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The regulations incoprorate requirements on occupational pension scheme trustees under at 2019 Competition and Markets Authority Order to carry out a tender process for fiduciary management services and set objectives for their investment consultants.

The Occupational Pension Schemes (Governance and Registration) (Amendment) Regulations 2022 (Regulations) will come into force on 1 October. The Regulations track the 2019 Competition and Markets Authority Order which introduced a requirement for trustees of occupational pension schemes to carry out a tender process for fiduciary management services and set objectives for their investment consultants.

Background

In 2019 the Competition and Markets Authority (CMA) made an order imposing new requirements on pension scheme trustees in relation to fiduciary management (FM) and investment consultancy (IC) services (CMA Order). The order was made following an investigation by the CMA which found that features of both the FM and IC markets were restricting or distorting competition in connection with the supply and acquisition of those services in the UK to and by pension scheme trustees.

The CMA Order imposed new duties on trustees of occupational pension schemes in relation to these services, which trustees have been required to comply with since 2019 under the watch of the CMA. It is these obligations – to carry out a tender process in relation to FM services and to set objectives for IC providers – which will be reflected in the Regulations.

The Regulations are being introduced now, almost three years after the CMA Order was made, to reflect the government’s commitment to integrate it into pensions legislation so that compliance with the new obligations could be regulated by the Pensions Regulator (TPR) rather than by the CMA. The Regulations were initially published for consultation in 2019, however the process was delayed due to the Covid-19 pandemic.

The Regulations

The Regulations will amend existing pensions legislation to move oversight of the from the CMA to TPR, but the obligations on trustees will remain broadly the same as those under the CMA Order:

1. Competitive tendering for FM services: where trustees of occupational pension schemes wish to put in place or extend FM services covering 20% or more of the scheme’s manageable assets, they must carry out a competitive tender exercise.
   
   Under the Regulations, manageable assets are essentially all scheme assets excluding buy-in policies (which were also excluded under the CMA Order) and asset backed contributions (which were not excluded under the CMA Order).
   
   Where an FM provider had already been appointed without a tender process when the CMA Order was made, trustees must carry one out within five years of the appointment. If that five-year period has or will expire before the Regulations come into force (which is expected to be 1 October 2022), the tender process must be carried out by then. In practice, schemes should already have complied with this requirement because the CMA Order said the tender process had to be carried out within two years of it having been made, and that period expired in June 2021.
   
2. Setting objectives for IC providers: trustees are required to set objectives for new and existing IC providers, and to review those objectives at least every three years and whenever there is a significant change to their investment policy.

The CMA Order referred to these objectives as “strategic objectives” however the Regulations refer only to “objectives” to avoid any misperception that only those objectives which relate to the investment strategy should be included in an IC provider’s objectives. The Regulations confirm that any “strategic objectives” set under the CMA Order will be treated as though they are “objectives” set under the Regulations which do not need to be reviewed until the end of the three-year period from the date on which they were originally set.

The Regulations also confirm that trustees must review the performance of their IC provider against their objectives at least once a year.

What has changed?

The Regulations do vary slightly from the CMA Order to reflect specific pensions policy considerations, in particular:

• Certain schemes are excluded from the requirements of the Order and the Regulations, for example those which receive IC or FM services from a provider which is also the scheme’s sponsoring employer or is connected with the sponsoring employer. The CMA order uses “interconnected body corporate” to define which organisations are connected for these purposes, however this does not include unincorporated associations or partnerships. The DWP therefore adopted the definition of “group undertaking” in the Regulations which does.
• The CMA Order treats IC and FM service providers participating in a joint venture as an interconnected body corporate. The DWP felt that this presented an avoidance risk, as it could incentivise organisations to create a joint venture to circumvent the new duties. As a result, the Regulations do not treat joint ventures of this kind as a group undertaking and make no other specific provision for organisations acting under a joint venture to be treated as connected.

What does this mean?

Trustees of occupational pension schemes (subject to some limited exceptions) have been required to comply with these obligations and to self-certify their compliance since 2019, so the introduction of the Regulations, expected on 1 October 2022, should not make a material difference for most schemes.

The practical difference for all schemes will be the submission of compliance statements which will form part of the scheme return process once the Regulations are in force, and TPR is expected to release amended guidance ahead of that date to help trustees understand the new procedures.

The DWP has committed to reviewing the Regulations to assess the extent to they have achieved the policy objectives and remain appropriate, and to report its findings by 31 December 2028.

 

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