How will actuaries apply the s37 remedy in practice? New FRC guidance published

In our second s37 remedy update of the year, we consider the guidance published by the Financial Reporting Council on 23 January (the “FRC guidance”) which is intended to support scheme actuaries with applying the remedy provisions.

What is the guidance?

For a reminder of the s37 remedy provisions and the background which led to their development please see our earlier updates here and here. To summarise very briefly, under the draft legislation, where the trustees identify a rule alteration where evidence of s37 confirmation was required and is missing or somehow deficient, trustees can make a written request to the scheme actuary “to consider whether or not, on the assumption that it was validly made, the alteration would have prevented the scheme from continuing to satisfy the statutory standard”. If the scheme actuary is satisfied that it is reasonable to conclude that it would not have prevented the scheme from continuing to satisfy the standard, they can then give a written confirmation to the trustees to that effect. This retrospective fix is available in respect of alterations that are “potentially remediable” (see our earlier articles for more details on this).

As we highlighted in our most recent article (regarding the latest round of amendments to the draft remedy provisions), the legislation is only one part of the puzzle when it comes to seeking retrospective confirmations of s37 compliance. The others we identified were the decision in Verity Trustees v Wood (which is expected to address key questions regarding the scope of the original s37 requirements) and the actuarial guidance to accompany the legislation i.e. the FRC guidance document.

The FRC guidance has been prepared with input from the Institute and Faculty of Actuaries and the Association of Consulting Actuaries, as well as the wider pensions community. Importantly the guidance is not yet final – it is being published now to give actuaries “sufficient time to prepare” but may be updated to reflect legislative changes to the remedy provisions as the Pension Schemes Bill progresses through Parliament.

Key points

The FRC guidance is 28 pages long and includes a helpful section of worked examples, to illustrate how the FRC envisages the practical application of the principles laid down in the guidance. Badged as “practical and non-prescriptive”, the stated purpose of the document is to help actuaries consider remedy applications “in a proportionate manner and to promote consistency across the industry”.

Key terms: There is guidance on interpreting some of the key terms that appear in the remedy provisions but are not defined: 

• “reasonable to conclude” – FRC guidance says the phrase has its ordinary meaning and the scheme actuary is expected to use their judgment. It highlights that certainty is not required, the scheme actuary is expected to reach a “reasoned and justifiable conclusion taking into account all the relevant facts and circumstances identified after taking a proportionate approach to the gathering of data”.
• “continuing to satisfy” – this, the guidance says, means that the scheme actuary should assume that the reference scheme test (RST) was met immediately pre amendment and only consider the rule alteration itself, not the impact of any changes (e.g. to pay structure) over time. If it is later established that the scheme did not meet the RST immediately prior to the alteration that is a matter for the trustees.

Proportionality is key: This is a running theme in the guidance. Paragraph 4.2 sets out a helpful list of what the scheme actuary does not need to do, including not needing to obtain the full data, or to determine with certainty whether the RST was met after the alteration (or indeed, confirm with certainty whether the alteration would not have prevented the scheme continuing to meet the RST). Paragraphs 4.6 – 4.9 draw out that there are likely to be circumstances where an understanding of the rule alteration alone can be sufficient to “determine whether the alteration would not have prevented the pension scheme from continuing to meet the RST”. Examples may include alterations that do not decrease benefits or where the benefits are subject to an RST underpin. Where there is uncertainty about the rule alteration or its meaning, the actuary is encouraged to seek input from the trustees or their legal advisors. 

Data: Where further information is required for the scheme actuary to reach their view, a key area of uncertainty has been how actuaries would tackle the practical issue of lack of data – due to the passage of time this is likely to be an issue for many schemes. Paragraph 4.5 is helpful in this regard: “In the majority of cases, the scheme actuary will not need full individual membership data to be able to form an opinion on whether it is reasonable to conclude that the rule alteration would not have prevented the pension scheme from continuing to meet the reference scheme test”. 

Under s101(4)(a) of the remedy provisions when applying the remedy the scheme actuary “may act on the basis of the information available to the actuary, as long as the actuary considers it sufficient for the purpose of forming an opinion on the subject-matter of the request”. The FRC guidance highlights that the scheme actuary is expected to use their judgment over what information is sufficient, and that they are “encouraged” to use information that is “readily available” i.e. can be obtained without incurring disproportionate time and effort.

Under s101(4)(b) the actuary can use any professional approach – this includes making assumptions or relying on presumptions – this, says the guidance, means the actuary may make appropriate assumptions about the scheme and / or information which is not available.

For the trustees’ part, when the scheme actuary requests information, it is for them (or the employer where appropriate) to decide how much time and effort to spend on obtaining the data; the corollary is that the scheme actuary will need to decide whether what is provided is sufficient for them to reach a conclusion. Examples are given as to the forms of data that may provide indirect evidence (paragraph 4.13) and paragraphs 4.15 – 4.18 deal with the particular issues around earnings data and information.

Commentary

The FRC guidance is helpful in many respects, advocating for a proportionate approach, including in respect of historic data which it recognises is unlikely to be available in full. Highlighting that certainty is not required is also welcome. Indeed, taking the document as a whole, there is a definite sense that a common-sense approach to working with schemes to find solutions is being actively encouraged. This is consistent with the DWP’s broader policy objective in bringing forward the remedy provisions.

The FRC guidance addresses a key area of potential tension – what happens if the trustees request a retrospective confirmation that the scheme actuary considers is not necessary because, in their view, there is sufficient evidence of a confirmation having been given at the time? The guidance indicates that in this circumstance the scheme actuary may suggest that the trustees seek legal advice but that, notwithstanding they consider the retrospective confirmation unnecessary, they “may nevertheless be able to form an opinion that it would be reasonable to conclude that the rule alteration would not have prevented the pension scheme from continuing to meet the reference scheme test. In this event, the scheme actuary may wish to consider confirming this to the requesting trustees or managers” (para 4.29).

Another potentially knotty area that is helpfully addressed in the guidance is the approach of the actuary where there are multiple rule alterations to consider. The guidance indicates that where the rule alterations have the same effective date the scheme actuary can consider them together and look at their combined effect (paragraph 4.31). Where the rule alterations have different effective dates they’ll need to be considered sequentially but when gathering information the actuary should consider asking for information about them all together (not least as information relevant to one alteration may be relevant to another). 

What next?

As we’ve highlighted in earlier updates (e.g. here and here), there may be specific circumstances for certain schemes that mean it is advisable to take action before the remedy provisions are finalised and the Bill’s drafting does envisage that requests can be made before the Bill becomes law. However, in general our view has been that for most schemes, it will be sensible to wait until the drafting is finalised, and the Bill has received Royal Assent. The publication of this guidance does not, we think, change that general position – it has been shared pre Royal Assent expressly with a view to helping actuaries prepare, rather than in order to fire the starting gun on trustee requests under remedy provisions (which are of course not yet law).

Trustees are promised their own guidance from the Pensions Regulator (TPR) – this is expected in the Spring. TPR’s director of Policy Joey Patel has said that TPR’s guidance will “support trustees to navigate this issue while ensuring that schemes are continuously in compliance with legal requirements”.

And of course, the decision in Verity Trustees v Wood is still awaited – we are monitoring developments in this case carefully and will share updates as they become available.

If you have any questions at all about the new FRC guidance, or s37 issues more generally, please do get in touch with Richard Knight or your usual Burges Salmon pensions team contact.