Pensions financial reporting update

This page details relevant changes in the regulatory and financial reporting environment. Further details of many of the changes are set out on our pensions sector page.

Single TPR Code of Practice
Pension Schemes Act 2021
Climate Change
Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2018
Conflict in Ukraine
Transfers and Scams
TPR Powers
Value for Members Assessment
Pension Protection Fund Levy consultation 2022/2023
GMP Equalisation Ruling – November 2020 and PASA guidance
DB Funding code
Changes to auditing standards and the classification of Large Schemes as other entities of public interest (OEPI)
RSM Publications

1. Single TPR code of practice

On 17 March 2021, the Pensions Regulator (TPR) launched a consultation on its intentions to consolidate 10 of its 15 codes of practice into a single code, their aim being to 'create a single point of consistent and up-to-date information for all pension scheme governing bodies'.

In addition, this consultation incorporated the changes introduced by the Occupational Pension Schemes (Governance) (Amendment) Regulations 2018 which stressed the need for Trustees to have 'effective systems of governance', bringing in a requirement for Trustees of schemes that have more than 100 members to perform their 'own risk assessment'.

Under these regulations, trustees are expected to establish a governance structure that is proportionate to the size, nature, scale and complexity of their scheme, making a risk assessment as to the suitability of their policies and procedures to address the financial, operational and other risks that their scheme faces.

This consultation period ran until 26 May 2021. On 24 August 2021 TPR published its interim response to this consultation, noting that more than 10,000 individual answers were received from a total of 103 respondents during the 10-week consultation period.

TPRs interim response to the consultation highlighted two areas that it would revisit its planned approach to:

Unregulated investments

an unintended consequence had been identified in its objective to limit the use of unregulated investments. As such they will now revisit how the original policy objective can be achieved without impacting larger schemes that use these assets as part of a well-managed investment strategy.

Own-risk assessment (ORA)

TPR stated that the responses had raised concerns around "the amount of work that it would create, the timeframe, the look of the finished product and the burden it would place on smaller schemes". As such it will look at the guidance requirements for this, reconsider the timeframe for both its introduction and the frequency of renewal of it.

TPR stated that on the whole, despite some concerns around applicability, the modular format of the new code had been welcomed by respondents.

In terms of next steps, TPR said in August 2021 that that the new code would not be laid before Parliament until Spring 2022 at the earliest. The expectation is that this will be at some point before the Summer 2022 recess.

Full details are available here.

2. Pension Schemes Act 2021

The Pension Schemes Bill 2019/20 received Royal Assent on 11 February 2021 and became enshrined into law. This Act introduces:

a framework for 'collective money purchase schemes' (often referred to as collective DC schemes);
increased powers for the Pensions Regulator (TPR), including the ability to issue fines and to impose Contributions Notices on companies or directors, as well as making it a criminal offence for employers to act in a way that increases the risk of accrued scheme benefits not being received or avoiding employer debts. In advancing the Bill, it was confirmed that these powers were not intended to be retrospective;
a requirement for trustees of DB schemes to create and maintain (with the agreement of the employer) a written statement of their scheme’s funding and investment strategy for ensuring that pensions and other benefits under the scheme can be provided over the long term;
amendments to the notifiable events framework;
pensions dashboards;
restrictions on statutory transfers, as a response to the heightened risk of pension scams; and
requirement for schemes to assess and manage climate risks and opportunities, publishing a climate change report annually, compliance being then reported to TPR through the annual scheme return. Larger schemes (schemes with £5bn or more in assets (excluding insurance policies), authorised master trusts and collective money purchase schemes) would need to have arrangements in place on climate change governance, strategy, risk management and targets from October 2021, publishing an annual report by the end of 2022. The requirements would then be rolled out to schemes with £1bn or more in assets the following year, with their application to smaller schemes reviewed in 2024.

3. Climate Change

On 8 June 2021, the DWP published its response to its January 2021 consultation, ‘Taking action on climate risk: improving governance and reporting by Occupational Pension Schemes‘
This response reconfirmed the detail included under the Pensions Act 2021 above, namely that from 1 October 2021, trustees will be required to meet climate change governance requirements, these being set based upon the recommendations made by the Task force on Climate-related Financial Disclosures (TCFD) for the financial sector.

In short, Trustees are expected to establish what the relevant climate-related risks are for their Scheme and then maintain oversight of these.

Where this oversight is outsourced, Trustees are expected to take ‘adequate steps to identify, assess and manage any climate-related risks and opportunities which are relevant to the governance activities they are undertaking’.

Trustees are then expected to report annually through a TCFD report as to how they have done so.

It is expected that Scheme members will be informed through their annual benefit statement (or the annual funding statement for members of DB schemes) that this Report has been published and where members can locate it.

Following on from the above, on 16 December 2021 the Pensions Regulator published complementary guidance to the statutory guidance that had been published by the DWP.

The aim of this being to assist Trustees in meeting these new requirements by providing examples that could be followed.

A copy of this complementary guidance is available here.

4. Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2018

The changes to the regulations included the following requirements for Trustees:

From 1 October 2019:

For schemes required to prepare a Statement of Investment Principles (SIP), it must be updated or prepared to set out:
- How they take account of financially material considerations, including (but not limited to) those arising from environmental, social and governance considerations (including climate change); and
- The Trustee’s policies in relation to the stewardship of investments, including engagement with investee firms and the exercise of voting rights associated with the investment.
In addition, for relevant schemes (a full definition is included in the Occupational Pension Schemes (Scheme Administration) Regulations, but can be broadly summarised as schemes offering money purchase benefits) trustees should:
- Publish their SIP on a website so it can be found and read by both scheme members and interested members of the public, and inform members of its availability via the annual benefit statement; and
- For default arrangements, prepare or update the default strategy to set out how they consider financially material considerations including, but not limited to, those arising from environmental, social and governance risk, including climate change.

From 1 October 2020:

For relevant schemes which are required to produce a SIP:
- Produce an implementation statement (IS) setting out how they acted on the principles that the trustees set out, and how the trustees acted on the Statement of Members’ Views; and
- Publish that implementation statement on a website so it can be found and read by both scheme members and interested members of the public and inform members of its availability via the annual benefit statement.

Some of the considerations around the Implementation Statement are challenging. The Pensions and Lifetime Savings Association (PLSA) have published guidance setting out:

What the legislation requires and by when
Some high-level ‘general principles’ for implementation statements
More detailed possible considerations
Specific guidance on voting behaviour
Top tips for investment (and responsible investment) communication.

This guidance is available here.

In October 2021, the DWP issued the following consultation ‘Climate and investment reporting: setting expectations and empowering savers’.

This consultation was produced to aid schemes in understanding what they need to do in relation to the ‘Paris Agreement’ and the required metrics, as the original requirements preceded this.

However, this consultation also included an explanation of DWPs expectations across the IS in those areas where Trustees were required to describe how they had implemented their investment policies.

This included both statutory and non-statutory (or best practice) guidance in areas where either feedback to DWP had indicated Trustees were experiencing challenges, or DWPs own view was that initial ISs were not complying with the Investment Regulations.

DWP have stated that they will ‘revisit the extent to which this Guidance is being followed and has helped trustees understand expectations around the SIP and IS – or whether a regulatory intervention is necessary.’ It was suggested that this would occur in the second half of 2023.

The consultation closed in January 2022.

A copy of this consultation is available here.

5. Conflict in Ukraine

The Russia-Ukraine conflict and the bringing of sanctions against Russia and certain Russian individuals has led to volatility in investment markets.

The Pensions Regulator (TPR) issued guidance to Trustees on 4 March 2022 on the considerations that they should be making in relation to their investment, risk management and employer covenant exposures.

This is included in full here, with areas TPR suggested that Trustees should be considering including:

Whether there has been any effect on the sponsor of the scheme, which has then in turn has consequences for the employer covenant. For example, through any direct impact to operations, trading links with suppliers or customers, or through broader macroeconomic factors such as increased inflation, rising fuel prices or foreign exchange risks;
The likely impact on the scheme’s investments including short/medium-term risks, and any liquidity challenges these events then present;
The adequacy of cyber safety procedures, in light of the potential heightened risk of cyber-attacks in the current environment;
The potential for heightened risk of financial crime, including scams and the need for procedures to be reviewed; and
Whether investments remain aligned with the policies and principles set out in the statement of investment principles, including environmental, social and governance considerations, as a result of these events.

TPR reminded Trustees that ‘aside from any short-term actions in relation to Russian investments due to divestment, sanctions, or change in appetite in relation to holding these investments’ that they should not be ‘making hasty, uninformed decisions’ with regard to their investment portfolio as a result of these events.

TPR also encouraged Trustees to communicate with members on any steps being taken to manage risks to the scheme, to avoid them ‘making rush decisions’ by providing them with ‘clear, relevant and timely information so they can [also] make informed decisions’.

6. Transfers and Scams

On 14 May 2021 the DWP published a consultation paper titled ‘Pension Scams: Empowering Trustees and Protecting Members.’

This consultation ran until 10 June 2021 with the intention of introducing further requirements on trustees, scheme managers and members of occupational and personal pension schemes prior to making transfer payments.

If the receiving scheme is a ‘low scams’ risk or the employee can demonstrate an employment link, then they can proceed as before. However, if these cannot be demonstrated then trustees and scheme managers are required to consider whether any defined ‘red flags’ exist. Should one or more of these exist then the transfer should not proceed.

The next step is then to assess whether any ‘amber flags’ are present. Should one or more of these be identified then the member must provide proof of having taking guidance for the transfer before the transfer can proceed.

To assist trustees and scheme managers in this process the DWP guidance includes an Annex with a standard list of questions for members to be asked.

Following the closure of the consultation, final regulations were published on 8 November 2021, alongside TPR guidance. These came into force from 30 November 2021.

Both the regulations and guidance were drafted with close co-operation between the Department for Work and Pensions (DWP), TPR, the Money and Pensions Service (MaPS) and the Pension Scams Industry Group (PSIG).

This guidance includes a decision tree and links to previously issued guidance to assist Trustees with tackling the requirements of the new legislation.

In addition to providing guidance, Pension Schemes were asked to make a pledge to combat scams by showing their commitments in this area to both its members and the pensions industry as a whole. Details of what this pledge entails and now it works is included here.

7. TPR Powers

On 29 June 2021, the Government published a response to its prior consultation on ‘Strengthening The Pensions Regulator’s Powers: Contribution Notices and Information Gathering Powers Regulations 2021.’

Under the Pension Scheme Act 2021, TPR’s new powers include the introduction of a new criminal offence of failure to comply with a Contribution Notice (CN) or, in the alternative, a civil penalty of up to £1m.

The response covered TPRs powers relating to Contribution Notices and information gathering powers. This included amounts for fixed and escalating penalty rates where there is non-compliance with any of TPRs information gathering requests.

TPR was asked within the consultation to consider whether it would produce further guidance on the new tests and its new powers more generally.

It was confirmed as part of TPRs response that ‘TPR is looking at updating its policies in this area as part of a wider piece of work to refresh and align their broader suite of operational policies, including aligning to changes brought about by the Pension Schemes Act 2021’.

TPR also confirmed that the ‘new jurisdiction tests are not retrospective, and that the new employer resources and insolvency tests will only apply to acts (or failures to act) from 1 October 2021’.

A further consultation on TPRs powers on notifiable events was issued. This set out a proposal for additional prescribed events. This consultation closed on 27 October 2021.

The final regulations are anticipated to be released in Spring 2022.

8. Value for Members Assessment

In June 2021, the DWP issued a joint response to two of its Defined Contribution (DC) consultations; ‘Incorporating performance fees within the charge cap’ (issued March 2021) and ‘Improving outcomes for members of defined contribution pension schemes’ (issued September 2020).

In this response it confirmed that new regulations will come into force that will challenge smaller DC schemes with total assets of less than £100m to demonstrate that they continue to offer value for members and that that value is comparable to larger schemes. TPRs view was that if this could not be done then Trustees of these Schemes should then wind these Schemes up and move their members monies into an arrangement that offers better value to them.

To give schemes time to obtain the necessary data to address these additional requirements, TPR stated that these requirements will now apply in the first scheme year ending after 31 December 2021.

In its response TPR also stated that ‘the next conversation [is] on what best value looks like for the millions of pension savers in medium and large schemes that are not in scope of the new value for members’ assessment’.

A full copy of the response can be seen here.

9. Pension Protection Fund Levy Determination 2022/2023

The Pension Protection Fund (PPF) consultation on levies for 2022/23 opened in September 2021. The PPF states in its consultation paper that while it has more information on the impact of the pandemic, and that substantial uncertainty remains, it plans to leave the parameters it uses unchanged for a further year.

Specifically, the Levy Scaling Factor (LSF) and Scheme-Based Multiplier are proposed to remain at 0.48 and 0.000021 respectively, with the risk-based levy cap set again at 0.25 per cent of scheme liabilities.

The credit scoring model that is used to calculate charges changed in April 2021 to a model operated by Dun & Bradstreet (D&B) that uses their Credit Ratings in a PPF specific model. This is to continue with the only change being that the mapping of Credit Ratings to Levy Bands or Rates has been updated in line with the policy statement that was issued in January 2021 which sought to remove some unintended inconsistencies between the Insolvency Risk Appendix and the basis with how D&B were themselves scoring companies.

As a result of these actions, it was suggested that there would be a reduction again in the overall levy collected to around £415m from the £520m collected in 2021/2022. The PPF suggested that this was in part due to the picture appearing more positive that envisaged at the same point last year.

10. GMP Equalisation Ruling – November 2020 and PASA guidance

November 2020 ruling

A further judgement was handed down by Justice Morgan in respect of the GMP equalisation litigation involving Lloyds Banking Group's DB Pension Schemes. This judgement was in respect of past transfers out.

This ruling identified that for the trustees of the schemes:

Neither statutory provisions, scheme rules or agreement with individual members, discharged the need for historic CETV payments to be topped up.
The duty to correct ‘inadequate’ transfers, including transfers that did not calculate a GMP at the point of settlement, is not time barred or forfeited, either under scheme rules or legislation.

However, it did state that the onus was on the transferred member to bring a claim forward if GMP was not calculated at the time the transfer was made.

While we acknowledge that it will take some time for individual schemes to fully work through the implications of the judgement with their lawyers and actuaries, including how to address some of the practical challenges presented, there are immediate consequences that will need to be addressed prior to completion of their next audited accounts. Trustees should be:

Re-assessing their conclusion in respect of the materiality of any potential arrears of additional liabilities in respect of GMP equalisation;
Amending wording in the trustees' report and any contingent liability or provisions disclosure or measurement assumptions to reflect their consideration of the judgment.

PASA Guidance

Following the original High Court ruling on the equalisation of GMPs in October 2018, the Pensions Regulator announced the formation of an industry working group bringing together representatives from the legal, advisory, actuarial, data and trustee sectors to assist pension schemes with this issue.

In July 2021, PASA published guidance to assist pension schemes with GMP conversion. This was then followed in August 2021 with guidance to assist with Transfers, following on from the High Court judgement above.

The GMP conversion guidance is available here.

The Transfers guidance tackled the challenges presented by the November 2020 ruling.

PASA has since followed this up with a webinar which involved sector participants discussing recent experiences that they had experienced in working through the implementation of GMP equalisation.

11. DB Funding code

The Pensions Regulator (TPR) is revising its Defined benefit funding code of practice ('the code’) and is undertaking two consultations on revisions to the code.

The first consultation (which closed for comment on 2 September 2020) included:

the new proposed regulatory approach;
the principles underpinning the new framework; and
how they could be applied in practice to provide clearer guidelines.

In the consultation document the Pensions Regulator highlighted their new twin-track compliance route for carrying out valuations (referred to as ‘Fast Track’ and ‘Bespoke’).

The Trustees can choose either route and change approach from valuation to valuation as they wish.

Fast Track is anticipated to be more straightforward, with quantitative guidelines, allowing trustees to assess whether TPR would consider their valuation compliant with the legislation.
Bespoke would offer more flexibility but would also possibly involve more regulatory input.

In January 2021, TPR published an interim response to this first consultation. This stated that there was ‘general support for the principles and regulatory approach proposed in the consultation’. The key concerns raised relating to how the twin-track compliance would work in practice.

A second consultation, which was originally planned for later in 2021, to focus on the draft code itself, as well as the addressing the concerns on the first consultation, has now been delayed until ‘the late summer of 2022’.

TPR has stated that ‘it is vital we take the time to get it right’ and wants not only to take the opportunity to learn from the DWP’s consultation on the draft funding and investment regulations, which is expected in the first half of 2022, but ‘recognise the economic backdrop to our second consultation and the balance between security for members and affordability for employers’.

TPR has stated that ‘the existing code and funding regime will remain in place until such time as the new legislative requirements and code come into effect’. When introduced, TPR has stated that the changes will be forward rather than retrospective looking, meaning that only those schemes with valuation effective dates on or after the code’s commencement date will be affected.

12. Changes to auditing standards and the classification of Large Schemes as other entities of public interest (OEPI)

In December 2019 the FRC published the Revised Ethical Standard for Auditors (the Ethical Standard). This included the concept of OEPIs, an entity which does not meet the definition of a Public Interest Entity, but nevertheless is of significant public interest to stakeholders.

This definition included pension schemes with more than 10,000 members and more than £1bn of assets, by reference to the most recent set of audited financial statements. For these Schemes non-statutory audit services that can be provided to the Scheme by the scheme auditor are limited to the permitted services referred to the Ethical Standard.

These new requirements for OEPIs come into effect for the audit of financial periods beginning on or after 15 December 2020.

13. RSM Publications

To prepare your pension scheme for upcoming challenges and opportunities, we have produced a series of webinars and articles exploring some of the key issues currently affecting the sector

Our pensions insights page which also includes details of all our other industry offerings is available here.