My work encompasses pensions legislation. For many years, new legislation has been set to come into force on either 6 April (particularly tax changes) or 1 October, halfway through the tax year. (If you’ve ever wondered why the tax year doesn’t start on 1 April, it’s a long story going back to 1752 and the switch from the Julian to the Gregorian calendar: one for another day.)
Anyway, every year many new rules kick in on 1 October, and despite the present maelstrom, 2020 is no exception. So what changed last week?
Transfers from defined benefit schemes became even more difficult to arrange, as the FCA stopped contingent charging. No longer is it permissible for the adviser to charge a fee only if the transfer goes ahead. The FCA knew that a ban would further reduce the availability of advice, but decided this concern was outweighed by the risk to members from the adviser’s conflict of interest: an unacceptably high proportion of transfers were proceeding on unsound advice.
Disclosure requirements have been ratcheted up another notch this week. Most schemes already have to produce a statement of investment principles (SIP), and publish it on a publicly available website. From 1 October, the SIP has to include information about policies on arrangements with asset managers. Furthermore, trustees have to publish an implementation statement, describing their policies about engagement and voting, and how and the extent to which trustees have followed their SIP. This has to be included in the next Annual Report and then made publicly available online.
Besides these stewardship matters, a SIP has to explain how 'financially material considerations' over the 'appropriate time horizon' of the investments are taken into account in the selection, retention and realisation of investments; and also the extent (if at all) that 'non-financial matters' are taken into account.
'Appropriate time horizon' means the length of time that the trustees consider necessary for the funding of future benefits by the investments of the scheme.
'Financially material considerations' includes but is not limited to environmental, social and governance (ESG) considerations (including climate change) considered financially material by the trustees.
'Non-financial matters' are defined as "the views of the members and beneficiaries including (but not limited to) their ethical views and their views in relation to social and environmental impact and present and future quality of life of the members and beneficiaries of the trust scheme".
This is serious stuff, with more to come, once climate change provisions in the Pension Schemes Bill come into force. A DWP consultation closing on 7 October is a harbinger of what these will mean, with larger schemes and master trusts in the frame first. They’ll have to implement effective governance, strategy, risk management and accompanying metrics and targets for the assessment and management of climate risks and opportunities.
1 October also marked the date on which The Pensions Regulator (TPR) resumed reviewing SIPs and Chair’s Statements. From this date too, various reporting easements that TPR had introduced from 1 July, to make trustees’ life a little easier during the COVID-19 pandemic, ceased to apply.
All the signs are that while the pandemic is far from over, any breathing space for the pensions industry ended on 1 October 2020. Pressure from TPR on smaller schemes – defined benefit as well as defined contribution – to consolidate is ramping up. How much more can trustees take? More pressing still, how are employers going to react?
Ian Neale, Director, Aries Insight
