Key takeaways

Context to the changes

The Investment Consultancy and Fiduciary Management Market Investigation Order 2019 ("CMA Order") has been in force from 10 December 2019. It implemented the bulk of the Competition and Market Authority's (CMA)  remedies following its findings (in 2018) that there were features of the investment and fiduciary management services market which adversely affected competition in the supply of those services to pension scheme trustees.  These features included a low level of engagement by trustees, a lack of clear information to enable trustees to asses value for money and that trustees are steered by consultants towards incumbent consultancy providers when entering into higher-cost fiduciary management services.

Most of the new requirements under the CMA Order apply to the firms providing investment consultancy and fiduciary management services rather than trustees. For example, the CMA Order imposes certain requirements on providers about how they disclose fees and market their services to trustees.  The CMA Order does, though, also impose requirements on trustees of occupational pension schemes in two areas.  Firstly, trustees are required to set objectives for their investment consultants where these are in place. Secondly, trustees are required to conduct mandatory tendering when appointing fiduciary managers, subject to certain asset threshold tests being met. 

The Government agreed in 2019 that it would make sense for the requirements on trustees to be transferred to pensions legislation, rather than continue to be imposed under the CMA Order. The rationale was that it made more sense for the Pensions Regulator to oversee compliance with these duties, rather than long term enforcement of requirements relating to occupational pension schemes continuing to sit with the CMA.  

The Government issued a consultation on how it proposed to implement the transfer of the requirements on trustees into pensions legislation, together with draft regulations, in July 2019.    The approach at consultation stage was to keep the substantive requirements unchanged.  There were, however, some differences between the draft regulations and the CMA Order to take into account "slight policy differences" between the two regulatory regimes.  

The obligations on investment consultants and investment managers referred to above are not being inserted into pensions legislation and will continue to apply under CMA Order. 

Consultation response and final (pensions) legislation:  overview

The response to the July 2019 consultation, together with final legislation, The Occupational Pension Schemes (Governance and Registration) (Amendment) Regulations 2022 (Final Regulation), has now been published.. Draft regulations had originally been expected to come into force in 2020.  The Government has said that the delay is due to "reprioritisation" caused by the COVID-19 pandemic.  The nature of the requirements on trustees under final legislation remain largely the same as at consultation stage (and in material respects the same as under the CMA Order) namely:

• to set objectives for investment consultants - this is likely to apply to most trustees in practice;
• conduct mandatory tendering for providers of fiduciary management services - whether this requirement is triggered in practice will depend on the nature of the particular arrangements in place; and
• reporting duties confirming compliance with the requirements. 

There are, however, some minor differences in how the regime will work under the Final Regulations, compared to how the regime currently works under the CMA Order. These are summarised under the headings "key points for trustees" at the end of this article. 

For readers who were following the consultation, some changes to the Final Regulations have been made in response to points raised during the consultation. Broadly speaking, the changes bring the Final Regulations more closely in line with the CMA Order.  This is likely to be welcome by trustees who have become familiar with the CMA Order requirements and who are likely to welcome consistency between the two regimes at this stage. Changes which have been made include:

• ABC arrangements: the Final Regulations expressly exclude asset backed contribution arrangements from the scope of the asset threshold test (relevant for determining if the requirement to conduct mandatory tendering for fiduciary management services is triggered). This change was made in response to concerns that the valuation of such assets is difficult.  Buy-ins remain excluded in the Final Regulations (as they did under the draft regulations and also the explanatory note to the CMA Order). 
• Actuaries "high level commentary" on investments: the Final Regulations include an express reference (similar to the formulation in the existing CMA Order) to the fact that actuaries who are providing "high level commentary" in relation to investments in the context of scheme valuations will not be providing advice for the purposes of the regulations (and consequently will not trigger the requirements on trustees to set objectives in relation to those services).
• Asset managers and investment consultants participating in joint ventures: additional provisions have been inserted into the Final Regulations with the intention of clarifying that where an asset manager and a provider of investment consulting services are connected via a joint venture, the asset manager can be a fiduciary management provider unless one of the other specific exemptions applies (and the duty to conduct a competitive tender can, therefore, in some cases, apply). 
• Asset managers subsequently providing investment consultancy services: the Final Regulations provide that asset managers who provide investment consultancy services after they are appointed as a manager will also be a fiduciary management provider irrespective of whether the investment consulting services are provided within the first 12 months of their appointment as asset manager.
• Trustee owned companies: "OPS firms", which are in-house authorised firms to whom investment management functions are delegated by the trustees of the schemes that established them, are intended to be excluded from the scope of the CMA Order and the Final Regulations. In response to the consultation, the definition has been tweaked so that the exclusion is not limited to such OPS firms as are owned by the trustees of a single occupational pension scheme and may also apply to ones that are owned by trustees of several different schemes.

The consultation response can be viewed here: 

Key points for trustees - relevant for both objective setting and mandatory tendering requirements

• Submit compliance reports to Pensions Regulator rather than the CMA: once the changes have come into force confirmation that trustees have complied with the requirements will need to be submitted to the Regulator as part of the annual scheme return process (via Exchange) rather than the CMA as they are currently. The Regulator has said that it will issue further guidance on the process before this happens. 
• Additional information will need to be provided part of compliance reporting: trustees should be prepared to provide additional information to the Regulator as part of confirming their compliance with the relevant requirements compared to the (fairly minimal) information which had to be provided under the CMA regime. Whilst much of this additional information should not be too difficult to provide (e.g. name and address of the provider, the date of appointment), trustees should be prepared for the process to take slightly longer, particularly when doing this for the first time.  Trustees should also note that where requirements have not been complied with, the Regulator will expect an explanation of why trustees have not complied (this is not currently the case under the CMA regime). Trustees will need to check with service providers that a compliance reporting process is in place.
• Penalties for breach: the Regulator will be given the power to issue compliance notices in relation to any breach of the requirements, as well as the power to issue penalties where compliance notices are not complied with. The maximum level of penalty notices under the Final Regulations is £5,000 for an individual trustee and £50,000 for a corporate trustees. This in line with penalty notices in relation to certain breaches of the automatic enrolment requirements. The Regulator is expected to issue further guidance in this area in due course. 
• Updated Regulator Guidance: in addition to the new guidance mentioned above (guidance on penalties and compliance reporting requirements), the guidance which was issued by the Regulator at the point the CMA Order came into force (and which is based on its provisions), will be updated before 1 October 2022.

Key points for trustees - setting objectives for investment consultants

• Don't forget the ongoing review requirements: the Final Regulations require trustees to review, and if appropriate revise, the objectives which they have set for their investment consultants every three years and without delay after any significant change in investment policy.   Trustees are also required to review the provider's performance against the objectives which have been set at least every 12 months. Trustees should note that the Final Regulations impose this as a legal requirement (under the CMA regime, this was recommended, but not, strictly, a legal requirement). 
• Check deadlines for complying with the review requirements: following on from the above, trustees should check when the deadlines for complying with the review requirements for their particular scheme will be.  For trustees who already have objectives in place (likely to be the case for many trustees), the Final Regulations confirm that deadline for the three yearly review of objectives will start to run from the date when the objectives were first set under the CMA Order. So, for example, those trustees who put in place objectives from 10 December 2019, would need to have reviewed those by 10 December 2022, so this should be on the agenda for upcoming trustee meetings.  The Final Regulations do not specifically address whether deadlines for conducting the 12 monthly performance review will work in a similar way, although calculating this deadline from the date the objectives were first set under the CMA regime would be consistent with the rest of the Final Regulations.  Trustees who are setting objectives for investment consultants for the first time after 1 October 2022 will need to ensure that objectives are in place from the first day that the appointment takes effect and comply with the necessary review deadlines thereafter.   
• If the services which are being provided encompass advice on investment strategy, check that the current objectives adequately cover those services: unlike in the CMA Order, advice on investment strategy is expressly included as one of the services which, if provided, will constitute advice for the purposes of the investment consultancy definition.  This means that objectives will also need to be set in relation to this aspect of investment consultancy services in addition to any other advice services falling within the existing definition of investment consultancy services. In practice, any objectives which have already been put in place may already cover this.  Trustees may, however, wish to check that, if advice on investment strategy is included in the consultancy services being provided, it is suitably reflected in their objectives. 

Key points for trustees - mandatory tendering for fiduciary management services

• Ongoing nature of the requirements: trustees should note that the competitive tendering requirements will not only apply when a scheme first meets or exceeds the asset threshold test but each time it subsequently meets or exceeds the threshold. For example,  if the trustees amend the contractual arrangements so that the amount of assets under management fall below the asset threshold and then subsequently make contractual changes which increase the assets under management to above the threshold again, they would need to run another completive tender.
• Deadlines for completing competitive tendering: The Final Regulations largely replicate the provisions of the CMA Order setting out when deadlines for conducting competitive tendering have to be met by. Broadly, this means that:
• For schemes with less than 20% assets under management before 1 October 2022: trustees must run a competitive tender before putting in place new fiduciary management agreements (FMAs) , or making changes to existing FMAs, which would result in 20% or more of relevant scheme assets being delegated.
• For schemes with 20% or more of assets under management before 1 October 2022: under the CMA Order, trustees with FMAs in place covering 20% more of relevant assets on 10 June 2019 (the date the CMA Order was made) were given a grace period of five years (running from the date the FMA commenced) in which to complete a competitive tender, with a shorter, 2 year, grace period applying in certain cases. The Final Regulations are intended to work so as to preserve the 5 year grace period.  Broadly, this means that any five year deadlines which started to run under the CMA Order, will continue running unchanged once the new regime comes into force.  If trustees were subject to the shorter two years grace period (which would be the case where the five year anniversary of the FMA's commencement fell within 2 years of the date the CMA Order was made), in most cases, trustees should have already have complied with the requirements and completed a competitive tender, in which case they will not be required to carry out a further tender on 1 October 2022 (although note the ongoing nature of the requirements referred to above).

Transition management services excluded from scope:  the Final Regulations include an express provision excluding the provision of transition management services from the scope of the competitive tendering requirements.