has been drafted to accommodate the proposals of the Royal Mail scheme but with the intention that others could follow a similar path. In CDC schemes, the risks remain wholly with the members but they are pooled with the aim of achieving a more reliable ‘target’ retirement income than a pure DC arrangement without exposing the employer to any ongoing risk. Assets and liabilities are subject to annual actuarial valuations to assess funding levels and benefits adjusted accordingly.

Trustees will require TPR authorisation to operate a CDC scheme. The authorisation process, which includes payment of a fee and may take up to six months, will comprise:

— a fit and proper requirement for those involved with the scheme;

— a scheme design requirement;

— a viability report explaining the scheme design and why the trustees consider it to be appropriate. This will require annual review and an actuarial certification;

— a financial sustainability requirement to satisfy TPR that the scheme has sufficient support to set up and run and also to run for a period following any triggering event (see below);

— a communication with members requirement, ensuring adequate systems for communication;

— systems and processes requirements; and

— a continuity strategy requirement.

Once authorised, CDC schemes will be subject to ongoing regulatory supervision. TPR will maintain a list of approved schemes and will require an annual supervisory return. Certain events will be notifiable and the Regulator will have the power to withdraw authorisation where appropriate. TPR will also be able to issue risk notices if there is a concern about the scheme, such as a breach of any of the authorisation criteria, to which trustees will need to respond with a plan.

Triggering events (events putting the Regulator on notice that the scheme may need to close) are set out in a table within the Bill, together with a relevant date for each event type. Following a triggering event, three continuity options are outlined; to discharge liabilities and wind the scheme up, to resolve the triggering event, and to convert the scheme to a closed scheme. TPR will have the power to ‘pause’ certain scheme activities after a triggering event and will require periodic progress reports.

The Bill sets out the framework for CDC provision. Time will tell whether this new ‘third way’ is widely embraced by scheme sponsors.


GMP Equalisation

HMRC’s February GMP Newsletter provides additional guidance to those schemes equalising benefits other than with a conversion method. The newsletter looks at the impact of GMP adjustments on benefit crystallisation events in a range of situations.

In July, the GMP Equalisation Working Group (GMPEWG) published a call to action highlighting three key areas for schemes to focus on. These are: understanding and progressing GMP reconciliation and rectification, review of relevant data quality and management of impacted transactions. It goes on to suggest stakeholder collaboration, identification of scheme-specific aspects and identification of good practice. The Call to Action, which was welcomed by the Regulator, was followed by a Guidance Note on Methods including worked examples.

The 2018 High Court judgement in respect of the equalisation of GMPs for the Lloyds Banking Group has significant implications for scheme administration, funding and accounting for all defined benefit pension schemes with unequal GMPs for members who were contracted out between 17 May 1990 and 5 April 1997.

The ruling creates a legal obligation (from the date of the ruling 26 October 2018) on scheme trustees to equalise GMPs through other scheme benefits. Equalisation includes backdating of benefit adjustments and related interest to 17 May 1990, subject to scheme rules which may have a 6 year limit. Estimates of the liability range from 0-4% (with a median of 0.7%) of scheme liabilities.

Under FRS 102 and the Pensions SORP, the obligation in respect of backdated benefits and related interest needs to be recognised as a liability in pension scheme financial statements for year ends after the judgement date, subject to materiality considerations.

Trustees may wish to undertake an initial high level assessment of the likely liability with a view to undertaking detailed calculations only if the amount is not clearly immaterial. It may not be necessary for trustees to include immaterial amounts in the financial statements although they may choose to do so along with an explanation of their approach and accounting in the trustees’ report.

Trustees will want to consider the implications of the judgement for their scheme, seeking professional advice and considering in detail which equalisation method, of the several suggested by the court, will be applicable and the likely costs. This will include liaising with the employer.

The calculations involved will be complex and the detailed member information required may not be available in time for the preparation of the financial statements. In such cases (which are expected to be few in number) it may be possible to use other methods to obtain a view of the likely financial impact on the scheme. Note that the DWP published guidance on the use of GMP conversion legislation on 18 April 2019, which sets out how schemes could use GMP conversion legislation to equalise benefits.


GMP Equalisation (cont.)

Trustees should endeavour to determine a reasonable (best) estimate for the cost of backdated benefits and related interest for inclusion in the financial statements.

However, it is possible that calculations based on the agreed approach are not finalised at the time of preparing the scheme financial statements and/or detailed calculations have not been fully completed. If the trustees conclude that it is impossible to determine a reliable estimate and there are grounds to believe the amounts are likely to be material this should be disclosed in the notes to the financial statements and treated as a contingent liability (rather than an accrual or provision) and the scheme auditor will consider the impact of this on the audit report.

Schemes accounting for backdated GMP equalisation liabilities will need to consider whether the amounts should be accounted for as accruals or provisions (the latter requiring additional disclosure under FRS 102). This decision will be made on a case by case basis. Generally, the distinction is made based on the level of uncertainty surrounding the liability, which is much less for accruals than for provisions.

Both parties to the Lloyds case agreed that equalisation applies to benefits transferred in. In other words a receiving scheme will need to make good any inequalities in benefits arising from transfers in. Consideration of transfers out and

any de-minimis considerations was deferred to a further hearing. Buy-outs are unlikely to be affected by the ruling as the scheme has passed the legal obligation to make benefit payments to the buy-out provider and in many cases the scheme and sponsor may no longer be in existence. The liability to equalise will therefore fall on the buy-out provider.

Disclosures and balances included in the financial statements as a result of the GMP equalisation ruling will be subject to audit scrutiny. The nature and extent of audit work required will depend on the uncertainty and complexity of any estimates required and disclosures made.

Further guidance is available from PRAG, including suggested disclosures covering various scenarios. However, it is clear that early liaison between trustees, scheme auditors, scheme actuaries and the employer is key to assessing the implications and likely impacts on pension scheme financial reporting. For an outline of the wider considerations and possible trustee responses see the summary attached.

http://kpmgeu-mkt-stage1-res.adobe-campaign.com/res/kpmgeu_mkt_stage1/1e090a532b49cfae082c7492befb8482.PDF


Protecting Defined Benefit Pension Schemes: Government response to consultation

Proposals for a stronger pensions regulator

The recent Pensions Bill (see earlier article) outlines provisions to strengthen TPR’s powers, picking up on some, but not all, recent proposals. This article gives an overview of the wider discussion, highlighting the Bill’s proposals where relevant.

In May, David Fairs (TPR) outlined The Regulator’s vision for a revised Code of Practice on Scheme Funding. The Regulator’s blog sets out the need for a long term view of funding and investment strategy, making a distinction between open and closed schemes and their differing maturity profiles. Emphasising that affordability is key, TPR will seek views on length of acceptable recovery plans in the context of strength of employer covenant, considering also the role of contingent support and investment strategy. TPR aim for the new code to provide a straightforward, fast track to demonstrating compliance whilst retaining flexibility. Two consultations are expected; the first focusing on options for DB funding framework and the second on the legislative package supporting it.

The February 2019 Government consultation response following its 2018 White Paper ‘Protecting Defined Benefit Pension Schemes’ set out proposals to improve the Pensions Regulator’s (TPR’s) powers enabling it to be more proactive, have the necessary powers to obtain information in a timely manner, able to gain redress for members and to deter reckless behaviour.

The 2004 Pensions Act put in place certain safeguards to mitigate potential moral hazard resulting from the creation of the Pension Protection

Fund (PPF). Recent proposals revisit those safeguards. Whilst the majority of employers comply with their obligations, the Government intend to ‘put in place tougher, more proactive powers so that the

Pensions Regulator can intervene moreeffectively ‘, ie to:

— give TPR powers to punish those who are deliberately putting their schemes at risk and to obtain redress when losses occur;

— legislate to introduce further criminal offences for reckless behaviour and build on current provision for disqualification of directors; and

— work with TPR to strengthen the notifiable events framework and corporate transaction clearance procedures (whilst not imposing measures which could adversely impact business activity).

These proposals go hand-in-hand with TPR's ‘Future’ regime which introduces 1:1 supervision for a select group of schemes and increased regulatory intervention more generally.

Notifiable eventsThe Bill adds more detail as to who should notify certain events and stipulates that a notification should have an ‘accompanying statement’ including, inter alia, a description of the event, it’s adverse effects, mitigations and communications with the trustees.

Earlier proposals set out an enhancement to the notifiable events regime to include notification of the sale of a material proportion of the business or assets of a scheme employer which has funding


Protecting Defined Benefit Pension Schemes: Government response to consultation (cont.)

responsibility for at least 20% of the scheme’s liabilities and the granting of security on a debt to give it priority over debt to the scheme. The existing notifiable event of ‘wrongful trading of the sponsoring employer’ is likely to be removed.

We expect TPR to revise its Code of Practice and update guidance on the notifiable events framework.

Declaration of intentIn relation to corporate transactions, the White Paper proposed the introduction of a Declaration of Intent by corporate planners with the intention that it will be shared with the trustees of the pension scheme and TPR. This is likely to be triggered by transactions such as the sale of a controlling interest in a sponsoring employer, the sale of the business of a sponsoring employer and the granting of security in priority to the scheme. Following outline provisions in the Bill, the Government will work with TPR on the implementation of these proposals.

PenaltiesThe Bill introduces new penalties: a criminal offence for failing to comply with a Contribution Notice and in relation to employer debt where collection of such debt is prevented, compromised or reduced. The latter provision is currently drafted very widely and will require clarification to become workable.

Penalties up to £1m are also proposed for the provision of false or misleading information to TPR, the trustees and scheme managers.

Other measuresAdditional measures in the Bill include clarification of the grounds for the issuing of, and defences to, Contribution Notices and amendments to

the ‘relevant time’ for calculating the sum payable. Enhanced interview and inspection powers are also outlined.

Other recent proposals have considered a range of measures impacting the interventions available to TPR.

The DWP have stated that they are working towards streamlining the Financial Support Direction (which will become known as the Financial Support Notices [FSNs]) regime and it’s target group broadened to ensure pension obligations are met.

Review of the Regulated Apportionment Arrangement (RAA) regime has also been considered following proposals that TPR should become involved earlier in the process.

However, a risk was recognised in allowing a greater number of RAAs and this issue is noted for further consideration.

Further consultation proposals included suggestion of a mandatory clearance procedure in relation to corporate restructuring activity. Current provisions for a voluntary process provide little incentive for employer engagement and the number of consultations has decreased markedly in recent years. The Government recognised that a mandatory process may result in disproportionate effect on normal economic activity and this concern was reflected in consultation responses. The Government have indicated that TPR should review its guidance on the clearance process in order to clarify its expectations and processes.

The Government intend to work closely with TPR in implementing all the measures proposed and to consult with stakeholders on the detail.


Climate change risk, ESG and trustees’ investment duties

Since our last Edition, climate-related risks have continued to dominate the headlines. On 12 March 2020, the Pensions Climate Risk Industry Group (PCRIG), launched a public consultation on its new guidance “Aligning your Pension Scheme with TCFD Recommendations”. This guidance is to help occupational pension schemes to assess, manage and report on climate related risks.

All pension schemes are exposed to climate risk, and this guidance is designed to support both defined benefit (DB) and defined contribution (DC) scheme trustees meet both the current legislative requirements to document policies on material financial considerations, including climate change risk, and policies on stewardship and investor engagement and voting.

The guidance does go further than to cover the legislative framework, providing guidance on climate related opportunities, should certain schemes want to lead the way.

Background - What is TCFD and what are the recommendations – recap

The Taskforce on Climate – related Financial Disclosures (TCFD) was established in December 2015 to develop disclosures drawing from existing frameworks where possible, following increased demand for transparency from organisations on risks and risk management processes. The work of the TCFD aligns with the Government’s Green Finance Strategy – Transforming Finance for a Greener Future – announced in July 2019.

The Green Finance Strategy has two objectives:

— Aligning private sector financial flows with clean, environmentally sustainable and resilient growth; and

— Strengthening the competitiveness of the UK financial services sector.

Three strategic pillars to achieve these objectives are:

— Greening Finance: Ensuring current and future financial risks and opportunities from climate and environmental factors are integrated into mainstream financial decision making, and that markets for green financial products are robust in nature;

— Financing Green: Accelerating finance to support the delivery of the UK’s carbon targets and clean growth, resilience and environmental ambitions, as well as international objectives; and

— Capturing the Opportunity: Ensuring UK financial services capture the domestic and international commercial opportunities arising from the “greening of finance”, such as climate related data and analytics, and from “financing green”, such as new green financial products and services.

In June 2019, the Final Report of the TCFD established 11 recommendations. Refer to table overleaf for these recommendations.


Climate change risk, ESG and trustees’ investment duties (cont.)

TCFD 11 recommendations

Governance Strategy Risk Management Metrics and Targets

a) Describe the board’s oversight of climate-related risks and opportunities

a) Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long-term.

a) Describe the organisation’s processes for identifying and assessing climate-related risks.

a) Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process.

b) Describe management’s role in assessing and managing climate-related risks and opportunities.

b) Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning.

b) Describe the organisation’s processes for managing climate-related risks.

b) Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas emissions, and the related risks.31

c) Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.

c) Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management.

c) Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets



To underpin the recommendations, the Taskforce developed seven Principles for Effective Disclosures;

1. Disclosure should represent relevant information;

2. Disclosures should be specific and complete;

3. Disclosures should be clear, balanced and understandable;

4. Disclosures should be consistent over time;

5. Disclosures should be comparable among companies within a sector, industry, or portfolio;

6. Disclosures should be reliable, verifiable and objective; and

7. Disclosures should be provided on a timely basis.

The UK became one of the first countries to formally endorse the recommendations.

The Consultation

In November 2019, the Pensions Climate Risk Industry Group was established to provide practical guidance based upon the recommendations of the TCFD. The Group is made up of representatives from TPR, DWP, BEIS, the PLSA and trustees and consultants.

The Government set the expectation that all listed companies and large asset owners, including occupational pension schemes will disclose in line with the TCFD recommendations by 2022. The Guidance is set out in four sections and follows a typical approach trustees would take to decision-making.

Part I provides an introduction to climate change and the transition and physical risks currently faced, the legal requirements on trustees to consider climate-related risks, and an overview of the TCFD recommendations and how they may be helpful for pension scheme trustees.

Part II sets out the suggested approach to integrating and disclosing climate-related risks in trustee governance, strategy and risk.. Guidance is also given on why stewardship forms a key part of an integrated approach to climate change risk.

Consideration of the impact of climate risk on sponsor covenant is included as an additional point for defined benefit schemes, enforcing the view that an integrated risk management approach to DB scheme funding and investments is linked to climate change risk. Methods of reporting and communicating are also a part of this section, reinforcing the seven Principles for Effective Disclosures set out by the TCFD.



Part III contains the technical supplements, with details and suggestions around scenario analysis and metrics.

Part IV Next steps and Appendices

Prior to reading the 104 page Guidance, it is advised that trustees read the “TCFD for trustees of pension schemes: Quick Guide” – a five-page document which summarises the guidance. It also sets out five easy steps to getting started:

1. Check you have got the governance and risk management right – develop and document your investment beliefs. Formalise and document your governance policies, including job roles, in relation to climate change.

2. Integrate into your investment and funding strategies – document the main climate risks and opportunities which will affect your scheme and their possible or likely impact. Explain how you will both mitigate those risks and take advantage of the opportunities. For DB schemes, include climate change in covenant assessment and monitoring.

3. Ask your consultants and asset managers to demonstrate climate competence. Make your expectations, drawn from your beliefs and strategies, clear. Both providers should demonstrate signatory status in relation to the PRI and UK Stewardship Code, a robust track record on climate, and consideration of climate risk as a core service.

Trustees should assess new managers on the quality of voting and engagement, and the quality of disclosures and scenario analysis, and monitor existing firms on their performance against any climate-related objectives, benchmarks and targets. Don’t be afraid dig deeper and keep asking questions. Challenge what you hear.

4. Conduct scenario analysis – Analyse your own holdings, for example using the TPI and PACTA tools. Compare your findings with peers. Challenge your asset managers and advisers on the results.

5. Monitor metrics – Ask your asset managers to report on the weighted average carbon intensity of your portfolio and compare this with similar products. Challenge your managers on what they are doing to engage with or reduce exposure to the most-polluting firms, getting data where it is unavailable.

The Consultation closes on 2 July 2020.

Existing requirements

Since 1 October 2019 trustees have had to update their Statement of Investment Principles (“SIP”) to take account of the requirements of the new Investment Regulations*. These changes have meant a real engagement with responsible investment –trustees of pension schemes, as institutional investors, have an important role to play in the oversight of companies in which their schemes are invested. As Guy Opperman said at the beginning of October 2019, “Pension funds are a powerful weapon against climate change”.



The Regulations are aimed at improving transparency of information on how trustees engage with their fund managers as shareholders and encouraging the adoption of a more long-term focus in investment strategies. Much of the legislation builds on steps already taken in the UK to improve the stewardship and governance of pension schemes.

The Pensions Regulator (“TPR”) published revised investment guidance for both defined contribution and defined benefit schemes in June and September 2019 respectively. The guidance reflects the changes to the legislation and is intended to provide clarity around financially material considerations and non-financial factors, stewardship and the implementation statement. In addition, within the guidance, TPR encourages adherence to the Principles of the revised UK Stewardship Code (effective 1 January 2020) if trustees are not already doing so.

Principle 7 of the revised Code states:

“Signatories systematically integrate stewardship and investment, including material environmental, social and governance issues, and climate change, to fulfil their responsibilities”

Towards the end of last year, Guy Opperman wrote to the UK’s 50 largest schemes, reminding them to “pull their weight” in the fight against climate change. For these schemes, the Pensions Minister requested the relevant sections of the SIP in order to monitor progress. In addition to close

scrutiny of their scheme SIPs, trustees should also consider any potential impact on reputation if the SIP falls below the required standard.

Pensions Bill Amendment

A further development is the proposed House of Lords amendment to the Pensions Bill. Baroness Stedman Scott introduced a new clause (to amend the Pensions Act 1995) requiring trustees to report on their strategies to manage climate change risk. This will significantly increase the climate risk disclosure requirements already faced by pension schemes.

This further push for more transparency arose from the joint call to action by Mark Carney and Therese Coffey for trustees to be more proactive against the risks of climate change. The new disclosures will mean schemes have to report environmental risks and climate change strategies and publish the information free of charge.

These requirements, which will amend the Pensions Act 1995 (PA95) by inserting a new section 41A include:

(a) Reviewing the exposure of the scheme to risks of a prescribed description;

(b) Assessing the assets of the scheme in a prescribed manner;



(c) Determining, reviewing and (if necessary) revising a strategy for managing the scheme’s exposure to risks of a prescribed description;

(d) Determining, reviewing and (if necessary) revising targets relating to the scheme’s exposure to risks of a prescribed description;

(e) Measuring performance against such targets; and

(f) Preparing documents containing information of a prescribed description.

Failure to adhere to the requirements could mean a penalty fine under the regulations: £5,000 in the case of individuals and £50,000 in any other case.

A new Section 41B of the PA95 will require schemes to publish climate change related risk information which they have prepared in line with Section 41A.

These amendments aim to ensure schemes set out and report in line with the TCFD recommendations –but, and the Government is keen to insist, they are not intended to direct pension schemes on how to invest. The DWP Supplementary Memorandum indicated that these new requirements, if and when introduced, will initially apply to larger schemes.

A consultation will be launched on the new rules in due course and resulting regulations laid which will prescribe the framework of disclosures, detailing the information, metrics and format to be followed.

It is worth noting that this amendment would make the UK the first country in the world to align the actions of pension schemes with the Paris Agreement. It would also place a reporting duty on TPR to publish schemes’ statements of investment principles and to create a repository accessible to the public.

Concluding comments

Environmental concerns are increasingly moving up the trustee agenda, and with this latest push with the Pensions Bill, trustees must take action to ensure compliance. The creation of a common framework will allow for both consistency and comparability across the industry.

Having updated their SIPs, trustees should now be looking at pulling together information for the first implementation statements which need to be ready for the first annual report from 1 October 2020.

Trustees should also prepare themselves for questions from members once the first implementation statements are published as more and more savers are showing interest in where their money is being invested.


Trustees’ investment duties (cont.):Summary of regulatory requirements

Effective date Requirement Schemes effected

Before 1.10.2019

(2018 Regs)

— Update SIP to set out how trustees take account of financially material considerations over the appropriate time horizon;— State the extent (if at all) to which non financial matters are taken into account in the selection, retention and realisation

of investments;— Policies in relation to the stewardship of the scheme’s investments, including engagement with investee firms and exercise of voting rights associated

with the investment; and— Optional policy including not only members’ ethical concerns, but also social and environmental impact matters and quality of

life considerations.

All schemes with 100+ members (DC schemes <100 must have a default SIP covering the first 2 points)

From 1. 10.2019 (2018 Regs)

— Publish SIP on a publicly available website and inform scheme members of its availability in their annual benefits statements. DC schemes

From 1.10.2020(2018 Regs)

— Produce implementation statement (included in the annual report) setting out the extent to which the SIP has been followed. — Note: DWP Guidance states that the implementation statement should be included in an annual report produced from 1 October 2020

DB schemes

From 1.10.2020(2018 Regs)

— Produce and publish an implementation statement (included in the annual report) setting out the extent to which the SIP has been followed. This must be published online and members made aware of its availability in their annual benefit statements.

Note: DWP Guidance states that the implementation statement should be included in an annual report produced from 1 October 2020 and published online from that date.

DC schemes

By 1.10.2020(2019 Regs)

Provide additional information in the SIP on engagement activities, including trustees’ methods of monitoring and managing capital structure and actual / potential conflicts of interest. The SIP to include a policy in relation to the trustees’ arrangement with any asset manager, setting out the following matters or explaining the reasons why any of the following matters are not set out:i. How the arrangement with the asset manager incentivises the asset manager to align its investment strategy and decisions with trustees’ policies; ii. How that arrangement incentivises the asset manager to make decisions based on assessments about medium to long-term financial and non-

financial performance of an issuer of debt or equity and to engage with issuers of debt or equity in order to improve their performance in the medium to long-term;

iii. How the method (and time horizon) of the evaluation of the asset manager’s performance and the remuneration for asset management services are in line with trustees’ policies;

iv. How the trustees monitor portfolio turnover costs incurred by the asset manager, and how they define and monitor targeted portfolio turnover or turnover range; and

v. The duration of the arrangement with the asset manager.

DB & DC schemes

By 1.10.2020(2019 Regs)

— Publish SIP online. DB schemes

By 1.10.2021 (2019 Regs)

— Produce an implementation statement, which explains how and the extent to which the trustees have followed their engagement policies and describes the voting behaviour by or on behalf of the trustees (including the most significant votes cast by trustees by or on their behalf) during the year and state the use of the services of a proxy voter during the year.

DB & DC schemes

By 1.10.2021 (2019 Regs)

— Publish implementation statement (see above) on a publicly available website. DB schemes


Competition & Market Authority’s Investment Consultancy and Fiduciary Management Market Investigation Order 2019 (the “CMA Order”)

On 10 December 2019, the requirements of the Competition & Market Authority’s Investment Consultancy and Fiduciary Management Market Investigation Order 2019 ( the “CMA Order”) came into force. The Competition & Market Authority (“CMA”) had identified significant concerns in its investigation into the investment consultancy and fiduciary management market and published the Order on 10 June 2019.

The Order aims to encourage trustees to improve engagement with their investment consultants and fiduciary managers, as it found that the more engaged trustees were, both in terms of investment strategy and their governance structures, the better decisions tended to be made on costs and values.

Key points1. Mandatory tendering for fiduciary

management services:Trustees will need to carry out a competitive tender (i.e. three or more competitive bids) if they intend to use fiduciary management services for at least 20% of assets (excluding buy-in policies from the calculation). Note for sectionalised schemes, the 20% is calculated based on asset values of the whole scheme. Trustees must also provide the fiduciary manager with written confirmation that they have been selected as a result of a competitive tender process before entering into the agreement. Fiduciary managers are also prohibited from entering into an agreement without this confirmation.

Transitional provisions apply where a fiduciary manager has already been appointed. For existing mandates entered into agreement before 10 June 2019 where a competitive tender process was not conducted, trustees must carry out a competitive tender process within 5 years of the first fiduciary management agreement (if multiple agreements) not competitively tendered. If the 5 years expires before, on or within 2 years of 10 June 2019, trustees must retender no later than 9 June 2021.

2. Setting objectives for investment consultancy:

Trustees will be required to set objectives with their investment consultant to take account of the scheme statement of investment principles (SIP); review performance of the investment consultant at least annually and review objectives at least every three years and without delay after any significant changes in investment policies.

The role of TPR

The Pensions Regulator (“TPR”) was asked to provide support and following a consultation period, finalised its guidance in November 2019 which is intended to help trustees satisfy the new requirements.

Four guides have been produced and are summarised below. Terminology used in the guides uses phrases such as the ‘law requires’ and ‘you must’ to indicate legal duties, and ‘you should’ to indicate good practice approaches to meet the requirements.


Competition & Market Authority’s Investment Consultancy and Fiduciary Management Market Investigation Order 2019 (the “CMA Order”) (cont.)

1. Choose an investment governance model

This governance model guide focuses on both investment consultancy and fiduciary models, setting out considerations to help trustees to determine the most appropriate for their scheme. Having a clearly determined governance model in place ensures timely decision-making, access to appropriate advice and the efficient implementation of scheme strategy.

An example investment consultancy model is included in the guide, set out in tabular form listing activities and responsibilities of trustees, the investment consultant and asset manager(s). The guide goes on to cover key matters for trustees to consider before choosing a model, and sets out key questions to ask when the model is to be reviewed.

Setting investment beliefs and objectives are an essential part of the governance process, as well as ensuring measures are in place to manage any conflicts of interest. In addition, TPR have provided a number of case studies to further assist trustees.

2. Tender for fiduciary management services

The guide outlines the benefits of running a structured and documented tender exercise, details the legal duties of trustees during the process for new and existing mandates, and the different approaches that can be taken to fiduciary management. The more engaged the trustee, the more likely to obtain better terms from the service

provider and get value for money. The guide also covers possible conflicts of interest to consider and whether to use a third party evaluator in the tender process.

Key principles of a competitive tender are set out to help trustees appoint the most appropriate service provider to meet the scheme needs:

1. Set objectives for the tender exercise

2. Seek advice and consider if trustee needs a third party to assist in the project

3. Agree criteria for selection

4. Understand the full range of market opportunities

5. Select a longlist of potential providers

6. See expressions of interest

7. Issue invitations to tender

8. Assess bids, and then select a short list

9. Invite short list to present proposals

The guide also sets out an illustrative example where the trustees of a scheme engage a third party to run the tender process together with a list of example topics to consider as part of the exercise.


Competition & Market Authority’s Investment Consultancy and Fiduciary Management Market Investigation Order 2019 (the “CMA Order”) (cont.)

3. Tender for investment consultancy services

This guide provides practical information and key matters to consider if the trustees are planning to run a tender for investment consultancy services. Depending on the governance structure and available investment expertise, trustees should consider what delegations would be most appropriate.

TPR provides an illustrative example of a scheme undertaking a tender exercise.

4. Set objectives for your investment consultant

The Order requires that trustees set strategic objectives for providers of investment consultancy services and TPRs guide sets out practical guidance on setting those objectives and deciding on the services to be obtained from the investment consultant.

The view is that by putting objectives in place, trustees will be better positioned to obtain better outcomes, value for money, and can also enable them to identify and manage areas of poor performance.

Trustees must ensure that they understand the legal definition of what constitutes investment consultancy services, as only those captured in law will trigger the requirement to set objectives. However, TPR does encourage trustees to set objectives for all additional services the scheme

receives. The guide provides a list of typical DB and DC services, together with case studies for trustees to consider.

Concluding comments

The regulations will enable TPR to oversee the applicable remedies and carry out monitoring, compliance and enforcement activity.

The aim is for the revised regulations, The Occupational Pension Scheme (Governance and Registration)(Amendment) Regulations 2019 to come into force from 6 April 2020. Note however, that as the CMA Order takes effect from 10 December 2019, pension scheme trustees had to comply from this earlier date during the interim period.


Pensions Dashboards

The recent Pensions Bill outlined the introduction of a framework to support pensions dashboards, including new powers to compel pension schemes to provide accurate information to consumers (see earlier article).

The Bill supports the concept of industry sponsored dashboards and sets out how it aims to achieve them. Legislation will be adopted to require schemes to make information available on dashboard platforms. While much of the detail will be included in enabling regulations, the Bill outlines that dashboards will need to include, inter alia, information about / relating to:

— state pensions

— occupational and personal pension schemes

— an individual or scheme.

Information to be provided in relation to an occupational scheme may include scheme constitution, the administration and finances of the scheme, the rights and obligations arising and the benefits accruing to the member.

Further provision is also made around the means of provision of information, the handling of information requests, the authentication of information and identity validation.

Consumer protection features highly, with the Bill explicitly stating that regulations ‘… are not to be read as authorising or requiring such processing of personal data as would contravene the data protection legislation….’ and regulations may require that processing is ‘…. not in breach of any obligation of confidence owed ….’.

As the functionality of dashboards evolves, consideration will need to be given to the level of consumer protection afforded.

The Money and Pensions Service (MaPS) will lead the delivery of the dashboard project initially and will convene a delivery group comprising relevant stakeholders. MaPS will run it’s own, non-commercial dashboard.

In the early stages, the information to be required is expected to be simple, with breadth prioritised over depth. The industry has been asked:

— to ensure schemes prepare their data to be ready within a 3 to 4 year horizon;

— to work with the delivery group on data standards and offer voluntary insight on delivery; and

— for organisations to create and test their own dashboards, in collaboration with the delivery group.

In order to deliver commercial dashboards, the appropriate digital architecture will need to be designed, data standards set and a governance and security framework put in place. Much will depend on the objective prioritised – to maximise data accuracy or member coverage. A perceived weakness in either of these objectives could undermine the credibility of this dashboard initiative.

In summary, the priority must be the provision of clear and simple information to scheme members to enable them to plan for retirement. The successful introduction of pensions dashboards could be a step change in modernising member communications.


News in brief

STOP PRESS

TPR has issued an update covering reporting duties and enforcement activity. They plan to take a reasonable, pragmatic and proportionate approach introducing flexibility to regulatory reporting and putting certain easements in place until 30 June 2020.

We will report in more detail on this regulatory development in future editions of Round Up.

AAF 01/20 published

The ICAEW published TECH 01/20 AAF in January replacing TECH 01/06 AAF for periods commencing on / after 1 July 2020.

There have been some changes in terminology (reporting accountant becomes service auditor and control procedures become control activities). Control objectives outlined in the appendices have been brought up to date and illustrative supplementary objectives included in some areas. The guidance is revised to assist management and service auditors with practical examples of reporting and also includes dealing with subservice organisations. Control objectives are specified for two new areas, fiduciary management and property investment administration and removed for hedge fund management.

TPR guidance issued

Since the last edition of Round-Up, TPR have issued the following guidance:

— Cross-border schemes: guidance in the event of a no-deal Brexit

TPR Annual DC Trust Report

TPR published their annual DC Trust Report in February – a statistics publication providing a snapshot of the current DC trust based landscape In the UK.

Main headlines include:

— More than 16 million people have saved £38.5 billion into master trusts, with 9 out of 10 people savings into the largest master trusts;

— The number of DC schemes has fallen 12% since last year, which shows some have consolidated; and

— 95% of memberships in DC schemes are invested in the scheme’s default strategy.

The information is collated from the annual scheme return data.


News in brief (cont.)

PPF Purple Book 2019

In January 2020 the PPF published their 2019 Purple Book analysing data relevant to schemes eligible for PPF compensation.

Data relating to schemes within the DB universe (almost all DB schemes and those with DB elements) shows a continued decline both in the number of relevant schemes and members.

Headline data highlights:

— Number of schemes: 5,436 (2018:5,524)

— Number of members: 10.1m (2018:10.4m)

— Aggregate funding position: 99.2% (2018 95.7%)

— Net funding position on s179 basis (PPF accrued benefits): deficit of £12.7bn (2018: deficit of £70.5bn)

The publication highlights a continuing trend towards cessation of benefit accrual – 44% (2019: 41%) with a further reduction in those schemes open to new members.

The impact of recovery plan payments is highlighted with payments expected to decrease by 80% over a 10 year payment as schemes’ funding levels increase . Investment trends in favour of bond investment rather than equities.

PPF compensation payments have increased to £775m (2018: £725m) with 148,005 members receiving benefits (2018: 135,377) averaging £4,328 (2018: £4,380). PPF levy payments have increased slightly from the prior year standing at £564m in 2018/9.

TPR’s DB landscape

The DB market saw further analysis in January with the publication of TPR’s DB landscape. The data set used for the TPR publication differs from the PPF’s Purple Book (the latter only including those schemes eligible for the PPF). The analysis highlights a decreasing active membership with the majority of members 81% (2018: 80%) now in schemes closed to either future accrual or new memberships.

TPR’s data reveals that only 13% (2018: 14%) of schemes remain open to new membership continuing a steady decline over the last decade.

Scheme funding data (comprising valuation data rolled forward to a common date of 30 March 2019) shows an overall statutory funding objective deficit across the relevant population of £159.24bn (2018: £152.27).



Consultation on simpler benefit statements

On 1 November 2019 the DWP published a consultation on simpler annual benefit statements. The purpose of the consultation was to seek views and evidence on three issues.

— How the use of simpler and more consistent annual pension benefit statements across the pensions industry through greater standardisation of structure, design and content could help improve engagement with pensions.

— A proposed amendment of the Disclosure Regulations to require relevant schemes to include member level charges and transaction costs information in pounds and pence on the annual benefit statement.

— An amendment of the Disclosure Regulations so that they no longer refer to the Financial Reporting Council as the body responsible for the guidance underpinning Statutory Money Purchase Illustrations (SMPI) and that the Secretary of State for Work and Pensions will issue guidance under statute to which trustees must have regard when producing SMPIs.

The consultation closed on 20 December 2019 and we await publication of the response.

GDPR – One year on

The Information Commissioners Office (ICO) has released a report looking at experience of GDPR to date and outlining future plans. The report provides a useful reminder that scheme trustees should revisit their data processing arrangements and satisfy themselves of their ongoing compliance.

The ICO report highlights that almost two thirds of Data Protection Officers (DPOs), surveyed stated that they either ‘agreed’ or ‘strongly agreed’ that there has been an increase in customers and service users exercising their information rights since 25 May 2018, the date of the GDPR coming into force. Awareness of individuals’ rights under the GDPR has been supported by the ICO’s Data Matters campaign – contributing to a 32% increase in visits to the ICO website and the number of personal data breach reports increasing four-fold in the year to May 2019.

The importance of an adequately supported DPO is discussed, stressing that adequate resourcing of this role should be a key priority for organisations. Guidance on GDPR, Law Enforcement Processing and four statutory codes (looking at age-appropriate design, direct marketing, data sharing and data protection and journalism) have been produced to help with understanding of the requirements. The ICO notes that while provision of support to organisations is a key part of their function, there will be no hesitation in taking enforcement action in cases of wilful or negligent breaches of the law.



Thinking ahead, the ICO plan to focus on areas identified as regulatory priorities whilst keeping up with continual change. Work will include focus on cyber security, AI, big data and machine learning, children’s privacy and use of surveillance and facial recognition technology amongst other areas.

Pensions Scams: TPR Blog

In August 2019, the Regulator reiterated its commitment to tackling scammers. This follows a statement confirming a continuing role in Project Bloom (combating pensions scams), made as part of its 2019 – 2022 Corporate Plan (see separate article).

The recent blog entry emphasises that scammers are becoming more sophisticated in their approach so that victims find it hard to identify phony schemes until it is too late and their savings have been lost.

The latest initiative sees the Financial Conduct Authority (FCA) and TPR collaborating to highlight the dangers posed by scammers, following research which suggested that over 5 million people could be at risk of such schemes in the UK. The regulators are urging savers to be ScamSmart and to check who they are dealing with before making any commitment. Research also notes that offers of high returns are equally likely to lure financially aware savers through such mechanisms as pension cold-calling, free pension reviews, claims of guaranteed high returns, exotic

investment, time-limited offers and early access to savings.

TPR have already used their powers against scammers in obtaining information to support investigations, taking court action to have scammers’ assets frozen and collaboration with law enforcement agencies with the aim of securing convictions and returning savers assets to them. However, the Regulator accepts that it can do more whilst emphasising that, through awareness of scam techniques ‘…savers targeted by scammers are their own best defence’ in safeguarding their pensions savings.

Auto Enrolment update

Minimum contributions to be paid into schemes used for auto enrolment increased from 6 April 2019 and now stand at 8%, a minimum of 3% of which must be paid by the employer. Employers will be required to certify their approach to auto-enrolment within one month of the increase.

TPR has announced that it will be undertaking short notice inspections looking at compliance with the auto enrolment requirements. These began in May and ran over the summer months. Participation in inspections is mandatory for employers and those found to be non compliant, expected to be the minority, could face fines or court action. In addition, sponsoring employers are advised to check their re-enrolment date (via TPR’s online tool) and ensure that they are prepared for this process.



Flexible Pensions: investment pathways

Pension scheme members proposing to enter non-advised drawdown of DC pots will benefit from the provision of investment pathways appropriate to their desired outcomes from February 2021 (delayed by COVID – 19; originally August 2020).

Flexibilities introduced from 2015 allowed for scheme members to have a wider choice of benefits from their DC pension savings. Prior to 2015, the majority took benefits in the form of annuities. The 2015 provisions allowed for early withdrawals from a DC pot, subject to tax at the individual’s marginal rate.

The flexible access provisions have been popular. Since their introduction, early access to DC pots has increased with over one million pots accessed and £30bn withdrawn.

Whilst the new flexibilities were welcomed, concerns have been raised about members not making well-informed decisions, with a Government consultation suggesting proposals for improvements and a cap on early exit charges.

A solution was proposed comprising two elements: i) protection for savers through the offering of appropriate and simple default decumulation pathways (including allowing NEST to offer decumulation options) and ii) the provision of more information to savers via an accessible ‘pension passport’ and provision of information to the pensions dashboard.

The FCA identified concerns that many savers opted for drawdown without taking advice or considering other options and found a lack of product innovation

in the market, often with savers being defaulted into unsuitable cash or quasi-cash options. The requirement that providers should offer investment pathways to customers entering non-advised drawdown was actioned with the aim of guiding the non-advised saver towards an appropriate decumulation solution, thereby avoiding the pitfalls of poor decision making. However, the success of this policy will ultimately depend on quality pathways being made available to savers.

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KPMG Pensions Accounting, Assurance and Regulatory Round ...€¦ · Senior Manager T: +44 (0)20 7311 6642 E: [email protected]. Sarah Lacey. Senior Manager T: +44 (0)20 7311