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Pensions Insights - December 2022

21 December 2022

In our monthly update, Pensions Insights, we give you our take on the latest highlights in the world of pensions law and policy. If you have any queries about any of the issues covered, or you require advice on a pensions related matter, please do not hesitate to contact your usual contact.

Case Law 

Trustees sentenced for illegal loans

Following a prosecution by TPR, two former pension scheme trustees have received sentences of 16 months in jail (suspended for two years) for making illegal loans of £236,000 from a company pension scheme to the pension scheme’s employer.  Both trustees plead guilty to the charges.  

Between 2017 and 2018 the trustees had paid £236,000 from the pension scheme to the sponsoring employer in the form of two loans in breach of statutory restrictions on employer related investments.

In June 2018, TPR staff challenged the second "loan" payment which it was claimed was being used as working capital for the business (and was being repaid on a monthly basis with 5% interest) and to support the business in the face of adverse effects caused by Britain leaving the European Union.  The court heard that in later interviews with TPR, the trustees changed their story and said the payments were used as investments on behalf of the pension scheme in a disused church with a view to potentially converting it into offices and a community space.

TPR’s investigators reported that they found communications from the trustees describing payments from the pension scheme to the company as loans and some repayments from the employer to the scheme were made under the reference “Loan”.

Since proceedings began £270,000 had apparently been paid by the pension scheme's employer into the pension scheme (which scheme is now broadly fully funded on a buyout basis).

The judge found in this case that the trustees had put the pension scheme at risk by removing large sums of money from it and that they had failed to manage the potential conflict of interest in running a business and acting as trustee of the occupational pension scheme (and had not sought appropriate professional advice about how to do so).

The judge went on to explain the trustees had only avoided jail, and being disqualified as company directors, because of their guilty pleas, the fact that the money they had paid back to the pension scheme and the impact that such a sentence might have on the continuing business of one of trustees.

New Law  

Pensions Dashboards: guidance on deferred connection published by DWP

The Pensions Dashboards Regulations 2022 allow applications to be made by schemes in some specific circumstances to defer their staging deadline by up to 12 months.

The Secretary of State for Work and Pensions is responsible for considering these applications and has now published guidance to aid understanding of the application process.

The guidance covers the circumstances in which an application for deferred connection can be made, how the DWP will consider such applications, deadlines for making an application, how to apply for a deferred connection, decisions on applications and review of those decisions.

News

The Pensions Universe Risk Profile (Purple Book) published

The most recent version of the Purple Book shows that there are now more DB schemes providing no form of accrual of benefits than those that do, with 51 per cent of schemes closed to new members and new benefit accrual.

The report shows the largest-ever annual fall in liabilities within the defined benefit universe with total section 179 liabilities reportedly falling by almost 12 per cent and buyout liabilities falling by almost 10 per cent in the year to 31 March 2022.

In terms of investments it reports that schemes have continued to invest a large proportion (72 per cent) of their assets in bonds, however, while the proportion of assets invested in equities remains stable (19 per cent), the proportion of assets invested in UK equities has fallen to a record low of below 10 per cent.

Launching the report, the PPF’s Chief Finance Officer and Chief Actuary, said that “As a result of our financial position strengthening significantly in recent years, we are entering a new funding phase where our focus will shift to maintaining our financial resilience. This means we can now take steps to reduce scheme levy payments without risking current and future members’ benefits. We expect to collect £200m in levy in the year 2023/24, nearly halving the levy collected in the previous year.”

TPR guidance on maintaining LDI resilience

Welcoming statements made by the Central Bank of Ireland and the Commission de Surveillance du Secteur Financier known collectively as National Competent Authorities (NCAs), on resilience of Liability Driven Investment (LDI) funds, TPR has issued its own guidance statement calling on trustees to maintain an appropriate level of resilience in leveraged arrangements to better withstand a fast and significant rise in bond yields and for those in leveraged LDI to improve operational governance.

Various recommendations are made including that trustees review their governance processes and consider the challenges that arose for their pension scheme during the volatility in September and October 2022, and then consider what practical steps they can implement as a result of lessons learned.

Practical steps recommended to ensure trustees are able to react quickly in response to stress in the market include:

  • Confirm authorised signatories are up to date and ensure that governance is sufficiently robust, and that decisions can be made at speed in stressed market conditions.
  • Stress the non-leveraged LDI asset allocation (eg equities, corporate bonds) using a yield shock as set out by the NCAs.
  • Stress the leveraged LDI pooled fund / segregated mandate using the same yield movement.
  • Calculate the required collateral amounts, and the type of assets (for example, gilts, cash).
  • Specify the dates when these collateral / margin calls need to be made.
  • Specify what assets would be sold, when the sell instructions would need to be given, and when the cash is settled.
  • Confirm who the instructions need to go by and the method of signature (electronic or wet ink).
  • Confirm that necessary collateral / cash margins can be paid on the dates specified.
  • Confirm the asset allocation post collateral / margin call.
  • Document these arrangements and review them regularly.

Further Reading