Regulator Warns Pensions Trustees On Portfolio Transfers

By Lucia Osborne-Crowley
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Law360, London (May 21, 2020, 1:37 PM BST) -- Trustees of defined benefit pension schemes could be unintentionally breaking the law when they move investments around during the market turmoil caused by the COVID-19 outbreak, the pensions regulator warned on Thursday.

The Pensions Regulator said the investments that are considered "default arrangements" under the pensions law could have changed as a result of the coronavirus outbreak. This means some investments will attract the stricter laws imposed on default arrangements — a one-size-fits-all scheme that makes investment decisions on behalf of savers.

Some funds have been temporarily closed off during the COVID-19 outbreak amid the volatility the pandemic has caused in markets. These funds, such as property funds, will reopen to investment when the economy stabilizes.

Trustees will have to direct their members' contributions into alternative funds if the existing default arrangement options are closed because of the outbreak.

But the watchdog warned that the alternative arrangements may become default arrangements under the pensions law in these cases.

Default arrangements attract a charge cap, a limit on the annual amount that can be charged to savers in the default arrangement of an auto-enrollment pension scheme. They also require a separate statement for investment principles — an additional written document required for default arrangements that sets out the trustees's investment aims and objectives.

The regulator advised trustees to check the law and, if necessary, seek legal advice to determine whether changes made as a result of COVID-19 have affected their default arrangement.

Trustees should immediately take steps to satisfy the legal requirements if they have unintentionally created new default arrangements, TPR said.

The watchdog said it will continue to take a "pragmatic approach, based on individual scheme circumstance, in deciding whether to take enforcement action."

The pensions watchdog has clamped down on compliance with default arrangement laws.

The regulator said in 2019 that it was investigating whether trustees of defined contribution schemes are regularly reviewing the performance of their default fund. Trustees must review a pension scheme's default strategy and its performance every three years, the watchdog said, adding it wants to "wake up" those that are not doing enough.

Ninety-five percent of employees who are automatically enrolled into pensions fall into a default fund, the watchdog said.

"We are working to wake up those trustees who, research has shown us, do not engage with the regulator or sometimes do not realize they are not meeting standards of governance or administration that we expect," David Fairs, executive director of regulatory policy, analysis and advice at TPR, said in 2019.

--Additional reporting by Najiyya Budaly. Editing by Ed Harris.

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