Look both ways
18th December, 2020
A review of 2020 and what to expect in 2021
Understandably, many of us will want to consign 2020 to the past, with barely a backward glance, and focus on the future in the hope that 2021 can be a better year than the one we’ve just lived through.
One of the biggest changes in many peoples’ daily lives in 2020 was that, overnight, swathes of the economy found that the perceived barriers to flexible working were not really barriers at all. I have to confess, I miss being in the office, the camaraderie of colleagues and the creativity that sparks when you get a bunch of people in a room trying to find a solution to a particularly knotty problem. But I also value the extra personal and family time that working from home has given me. One silver lining, in a year which yielded few, is that more of us will have had the flexibility to find a work life balance that works for us, for our employer and for our clients and members.
It is worth stating that, generally, the collective response to the Covid-19 pandemic from trustees and their advisers and administrators ensured that pension schemes continued to serve their members, providing certainty in an uncertain time.
The world did not stop turning in 2020, even if sometimes it felt as if it had. And as the world kept turning, developments in pensions law and practice continued to flow.
In any event, this review of 2020 is getting ahead of itself if we do not first consider the almost three months before that fateful day on 23 March when the Prime Minister addressed the nation and told us to ‘stay home, protect the NHS and save lives’.
2020 has been a year of ‘themes’ in terms of legislation, cases and The Pensions Regulator.
The year started with the re-introduction of the Pension Schemes Bill into Parliament, following its dissolution at the end of 2019. The Bill has progressed throughout the year and we will return to it later to consider its current status and likely final content.
The Pensions Regulator (TPR) started the New Year with the publication of its latest Defined Benefit (DB) Scheme Return which contained a new question on employer covenant and a request for website links to published Statement of Investment Principles.
The start of 2020 was also a milestone for the Pension Protection Fund (PPF) as The Carillion Rail (GTRM) Pension Scheme became the 1000th scheme to transfer to the PPF since its inception.
How many more schemes will enter as a result of the economic impact of Covid-19? Only time will tell, but the PPF is already starting to factor this into its modelling.
Other ‘highlights’ from the first three months of the year included:
- The Courts grappling with more RPI/CPI cases, where trustees and employers sought clarification on the correct measure of price inflation for increases to pensions in payment. Pension indexation is another 2020 theme to which we will return.
- Changes to pension schemes Internal Dispute Resolution Procedures (IDRPS) to reflect the Money and Pensions Service (MAP) bringing together three existing financial guidance bodies: The Money Advice Service, The Pensions Advisory Service and Pension Wise.
- Stephen Timms agreeing to fill the big shoes of Frank Field, following his appointment as Chair of the Work and Pensions Committee. In Q1, we also witnessed a high-profile cabinet reshuffle that included the resignation of Sajid Javid as Chancellor and his replacement by Rishi Sunak – a name the UK public would come to know very well as the year progressed.
- TPR published its response to its consultation on the ‘future of trusteeship and governance’, which received a record 114 written responses.
- TPR also published the first stage of a major consultation on its revised Code of Practice for defined benefit pension scheme funding.
- HMRC published the first of two newsletters of the pension tax implications of addressing inequalities arising from Guaranteed Minimum Pensions (GMPs).
- And, in the March 2020 Budget, there was an increase in the level of ‘adjusted income’, at which the annual allowance is reduced, from £150,000 to £200,000; the minimum tapered annual allowance reduced from £10,000 to £4,000; and a consultation on reform of RPI was published.
Oh, and there was the ‘minor issue’ of The EU (Withdrawal Agreement) Bill receiving Royal Assent allowing the UK to leave the EU on Friday, 31 January, at 11pm, with a transition period until 31 December 2020. Brexit is yet another theme to which we will return.
Suffice to say, pre-Covid-19, the beginning of 2020 was a busy time for UK pensions. Further, as we will see, there was no let up as the pandemic took hold.
The second quarter of 2020 saw more failed attempts by pension scheme sponsors to reduce their pension liabilities by changing the measure of price inflation for increases to pensions in payment from RPI to CPI.
It also saw the publication of TPR’s annual funding statement which, not surprisingly, focussed on guidance for completion of valuations in the Covid-19 environment; Coronavirus was now headline news. This statement from TPR was both preceded, and followed, with specific guidance designed to help pension scheme trustees and employers cope with the financial impact of Covid-19.
In another response to the pandemic, the Corporate Governance and Insolvency Bill was published to provide greater opportunities for corporate survival and better returns for creditors during and after the Covid-19 emergency. This Bill, now an Act, has important implications for pension schemes which are material, and usually unsecured, creditors of their sponsoring companies.
Last, but by no means least, in Q2 2020, we were also provided with interim superfund guidance, setting out TPR’s expectations for DB consolidator superfunds, and the High Court ruling in the Hughes case where it was held that the PPF compensation cap age is discriminatory (this ruling now being appealed).
This brings us to the second half of 2020.
The third quarter of 2020 was a relatively quiet three months, but still notable for the following:
- Another ‘Barber equalisation window’ case (Safeway v Newton).
- More on GMP equalisation in the form of a second HMRC Newsletter, covering lump sum payments, and PASA guidance, which dealt with data and member communication.
- A pensions tax relief consultation, which many consider to be the ‘thin edge of the wedge’ in terms of more far-reaching reform that could entail the end of marginal rate relief on pension contributions.
- A consultation on climate change, which seems destined to become one of the issues of the decade for pension schemes.
- Another consultation, this time on defined contribution (DC) outcomes and likely to lead to further consolidation of DC pension schemes.
- Legislation providing that debts owed to HMRC following company insolvency are to have secondary preferential status from December 2020.
- More updates to TPR Covid-19 guidance, specifying that, from 1 January 2021, DC schemes and providers will be asked to resume the reporting of late contribution payments and that from, 1 October 2020, other types of enforcement start to return to normal.
This brings us, as winter follows autumn, to the final quarter of 2020.
The Pension Schemes Bill, mentioned at the start of this article, is close to Royal Assent and contains important provisions around TPR powers, scheme funding, collective DC schemes, the Pensions Dashboard, restrictions on transfer rights and more measures on climate change.
TPR is asking us to “pledge” to combat pension scams by signing up to their latest campaign for protecting pension savers.
On a related note, the High Court clarified how the legislation governing the Fraud Compensation Fund (FCF) should be interpreted, paving the way for pension scam victims to claim compensation.
The High Court told us, in the second Lloyds Bank Pension Schemes case, that trustees of DB schemes, which provide GMPs, are required to revisit and, where necessary, top-up historic cash equivalent transfer values that have been calculated on an unequalised basis.
And the Government confirmed that the Retail Prices Index will be reformed to align with the Consumer Prices Index, including owner occupiers’ housing costs, but not before February 2030.
So having reflected on the year just passed, what might 2021 bring? Twelve months ago no-one’s crystal ball had a global pandemic front and centre of their predictions for 2020. A cautious author would finish the article here.
From a wider perspective, the recent news on various vaccines gives hope that life will start to change again, to another new normal, a bit more like the old normal, but probably still different. The global focus will be on delivering economic recovery.
In the pensions world there are a few things on the horizon that we can be reasonably certain we will hear more about in 2021:
- Brexit and, in particular, end of the transition period without a UK/EU deal being reached (or with?)
- Economic ‘fall-out’ from Covid-19
- Budget 2021
- GMP equalisation, with schemes finally ‘doing it’
- Hampshire, Bauer and Hughes and implications for PPF and levy payers
- Legislation for commercial consolidators and superfunds
- TPR’s consultation on a new DB funding framework
- Climate change.
The world will keep turning, and life and change will continue to flow.
I’ll leave you with a quote from a 10th Century Anglo-Saxon poem, better known from the Saxon Stories of Bernard Cornwell.
Wyrd bið ful āræd. Fate is inexorable.