FinTech in Turkey: Overview
Ekin İnal and Ecem Naz Boyacıoğlu provide an overview of FinTech in Turkey.
Essential Pensions News covers the latest pensions developments each month in an “at a glance” format.
Of general interest is the publication by the Pensions Regulator (TPR) of answers to a number of frequently asked questions about the new governance and charge control measures that came into force in April 2015. These are summarised at the link below.
The TPR’s additional information and responses to FAQs include:
View the FAQ responses.
Of interest to DB schemes is TPR’s updated guidance on assessing and monitoring the employer covenant. Aimed mainly at trustees of DB pension schemes (and their advisers), the guidance is intended to identify good practice for trustees in:
The key points of the guidance are summarised at the link below and our October 2015 briefing will look at the guidance in detail.
The previous version of the guidance, published in November 2010, has been substantially updated, primarily to reflect the replacement of TPR’s DB funding code of practice in June 2014. The guidance applies to assessments of employer covenant for scheme funding purposes, but will also be relevant in other circumstances, for instance, covenant assessments following a change in structure of the employer's group.
TPR expects trustees to have a sound understanding of the covenant since this forms an essential part of an integrated approach to risk management. An understanding of the covenant should underpin the trustees' approach to investment and scheme funding.
The main points to note from the guidance include:
Scope of covenant assessment - the guidance sets out the scope of a covenant assessment and includes a list of questions that trustees should be able to answer based on the assessment. Examples are provided of inadequate and good analysis in covenant reports.
Documenting the assessment - trustees should document clearly the assessment process and its conclusions, including whether they commissioned independent advice or decided to assess the covenant themselves.
Timing of covenant reviews - TPR states that “as a minimum”, trustees should carry out a full covenant review at each valuation. They should also monitor the covenant “regularly between formal reviews” and have well-developed contingency plans to allow them to take prompt and effective action if required.
Proportionate approach - trustees may take a proportionate approach to assessing the covenant, with the level of detail and frequency proportionate to the circumstances of the scheme and employer. The guidance includes a table listing factors to help trustees decide on a proportionate approach to assessing the covenant, and setting out examples of factors which might indicate when a review should be conducted more or less frequently. These factors include complexity of the group structure, size of the deficit and size of the employer's cash flow relative to the scheme's funding needs.
Independent external advice - trustees should assess (and periodically reassess) whether they need to commission an independent covenant review or whether they are able to assess the covenant themselves. TPR suggests that where trustees lack the objectivity or expertise required to perform an appropriate assessment, they should consider appointing an independent adviser. A list of factors that may point towards obtaining external advice is contained in the guidance and Appendix A also includes a list of suggested questions to help trustees appoint a suitable covenant adviser.
Collaboration - trustees and employers should work collaboratively together. In relation to this, the guidance states that if the employer has failed to provide sufficient information to allow the covenant to be assessed, the trustees should consider reducing their reliance on the covenant when setting their investment and funding strategies.
Sustainable growth - where an employer prioritises investment in the sustainable growth of the business at the expense of contributions to the scheme, the employer must justify why such investment will benefit the scheme and why the support of the scheme is necessary. Further, "in the absence of sufficiently detailed plans for the employer's proposed investment in growth, trustees should not be willing to compromise the position of the scheme to support that investment" (page 15).
Forward-looking assessments - assessments of the employer covenant should be forward-looking. They should focus on the ability of the employer to contribute cash to the scheme over an appropriate period to achieve and maintain full funding based on an assessment of the employer's forecast cash flows and the medium and long-term outlook for the business and the market in which it operates.
At Appendix B, the guidance includes a section highlighting additional considerations for trustees of schemes sponsored by not-for-profit employers, including understanding the legal status of the not-for-profit employer, and the extent of ant restrictions on income, assets and reserves.
At Appendix C, the guidance sets out the additional complexities which apply when the covenant is provided by multiple, non-associated employers. It emphasises that such schemes are often complex and that a bespoke approach based on expert advice is likely to be needed.
The guidance includes a (non-exhaustive) list of additional factors to consider when assessing the employer's legal obligations to the scheme, which include the legal obligations and status of each employer and the mechanics of employer withdrawal.
One of the key considerations for trustees of such schemes will be the approach to setting the contribution structure and allocating contributions between the employers. The guidance states that when putting in place a contribution structure, trustees may recognise the more limited financial capacity of weaker employers and adjust the structure accordingly.
As the previous version of the guidance was published some 5 years ago, the substantial revision and updating by TPR is welcome. The guidance now takes into account the new DB scheme funding code and reflects TPR's new statutory sustainable growth objective.
The practical examples and checklists will be useful for trustees. The specific guidance relating to schemes with not-for-profit employers and for those with non-associated multi-employers where complex issues may arise in covenant assessments, are welcome additions, and these appendices will be looked at in detail in our October 2015 briefing.
This is TPR’s first publication in a planned series of guides for trustees of DB schemes to help them apply the DB funding code of practice. Further guidance is due later this year on integrated risk management and investment strategy.
Of general interest is the announcement on 9 September 2015 by HM Treasury that the Chancellor will deliver his Autumn Statement to Parliament on Wednesday 25 November 2015 alongside the Spending Review. The date of publication of draft legislation for the Finance Bill 2016 has yet to be announced.
Hopefully, the Government’s response to the consultation on pensions tax relief will be published before that date, and the extent of any relevant legislation will then be clearer.
Of interest to DB schemes is the announcement on 21 September 2015 from the Pension Protection Fund (PPF) that:
The 2016/17 levy estimate of £615m is lower than last year’s estimate of £635 million, and the reduction reflects improvements in the Experian scores that scheme employers and guarantors are receiving, balanced by a deterioration in smoothed scheme funding.
The PPF has announced that it aims to keep the methodology used for calculating the levy as stable as possible for each three year period. As a result, given this is the second year of the levy triennium, the rules are substantially the same as those published in 2015/16.
The proposals in the consultation document are intended to continue to improve practical elements of the levy rules and reduce burdens on schemes. The PPF is proposing to simply the process for re-certifying mortgage exclusions and asset backed contributions.
Alongside this the PPF is launching a series of interactive half-day seminars in five major cities for pension scheme trustees, employer representatives and professional advisers. These seminars will provide an introduction to the issues raised in certifying Type A contingent assets for recognition in the levy.
The consultation confirms that Experian scores will be used between April 2015 and March 2016 for the 2016/17 PPF levy. Pension scheme trustees and employers can log on to view and check their scores and supporting data here.
Of interest to DB schemes is the PPF’s publication of an updated version of its annual guide to the levy invoice, A Guide to the Pension Protection Levy 2015/16.
The guidance reflects the PPF's decision to change its insolvency risk provider, with Experian insolvency probability scores now being used in place of the previous supplier's D&B failure scores. It includes explanations of the changes to the previous system that have been introduced as well as giving practical examples of the calculation bases. A copy of the new guide has been sent out with the pension protection levy invoices which are currently being issued to affected schemes.
The guide explains how the levy is calculated, how schemes can make payment, and what they should do if they wish to query the invoice. A full guide on challenging the levy invoice, taking into account the appointment of Experian, was published in May 2015, in the form of FAQs.
Of interest to DB schemes is the statement from the Incentive Exercises Monitoring Board that it expects to publish a revised version of the voluntary code of good practice for incentive exercises “by the end of 2015”. At the time the code was drawn up by the pensions industry in 2012, it was agreed the Monitoring Board would undertake a review after three years.
In its published statement announcing the intended schedule, the Monitoring Board said that the “far reaching changes” associated with the new pension flexibilities had needed to be “taken into account in the review of the Code's effectiveness and how it should change to meet the needs of the various stakeholders”. It also noted that it had promised to take account of industry views more broadly and the Technical Group of the Monitoring Board would present its thoughts to the next meeting of the IE Industry Forum for comment and suggestions, before taking a final paper to the IE Monitoring Board and then to the Pensions Minister.
In our update for March 2015, we reported on the case of IBM v Dalgleish, where the High Court held that the manner in which the employer, IBM, had made changes to scheme benefits was a breach of both its “Imperial” duty of good faith and its implied contractual duty of trust and confidence. The High Court has now granted an application for a protective costs order from the representative beneficiaries in respect of the appeal proceedings.
In July 2015, IBM received leave to appeal both the breach judgment and the remedies judgment to the Court of Appeal, and the hearing is likely to take place by April 2016.
In a judgment given on 17 June 2015, but unavailable until late in August 2015, the High Court granted an application for a protective costs order from the representative beneficiaries in respect of the appeal proceedings. Generally in litigation, costs follow the event. However, it is possible in pensions litigation for a party to seek a prospective costs order from the court that, irrespective of the outcome of the case, it will be entitled to its indemnity costs (or any costs ordered against it) out of the assets of the scheme.
The court will make costs orders in trust litigation by reference to three categories of cases identified in Re Buckton :
However, there have been occasions where the court has been willing to broaden the Buckton categories and grant a prospective costs order where it might not otherwise have done so.
Warren J confirmed that, even though it was common in where a beneficiary seeks to appeal not to be granted a protective costs order, he was prepared to do so in this case.
His exercise of discretion in granting the order took into account the facts that:
The issue of prospective costs orders has come before the courts with increasing frequency, and the courts have proved willing to explore the flexibility of the Buckton categories in their decisions. This case is an important consideration of the rights that a party has to seek such an order for their costs on an appeal (rather than at first instance), although given the complexity of the case law on this issue, it is not likely to be the last time that judicial guidance is sought.
This decision marks the last of the IBM v Dalgleish proceedings to be heard in the High Court. The case now moves to the Court of Appeal with a hearing due to take place by April 2016. We will report on further developments in a future update.
Of interest to all DB schemes is the decision in Buckinghamshire and others v Barnardo's and others , where the High Court (HC) held that a DB scheme’s rules did not give the trustees power to switch from using the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) in revaluing deferred pensions and indexing pensions in payment so long as RPI remained an officially published index.
The court held that there could be no “replacement” of RPI within the meaning of the definition of “Retail Prices Index” in the rules so long as RPI remained an officially published index. Further, a decision by the authority which publishes RPI that it is no longer to be recognised as a national index would not constitute a “replacement” of RPI.
Most salary-related occupational pension schemes are required under the Pension Schemes Act 1993 to revalue deferred members' benefits until they come into payment and to increase pensions in payment by a minimum amount each year to protect against the effects of inflation. Broadly, a pension must be increased by the “appropriate percentage”, which is specified each year under annual revaluation orders made by the Government. The appropriate percentage is also effectively capped by a limited price indexation (LPI) mechanism.
Primary legislation does not stipulate how inflation is to be measured for these purposes. Historically, the appropriate percentage was calculated by reference to the RPI. However, in 2011 the Government decided to switch to using the CPI as the measure of inflation instead.
There is no overriding or modifying statutory power allowing schemes to switch to CPI-linked indexation or revaluation if their rules provide otherwise. Therefore, the impact of the statutory change on revaluation and indexation in private-sector DB schemes depends on the specific drafting of the trust deed and rules.
The HC has previously considered the impact of the switch to CPI:
The case concerned the Barnardo Staff Pension Scheme (the Scheme), established in 1968 as a DB scheme, and closed to new entrants in 2007, when it was also converted to a career average revalued earnings (CARE) scheme for future service benefits. The Scheme was closed completely to further accrual on 1 May 2013. Increases to pensions in payment and increases to deferred pensions under the Scheme were calculated by reference to RPI.
The trustees brought a claim concerning the interpretation of the Scheme's rules after Barnardo's, the Scheme's principal employer, proposed that the trustees should substitute CPI for RPI for indexation and revaluation purposes. Barnardo's argued that the trustees had the power to effect such a substitution. The trustees' claim concerned whether they had power to select an index in place of RPI for these purposes and, if so, what other indices might properly be adopted.
Although the claim involved the interpretation of five separate sets of rules, two sets of rules were considered by the parties to be of primary importance:
The parties agreed that the principal issue was whether the definition of “Index” as “the Government's Index of Retail Prices or any other official cost of living index published by authority in place of or in substitution for that Index” meant either:
Warren J rejected the employer's argument that the adoption of a new index was of itself a replacement of RPI. He held that there could be no “replacement” of RPI within the meaning of the definition of “Retail Prices Index” in the Scheme rules so long as RPI remained an officially published index.
Warren J concluded that the rules should be construed on their own taking account of all the relevant circumstances at the time. He could not presume that the change in wording (between the 1978 and the 1988 rules) reflected a deliberate decision to give the trustees a general discretion about which index to adopt.
Warren J also held that there could only be a “replacement” of RPI (within the meaning of the definition of “Retail Prices Index”) when RPI has ceased to be published. This gave the word “replacement” a perfectly ordinary meaning, whereas other interpretations would produce difficulties.
The HC considered that Danks was not relevant since no issues arose in Barnardo’s in relation to section 67. Warren J also considered that the wording of the relevant definitions in Arcadia was “materially different” from the wording of the rules in Barnardo’s in that the word “replacement” did not appear. Warren J concluded that Arcadia provided “little by way of assistance in resolving the issues”.
This case highlights that the impact of the statutory switch from RPI to CPI very much depends on the drafting of a particular scheme's trust deed and rules.
At the time the statutory switch to CPI-linked indexation and revaluation was implemented, many advisers commented that the failure to introduce an overriding or modifying power allowing schemes to switch from RPI to CPI created a “legal lottery”. The effect of this, as illustrated by this case, is that schemes may or may not be able to make the switch to CPI under the existing terms of their rules.
In a determination that will be of general interest, the Pensions Ombudsman (PO) has concluded that it was reasonable for the trustee of a self-invested personal pension (SIPP) to delay making a decision on the distribution of death benefits in order to give the deceased member's adult children time to provide further information. The circumstances of the case included allegations by the children of financial irregularities, including possible fraud, against the member's current partner, Mrs Barnicoat, whom he had nominated to receive the death benefits six months before he died.
The PO dismissed a complaint by Mrs Barnicoat, who was eventually awarded the member's death benefits nearly a year after her partner’s death. She claimed that the delay while the trustee looked into the children's allegations caused her financial loss and considerable distress, a situation she said was exacerbated by the trustees' decision to keep the details of the children's claims confidential.
The PO held that although the trustee could have been more proactive in checking the truth of the allegations where possible and keeping the member updated without breaching confidentiality, it had acted fairly and reasonably in the exercise of its discretion. In doing so, it had balanced the need to obtain accurate information against the “legitimate desire to protect people's confidentiality”.
Mrs Barnicoat's unmarried partner, Mr Bunn, was a member of the Hargreaves Lansdown Vantage SIPP and had two adult children and several grandchildren from a previous relationship. In March 2012, Mr Bunn completed a death grant nomination form in favour of Mrs Barnicoat. He died six months later, on 14 September 2012. Mrs Barnicoat was not a beneficiary under Mr Bunn's will, which named his two children as executors. The SIPP's rules gave its trustee, Hargreaves Lansdown Asset Management Limited (the Trustee), discretion to pay death benefits to a wide range of potential beneficiaries, including anyone the member had nominated, his relatives or a beneficiary of his estate.
Mrs Barnicoat gave the Trustee details of her financial position and relationship to Mr Bunn. However, Mr Bunn's children told the Trustee that his relationship with Mrs Barnicoat had broken down and that they needed time to obtain evidence about alleged financial irregularities around the time he died in relation to unauthorised bank account access and the proceeds of a property sale. The Trustee said that the nature of the allegations was not relevant and would not lead it to conclude that it should not follow the nomination form. However, it said that given the serious nature of the allegations, including fraud, it would give them more time to provide new information to demonstrate their relevance. It also agreed to maintain confidentiality and not to give Mrs Barnicoat copies of the children's evidence, which later included medical reports, financial transaction records and details of a potential police investigation.
The Trustee did not inform Mrs Barnicoat of the delay until 1 March 2013, for which it apologised and later offered £500 as compensation for any distress and inconvenience caused. It also said that she would receive the death benefit as sole beneficiary unless Mr Bunn's children supplied relevant evidence.
Between April and August 2013, the Trustee continued to press Mr Bunn's children for evidence to back their challenge and on two occasions set 14-day deadlines for them to do so. On each occasion, the children requested more time to allow them, variously, to instruct solicitors, await probate (which they said would allow access to relevant documents) and liaise with the police, a private investigations agency and fraud departments at several financial institutions. Mrs Barnicoat also instructed solicitors, who complained to the Trustee that it had supplied very little information about the nature of the children's challenge. At this time, the Trustee offered to make her an interim payment, which Mrs Barnicoat twice rejected.
On 28 August 2013, the Trustee informed Mr Bunn's children that as they had not supplied any further relevant evidence, it could delay no longer. It informed Mrs Barnicoat's solicitors the same day that she was the sole beneficiary of the death benefits and, after considering further submissions from Mr Bunn's children, paid the SIPP benefits to her on 9 September 2013 (that is, just under a year after Mr Bunn's death). These were used to provide a capped drawdown pension plan of £3,727 a year beginning on 1 February 2014.
Mrs Barnicoat complained to the PO that unreasonable delays by the Trustee in paying her the death benefits caused her financial loss because she had to live on her own assets after Mr Bunn's death and annuity rates had fallen by the time her drawdown pension was secured. She had refused the interim payment offer as she thought she would have to repay it if she was not awarded the death benefits. The process would have been expedited if she had known and been allowed to counter the “unfounded allegations”. She engaged solicitors (costing £2,000) because the Trustee would not give her full information and did not tell her she could consult the Pensions Advisory Service.
Among other things, the Trustee submitted that if it had been able to give Mrs Barnicoat a full explanation, it might have reached a decision much earlier and that, with the benefit of hindsight, it was possible that Mr Bunn's children had exaggerated their claims. But at the time it was considering the information the children had supplied and their confidentiality request, it was prudent not to assume they were lying, especially given the allegations of fraud. In relation to the interim payment offered to Mrs Barnicoat, the Trustee submitted that it was obvious that she would not have had to repay this money.
The PO dismissed the complaint.
HMRC rules allowed the Trustee a period of broadly up to two years after Mr Bunn's death to make the payment of the death benefits. In exercising its discretion, the Trustee was under a duty to act reasonably, set aside any moral or other prejudices, and also to consider all relevant facts, including any nomination form, but ignoring anything that was irrelevant.
In particular, the Trustee should:
The PO stated that the decision was not clear cut and "[g]iven the range of discretion, there was unlikely to be only one answer that was to be regarded as 'right' with all others being wrong", something the potential beneficiaries clearly found hard to understand. In these circumstances, it was therefore reasonable of the Trustee to allow Mr Bunn's children additional time to conclude their private investigation and comply with their request not to disclose the reasons behind the investigation to Mrs Barnicoat.
Although he dismissed the case against the Trustee, the PO noted that it would have been preferable for it to have been more proactive in the matter by, for example, discreetly checking the truth of the information presented by Mr Bunn's children, where possible, and giving reasons to Mrs Barnicoat for the delay without breaching confidentiality.
He also noted that Mrs Barnicoat had not mitigated the loss she claimed as she had refused the interim payment and that he did not think she needed to engage a solicitor, particularly as their involvement would not have affected the Trustee’s ultimate decision. The £500 offered by the Trustee for the “significant distress and inconvenience” caused to Mrs Barnicoat in dealing with the matter was already a reasonable amount in the circumstances.
The decision to dismiss the complaint is seems sensible in these circumstances. The full details of the allegations made by the deceased member's children are not available and so it is difficult to evaluate the pension provider's conduct in delaying the payment of death benefits pending its investigation.
This determination is a reminder that when a provider or trustee is required to exercise their discretion over death benefits, this is often not straightforward. On the one hand, it is effectively required to make payment within two years so as to avoid tax charges. On the other hand, interested parties may reasonably expect the trustee to gain a thorough understanding of the underlying background, which may take some time to establish.
However, in this case the benefit payment was made well before the end of the two-year window, so the complainant's submission that it should have been made earlier was unlikely to find favour with the PO. It is therefore also unsurprising that the PO refused to reimburse her expenditure in pursuit of her complaint.
View the determination.
Ekin İnal and Ecem Naz Boyacıoğlu provide an overview of FinTech in Turkey.
During his State of the Nation Address, the President gave reassuring impetus to solving the current energy crisis and perennial load shedding that has been decimating the economy.