Pensions Essentials - January 2024

The General Code, which was first consulted on back in 2021, amalgamates 10 of the Regulator’s 16 codes of practice, so much of the content will be familiar.  It does not include the existing codes on funding (which is due to be re-issued in revised form later this year), modification of subsisting rights, notifiable events, material detriment or the specialist codes of practice for master trusts and collective defined contribution schemes. 

Section 249A Pensions Act 2004 requires trustees to “establish and operate an effective system of governance including internal controls… [which is] proportionate to the size, nature, scale and complexity of the activities of the… scheme”.  This applies regardless of scheme size, although certain types of scheme are exempt, such as authorised master trusts and collective defined contribution schemes.  The General Code sets out the Regulator’s views on the policies and processes that trustees should have in place to comply with this statutory duty and on the frequency with which trustees should review those processes to ensure that they remain appropriate.  It identifies specific areas of governance, including policies and processes, that should be part of an effective system of governance and says that trustees should have a policy for the review of each element of their governance processes at least every three years.

The Code also says that trustees of schemes with 100 or more members should carry out an assessment of how well their effective system of governance is working, and the way potential risks are managed.  This is referred to as an own risk assessment or “ORA”.  The ORA needs to be in writing and signed off by the chair of trustees.  The first ORA should be completed within 12 months of the end of the first scheme year starting after the General Code comes into force or, if later, either 15 months from the date on which the next actuarial valuation is due or the due date for the next chair’s statement.  Subsequent ORAs should be carried out at least every three years, but not all elements of the system of governance need to be assessed at the same time.  The General Code sets out specific matters that should be addressed by the ORA. 

For a more detailed analysis of the content of the General Code, please see our separate client briefing.

As part of its Mansion House reforms, the Government announced that it is going ahead with its proposal to expand “whole-of-life” collective defined contribution (CDC) provision (i.e., arrangements which offer accumulation and decumulation in one vehicle) to multi-employer schemes where the employers are not associated with one another, which would allow for commercial providers to offer CDC schemes.  We are expecting a consultation on the draft changes in the coming weeks.  The Government also made clear that it wishes to explore the opportunities presented by decumulation-only CDC arrangements, but only after further consideration. 

At the same time, the Government acknowledged that the regulatory architecture for individual and connected employer CDC (contained in the Pension Schemes Act 2021 and regulations), which will be used for multi-employer schemes, needed technical amendments to address some issues.  These changes have now been made, in the draft Occupational Pension Schemes (Collective Money Purchase Schemes) (Amendment) Regulations 2023:

• Amendments make clear that, during the wind-up of a CDC scheme, the accrued rights of the dependants and survivors of members or survivors of dependants can be transferred to a flexi-access drawdown arrangement. This change takes effect from 1 October 2024.
• When an annual valuation shows that a decrease to benefits needs to be made, for example due to a fall in the value of the collective funds, schemes can smooth the impact of the reduction on members through the multi-annual reduction (MAR) process. The amendment implements a suggestion made in consultation responses that where a MAR is initiated following poor investment performance and there is a subsequent positive bounce back in investment, that increase should be offset against any planned reduction under the MAR.  This change takes effect as soon as the amending regulations come into force.

The Court of Appeal, in The Pensions Ombudsman v CMG Pension Trustees Limited, confirmed that although determinations and directions of the Pensions Ombudsman (TPO) are binding, the Ombudsman is not a “competent court” for the purposes of the set-off provisions in the Pensions Act 1995.  This means that if trustees wish to recover overpaid benefits by offsetting them against future benefit payments and there is a dispute, they will need an enforcement order from the county court.  (See our Pensions Essentials November 2023 for discussion of the case.)

TPO has issued a statement about the ruling.  After expressing its disappointment at the decision, TPO reports that there will be legislative changes to enable it to conclude overpayment disputes without the need for a county court order.  In the meantime, a factsheet provides guidance on how, in accordance with Civil Procedure Rules, overpayment disputes should now be managed:

• The county court will not revisit the merits of the dispute but will authorise the scheme to deduct overpayments from the member’s future pension payments in accordance with a schedule in TPO’s determination which will set out the amount and rate of recoupment. When issuing its determination, TPO will also provide a certified copy for the county court. 
• Court form N322A must be completed, with a fee, referencing Section 151 of the Pension Schemes Act 1993 (under which enforcement is sought).
• The appropriate county court is the one nearest to the member’s address.

Meanwhile, TPO, in Mr Y, its first determination of a complaint relating to recoupment since the Court of Appeal’s decision in CMG, decided that the trustee should not have started recovery of overpayments without a county court order.  TPO had found that the trustee was entitled to recover the overpayment by recouping the excess from future pension increases, but because of the CMG decision, the trustee had acted in breach of trust in starting recoupment without a county court order.  The trustee was ordered to pay the increases withheld and to apply to the county court for an order, in accordance with the new factsheet, to allow it to recoup the overpayment in accordance with the schedule set out in TPO’s determination.  TPO accepted that there had been no maladministration because the trustee had received unqualified advice from its legal advisers that it could recoup overpayments.  However, it noted that, going forward, the recoupment of disputed overpayments without a county court order would be likely to constitute maladministration.

The Pension Protection Fund (PPF) has announced its final levy rules for 2024/25 and confirmed a 50% reduction in its target levy collection to £100m, down from £200m in 2023/24.  As a result, almost all PPF-eligible DB schemes in the UK are expected to see a further reduction in their levy.  As supported by respondents to the consultation, and set out in its Policy Statement, the PPF will proceed with minimal changes to its levy methodology for the next levy year.

The majority of respondents to the PPF’s consultation understood and supported the PPF’s approach, in light of the legislative constraints, to maintaining a levy at this level in future years.  However, almost all felt strongly that legislation should be changed as soon as possible to allow the PPF to move to a much lower or even a zero levy.  The PPF has shared these responses with DWP who will consider the points raised and “expect to legislate as soon as parliamentary time allows”.  Changes could result in larger well-funded schemes paying higher levies in future if the levy calculation focuses on schemes that pose the greatest risk to the PPF. 

The PPF has also confirmed that the Pensions Regulator expects to publish updated guidance on asset class reporting shortly.  The proposed changes would clarify the preference for schemes to report their exposure primarily via the asset mix, only using the more detailed risk factor stress impact methodology for particularly complex arrangements that cannot be adequately described in the asset mix.

Some key dates to note in relation to the levy are:

• Submission dates:
  • Scheme returns and electronic contingent asset certificates to TPR by 31 March 2024.
  • ABC certificates and special category applications to the PPF by 31 March 2024.
  • Contingent asset documents to the PPF by 5pm on 2 April 2024.
  • Deficit Reduction Contributions certificates to TPR by 5pm on 30 April 2024.
• Mean scores will be published in July 2024; invoicing starts Autumn 2024.