• TPR: managing investment and liquidity risk in the current economic climate
• IC/FM requirements: CMA Order replaced
• DC transfers: PASA guidance
• TPO: member not entitled to discretionary cost-of-living increases
• Tribunal overturns penalty for AE non-compliance

TPR: managing investment and liquidity risk in the current economic climate

In the midst of market turbulence, and anticipating the end of the Bank of England’s gilt purchase scheme on 14 October, the Pensions Regulator (TPR) issued a statement for trustees on 12 October 2022 on managing investment and liquidity risk. The guidance is relevant to all schemes, not just those that have been directly impacted by liquidity issues so far, and includes both short- and medium- term actions for trustees to consider. Trustees should ensure that they read the statement in detail; the summary below highlights points that may be useful as part of a review of the impact of events in recent weeks and ongoing market volatility.

DB schemes

• The Regulator recognises that for many schemes, decisions have had to be made in recent weeks at very short notice and based on the information available. Continued engagement with investment advisers will provide an accurate picture of your position, as regards both funding and hedging. You should also consider the ability of your employer covenant to support investment risk (taking into account any impact of market events on covenant strength).
• Review your operational processes to ensure that you can react quickly to changing circumstances, with robust procedures for decision-making and implementation and contingency plans for liquidity and cash management.
• Review your liquidity position, including how the balance of liquid to illiquid investments has changed within the scheme and whether existing cash management and disinvestment plans need to be revised. For ongoing hedging, consider whether there is sufficient liquidity to meet collateral calls in a more volatile environment and if not, how this can be managed appropriately.
• Review your liability hedging position. Consider the impact if (as expected) LDI funds move to a lower level of leverage. There may be market opportunities to increase or replace hedging or lock in some funding improvements, including access to the insurance market (subject to insurer capacity constraints).
• Review your funding and risk position. Many schemes are likely to have seen an improvement in funding and may be approaching funding triggers. The balance of risk in the scheme’s portfolio may have changed and should be reviewed.
• Consider the impact on other areas e.g. transfer values. Remain vigilant to the risk of scams, which might be fuelled by market uncertainty.

DC schemes

• TPR’s main focus is on mitigating the risk of members making hasty decisions, and protecting them from scams. It recommends communicating with members approaching retirement to make them aware of their options and to emphasise the importance of seeking financial advice or speaking to MoneyHelper before making decisions.
• In addition, TPR encourages you to remain vigilant for scams and suspicious transfers, to review your investment strategy and to ensure you can act at speed where necessary.

TPR will continue to monitor the situation and provide further updates to trustees if needed as the situation develops. Good information and advice is critical to decision-making; for support as you review your scheme’s position and next steps, please contact your usual A&O adviser.

Read the statement.

IC/FM requirements: CMA Order replaced

The Competition and Markets Authority (CMA) has confirmed that the requirements in its 2019 Order on pension scheme trustees using Investment Consultancy (IC) and Fiduciary Management (FM) services ended on 1 October 2022. Those requirements have now been replaced by DWP regulations (read more). Schemes no longer need to submit compliance statements to the CMA; the announcement says that TPR will communicate how compliance should now be reported ‘in due course’.

The provisions of the Order that impose prohibitions and obligations on IC providers, FM providers and IC-FM firms, including in relation to compliance reporting, remain in force.

Read the announcement.

DC transfers: PASA guidance

The Pensions Administration Standards Association (PASA) has published good practice guidance on DC transfers. While the guidance is voluntary, PASA anticipates that the Pensions Ombudsman (TPO) will reference it when reviewing complaint cases as a source of what good industry practice looks like.

The guidance sets out best practice processes for handling quotation requests and settlement. It includes example member communications, checklists and a transfer template. The guidance stresses the importance of good communication, including in particular where delays are being caused by a third party. It suggests that communications should ‘add real value’ to the saver, ensuring the steps in the transfer are clearly signposted and providing comfort to savers, remembering they are likely to be lay people. It recommends that trustees agree acceptable service level agreement timescales for processing transfers up front with their administrators. It also suggests that transfers not raising any red flags (under the red and amber flag system introduced in 2021) should be processed ‘as speedily as possible, to ensure good saver outcomes’.

Read the guidance.

TPO: member not entitled to discretionary cost-of-living increases

TPO has rejected a complaint against a scheme for not awarding discretionary increases to a member’s pension. The member’s benefits were accrued before legislative requirements to increase pensions were introduced. Member communications included statements such as ‘bonuses may be declared […] which will increase all earned benefits’, deferred pensions would ‘increase by bonuses declared each September’, and pensions ‘may be increased by a discretionary bonus if the funds held are adequate’.

Of particular interest given current cost-of-living issues (which were not raised in this case) is that, as well as a discretion to award annual bonuses, the rules gave trustees a power to increase pensions where they considered it appropriate ‘having regard to the increase in the cost of living’ and after obtaining actuarial advice.

TPO found that the member was not entitled to increases, since the legislative requirements did not apply to his pension; the bonus forecasts he had received were not guarantees; the trustee had to consider the impact that paying bonuses would have on the ongoing solvency of the scheme. The trustee’s main responsibility was to meet the funding requirement of its liabilities, such as paying pensions, not award discretionary increases which are ‘ordinarily paid out of a surplus’ (the scheme had been in deficit on a technical provisions basis).

Read the case.

Tribunal overturns penalty for AE non-compliance

The First Tier Tribunal has revoked an escalating penalty notice (EPN) issued by TPR for non-compliance with an employer’s auto-enrolment (AE) duties: DNS Retail Management Ltd v TPR. The employer argued successfully that they had not received communications from TPR in relation to compliance.

The judge held that, although presumption of delivery is a powerful factor and there is a need for robust enforcement of AE requirements, he was persuaded that the relevant documents had not been delivered and therefore the EPN should be revoked. He noted that the employer faced a disadvantage in being required to prove a negative (that the correspondence had not been delivered), and considered a number of factual points that suggested there may have been issues with delivery, such as the address being presented confusingly on Companies House (making it look similar to another address); that TPR letters make it apparent that they contain important information, so were unlikely to have been overlooked; that the immediate response to a later letter suggested the employer was not inclined to ignore official correspondence; and that it had no prior ‘form’ for AE non-compliance.

This case runs counter to the general theme of a number of similar recent cases, where the tribunal has been unsympathetic to employers claiming that they did not receive correspondence from TPR and has not been persuaded that the presumption of delivery was overturned.

Read the case.