Annual Pensions Webinar 2021 - 18th January - 21st January - V
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Annual Pensions Webinar 2021 18th January – 21st January
Thank you for joining Contents
our Annual Pensions
Webinar 2021!
I would like to thank you for attending DC trends: consolidation, compliance and ESG 3
Baker McKenzie's Annual
Pensions Webinar 2021. The year in review - cases and determinations that
5
For those who attended, and those we have shaped the pensions landscape
missed, this brochure provides a
summary of the key takeaways The year ahead - what will 2021 hold for trustees
7
from our four sessions. and employers?
Though the pace of change looks Looking towards long term objectives: DB
set to continue for all of us as 11
consolidation and buy-out
we move into 2021, we hope that
our sessions provoked thought
and provided some clarity and
practical guidance on how to
manage some of the critical pensions
issues currently faced by employers,
trustees and pension providers. If
you have any questions, please
feel free to reach out to your usual
Baker McKenzie contact.
With very best wishes,
Jeanette
Jeanette Holland
Partner
+44 20 7919 1171
jeanette.holland
@bakermckenzie.com
DC trends: consolidation, compliance and ESG
Our first session focused on developments in defined contribution pension provision, including transfers to DC
master trusts, ESG and DC compliance issues. Here is a summary of what was discussed.
Transfers to DC Master Trusts
Employers and trustees alike are driving switches strategy. There are a number of legal aspects to
to master trusts. Potentially lower costs, and the ESG.
merit for members of regulated DC master trust
governance structures and potentially wider member Trustees' fiduciary duty to exercise their power in the
options and fund ranges - particularly when best interests of the scheme members has usually
compared with smaller DC arrangements - are often been interpreted as meaning in the members' best
key factors. financial interests, maximising the best risk-adjusted
returns for the scheme. However, there is now
The first key step is to identify the core project support for the position that profit maximisation alone
structure. A future-service only arrangement for is not enough to satisfy the fiduciary duties of a
employers is fundamentally different - in terms of trustee and that the "best interests" principle is an
legal documents (Deed of Participation and employer integral part of a broader principle that a trust power
services agreement) and due diligence (is a scheme should be exercised to promote the purpose of a
closure consultation needed first?) - from a legacy trust.
past rights transfer (with a Transfer Deed and
scheme merger due diligence of powers and fiduciary Since 1 October 2019 trustees' statements of
issues). investment principles have had to include a
statement of their policy in relation to "financially
Trustees must weigh up the relevant factors to material considerations" over the appropriate time
protect members. Once powers and process are horizon. These include but are not limited to ESG
resolved - typically a formality - trustees will want to considerations including but not limited to climate
ensure members' interests are protected. Advice change which the trustees consider financially
comparing the two arrangements is usually core to material. Trustees also have to include in the SIP a
this. Trustees may also need to assess (and policy statement on extent to which non-financial
potentially mitigate for) (i) any valuable tax matters are taken into account.
protections that members could lose, whether
scheme-specific (e.g. lump sums or early pension Under the new Governance Regulations (which will
rights) or member-specific (e.g. registered LTA- apply once the new "single code of governance" is in
enhancements); (ii) any benefits that are not place), trustees will have to carry out and document
replicated in the master trust e.g. ancillary rights an "own-risk assessment" at least every three years.
previously enjoyed on redundancy, or rights linked to One of the types of risks that will have to be
DB benefits in a hybrid scheme (e.g. flexibility to assessed are risks related to climate change, use of
maximise tax free lump sums from DC instead of resources and the environment, social risks and risks
commuting DB - with options to transfer back to the related to the depreciation of assets due to regulatory
original scheme becoming common). assessment.
ESG Aspects Climate change reporting provisions have been
included in the Pension Schemes Bill. The proposal
ESG, (environmental, social and corporate will affect only large schemes at the outset (assets of
governance) considerations have ever-growing more than £5 billion), as well as all authorised master
importance in the Pensions world. Policy makers trusts and authorised collective money purchase
believe the buying power of pension fund investment schemes. From October this year such schemes will
can be put to good use if trustees properly take have to have in place governance and metrics for
account of ESG factors. It's not just about saving the assessing and managing climate risks and
planet. There is a broad range of issues that fall opportunities from 1 October 2021 and then publish
under each aspect of ESG, and different kinds of disclosures in line with TCFD recommendations and
risks arise in each area. The challenge is to take report the greenhouse gas emissions of their
account of these risks in determining investment portfolio.
3DC Compliance Issues future. Trustees should also be aware that when
members are "mapped" from one fund to another
Planning ahead for the implementation statement. when the Trustees change their managers, this can
Trustees of DC schemes need to prepare an lead to funds which were not previously subject to the
implementation statement and publish it on a public cap becoming "default" funds, so Trustees should
website before 1 October 2021. It must set out the seek advice on any changes.
extent to which the SIP has been followed during the
scheme year, detail any review of the SIP, detail any Other upcoming issues to be aware of:
changes to the SIP and the reasons for them, and set
out details of the Trustee's voting behaviour and any Annual Benefit Statements. The DWP has
use of proxy voting services during the year. Trustees indicated it will simplify and shorten annual
will need to consider what should be included in the benefit statements, and put in place an annual
statement, and what questions they will need to ask "statement season" during which members can
their managers and advisers. expect statements from all their pension
schemes.
CMA Order compliance. At present, the Competition
Stronger "nudge" towards guidance. A DWP
and Markets Authority oversees the requirements
policy statement confirms that Trustees will in
relating to investment consultants and fiduciary
future need to provide members with a "stronger
managers. Later this year, regulations are expected
nudge" towards Pension Wise guidance before
to be finalised which will mean the Pensions
they can access Defined Contribution (DC)
Regulator will take on this role, and Trustees will then
benefits, and Trustees may need to record opt-
need to report their compliance with the requirements
outs and seek compliance statements from
to the Regulator via their annual scheme return.
members.
DC Charge Cap. The cap applies to default funds Transfer-out requirements. Changes to the
which are used for auto-enrolment, and limit member- transfer requirements are expected as part of the
borne charges to 0.75%. A recent review of the cap Pension Schemes Act 2021 once it becomes law.
by the Government has not resulted in changes to Details will follow in regulations, and Trustees
the level of the cap, but the application of "flat fees" to might need to amend their transfer processes
very small deferred pots of benefits will be limited in accordingly.
KEY CONTACTS
Arron Slocombe Chantal Thompson Caspar McConville
Partner Partner Senior Associate
+44 20 7919 1240 +44 20 7919 1959 +44 20 7919 1030
arron.slocombe chantal.thompson caspar.mcconville
@bakermckenzie.com @bakermckenzie.com @bakermckenzie.com
4The year in review - cases and determinations that
have shaped the pensions landscape
2020 was another busy year in the Courts and at the Pensions Ombudsman
Pensions Ombudsman's office. Here is a summary of
the cases that we shared with you at our seminar. The Pensions Ombudsman saw more that 20,000
new enquiries come through the door and resolved
In Court nearly 3,500 issues. Another busy year is forecast,
with complaint areas continuing to include delays,
Schrems II - Cross border data transfers. The transfer scams and ill-health cases, and also
judgment both invalidated the EU-US Privacy Shield redundancy and furlough scheme related matters - a
arrangement and raised questions over the level of sad sign of the times. Reviewing on-the-ground
data protection offered for those relying on Standard governance in these areas is key for all pensions
Contract Clauses (SCCs) when transferring data from professionals.
the European Economic Area (EEA) to a third
country. Trustees and employers of UK pension Two key determinations from last year included:
schemes should consider whether the mechanisms in
place to protect any transfers of scheme personal Mr T: CAS-38354-V5L8. Transfer delays and
data to outside of the EEA (for example to other investment loss Due to the plan administrator's
entities in the employer's corporate group) remain unreasonable delays, Mr T's transfer was not
valid. The UK will itself become a third country for completed in time to enable him to take advantage of
these purposes from the end of April (although this the fall in the stock market following the Brexit vote.
may be extended) under the Brexit deal and we await Mr T had appealed to the High Court, after the initial
the decision of the European Commission with Ombudsman decision in 2018 only compensated him
respect to what this will mean for data transfers from for distress and inconvenience. On remission, the
the EEA to the UK going forward. Ombudsman upheld Mr T's complaint. Though not
able to establish exactly what would have happened,
Palestine Solidarity Campaign - Investment on the balance of probabilities the Ombudsman held
strategy. The Supreme Court found the Secretary of that Mr. T would have invested £250,000 cash in the
State had exceeded his powers by issuing guidance FTSE 100 immediately after the leave vote and that
prohibiting investments by local government pension had he done so, he would have made a profit of
schemes that ran counter to the Government's £43,700. The Ombudsman awarded the lost profit as
foreign or defence policy. Power to direct how compensation, plus interest of 8%. This is an
administrators should approach non-financial (e.g. important decision showing the need to process
ESG) considerations did not include a power to direct transfer requests without undue delay, and how
what investments they should not make. foreseeability and measurability of loss may be
Administrators of local government pension schemes considered and determined in this context.
are quasi-trustees who should act in the best
interests of members, and the funds of the scheme
represented the employee's money, not public
money. ESG considerations should, therefore, be
subject to an overriding duty to act in member's best
financial interests and any guidance from the
Secretary of State has to be read in that context.
5Mr Y (PO-27002). Incomplete member records and a indicated retained GMP liabilities in the plan for Mr Y.
claim for deferred pension GMP benefits were No evidence was provided as to why Mr Y would
discovered for Mr Y during the plan's GMP have lost his entitlement to a deferred pension. The
reconciliation exercise. However, Mr Y's employment Deputy Ombudsman therefore concluded that on the
and pension records were no longer available and Mr balance of probabilities Mr Y was entitled to a full
Y was unable to provide evidence of his benefit deferred pension and not just the GMP element. Mr Y
entitlement. The scheme's management team were was also awarded £500 for significant distress and
therefore only prepared to provide Mr Y with a GMP, inconvenience. The determination clearly shows the
but Mr Y claimed that he was entitled to a full need for good record keeping by all parties involved
deferred pension. The Deputy Ombudsman noted with running a pension scheme and it is useful to
that she could only form her opinion based on the show where the Deputy Ombudsman considered the
evidence available and clearly NICO records burden of proof lies in such cases.
KEY CONTACTS
Danielle Klinger Hannah Moxon Sue Tye
Senior Associate Associate Of Counsel
+44 20 7919 1490 +44 20 7919 1068 +44 20 7919 1178
danielle.klinger hannah.moxon sue.tye
@bakermckenzie.com @bakermckenzie.com @bakermckenzie.com
6The year ahead - what will 2021 hold for trustees and
employers?
2021 is also shaping up to be another busy year. In receiving trustees, the judge did not address this
this session, we looked ahead at issues around GMP issue directly.
equalisation and conversion, the Pensions Schemes
What does 2021 hold? GMP equalisation should be
Bill, including DB funding requirements and
at the top of many trustees' agendas. In terms of
contingency planning for employers becoming
which method trustees are likely to select, whilst the
distressed.
two principal dual records methods, Methods C2 and
GMP Equalisation and Conversion B, are likely to be more straightforward from a legal
perspective, they may cause more of a long-term
GMP equalisation: Equalisation projects under so- administrative burden on schemes. Conversely, GMP
called "dual record" equalisation methods (such as conversion throws up more legal issues but the
Methods C2 and B) can more easily get underway in administrative burden may be lighter. A comparison
2021 as HMRC provided helpful tax guidance in 2020 of all options should be discussed with advisers.
that will enable adjustments to be made to members'
benefits without, for the most part, affecting members' Pension Schemes Bill Developments
personal tax positions.
The Pension Schemes Bill will shortly receive
GMP conversion: There are more legal issues to Royal Asset. The implementation of the various
work through on GMP conversion projects, including provisions will occur at different times, for example
which employer should consent to a conversion and the new Regulator powers provisions will take effect
benefits to be provided for contingent beneficiaries. by the Autumn following a consultation, production of
Benefit adjustments may also cause significant Regulator guidance by the Regulator, and new
annual allowance and lifetime allowance tax issues regulations.
for deferred members, for whom there may also be
The Regulator has new powers, but the big
actuarial challenges in calculating the converted
question is how it will use them. New grounds on
benefits. HMRC has yet to provide further tax
which to issue contribution notices will make it easier
guidance and a PASA working group aims to provide
some clarity in the first half of 2021. Specialist advice for the Regulator to issue these notices compared to
the current options. However, we don't necessarily
will be required.
expect a dramatic increase in the number of notices
Historic transfers: Following the November 2020 being issued - individual case circumstances and
Lloyds judgment, trustees should consider historic Regulator appetite/capacity to pursue will affect this.
transfers where the GMP was not equalised prior to
The most high profile changes are in relation to
transfer. Trustees should get advice specific to their
new criminal offences and civil penalties. The
circumstances. Broadly, for transferring trustees, a
top-up is due automatically where the original transfer potential for a prison sentence of up to 7 years will be
a strong deterrent for companies not to take action
was carried out under the cash equivalent transfer
that will be detrimental to a pension plan, as will the
value legislation. Where the transfer was carried out
under the scheme rules or was part of a bulk transfer, new £1 million civil fine. There may be more
sanctions early on as companies, trustees and
there is no automatic top-up payable, although funds
advisers digest the implications of the new powers
may have to be paid, for example, if a member
challenges this or where contractual documentation and the Regulator's approach.
requires this. Trustees need to consider proactively We expect the greatest impact of the changes will
they should pursue making top-ups; there was little be the new statement of intent. Trustees have
guidance in the judgment. The extent of proactivity sometimes been considered as an afterthought in
will be scheme-specific and will depend on various transactions, and the new statement of intent will
factors (including balancing administration costs and require companies to consult with trustees and
data availability). For receiving DB trustees, the consider the impact of a transaction on a defined
judgement confirmed that they are obliged to benefit pension plan. This is the area where there is
equalise GMPs, even in respect of pre-transfer the greatest uncertainty over how it will operate in
service, whether or not a top up is paid. For DC practice, in particular concerning at what stage in a
7transaction notifications will need to be made to signed by the Trustee chair and on which the
trustees, and how this will apply in different types of employer has been consulted on certain aspects
transactions (e.g. auction sale or public takeover). (the supplementary matters).
There are other changes in the Pension Schemes The "Statement of Strategy" must be
Bill too. Along with the Regulator powers, there are submitted to TPR periodically (the
also changes to introduce new obligations on Regulations are to prescribe how often)
schemes to consider climate change, and to give
The Statement of Strategy will also need to
greater powers to stop transfer values to prevent
scams. set out supplementary matters, including:
the extent to which the funding and
DB Funding Requirements
investment strategy is being successfully
Given the size of some Defined Benefit scheme implemented, including any remedial
liabilities, and the range of covenant support steps;
available to the schemes, it is not surprising that
main risks faced by the scheme in
scheme funding and investment remains a key area
implementing the funding and investment
of regulation through primary and secondary
strategy and intended mitigation or
legislation and through the Regulator's Code of
management of risks;
Practice.
reflections on any significant past decisions
As the last major revision of the funding requirements
taken by the trustees or managers that are
was made under the Pensions Act 2004, the time is
relevant to the funding and investment
ripe for an overhaul.
strategy (including any lessons learned that
The thrust of the new funding framework, already have affected other decisions or may do so in
anticipated in the Regulator's annual funding the future). Regulations will flesh out the
statements, is that there should be a long term detail and level of prescription and Section 10
objective for the scheme supported by a funding and Civil penalties will apply for non-compliance.
investment strategy to achieve it. Schemes are
Regulator role: Consultation on the new Code
already anticipating/debating what that long term
and the Fast Track/Bespoke approaches
objective should be. However, we await much of the
detail. The Regulator will have a key role in the new
funding regime, given the power to apply civil
More detail as regards the provisions of the
penalties and a new power under s 231 of the
Pensions Schemes Bill/Act 2021
2004 Act to direct the trustees to revise the
The primary legislation requires a funding and strategy in accordance with the Regulator's
investment strategy to be determined by the direction where there has been non-compliance.
Trustees, and where necessary, from time to
The Regulator is consulting on the new Code of
time, revised. This strategy is defined as "a
Practice to deal with the new requirements,
strategy for ensuring that pensions and other
including the approach to the long term funding
benefits under the scheme can be provided over
objective.
the long term".
This long term objective will be different for
The strategy must be agreed (in most cases) with
different schemes depending on the applicable
the employer.
circumstances e.g. it may mean targeting buy-
The strategy must also set out the funding level out, or "self-sufficiency" (i.e. where the scheme
to be achieved under it. The "relevant date" for no longer reliant on employer support).
achieving this funding level will be determined
The Regulator has suggested two approaches to
under Regulations - expected this year.
achieve this over time as regards actuarial
In addition, Trustees have to determine the valuations in respect of a scheme – the Fast
investments they intend to hold at that relevant Track and the Bespoke.
date.
Fast Track - the parameters for this will be
Having determined, or revised the strategy, the prescribed and where this approach is adopted
Trustees must produce a written statement of it, there will likely be less Regulator engagement.
8 Bespoke - as the name suggests - will allow insulation for member DC and DB benefits from
greater flexibilities than Fast Track but will likely employer distress or scheme termination?
involve greater Regulator engagement.
4. Identify and prioritise known issues
The Regulator's response to the first consultation is remediation - actively decide whether technical
eagerly awaited and will help set the context for the or structural issues (e.g. benefit discrepancies)
second consultation on the text of the new Code should be addressed whilst employer support is
expected later this year. available.
Protecting Schemes from Employer 5. Funding arrangements and support: holistic
Distress: Legal Aspects of Contingency review - at a proportionate level - of legal and
Planning practical support; in short, know what there is
and what needs to be done should employer
The Pensions Regulator's November 2020 distress materialise.
guidance is the latest - and clearest and most
itemised - list of expected actions of trustees for 6. Legal covenant - linked with 5, document the
up-front planning (in particular when employers are understanding of the suite of support, triggers
not in distress) to address risks that flow from and processes.
insolvency. There is no "template" policy or checklist
7. Information disclosure protocols - understand
and a core theme is "integrated" planning across
or put in place appropriate, transparent and
legal, funding, investment and covenant work
enforceable legal and practical arrangements
streams.
covering employer financial disclosures
Trustees (and employers) will want a (covenant monitoring) and a framework for
proportionate approach - and need to start the member and regulatory disclosures.
diligence somewhere. We suggest the following
8. Operations and governance - holistic
"top 10" with a legal slant to commence the due
consideration of operational continuity from
diligence (and, crucially, prioritisation) process and
administration, payroll, key personnel and a "go
lead naturally to other core areas in preparing an
to" Continuity Policy framework itself - in short,
integrated policy:
ensuring the scheme can operate independently
1. Trust Deed and Rules - core powers of the employer.
assessment and improvement where needed to
9. Data protection by design - embed this into all
ensure functionality on employer distress.
work streams.
2. Third party contracts - ensure relevant
10. Trustee knowledge and understanding -
continuation or transition powers and services
shaping the Continuity Policy; understanding
are in place (starting with core ones - others
delegated roles and "first response" actions;
might be parked until signs of employer
periodic review and refresh as with all
distress).
governance frameworks.
3. Expense reserving - can arrangements be put
in place and documented today to give greater
KEY CONTACTS
Jeanette Holland Jonathan Sharp
Partner Partner
+44 20 7919 1171 +44 20 7919 1415
jeanette.holland jonathan.sharp
@bakermckenzie.com @bakermckenzie.com
Arron Slocombe Vicky Thompson-Hill
Partner Knowledge Lawyer
+44 20 7919 1240 +44 20 7919 1913
arron.slocombe victoria.thompson-hill
@bakermckenzie.com @bakermckenzie.com
9Looking towards long term objectives:
DB consolidation and buy-out
And in our final session we looked at strategic solutions to defined benefit pension provision.
Defined Benefit Solutions: What is your endgame?
It is far from surprising that in these times of great single section for all employers and the collective
uncertainty, employers supporting, and trustees employer covenant will be pooled.
running, defined benefit pension plans are asking
themselves the important question: what steps How do the various categories differ?
should we be considering to ensure the continued This is best illustrated by the following table:
provision of benefits to plan members i.e. to ensure
that the main purpose of the pension plan can be
Key DB Master Stoneport Superfund
fulfilled? For employers, who have their businesses to
considerations trust
focus on, what is the best strategy for the
company/group to mitigate risk, limit management Continued Yes Yes No
time and reduce cost volatility? For trustees, theirs is employer
a constant quest to achieve better security for the support
plan members' benefits.
Covenant Employer Employer Capital
So, there is much to consider; the legal, actuarial, provided by then all buffer
investment, covenant and governance aspects must employers
all be taken into account. And the range of options in
the market and legislative framework is developing Main employer Cut Cut Pension
fast. rationale for costs/admin costs/admin fund no
joining and longer a
We took the opportunity in our seminar to look at two strengthen company
endgame solutions; the DB consolidator market and employer liability
capital backed investments. We were delighted to covenant
have be joined by Richard Jones, Chief Executive of
Stoneport Pensions and a director of Punter Southall Regulation Occupational Occupational Occupational
Solutions Limited, who provided his insights into the pensions pensions pensions
legislation legislation legislation
wider DB consolidator market and the ways in which
the different consolidator models safeguard Regulator
members' benefits. guidance
Ultimately,
DB Consolidators bespoke
What are they? legislation
There is no set definition of "DB consolidator". We
have defined it to mean any multi-employer pension
scheme which is set up to provide benefits to Why have they been developed and how is the
employees and former employees of multiple, non- market developing?
associated employers. That definition will incorporate DB consolidators are an inevitable consequence of
DB master trusts and alternative forms of the closure of DB schemes to new membership and
consolidator vehicle as well as superfunds (currently accrual. With DB schemes now being seen by many
limited to Clara and the Pension Superfund), companies as sizeable balance sheet liabilities and
An example of an alternative form of consolidator is costly to administer, there is a strong desire to cut the
the Stoneport Pension Scheme established by Punter cost of running them or to remove the liability from
Southall. This scheme is initially a segregated DB the balance sheet at a lower cost than buy-out. Each
master trust, but once there are a sufficient number of category of master trust appeals to different
employers, the scheme will be centralised into a segments of the market:
11DB master trusts typically appeal to smaller Capital-backed Solutions
schemes as they often improve governance at a
The "capital-backed solution" (also known as the
lower cost.
"capital backed journey plan") is one of the most
Stoneport is aimed at schemes with fewer than recent innovations in the DB sphere. The market in
1,000 members – it is looking for no more than 100 this area is young and still evolving. At the time of
schemes to join and will then close for business and writing only one capital-backed solution had been
become a centralised scheme. publicly announced. However, we understand that
more deals may be in the pipeline and other
Superfunds are likely to focus on larger, less mature providers may be looking to enter the market.
schemes with relatively strong employers and
potentially schemes which pass through a PPF What are they?
assessment period following employer insolvency as
Essentially, a capital-backed solution is a contractual
an alternative to securing PPF+ benefits with an
arrangement between a pension scheme and a
insurer. We may see this aspect of the market
solution provider, which puts up capital to support the
developing in the current economic conditions.
scheme's journey plan. Generally, the link between
What is the key consideration for trustees in the sponsoring employer and the scheme will remain
deciding whether to transfer to a consolidator? and the trustees will remain responsible for running
the scheme.
This whether to transfer to a consolidator will give the
greatest likelihood of members receiving their The aim is to reach a particular target (potentially
benefits in full. Trustees must consider consolidators buy-out) with the additional capital support providing
along with all other potentially available options. scope to retain investment risk for longer – and
therefore potentially reaching the scheme's target
For a master trust, this is essentially a governance more quickly.
and cost question, as members continue to benefit
from the employer covenant. The capital support is intended to provide a measure
of protection if things going wrong (in addition to the
Similarly with Stoneport the employer covenant employer covenant) - recognising that the
remains. The key issue here is whether the pooling of arrangement will likely involve the scheme
the scheme's employer covenant with that of a maintaining a higher level of risk in its investment
number of other employers will improve members' strategy for longer. Although it will likely provide a
benefit security. measure of protection for investment, interest rate
and longevity risk (for example, the provider may
For Superfunds, the employer covenant is replaced
provide a level of "guarantee" on asset performance),
by a one-off contribution by the employer and some
there are likely to be limits to this protection. There is
external third-party capital. The main considerations
therefore a lower degree of risk transfer than in a fully
for trustees who are contemplating a superfund
insured solution (such as a buy-in) but this should be
transfer include:
reflected in the cost of the arrangement.
If benefits can be bought out now or in the
The solution may include ancillary services, including
foreseeable future, a superfund is not necessarily
fiduciary management or liability management
the best option.
exercises supported by the provider to assist the
Will joining enhance the funding level as a result scheme in reaching its target.
of the employer making an additional capital
contribution?
The level of protection provided by the interim
authorisation and supervisory regime.
Is the superfund structure suitable to the
scheme's liability profile?
For all options in the market, trustees will need to
carry out detailed due diligence, including as to
structure, terms, and likely outcome for members.
12What should trustees and employers be thinking terminated and what are the consequences (e.g.
about when looking at these solutions? any fees or penalties).
It will be important to understand the nuts and bolts of Trustee control and decision-making - the
the arrangement, what value and protection it can trustees will want to understand what this means
add and its limits. Here are some key points to think for the day-to-day running of the scheme, how
about: their governance processes may be affected and
what, if any, role the provider may have in the
Strength of the provider (counterparty risk) - if running of the scheme.
the provider has to be called on to make good on
What is the Pensions Regulator's view?
its "guarantee" how certain can the
trustees/employer be of payment. Note that the The Regulator recognises capital-backed solutions in
stringent solvency rules which apply to insurers its 2020 superfunds guidance as one of the "other
will not necessarily apply. models" available and comments that it is continuing
Limits to any protection for the scheme - to "engage with the proposers of these models to
recognising that these solutions are cheaper than understand them better and to determine whether our
insured arrangements, there will not be a guidance needs to change to reflect these
complete risk transfer to the provider. It will be developments". So there may be further guidance on
important to understand where the limits of any these arrangements.
protection lie.
In the meantime, the guidance suggests that the
Consequences of unprotected risks - what Regulator will expect many of the same principles as
happens under the arrangement if an apply for superfunds to be applied by trustees and
unprotected risk arises? It will be important to employers when assessing capital backed solutions
understand if there are any events which the (although it seems to be accepted that not all of the
arrangement cannot support and which may be a superfunds guidance will be relevant). A fundamental
termination event (e.g. employer insolvency). guiding principle, in the Regulator's view, common to
all "endgame" solutions, is whether the arrangement
Termination and its consequences - in what
is likely to result in a better outcome for members.
circumstances will the arrangement can be
KEY CONTACTS
Jeanette Holland Tom McNaughton Paul Williams
Partner Of Counsel Senior Associate
+44 20 7919 1171 +44 20 7919 1193 +27 11 911 4404
jeanette.holland tom.mcnaughton paul.williams
@bakermckenzie.com @bakermckenzie.com @bakermckenzie.com
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