UK Pensions Law Update – November 2022

Following confirmation from the Treasury in 2020 that the Retail Prices Index (“RPI”) will align with the Consumer Prices Index (including owner occupier housing costs) (“CPIH”) from 2030, the trustees of the BT Pension Scheme, Ford Pension Schemes and Marks and Spencer Pension Scheme sought judicial review of the decision.

By way of reminder, the trustees’ view was that the full impact of the decision has not been properly thought through. They considered that such a challenge was necessary, as the changes would:

(i) result in millions of pensioners being poorer in retirement. It has been estimated that aligning the RPI with the CPIH from 2030 will reduce the value of affected defined benefit pensions by 4-9% (with women suffering the most, due to greater life expectancy); and

(ii) reduce the value of RPI-linked assets held to meet pension benefit promises, leading to the weakening of schemes’ funding positions (with the consequent impact this would have on sponsoring employers). The reduction in market value of RPI-linked gilts held by defined benefit pension schemes was stated to be around £60 billion.

As an aside, RPI-linked gilts issued before July 2002 contain an early redemption clause which would allow the gilt-holder to redeem it before it matures if there is a “fundamental change” in the RPI which would, in the Bank of England’s opinion, “be materially detrimental to the interests of stockholders”. The Bank confirmed in March 2019 that aligning the RPI with the CPIH would constitute such a “fundamental change”. The last of these “old-style gilts” with this early redemption clause matures in 2030. The Chancellor has a power to veto any change in the RPI which could trigger this early redemption provision, and has therefore refused consent to change the composition of the RPI until 2030 to avoid mass early redemptions.

The High Court has dismissed the claim on the basis that:

(i) the decision was not outside the powers granted to the UK Statistics Authority to change the composition of the RPI;

(ii) it was reasonable for the UK Statistics Authority to focus solely on the statistical flaws in the RPI when making its decision, and it was under no duty to take into account the interests of pension schemes and other gilt-holders;

(iii) the Chancellor did consider the adverse impacts on gilt-holders and was entitled to act on the advice he received that gilt-holders were not entitled to any compensation for the change in the RPI’s composition from 2030;

(iv) the degree to which the public were consulted over the change and any relevant compensation was not unreasonable; and

(v) the implementation of the change need not be delayed further.

Comment

Given how high the bar is for success in judicial review actions, it is perhaps unsurprising that the claim failed. Schemes should now focus on how the alignment of the RPI with the CPIH might affect their members and consider including appropriate reference in the next scheduled member communication.

During the recent Conservative Party Conference in October 2022, Michelle Donelan, the new Secretary of State for DCMS, made a speech announcing a plan to replace the UK GDPR with a new “British data protection system”.

Donelan detailed the aims of the DCMS – being to drive growth and create more highly paid tech, digital and creative jobs with a view to growing the economy. She suggested that “there remains a significant amount of red tape in our way”, singling out data as an area to focus on. Specifically, Donelan referenced the “bureaucratic nature” of the current UK GDPR regime and research by the DCMS to justify the need for a new regime. This announcement means that the Bill, which is currently progressing through Parliament, is now likely to be abandoned. Donelan made no reference to the Bill in her speech. As the Bill would not be hugely transformational to UK data laws, it is possible that Donelan is now seeking to bring about a more radical overhaul of the UK GDPR regime.

Although detail about the new British data protection system was scarce, Donelan’s speech states that it will continue to protect consumer privacy whilst providing a simpler landscape for businesses to navigate, citing regulations in other countries such as Israel and Japan as examples of alternative data protection regimes. Further, Donelan’s criticism of the UK GPDR focussed on the current requirements for smaller organisations “in the main [being] forced to follow the same one-size-fits-all approach as a multinational corporation”.

However, any changes will need to find the right balance between:

(i) reducing some of the administrative burden of the UK GDPR; while

(ii) maintaining the UK’s finding of adequacy from the EU Commission that facilitates the sharing of personal data between the UK and the EU.

Comment

Pension scheme trustees have spent a significant amount of time reviewing policies, procedures and contracts with third party providers to ensure compliance with the current UK GDPR regime. So, the advantage of the Bill, if enacted as initially published, would have been that changes to the status quo might have been minimal.

That said, if some of the bureaucracy of the current regime is removed in future then that could be welcome in the longer term – albeit of course there will likely be much initial work involved in getting pension schemes’ current arrangements to fit with the new regime. We shall continue to monitor developments in this area.

The DWP has announced its proposal to establish a Minister-led, cross-department taskforce on the “S” in ESG – ie social factors. This is to address the DWP’s finding that most schemes do not focus on social factors when making investment decisions. The taskforce would identify reliable data for use by pension schemes to assess financially material social risks and opportunities when making investment decisions.

The proposal came as part of the DWP’s response in July 2022 to its call for evidence for consideration of social risks and opportunities by occupational pension schemes back in March 2021. The response acknowledged that there is an inclination for special policies on social factors adopted by schemes (where they have been adopted) to focus on human rights in the context of business practices, but also noted the need for more transparency in reporting on modern slavery in the supply chain, as this could bring a financially material risk for pension schemes. The response also identified the potential growth opportunities provided by social bonds issued by corporates from emerging markets.

Comment

The “S” in ESG has seen less focus than its cousins in recent years, not least because data focusing on the social impact of investment decisions is not readily available. Whilst trustees’ legal investment duties are clearly focused squarely on financial return, financially material social opportunities and risks are part of that equation. The Government’s desire to provide pension schemes with data to help them focus on the “S” is therefore to be welcomed.

The draft Funding Regulations would require DB schemes to:

(i) set a date at which the scheme will have reached “significant maturity” – this will be the date it reaches a duration of liabilities which will be set out by tPR in the revised DB funding code. Currently, this expected to be 12 years; and

(ii) determine a low dependency asset allocation and funding basis which the scheme plans to reach before that date of “significant maturity”. For these purposes, low dependency means that the scheme is unlikely to require further employer contributions under “reasonably foreseeable circumstances”.

The DWP appreciates that scheme maturity varies depending on the proportion of active / deferred members and pensioner members in the schemes and intends to provide flexibility to open schemes so that they are not prevented from investing in assets with potentially better returns, so long as the risks can be supported (which will depend on the strength of the employer covenant). The stronger the employer covenant to back negative outturns, the less risk-averse the strategy can be.

Significantly, the draft Funding Regulations would once again require recovery plans to eliminate shortfalls “as soon as the employer can reasonably afford”. This is essentially a move back to the legislation as it was when introduced in 2006, and reverses later changes which acknowledged that an employer’s sustainable growth could and should also be taken into account – that an employer should not be expected to pay contributions at a particular level simply because it can afford to do so.

Schemes will be required to determine their first funding and investment strategy no later than 15 months after the effective date of the first actuarial valuation after the Funding Regulations come into force. Trustees will also be required to submit a written statement of strategy to, and in a form required by, the Pensions Regulator (“tPR”), setting out the strategy itself, alongside other supplementary matters. The statement will need to be signed off by the chair of the trustee board.

Comment

Much of the detail of the new requirements for long term journey planning is yet to come and will be set out in tPR’s next iteration of the DB Funding Code (due to be published for consultation later this year). That said, the proposed switch back to a focus on employer affordability when setting deficit repair contributions is of particular note.