Chris Brown, Director, Burges Salmon

Hello everyone and welcome to the fourth episode of season three of the Burges Salmon Pensions Pod. My name is Chris Brown and I'm a director in the pensions team and as I'm joined, as usual, by Helen Cracknell, hi Helen.

Helen Cracknell, Senior Associate, Burges Salmon

Hi Chris, hi everyone.


And Helen I've been really looking forward to this episode because I've been off the last week and you've been working very hard here with the trainees in our team, so these are the trainees who move around different areas of the firm and our five trainees Shannon, Lydia, Emily, Katy and Scarlett currently sitting in pensions and Helen they're going to give us a bit of a news update with five different news stories, that's right isn't it?


Yes, so a bit of a different one this week, so lots of different people speaking and we're looking at five interesting pensions news updates, so covering both Define benefit and Define contribution pensions


Brilliant, okay, so without further ado I'll hand over to you and everyone welcome to the podcast.


So, as mentioned, our guests today are our pensions team's current trainees Shannon, Lydia, Emily, Katy and Scarlett, welcome everyone to the podcast. So Shannon, what's the first topic of today's podcast about?

Shannon Willett, Trainee Solicitor, Burges Salmon

Thanks Helen. So this episode is all about hot news topics and so it only seems right to mention the liability-driven investment crisis given that hardly a week goes by without the word 'LDI' cropping up in the pensions press. In the last month, since we last discussed LDI in episode one of our podcast, the Work and Pensions Committee have published a letter from the Pensions Regulator regarding its investigation into the LDI crisis and has announced a further inquiry.


Can you let our listeners know a bit more about what that letter covered?


Sure, in the letter the Regulator said it is considering how to collect data on LDI arrangements and consequent liquidity buffers. With its current data collection system geared towards annual collection, the Regulator has raised with the DWP the possibility of introducing a new notifiable event which would require schemes to notify the Regulator of the status of their LDI arrangements, for example if the financial buffers in place are eroded beyond a certain threshold. If this route is adopted schemes would be encouraged to comply on a voluntary basis in the period before the notifiable event is introduced.


That's quite interesting then, but what do you think would be the next step in this topic?


The Work and Pensions Committee has opened a further call for evidence to inform a session with the pensions minister in the economic secretary to the treasury in March on whether or not further regulation is required. The deadline for submissions is Friday the 3rd of March, but in the meantime there are some things that trustees with an LDI strategy should be doing, such as confirming what has happened to their schemes funding level since October, speaking to their investment consultant and LDI managers about changes that may need to be made to their strategy, and collating the documentation relating to the scheme's LDIs, for example.


Thanks Shannon, that's really clear. Also, if any of our trustee listeners are keen to find out more on the practical considerations, please look at our blog where Catrin Young discusses further actions trustees can take in the meantime while we're waiting for this all to unfold. So, now moving on to Lydia, what topic are you going to cover today?

Lydia Morris, Trainee Solicitor, Burges Salmon

Thanks Helen, so I thought it'd be interesting to run through a call for evidence which was published by the department for Work and Pensions on the 30th of January, and this open consultation seeks to address the challenge of deferred small pots.


So can you explain what that challenge is for our listeners? It's definitely a hot topic at the moment I'm seeing all over the news.


Of course, so since 2012 the introduction of automatic enrolment has meant that millions of people have begun to save their pensions, however that has also resulted in individuals accumulating a number of deferred small pension pots over their working lives, so when someone leaves their employer they may just have a few hundred pounds saved and they would leave that small pot behind rather than go through the effort of transferring it to their new employees pension scheme because that's not always a simple process. And the risk is that individuals will then lose their pension pots over their lifetime or never claim them and the Pensions Policy Institute have recently estimated that the value of lost pension pots has grown from £19.4 billion in 2018 to £26.6 billion in 2022. That growth adds increased costs and inefficiency into the UK workplace pensions market and there have even been warnings that it could damage the financial sustainability of master trusts or the credibility of automatic enrolment itself and on an individual level it can be quite difficult for people to keep track of these small pots. They could be eroded by charges as well and for some people it's often more logical to have one big pot of pension savings because then there's more opportunity for growth and you'll have more opportunities on retirement.


So what kind of solutions are there out there?


So the Department for Work and Pensions have narrowed down to two potential solutions and they're asking for responses on both of these solutions in the call for evidence. So the two solutions are, the first is the creation of default consolidators. So with this your deferred small pots which are eligible, they transfer automatically to one consolidator, and members would still be given an opportunity to opt out if they wanted to. The second solution is the introduction of pot follows members legislation, so under this model when an employee moves jobs their deferred pension pot in their former scheme would automatically move with them to the new employer scheme, if it meets certain eligibility criteria. So those are the two potential solutions and the consultation will close on the 27th of March. There'll still be a further consultation period to follow that and there are a number of issues that do need to be resolved, so a practical solution could still be a number of years away.


Definitely one to keep an eye out on at the moment. I know that personally lots of my friends have lots of different pots from different jobs. Nowadays I think people move jobs more regularly than perhaps in the past, so it's really something that needs a solution.

Emily I understand you'll be covering a recent memorandum of understanding?

Emily Fox, Trainee Solicitor, Burges Salmon

Hi Helen, yes, thank you, so another hot news topic that has come to our attention recently has been the memorandum of understanding, signed on the 7th of February between the Department for Work and Pensions and the Pensions Regulator in relation to criminal offenses. Now this relates specifically to criminal offenses for avoidance of employer debt and conduct risking accrued in benefits, as specified under sections 58a and 58b of the Pensions Act 2004. So, the memorandum states that while both the Secretary of State and the Pensions Regulator are designated prosecutors for the offenses, it is expected that the Pensions Regulator will bring prosecutions rather than the Secretary of State. It is expected that the Secretary of State would not initiate a prosecution against a person for an offense where the Pensions Regulator has decided against prosecution. Of course except in exceptional circumstances for example where the Pensions Regulator ceases to exist or its ability to prosecute is otherwise hindered.


That's definitely providing further clarity, but isn't there already an MOU between the Department of Work and Pensions and the Pensions Regulator in place?


Yes you're correct, so let's clear this up, the general roles of the Department for Work and Pensions and the Pensions Regulator are described in a memorandum of understanding between the Department for Work and Pensions, the Pensions Regulator and the pension protection fund, which was set out in February 2008. This was the tripartite MOU. So where there might be any conflict arising between the tripartite MOU, and the new MOU, it is the tripartite MOU that takes precedence.


Okay, yes that's good to know. Katy, are there any recent cases to update our listeners on?

Katy Dixon, Trainee Solicitor, Burges Salmon

Yes thanks Helen, I'd like to talk a bit about the recent developments in the options UK personal pensions LLP and financial Ombudsman service case. Now before going on any further, I just want to clarify that options UK personal pensions have changed their names throughout this matter, there's options throughout just for simplicity, so the backstory to this is that the financial Ombudsman service upheld a complaint by Mr Fletcher. Now, Mr Fletcher had been cold-called by an entity called CLP who advised him that he would get better retirement income, lower level of investment risk if he were to transfer his pension savings into a sip administrated by options, so Mr Fletcher then did this.

Now, CLP were not authorised by the FSA to carry on the regulated activity of advising on investments and unfortunately the investment into that sip wasn't successful and Mr Fletcher suffered a significance at financial loss and so complained to the financial Ombudsman.

Now, the financial Ombudsman considered that even though options had no duty to advise Mr Fletcher, it was not fair or reasonable for them to accept his application for the sip, after that unregulated advice from CLP.

Therefore they deemed it was reasonable for options to compensate Mr Fletcher for the financial loss, with an additional award for the trouble and upset, so that was the financial ombudsman's decision on the 28th of March 2022, on the 21st of December 2022 the high court refused options application for a judicial review of that decision by the Ombudsman and the recent update to this matter is that on the 23rd of January 2023 an appeal was lodged by options against that refusal for judicial review of the financial ombudsman's decision.


So what kind of takeaway is there for the pensions landscape?


Well you see in the high courts judgment in December, which was refusing options application for judicial review, there was quite a lot of relevant points particularly to the duties of pension providers and managers to their members. So in that application options are put forward five grounds for why they thought the financial ombudsman's decision was incorrect and two of which specifically related to their duties.

So first of all options claimed that they had complied with their contractual and common law duties and then secondly, they also tried to put forward that the financial Ombudsman had erred in finding that they had a duty due diligence on introducing parties. So to do this options try to differentiate between the code of business rules 2.1.1, which is actionable, and the SRA principle six which is not. But the judge ultimately held that there is in reality very little meaningful difference between those two because both of them actually imposed an obligation to act fairly and both refer to the interests of the client. Therefore it was deemed that the complaint was upheld and its reference to the relevant rules and guidance was deemed acceptable.

So to summarise this case, it gives quite an interesting insight into the obligations of pension providers and though an appeal of that rejection of just judicial review was expected, it will be quite interesting going forward to see the outcome of that appeal, as it could give further clarification on what the obligations are of pension providers to their members.


Definitely, scams are a massive hot topic at the moment, so I guess this is interacting with that as well. Scarlett, what's our final topic for today?

Scarlett Sullivan, Trainee Solicitor, Burges Salmon

So Helen, our final topic is the value for money consultation paper, which was published by the Department for Work and Pensions on the 30th of January this year. So the paper seeks views on policy proposals to introduce a value for money framework and Regulatory regime which covers defined contribution pension schemes.

The aim of the value for money framework, or VFM framework, is to shift the focus of the DC pensions market away from cost and onto value. In practice the framework seeks to encourage greater transparency of reporting across the DC pensions market and also to support consolidation of schemes where this is in savers' best interests. So the consultation proposes two possible approaches to how schemes will carry out the VFM assessment in practice. The first is by way of regulator defined benchmarks with thresholds set beneath each benchmark that schemes would have to meet or exceed to be assessed as value for money.


And what's the second approach?


So the second proposed approach to assessment is by market comparisons, whereby trustees will compare their scheme with at least three others and how disclosure will be reported hasn't yet been finalised but publication of results is likely to be either via the provider's websites, which is a more decentralised approach, or via an official centralised portal. So the conclusion of the VFM assessment should enable schemes to clearly fall into one of three categories and the categories are quite clear, they're either value for money, not currently value for money but with identified actions to improve in certain areas that would deliver value for money, and the third category is not value for money. So the published VFM assessment would include this result, as well as an explanation of the assessment and comparisons behind the findings and the assessment has to be in sufficient detail to allow independent or regulatory challenge of the result and and the overarching aim of the VFM framework is that public disclosure of these assessments should hopefully incentivise underperforming schemes and providers to either improve or to exit the market altogether.


Quite a definitive answer there.

Thanks everyone for coming on the podcast and sharing our hot topics of the moment.

Thanks everyone for listening to the Burges Salmon Pensions Pod. If you'd like to know more about our pensions team and how our experts can work with you, you can contact myself or Chris or any of our team via our website. All of our episodes are available on Apple, Spotify or wherever you listen to your podcasts. Don't forget to subscribe and thanks for listening.