“When I set up my consultancy, who could have foreseen what the world would be facing just a month or so later?”. Setfords Consultant Solicitor Maria Riccio reflects on the impact of the pandemic on the world of UK pensions together with some observations on broader issues.
Following the first lockdown, furlough became an all-too-familiar term for many. Whilst the scheme presented help to employers from a general employment perspective, it threw up questions about the treatment of employees from a workplace pensions perspective, in particular auto-enrolment duties. It was pretty tricky for employers who handle their pensions payroll themselves, especially for their employees on flexible furlough. Those using external providers had a bit more initial success, at least after they got over remote working challenges!
Then it was the turn of employers sponsoring defined benefit schemes. The impact of Covid on their businesses meant that many were facing payment default and wanted to negotiate new rates with their trustees to stay afloat. I had thought that perhaps the flood gates might open, but most employers have weathered the storm without having to make interim changes to their normal contributions. To be honest, although the Pensions Regulator allowed some flexibility, the hoops to go through are strict, off-putting, and in most cases, unachievable. When you then add the overarching duties owed by the trustees to scheme members, it becomes a challenging exercise. And all the while this was going on, employers, trustees and advisers needed to be on high alert to a host of new problems, such as rising scams and savers panicking and not making good decisions about their UK pension options. It has certainly shone a light on how important it is for pension schemes to get good advice from people they can trust and rely upon.
It is also worth noting that from 1 October 2021, the Pensions Regulator will have its current statutory powers beefed up. Two new tests will be added to issue contribution notices for defined benefits schemes. Plus, there will be the introduction of new criminal offences aimed at more severe or reckless conduct. The new powers are not expected to change the kind of behaviour that the Regulator will investigate but gives it many more options and a more extensive armoury to deal with wrongdoers.
Then, of course, there is the age of the virtual meeting. Most UK pensions professionals grasped this relatively quickly, and professional trustees will almost certainly carry this on for routine matters or urgent project matters. Those I know do not think that traditional face to face meetings should stop completely. After all, trustee boards are a team. And, for the most effective team working, they need to get together in person.
I have watched quite a few online lectures, and whilst they are very good, I have to admit that I can find myself multitasking or getting distracted by the dogs – it’s not ideal. And, of course, networking does not work remotely. There are only so many quizzes or cheese and wine evenings you can take part in – but as hard as you may try, you cannot really get to know anyone.
Going back to UK pensions, we also have the rise of climate change and how pension funds are approaching Environmental, Social and Governance (ESG) investing. So, what is ESG? It is a set of rules that investors (generally, trustees of occupational pension schemes) use to assess the assets they may want to invest in, considering their own values and those of their scheme members. It also has a broader impact as it can reveal poor governance and the environmental impact on their decisions. At the virtual 2020 Pensions and Lifetime Savings Association (PLSA) conference, speakers from The Church of England Pensions Board and the National Employment Savings Trust (NEST) spoke about their attitudes to climate change. They agreed that they do not want their members retiring in a world ravaged by global warming. It was felt that if UK pension funds use their collective leverage, they can drive the transition to a low carbon economy in the interests of scheme members. New legal requirements relating to climate change risk and how pension schemes should deal with it are coming in on 1 October 2021.
I would raise a little word of caution here as pension scheme trustees are constrained by their governing trust deed and rules, which is the starting point in deciding what they can or cannot invest in. In addition, they must comply with other pensions legislation and their trust law and common law duties flowing from case law. So, trustees need to take advice from their legal advisers and investment advisers.
We have also seen the increasing differences in demographics and generations. I think it is true to say that anyone 50 or over is probably the last generation who will be able to retire on a half-decent pension. It was bad enough before the pandemic, but we now know that younger workers have borne the brunt of it with more job losses than other age groups, and they also save and invest in less generous defined contribution schemes. At the same time, UK pensioners have become relatively wealthier through better performing pensions, inheritances and other investments, including homeownership.
Of course, there are rumours of the sacred triple lock on state pensions ending. The Conservative-Liberal Democrat coalition introduced it in 2010 to ensure that the state pension does not lose its value in real terms. It is a three-way guarantee whereby the state pension is increased by the greatest of average earnings, prices measured against the CPI or 2.5%. Employees coming off furlough and back to full pay is recorded as a significant rise in average earnings. This leads to the unique situation of a rise, possibly of 8% to the state pension (based upon Bank of England estimates). So, you can easily see the problem. The retention of the triple lock was a Conservative manifesto promise, but the Chancellor has now hinted that it could be broken to ensure fairness between taxpayers and pensioners. Despite the general inequality, there are, of course, many thousands of UK pensioners who exist on the state pension alone. The Chancellor needs to find ways to pay for the unprecedented economic support during the pandemic, and it cannot all come down to the taxpayers. A change is inevitable; maybe a cap could be placed upon the average earnings figure; who knows? Over to you, Mr Sunak…
I am going to finish my little run through with a few words about public service pensions. All the public service pension schemes were changed in 2015 to introduce a lower level of pensions accrual. In addition, the normal pension age was increased, but transitional provisions were applied for people over a certain age to protect their previous pension age. This special protection was challenged in the McCloud case as being age discriminatory. The Government lost, and all public service pension schemes are now going through the process of remedying the discrimination—an extraordinarily complex and expensive task and, in most cases, a further burden for the taxpayer.
McCloud has proven to be the nail in the coffin for some private sector employers who, by their unique nature, can participate in some public service schemes, for example, independent schools participating in the Teachers’ Pension Scheme (TPS). Many independent schools have seen their incomes fall in the last few years, and now Covid has added further to this burden. The reality is that the TPS is not a sustainable pension provision for most in the independent sector. Many schools have already exited or are in the process of exiting. They have already faced a massive hike in their contributions (which does not apply to state schools). Exiting is, of course, not popular with the teaching staff, regardless of the cost. As such, it must be handled carefully. Schools should realistically factor in an academic year to undertake the process of taking suitable professional advice.
Overall, it’s a rather gloomy picture for UK pensions. But then again, it is for most things right now. However, at long last, we have reached so-called “Freedom Day” – I, for one, very much hope that we can start to get some of the “old normal” back again.
This note is not intended to substitute legal advice from your instructed lawyer. You should always consult with your lawyer directly regarding any specific queries you may have.