Pensions updates | December 2024

The Pensions Regulator publishes revised employer covenant guidance to align with new DB funding code of practice

The Pensions Regulator (TPR) has at last published the updated employer covenant guidance for trustees of defined benefit (DB) pension schemes, aligned with its new DB funding code of practice which was brought into effect on 12 November 2024. Described by TPR as ‘the last piece of the jigsaw to help schemes carry out valuations under the new DB funding code’, the updated guidance includes the first regulatory definition of employer covenant aiming to provide greater market certainty and promote consistency across schemes.

Key updates and implications for trustees

Key updates encompass cash flow analysis, reasonable affordability assessments, maximum affordable contributions, reliability periods, covenant longevity, and contingent assets. The updated guidance emphasises proportionality in covenant assessments and includes worked examples for complex areas. Significantly, TPR expects trustees to use the updated guidance to review whether their existing covenant analysis is focused in the right areas and remains proportionate, especially where trustees have experienced significant changes in their scheme funding position over the last few years.

An employer covenant is effectively the extent to which a sponsoring employer has a legal obligation and financial ability to support a scheme now and in the future, as well as any expected scheme support from suitable contingent assets. An assessment of the employer covenant should focus on the employer’s ability to make cash contributions to the scheme, and the scheme’s access to contingent asset support, to eliminate any existing funding deficit and to address any further deficit that could arise from a scheme-related stress event. This assessment will therefore assist trustees to set an appropriate recovery plan for the DB scheme, if one is needed, and should be carried out at each scheme valuation at the minimum.

TPR’s new DB funding code of practice applies to DB pension schemes with actuarial valuation dates on or after 22 September 2024 and aligns with the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024 which came into force on 6 April 2024. The publication of the updated employer covenant guidance therefore completes the framework for valuations under the new DB funding code of practice, reinforcing TPR's commitment to protecting member benefits and ensuring employer support aligns with scheme risk profiles.

The Pensions Ombudsman finds trustees facilitating pension liberation liable for £5.2m and collaborates with BBC Eastenders

The Pensions Ombudsman’s Pensions Dishonesty Unit has concluded an extensive investigation into three occupational pension schemes, resulting in directions for trustees to repay over £5.2 million into the schemes.  The schemes were the Eleven Property Pension Scheme, the SHK Property Services Pension Scheme and the Gilbert Trading Pension Scheme. 

The Deputy Pensions Ombudsman found that scheme funds were invested in breach of trustee investment duties, facilitating pension liberation arrangements by trustees in a position of conflicting interests.  Trustees, including two individuals in their personal capacities, were found to have acted dishonestly and attracted personal liability. A pension administrator was also found liable as a dishonest assistant.  This case, following the recent Ecroignard Trustees determination, brings the total repayments directed by the Pensions Dishonesty Unit to over £40 million across ten schemes, highlighting the Pensions Ombudsman’s efforts to combat pension fraud and hold dishonest actors accountable.

Meanwhile TPR, alongside other organisations, has collaborated with the BBC’s EastEnders to help make viewers aware of pension scams.  Poor Jean!  This forms part of TPR's broader strategy to combat pension fraud, which includes a recent video campaign showcasing a real-life victim from a £13.5 million prosecution case. 

TPR, as part of the Pension Scams Action Group (PSAG) and the National Fraud Campaign, is urging the pensions industry to report suspected scams to Action Fraud.  TPR emphasises that such reports are crucial for building a comprehensive national intelligence picture to effectively tackle evolving fraud tactics.  TPR's approach highlights the importance of public awareness and industry cooperation in safeguarding pension assets.

Case update: Maladministration caused no financial harm where employee acted unreasonably

Mrs S, an employee at Peacehaven Community School (part of the Swale Academies Trust ("SAT")) was an active member of the East Sussex Pension Fund. She was offered an alternative role in September 2019 after her role transferred to a central team at SAT but rejected it in December 2019, requesting redundancy instead. However, she had not received a pension illustration, which should have been provided during the consultation period, and her request for this information was delayed due to errors in communication between the Pension Department, the School, and the HR Department.

The HR Department failed to forward the required pension illustration to the School, causing delays, and Mrs S was misled into thinking her redundancy would entitle her to a "full" pension, leading her to believe she would receive a pension at the normal retirement age. She claimed that had she received the correct information, she would have accepted the alternative role and avoided financial harm, including having to find a new, lower-paying job.

The Pension Department and SAT admitted to maladministration, including the failure to inform Mrs S correctly and promptly, but they argued that their actions did not directly cause Mrs S's financial harm. The HR Department’s failure to provide the pension illustration was seen as the main cause of distress, and it was held by the Adjudicator that the HR Department’s errors caused Mrs S unnecessary inconvenience.

Decision

The Deputy Ombudsman ruled that while the Pension Department and SAT's actions amounted to maladministration, they did not cause significant distress to Mrs S as to justify an award. The main cause of her distress was the HR Department's maladministration, and it was ordered to pay her £500 for the distress and inconvenience caused.

Comment

The decision shows that awards for successful complainants will reflect the distress and inconvenience caused but will not be artificially inflated if there were only a limited range of options otherwise available to the complainant if the correct information had been correctly provided during the redundancy consultation process. Further, the decision highlights the importance of providing clear and timely pension illustrations during redundancy consultation periods. Failure to do so could lead to an individual being misled about their pension entitlement.