In the May edition of our Taylor Wessing Pensions Bulletin, we give a snapshot of some recent pensions developments, which include:
Virgin Media and pension scheme accounts: Pensions Research Accountants Group issues a discussion paper
We have reported in previous bulletins on the significant issues for schemes previously contracted out on a defined benefit basis of the decision in the Virgin Media case and, amongst other things, on guidance produced by the ICAEW about the accounting implications. The Pensions Research Accountants Group (PRAG) has now also issued a discussion paper specifically focused on the possible implications for certain aspects of pension scheme accounts.
The paper provides a brief summary of the decision and what the next steps might be. It recognises that further developments, such as the outcome of further court cases, may impact on that, including whether or not trustees can validate deeds retrospectively, and so the situation should be monitored closely.
The paper outlines the main approaches trustees currently appear to be taking which include:
- to 'wait and see'
- adopting a high level information gathering approach where there might be concerns about previous governance processes or documentation or to establish if there might be any issues
- taking a detailed analysis approach which is said to only apply to a few schemes where it is known that they do not have the relevant documentation and have asked the scheme actuary to calculate the possible impact.
PRAG's understanding is that most schemes have adopted the 'wait and see' approach and so for the majority no reliable estimate or quantification of any possible liability has been made. The paper suggests that once trustees have decided the most appropriate approach (possibly after discussions with their legal advisers) they should discuss with their accountants and auditors what the best treatment will be for the purposes of the accounts.
The paper also discusses the types of accounting disclosures that may be required and a number of other important considerations including whether or not to include a reference to the case in the Trustees' Annual report, the possible impact of a bulk transfer and the position of the employer. Finally, there is a list of questions upon which PRAG is seeking feedback which may result in further updates to its paper.
The paper is a useful reminder of the different approaches being considered by pension schemes in response to the Virgin Media decision and the possible implications from a pension scheme accounts perspective. As we have said before, it is an area that will need to monitored as further developments unfold (for example in further court cases or possibly even in Government action to address the issue).
Superfunds: The Pensions Regulator provides some pointers for making transfers to superfunds smoother
Transfers of defined benefit (DB) schemes to superfunds is a potential endgame solution which has already been used by three schemes whose transactions with Clara (the first superfund to be approved by The Pensions Regulator (TPR)) were cleared by TPR in 23/24 and early 25. In a blog, TPR outlines some of the top tips emerging from the experience of those transactions to help future processes run more smoothly.
It says that a persistent theme is uncertainty and a lack of clarity about what TPR expects from transacting parties about certain aspects in the clearance process, so the blog addresses these specifically. For example, it says in the Gateway test one – buy out cost, schemes do not need to obtain a buy out quote from the insurance market to determine whether or not the buy out is affordable and that an objective estimate from an actuary with experience of the market will be sufficient for this purpose.
On diligence on superfunds, TPR points out that it will have carried out a detailed analysis of legal and governance structures, systems and processes and key people relating to the superfunds listed on its website. It would not be concerned if transacting schemes only carried out minimal due diligence in relation to these aspects.
Schemes will, however, need to have a thorough understanding of the superfund's business model and specifics in relation to the transaction such as cash injections, surplus issues and and any possible continuing employer involvement (eg as a guarantor). There must be a comprehensive rationale (even stronger where the scheme has on-going employer support) for transferring, including supporting advice and evidence and setting out the pros and cons.
There is also commentary around elements of Gateway test three (that the transfer improves the likelihood of members receiving full benefits) especially where a key factor is the employer's ability to support the scheme outside of the superfund. The blog also comments on bulk transfer terms and any measures designed to ensure that TPR's capitalisation requirements are met at transfer.
As schemes continue to explore endgame solutions it is useful to understand more of the nuances around TPR's process for providing clearance in relation to superfund transactions which will hopefully ensure such transactions run more smoothly.
Regulations extending Collective Defined Contribution to multi employers to be published
The Pensions Minister has announced that new regulations will be laid 'in the Autumn' to allow multiple employer Collective Defined Contribution (CDC) schemes to be established so that a range of unconnected employers can participate in a single arrangement, with the Government hoping it will provide more options for savers and for employers in terms of pension provision. The Minister also confirmed the aspiration to deliver decumulation only CDC schemes which would allow DC savers to access CDCs, giving them the chance to buy longer term, pooled retirement products that 'deliver stability for pensioners'.
The proposed extension of CDC will open up new possibilities for pension provision for employers and possibly an attractive alternative to defined benefit or defined contribution offerings, though it is perhaps in the decumulation context that these arrangements may prove most popular because they may allow pensioners more flexibility in the retirement product they choose.
The Pensions Regulator's annual funding statement: key points in light of the new scheme funding regime
TPR has issued its first annual funding statement following the introduction of the new scheme funding requirements. With healthy funding positions and around three quarters of DB schemes said to be in surplus on a low dependency basis, TPR expects there to be a shift in focus from deficit repair to endgame planning. However, it says that trustees should also keep in mind the potential for heightened trade and geopolitical uncertainty and to 'understand any risks to the scheme's investment strategy and employer covenant'.
TPR expects around 80% of schemes to be able to meet the Fast Track scheme funding parameters and, following engagement with industry, TPR has also provided further information for schemes completing valuations under the new regime (for example in relation to assessing and monitoring the employer covenant and supportable risk). TPR has confirmed it will be 'risk-based' and 'outcome focused' when deciding which schemes to interact with. It also reiterates that the new funding regime requires the valuation process to be more integrated, and so for Trustees to work collaboratively with their different advisers throughout, and, given the new elements to it, Trustees will need to engage with those advisers early, as well as employers.
The Department for Work and Pensions points to developments in the defined benefit market
The Government has now responded to a report published by the Work and Pensions Committee (WPC) under the previous Government, raising a number of issues around DB schemes. The response confirms many developments that have already been announced, such as
- the response to the previous consultation called 'Options for Defined Benefit Savers' which has just been published and includes, amongst other things, plans around surplus extraction, lifting restrictions on how surplus can be used and confirmation that provisions on surplus will be put forward in the Pension Schemes Bill
- proposals to give the Pension Protection Fund (PPF) greater flexibility to adjust the levy it collects from DB schemes
- plans to include provisions for an authorisation and supervision framework for superfunds to be included in the forthcoming Pension Schemes Bill.
There are references, however, to other important areas such as:
- plans to consult on a framework for trustee accreditation and governance, which will include considering how TPR and Department for Work and Pension (DWP) could provide extra support for lay trustees who need it and the position of sole trustees
- conducting a closer examination, with TPR, of why schemes are not making discretionary pre-97 increases (noting that Government plans around surplus sharing will, according to the response, make it easier for schemes to make decisions that include making discretionary benefit increases). The Government has also said it is committed to considering and reflecting on this issue in the context of PPF compensation also, while recognising that the issues are 'complex'.
The industry is now keen to understand the entirety of what will be included in the promised Pension Schemes Bill (due 'in the Spring') . This response also indicates a busy schedule of developments for the rest of the year for pension schemes and their trustees which will need to be monitored as any regulatory and legislative measures emerge.
Trustees and market volatility: The Pensions Regulator's report and areas for trustees to focus on
TPR has issued guidance to trustees of both DB and defined contribution (DC) schemes on what they should be doing in relation to their investment governance in the light of recent market volatility and the ongoing geopolitical uncertainty.
For DB schemes, that involves focus on ensuring short term liquidity and cash flows can be met, investment strategy meets the changing economic environment (consulting with advisers and investment managers on this), schemes have operational and governance resilience and covenant and employer considerations. For DC schemes suggested areas of focus for best practice include member communications, investment and risk management and strategic oversight.
The guidance is a useful reminder of some key points trustees should be considering, with their advisers where necessary, in the current economic environment and TPR has said it will also monitor and update its engagement with schemes and guidance accordingly as issues evolve.
Stop press
The Government has just (29 May) published the final report of the Pensions Investment Review. Central to the report is the 'decision to add momentum to the significant consolidation already underway in DC schemes', moving towards a marker with 'bigger, better and less fragmented schemes'. More detail on this will be provided in forthcoming bulletins.
