Pensions Regulator sets out its new approach to scheme funding

On 3 March the Pensions Regulator set out, in the first of two consultations, proposals for how it intends to regulate DB funding, taking into account investment strategy and employer covenant.  The lengthy consultation paper explores the application of eight principles, setting out a range of options on which the Regulator will need to come to a landing before finalising its new “fast track” route to compliance.  Alternatively, trustees may be able to propose a “bespoke approach”, but this will attract greater scrutiny and engagement with the Regulator.

This important development is summarised and analysed in our News Alert.  A number of blogs have also been published on our Pension Schemes Bill hub, accompanying which is the launch of an LCP Fast Track Forecast service.

Comment

There will be a second consultation on the draft of the replacement DB Funding Code of Practice later in 2020, but this first consultation sets the framework that the Regulator intends to follow.  We can now start to gauge its impact, which is likely to be very scheme-specific.

Pension Schemes Bill – Committee stage continues

The House of Lords’ detailed examination of the Pension Schemes Bill continued on 26 February, firstly with the remaining proposed amendments relating to the new powers being given to the Pensions Regulator.

Dividend payments

Much time was given over to debating the first amendment on the agenda, under which, for a scheme in deficit, a dividend payment greater than the annual deficit repair contribution would need to be notified to the Pensions Regulator if the annual deficit repair contribution was less than 20% of the scheme’s deficit.

Peers used this amendment to press the Government to empower the Regulator to be stronger with companies on dividend payments when their DB schemes are in deficit, with a clear concern that seeking to influence prospective dividends when setting recovery plans at triennial valuations is not enough.

The debate resulted in the Government having to agree to a side-meeting with many peers before the amendment was withdrawn.  Baroness Stedman-Scott, for the Government, also said that the Regulator will become tougher with sponsoring employers to ensure that they treat their DB schemes fairly, saying that it will be “taking a power to set out more clearly in secondary legislation what is required for an appropriate recovery plan”.  She said that the Government will work closely with the Regulator during its consultation on DB funding to ensure that regulations to come support the Regulator’s ability to “take action against employers that do not pay a reasonable proportion of their available resources to bringing down any pension scheme deficit”.

Earlier she said that a report on the case for requiring companies to disclose information about their distributable reserves from which dividends are paid is expected shortly.  This is one of the actions arising from the August 2018 announcement by the Department for Business, Energy and Industrial Strategy on reforms to corporate governance and insolvency law (see Pensions Bulletin 2018/34).

It could be that this report eventually helps to square the circle between the Regulator’s focus on seeking to influence prospective dividends as necessary to ensure that recovery plans are appropriate, and the desire by some politicians to clamp down on the dividends themselves whilst schemes remain in deficit.

Pensions dashboard

Aspects of the pensions dashboard initiative were debated through the device of one amendment that was subsequently withdrawn.  A number of peers had clear concerns about the lack of concrete progress in relation to a project launched at the 2016 Budget.

Earl Howe, for the Government, defended the project and gave various assurances as to what would be delivered, including a publicly-owned dashboard provided by the Money and Pensions Service (“MaPS”, on which the Bill is silent).  He also said that “MaPS and the industry delivery group intend to set out their approach for the year ahead by Easter.  By then, we should have at least the outline of a plan, with milestones I hope”.

Separately, via a blog, MaPS said that “in the coming months” it intends to publish a paper setting out its proposals for the data that schemes and providers would need to submit to the dashboard.  MaPS has also commissioned research to enable it to understand the challenges that pension providers and schemes will face in supplying such data.

The dashboard debate continued on 2 March when numerous amendments needed discussion.  During debate on one of them Earl Howe said that the provision of a qualifying dashboard service would come within the remit of the Financial Conduct Authority and an Order to that effect would be placed before Parliament in due course after discussion with HM Treasury and the FCA had concluded.  He also confirmed that the FCA would consult on the necessary additions to its handbook rules and guidance.

Climate change risk

The Government’s climate change amendment (see Pensions Bulletin 2020/06) was accepted without discussion.

Transfers from unfunded public sector schemes

The Government’s anti-scams proposal to extend the restrictions on the right to transfer benefits so that it also applied to transfers from unfunded public sector schemes was also accepted into the Bill.

Pension Wise guidance

Finally, during the debate on another amendment, Earl Howe gave an update on where the Government had reached in implementing measures in the Financial Guidance and Claims Act 2018 to increase the take-up of Pension Wise guidance (see Pensions Bulletin 2018/19).  Following some initial groundwork the DWP is intending to consult at some point this year in relation to flexible (ie typically DC) benefits in occupational pension schemes.  The FCA will also consult on rules appropriate for contract-based DC schemes.

Comment

After the Committee stage the Bill moves to the Report stage in the House of Lords.  There are still several more days of debate and opportunities for peers to table further amendments.

General levy to increase by 10% from April 2020 – and more to come

This is the headline announcement following the Government’s response to its consultation last October (see Pensions Bulletin 2019/40).

This 10% increase to the general levy will apply to schemes with more than 11 members and is the option that the Government was originally “attracted to” in the consultation.  This means that, for example, a 1,000 member occupational scheme will pay £2,290 this year compared to £2,080 last year.  A similar personal pension scheme will pay £890 this year compared to £810 last year.

Occupational schemes with 11 or fewer members will pay £75 this year compared to £29 last year whilst similar personal pension schemes will pay £30 compared to £12 last year.

The Government was not persuaded by arguments put forward to delay the start of corrective action until 2021 and states that it will conduct a structural review of the levy “by summer 2020” leading to a further consultation exercise in the autumn about the levy from April 2021 onwards.

Comment

The Government is clearly spooked by the size of the deficit that has grown (currently estimated as over £50m) and now that it has stirred itself it intends to take swift action.  The forthcoming consultation could prove divisive as there will be competing interests from different stakeholders.  That we can expect further, possibly large, increases from April 2021 seems to be a given.

Actuaries predict increased life expectancies in latest mortality projections model

The Continuous Mortality Investigation (CMI), an offshoot of the Institute and Faculty of Actuaries, has released its latest mortality projections model (CMI_2019) which gives slightly higher cohort life expectancies than in the previous version of the core model (CMI_2018).

Key findings by the CMI include:

• Standardised mortality rates in England & Wales were 3.8% lower in 2019 than in 2018.  This is the largest fall in mortality rates since 2011
• The average mortality rate in 2019 was the lowest that has ever been seen in England & Wales

The CMI has published a set of FAQs on CMI_2019 with the aim of assisting those presented with results from the latest model – such as pension scheme trustees.  Amongst other things, the CMI comments include:

• Analysis of data published by the Office for National Statistics (ONS) shows that people aged 65-89 living in less-deprived areas of England & Wales have higher life expectancy than those in more-deprived areas, and since 2001 have experienced mortality improvements about 1% a year higher on average
• There has been considerable debate about the reasons for lower mortality improvements since 2011.  Most actuaries expected some slowdown in mortality improvements as some of the factors that led to the previous high improvements could not persist.  In particular, a large part of the high mortality improvements in the decades before 2011 came from reductions in deaths from circulatory diseases, such as heart attack and stroke.  As the proportion of deaths from circulatory diseases fell, subsequent reductions could not contribute as much to overall mortality improvements.  A higher proportion of deaths are now caused by cancer and dementia, which have shown lower mortality improvements.  However, the sudden change around 2011 suggests that other factors were involved.  For example, economic conditions are likely to have played a part

Comment

The last few years have seen a continued slowdown in improvements to life expectancies, reducing the value placed on pension scheme liabilities and improving funding positions.  The experience over 2019 appears to buck this trend, and the latest mortality projections, which are used by most trustees in the UK to manage their defined benefit pension schemes, produce slightly longer life expectancies, so slightly increasing the value of pension scheme liabilities.

However, improvements in mortality are volatile year-on-year, and it is too early to conclude whether mortality experience for 2019 implies a jump start to the stalled improvements in life expectancies for the average person in England and Wales.

FCA responds on Patient Capital and Authorised Funds

The Financial Conduct Authority has issued a feedback statement summarising responses from its discussion paper of December 2018 (see Pensions Bulletin 2018/51) on whether there are unnecessary barriers to investing in patient capital through authorised funds.

The FCA states that it has not found any significant barriers to investing in patient capital assets through funds available for professional investors.  It did find some barriers to investing in patient capital within the FCA authorised funds regime for broad retail distribution. However, none of these barriers are unnecessary and cannot be relaxed without introducing a degree of risk that is inappropriate for retail investors.

The FCA also notes that other investment products, such as investment trusts, provide alternative ways for retail investors to access long-term investments.

The FCA will be considering any rule changes with regards to authorised funds holding illiquid assets that may be recommended upon completion of the Bank of England’s Financial Policy Committee (FPC) work later this year.

Comment

The feedback statement discusses the events surrounding the suspension of the LF Woodford Equity Income Fund last summer.  Speculatively, it is possible that these events have influenced the FCA’s thinking in the statement.

On a connected point we are still waiting for the DWP’s response to its consultation on DC schemes and investment in illiquid assets which was launched last February (see Pensions Bulletin 2019/05).  More than eleven months have passed since that consultation closed so we hope to see the DWP’s response soon.

DWP encourages Regulator to be proactive on climate change

An exchange of letters between the DWP and the Pensions Regulator has outlined some of the ways the Regulator is expected to encourage green investment in future.

Following the publication of the Government’s Green Finance Strategy in July 2019, the DWP has written a letter outlining how mitigating and managing climate change fits within the role of the Regulator.  In the coming months the DWP envisages that the Regulator will set out a strategy for dealing with the financial risks arising from climate change, including how this strategy will be resourced and implemented and involving continuing engagement with the TCFD’s (Taskforce on Climate-related Financial Disclosures) Regulators’ Taskforce.

The Regulator has replied that it has already taken action, focussing on Master Trusts as some of the largest schemes, and will be reporting on climate change adaptation in the occupational pensions sector in future.  It also says it will take an active role in the consultation that will be launched next week on the Pensions Climate Risk Industry Group guidance for trustees and will promote the guidance when it is available.

Comment

Climate change is clearly a hot topic, and trustee boards currently trying to avoid the issue can expect a strong steer that it must be dealt with in the coming months.