In the dawn of a new decade and a strong Conservative majority now in place for the New Year, we summarise our thoughts on what the New Year holds for pensions (bearing in mind we still have the uncertainty of impending Brexit at the end of the month).
Pension Schemes Bill – in, out, then in again
Just before Christmas, the Queen’s Speech confirmed that the Pension Schemes Bill (which was first announced in October 2019, then shelved), would be reintroduced in the 2019-20 parliamentary session. The draft Bill sets out a range of measures, including provisions on:
- New criminal offences for putting pension benefits at risk;
- Defined benefit (DB) scheme funding and investment strategy;
- New collective defined contribution schemes;
- The establishment of the framework for the creation of pension scheme dashboards, allowing “people to access their information from most pensions schemes in one place online for the first time";
- Enhanced Pensions Regulator powers;
- Revisions to the rules under which transfers may be made between pension schemes; and
- Changes to the Pension Protection Fund (PPF) compensation rules.
The draft Bill is yet to be published, but we expect the main focus will be tougher penalties and stronger powers of the Regulator.
Protection of employees’ pension rights on employer insolvency – Bauer case
At the end of 2019, the ECJ published its decision concerning the application of Article 8 of Directive 2008/94/EC (protection of employees' pension rights in the event of the insolvency of their employer). Whilst this relates to a German case, some aspects are of particular interest to UK defined benefit occupational pension schemes given the potential impact on PPF compensation and the PPF levy. In this case, a member of a work-based pension scheme sued the German equivalent of the PPF in respect of an unpaid element of his pension, following his previous employer’s insolvency.
Article 8 provides that member states are obliged to take "necessary measures" to protect the interests of employees and former employees at the date of their employer's insolvency in respect of accrued rights to old-age benefits under occupational pension schemes.
Here, the German equivalent of the PPF assumed responsibility for paying a member’s pension, but refused to pay one part of it, stating that it had no obligation to guarantee any payment made by an employer in compensation for a previous pension benefit reduction.
The ECJ held that member states have “considerable latitude” in determining the means and level of protection of employees’ accrued pension entitlement, and that Article 8 doesn’t prevent member states from reducing the accrued entitlement where employees’ employers fall into insolvency, provided any reduction isn’t manifestly disproportionate such that the employee would have to live below the relevant at-risk-of-poverty threshold.
The PPF will have been keeping a keen eye on the outcome of this judgment, However, in the UK, given the PPF’s cap is currently set at £40,020, such a reduction permitted in this case is arguably unlikely.
New Pensions Regulator’s Code of Practice on DB scheme funding
The Pensions Regulator is expected to launch its consultation on a new code of practice in the New Year. This has been considerably delayed in light of Brexit and the uncertain political climate, with the Regulator commenting that this would be published when “things might have settled down” in the New Year. In light of several high profile corporate failures in the last year, which we have previously commented on in articles last year, the code is expected to reflect the Regulator’s promise to be “clearer, quicker and tougher”, also setting out more detailed expectations for trustees to explain the long-term objective for their schemes.
Tied in with this, pension scheme trustees should keep a keen eye on investments – many UK investment managers predict gains in the next 12 months, given the uncertainty that 2019 brought, with less international investment.
Bumper boost in State Pensions
From April 2020, the State Pension is set to rise by 3.99% - the largest increase since 2012. This is considerably above the level of inflation, which currently stands at 1.7%.