Of interest to all schemes is the DWP’s publication of Better Workplace Pensions: Reducing regulatory burdens, minor regulation changes, and response to consultation on the investment regulations.
The document sets out various minor changes to the current scheme administration regime for consultation, as well as asking for responses on possible changes to the way pension schemes disclose investment information to their members. The consultation closes on 9 December 2015.
The DWP is consulting on minor changes to various aspects of the current scheme administration regime aimed at reducing the “regulatory burdens” on occupational pension schemes. In the foreword to the publication, pensions minister Baroness Altmann states that the changes reflect that “...pensions law is complex and technical, and that sometimes we need to change it because you tell us it is not doing the job we want it to.”
The document covers the following issues:
- DC Governance. Draft amending regulations confirm that multi-employer group schemes are excluded from the additional governance requirements, and apply a statutory override to provisions in trust deeds and rules where they conflict with the trustee requirements for relevant multi-employer schemes to have at least three trustees.
- Scheme accounts. The DWP proposes that the current accounting requirement for investment disclosure information is deleted and replaced with a simpler statement from the auditor of compliance with FRS 102 and the pensions SORP noting any material departures.
- Investment Regulations. The DWP confirms that no changes will be made to the Investment Regulations (following a consultation in February 2015) and that non-statutory guidance on investment is the government's preferred method of communicating with trustees on this issue.
- Disclosure requirements. The DWP is seeking views on the extent to which schemes are currently able to disclose information to members on how the scheme makes investments.
We look at each of these areas in more detail below.
A key part of the proposed changes relates to clarifying the new occupational DC scheme governance requirements that came into effect from 6 April 2015. For multi-employer schemes, including master trusts, there are additional requirements for a minimum of three trustees (or three trustee directors where the trustee board is a corporate body) to be appointed and that the majority (including the chair) must be independent from any service providers used by the scheme). The new proposals include:
- narrowing the definition of a multi-employer scheme so that employers which are part of the same group are excluded. The consultation states that the DWP has received feedback that while the current wording appropriately captures master trusts it might also inadvertently bring “ordinary group schemes” within the scope of the legislation where, for example, a corporate transaction creates a participating employer from outside the group;
- amending the scheme administration regulations to allow a deputy chair, or acting chair, of a scheme's trustees to sign the chair's statement. Where there is no chair in place, trustees have three months in which to appoint one which could lead to an instance of having no chair to sign the annual statement. This amendment is intended to address the situation where there is a delay in making an appointment, as the statement might not otherwise be signed in time; and
- confirmation that where there is a conflict between the statutory requirement for a minimum of three trustees to be appointed, and a scheme's trust deed and rules, the regulations override the rules. This will assist schemes where the trustees do not have the power to amend the rules to reflect the new requirement.
These changes will be included in the Occupational Pension Schemes (Scheme Administration) Regulations 1996 and the Occupational Pension Schemes (Charges and Governance) Regulations 2015.
For private sector occupational pension schemes, a new pensions Statement of Recommended Practice (SORP 2015) applies to the preparation of scheme accounts for periods commencing on or after 1 January 2015. SORP 2015 reflects changes to UK Generally Accepted Accounting Practice due to the implementation of Financial Reporting Standard 102 (The Financial Reporting Standards applicable in the UK and Republic of Ireland) (FRS 102).
The DWP is proposing amendments to the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996 to bring the current pension scheme reporting requirements in line with the new accounting practices. The DWP proposes different suggested approaches for the new accounting requirements. However, its favoured option is for the current detailed scheme investment disclosure requirements to be replaced by requiring the auditor to provide a statement that the accounts have been prepared in accordance with FRS 102 and the pensions SORP, and to note any material departures from them, specifically:
- concentration of risk;
- employer-related investment; and
- total of investment purchases and sales.
The DWP estimates that the proposed amendments will save schemes £4.25 million annually in reduced audit costs.
In addition, the DWP proposes to exempt multi-employer schemes with at least 20 participating employers from the requirement to obtain a statement from their scheme auditor on whether, in their opinion, contributions have been paid in accordance with the schedule of contributions.
The document also contains the government's response to the consultation on two potential changes to the Occupational Pension Schemes (Investment) Regulations 2005 (Investment Regulations) consulted on earlier in 2015.
Reflecting the concerns raised by the Law Commission, which recommended a review to ensure that any changes to the Investment Regulations supported trustees in understanding and meeting their duties, the February 2015 consultation focussed on:
- whether the regulations clearly reflect the difference between financial and non-financial factors when taking decisions about investments; and
- the role that a “stewardship” approach can play when taking decisions about investments, including whether trustees ought to be required to comply with the Financial Reporting Council's UK Stewardship Code (Stewardship Code).
The Government considers that, overall, amending the Investment Regulations to include a distinction between financial and non-financial factors would not necessarily clarify trustees' understanding of their fiduciary duties. It was also clear from responses that there were concerns among respondents on whether requiring trustees to comply with the Stewardship Code, or explain why they have not done so, was the most appropriate way to encourage trustees to consider how to engage with companies to promote their long-term success.
In addition, the response confirms that the Government is satisfied that pension schemes trustees now have a good awareness of their duty to consider factors that may be financially material to the performance of their investments. The consultation response states:
“This suggests that the Law Commission’s conclusions and the subsequent changes to guidance for trustees are having a beneficial impact.”
Based on this, the Government considers that guidance will be more effective than changes to the Investment Regulations, stating that this has the advantage of being easier to amend and keep up to date.
Consultation on disclosure of investment information
In March 2015 the FCA published a discussion paper containing a call for evidence on improving the reporting and disclosure of information about transaction costs in occupational and workplace personal pension schemes. In order to ensure that any changes to introduce greater transparency are introduced “in a co-ordinated way” the Government is asking for views and evidence on the best methods of disclosure of information about schemes' investments and what issues, if any, will need to be addressed. In particular, it is seeking feedback on the extent to which occupational schemes are currently able to make certain information available to members, prospective members, their spouses, and beneficiaries about how the scheme makes investments, including:
- the selection, monitoring, retention and realisation of investments (this will include information about the companies that funds are invested in);
- the stewardship of investments (this will include how voting rights associated with investments are used); and
- the selection, appointment and monitoring of investment managers and other agents to whom powers are delegated.
The Government seeks details of any changes occupational schemes would need to make to ensure this information was made available, and the costs involved.
The consultation document draws diverse minor changes and addresses several issues at once. This is intentional, as the pensions minister recognises that responding to consultations can itself be an additional ask of an already busy industry.
The DC governance changes reflect specific concerns raised by the pensions industry and it seems the Government is making a positive attempt to ensure the compliance regime remains practical and flexible. Similarly, the audited accounts changes address concerns voiced by many trustee boards faced with a long list of information to compile for annual accounts which may only be read by a limited audience.
Finally, schemes will welcome confirmation that, rather than further amendments to the Investment Regulations, the Government will seek to use guidance to inform and direct trustees on how best to fulfil their duties. The consultation states that this reflects evidence of how trustees are managing their schemes' investments and feedback from the Pensions and Lifetime Savings Association that all respondents to their most recent annual engagement survey agreed that active consideration of risks to a company’s long-term sustainability was compatible with fiduciary duty.
View the consultation paper.