Pensions issues in a time of pandemic

 The Covid-19 crisis means testing times ahead for trustees and sponsoring employers of occupational pension schemes (OPS).

Long term scheme funding issues were already a concern before the pandemic hit. The resultant financial crisis has impacted some employers’ covenant strengths and may ultimately see more distressed schemes falling into the Pension Protection Fund.

In this article, Garon Anthony looks at three of the emerging risks for pensions schemes and offers some advice on how at least some of those might be managed.

Regulatory scrutiny

The Pensions Regulator (TPR) continues to drive ahead its “clearer, quicker, tougher” approach to the supervision of employers and trustees to ensure that they fulfil their duties to scheme members. TPR has already increased its investigations and enforcement actions where it suspects misconduct.

And the Pension Scheme Bill becomes law later this year. That will see, amongst other things, TPR get new anti-avoidance and investigation powers and the ability to impose bigger fines and criminal sanctions on wrongdoers.

Cyber risk

Cyber risk continues to be a major issue for all participants in the pensions’ industry, including TPR. Pension schemes hold large amounts of personal data and assets which makes them a target for fraudsters and criminals.

The seismic changes to working practices in the last 12 months has increased the risk with many in the pensions industry now working remotely as a result of Covid-19. This means more people becoming vulnerable to cyber-attack through, for example, malicious email traffic. Overall, this leads to the potential risk of regulatory fines, claims, complaints, legal action and reputational damage for trustees, employers and their advisers.

Member complaints and pensions liberation

Member complaints are on the rise as result of frauds perpetrated on members by unscrupulous pensions liberation scammers that can see members lose some or all of their pensions savings into black holes and get hit with big tax bills. Many of these complaints end up before the Pensions Ombudsman or the courts. Some members might complain that the trustees should have done more to prevent them from falling victim to the scam and therefore compensate them for their losses, especially if they are unable to secure redress from other sources.

Personal financial difficulties caused by Covid-19 may lead to more people looking to get at their pensions savings early and thereby falling victim to a scam. Complaints about trustees therefore look likely to increase in the future especially as there are many claims management companies happy to help.

Top risk management tips

• Trustees should familiarise themselves with scheme governing documents before taking decisions and keep good records of how and why those decisions were made (in particular at trustee meetings) in case they need to justify those decisions to the member or the Ombudsman in future. They should take professional advice when in any doubt.
• Member communications are key. Trustees and employers must communicate clearly, concisely and in everyday language with members. Members should be told about any disruptions that may be caused by, for example, Covid-19 or a cyber-attack, what is being done to restore normal services and the timescales involved.
• When confronted by a member transfer request out of an OPS, trustees’ due diligence is key. Make the member aware of the issues and risks around pensions liberation and look out for red flags raised by the receiving scheme. Find out whether the receiving scheme is registered by HMRC or, where relevant, authorised by the FCA. Document thoroughly all aspects of the due diligence process.
• If faced with a claim, complaint or an investigation, trustees should think about the protections available to them in the scheme rules or in legislation. Insurance cover may be available to trustees and employers in pension trustee liability or cyber risk insurance policies.
• Trustees and employers should keep a close eye on TPR and the messages that it is sending out to the regulated community, why and what actions may be necessary to ensure compliance.