• Pensions Regulator updates its DB superfund employer and trustee guidance
• September’s CPI sets the scene for next year’s pension benefits and limits
• Reform to DC annual benefit statements to go ahead
• Diverting contributions back to gated funds – the Regulator updates its guidance
• Pensions Regulator looks to its future with a long-term pivot from DB to DC
• Pension Schemes Bill – Government seeks to reverse its House of Lords’ defeats
• Investment Association claims success in tackling high executive pensions

Pensions Regulator updates its DB superfund employer and trustee guidance

The Pensions Regulator has updated its guidance for trustees and employers considering transfers to a DB superfund.  This follows the publication of its updated guidance for those running such funds in June (see Pensions Bulletin 2020/26).  This launch is accompanied by a blog from Nicola Parish, the Regulator’s Executive Director of Frontline Regulation, explaining the Regulator’s approach to the supervision of superfunds.

The guidance, which was previously separated into two, is now presented as guidance applicable to both parties.  Significant changes include a much greater emphasis on the need to demonstrate to the Regulator that the transaction meets the three ‘gateway principles’ set out in the DWP’s consultation (see Pensions Bulletin 2018/50), the response to which has yet to be published.  These principles are as follows:

• A transfer to a superfund should only be considered if a scheme cannot afford to buyout now
• A transfer to a superfund should only be considered if a scheme has no realistic prospect of buyout in the foreseeable future, given potential employer cash contributions and the insolvency risk of the employer
• A transfer to the chosen superfund improves the likelihood of members receiving full benefits

There is detailed guidance on what needs to be considered under each of these principles.  Unsurprisingly, the Regulator says that only those superfunds to be named on its website should be considered.  A list of such superfunds is promised for publication shortly, but ahead of this, the link sets out details of the Regulator’s assessment process.

The mechanism for liaising with the Regulator remains the ceding employer applying for clearance that the Regulator will not use its moral hazard powers as a consequence of the transaction and trustees demonstrating as part of this submission that they have undertaken an appropriate level of due diligence.  However, the guidance now acknowledges that some transactions do not involve an immediate severing of employer responsibility for the scheme and so covers these situations as well.

The employer is expected to act in a supporting role for the trustees, supplying them with the information they need and paying for any professional advice they require.

The Regulator makes clear to trustees the magnitude of the decision they are being asked to take, should they support the transaction.  Some clear expectations of trustees are set out, along with a statement that they are expected to have had their decision subjected to “appropriate and proportionate discussions and review, including challenge”.

The guidance concludes with a warning about the length of time that can elapse before clearance is granted – at least three months will be required for superfunds already being assessed by the Regulator.

Comment

This guidance is a significant extension to the modest guidance that accompanied the DWP’s 2018 consultation, but there are no major surprises and it does deliver much needed clarity on the Regulator’s expectations of trustees and scheme sponsors looking to transfer to a superfund.  Those considering such transactions would be well-advised to study it.

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September’s CPI sets the scene for next year’s pension benefits and limits

The announcement on 21 October that the Consumer Prices Index rose by 0.5% over the twelve months to September 2020 sets the scene for the calculation of a number of pension benefits and limits for the next tax year.  Over the same period the Retail Prices Index rose by 1.1% and the CPIH by 0.7%.

State pensions

If the Government is to retain its 2019 manifesto commitment and deploy the “triple lock” formula, the Basic State Pension (currently set at £134.25 pw) and the Single Tier State Pension (£175.20 pw) will increase next April by 2.5% as this is higher than both the usual earnings growth measure (-1.0%) and the CPI figure of 0.5%.  The Social Security (Up-rating of Benefits) Bill, currently making its way through Parliament (see Pensions Bulletin 2020/41) enables an upwards review to take place in the face of negative earnings growth.  However, it also gives discretion to the Government to set next April’s rates.

SERPS and S2P entitlements will increase by 0.5% next April.

Occupational pensions

Next year, schemes that apply the Limited Price Indexation rules to pensions in payment will have to increase them by at least 0.5% for both the pension that accrued between 6 April 1997 and 5 April 2005 and the pension that accrued after 5 April 2005.

GMPs that accrued after 5 April 1988 will also increase by 0.5%.

The one-year minimum revaluation of that part of a deferred pension in excess of any GMP will be 0.5% for both the 5% and 2.5% capped orders.

Pensions tax

Following the CPI linkage introduced by Finance Act 2016, the £1,073,100 lifetime allowance for pensions tax purposes should increase to around the £1,078,900 mark on 6 April 2021, but the Government will confirm the exact figure in due course.

For those accruing defined benefits or cash balance, the increase in the CPI of 0.5% is effectively the inflation allowance made before the annual allowance starts to be used up in the 2021/22 tax year.

Comment

Last week the ONS confirmed that the earnings measure used to drive the annual review of state pensions is negative.  As a result, the Social Security (Up-rating of Benefits) Bill has become essential in order that state pensioners receive any increase in April 2021.  We wait to hear whether they will enjoy a 2.5% increase.  If they do, it will be five times the rate of CPI inflation.  Continuation of the triple lock policy next April also begs the question of what will happen the following April as there is a likelihood that earnings will bounce back next year and deliver a substantial increase to state pensions in 2022.

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Reform to DC annual benefit statements to go ahead

The DWP is to press ahead with a number of reforms to the pension benefit statements issued annually by DC schemes.  This news, contained within the DWP’s response to its consultation last November (see Pensions Bulletin 2019/42), is broadly in line with what had been proposed then.  In summary:

• Simpler statement templates – the DWP will consult later this year on a mandatory approach to statements for DC schemes used for auto-enrolment, taking the two-page statement template as the starting point in considering the length, content and design.  The alternatives of using design principles or descriptors was rejected.  There is the possibility that other schemes, including DB schemes, will be considered later
• Inclusion of charges and transaction costs – rather than increasing the length and complexity of the above template, it will just include a signpost to where a more detailed assessment of this information (as required already) is provided.  The DWP also intends that the template will signpost to information on the pension scheme’s investment strategy, including whether the member’s pension is invested individually or on a pooled basis, and with due regard to Environmental Social Governance and climate change
• Assumptions – the DWP will continue to work across government with a view to identifying the most appropriate ownership of the assumptions going forward.  So it is not clear at this stage whether the DWP will be taking responsibility for them as had been proposed
• Statement season – the DWP is supportive of this and will consult later on a mandatory approach for the timing of provision of an annual written pension benefit statement.  The related ‘orange envelope’ idea will not be developed because of scam concerns

The consultation to come will involve draft regulations and guidance, on which the DWP intends to work with the pensions industry in order to finalise.

Comment

There is a need for action to be taken in this area, as we noted when the consultation was launched, and what is being proposed will hopefully be of benefit to members and prove to be useful communications by schemes.  There is much legislation and statutory guidance in this area already, but it is in need of an overhaul, particularly with the huge increase in DC memberships and the advent of the dashboard.

But quite when the DWP-sanctioned simpler annual statement is to be delivered remains uncertain.  We suspect that April 2022 is the earliest possible start date given all the work that statement providers will need to undertake to fit within the new framework, the details of which are awaited.

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Diverting contributions back to gated funds – the Regulator updates its guidance

At the start of the coronavirus pandemic many investment funds (particularly property funds) were “gated” preventing contributions going into them.  Members’ contributions were therefore temporarily diverted to other funds, typically cash funds.  Now that these gated funds are re-opening there are concerns that they could be classified as “default” arrangements, depending on how legislation is interpreted, resulting in additional governance requirements.

The Pensions Regulator had already updated its guidance about this in July (see Pensions Bulletin 2020/28) but following discussions with various industry representatives it has updated it again and added a very helpful easement to its interpretation stating that a default arrangement is unlikely to be created when trustees inform members that the trustees’ view is that “the pre-existing expression of choice remains in place and they are given the opportunity to object before those contributions are redirected back into the original self-select fund”.

Comment

Although this may seem a minor change it is very helpful for DC schemes affected by this problem and should avoid the proliferation of unnecessary default arrangements.  We are already aware that some schemes have benefitted from this updated guidance.

However, it is unfortunate that the Regulator hasn’t (at the time of writing) noted this change in the update history of this web page so it is likely that some people will not notice it has changed.

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Pensions Regulator looks to its future with a long-term pivot from DB to DC

The Pensions Regulator has published a 15-year strategy document for discussion with its stakeholders in which it intends to change its current scheme-based view to one that “puts the [pension] saver at the heart of all that we do”.  Delayed from publication in the spring due to the pandemic, the Regulator says that:

• For savers in retirement or entering retirement over the next 15 years, it will focus on protecting their savings outcomes so that money built up over a lifetime of saving is secure
• For savers that are further away from retirement, it will focus on driving participation and enhancing the outcomes they get from their pensions

The document looks at pension savers and how they will evolve, taking in turn Baby Boomers, Generation X, Millennials and touching on Generation Z.   It also examines how the pension landscape may evolve, before concluding with five strategic priorities, each with a strategic goal – the last of which is to be a “bold and effective Regulator”.

Feedback is sought on the document by 16 December following which it will be settled and published in the new year.

Comment

This attractively packaged document makes clear that the Regulator is shifting its emphasis from DB to DC, whilst acknowledging that there remains much for it to do for those in DB schemes.

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Pension Schemes Bill – Government seeks to reverse its House of Lords’ defeats

Proposed amendments to the Pension Schemes Bill have been tabled by Guy Opperman, seeking to reverse all four non-Government amendments carried by the Lords in June (see Pensions Bulletin 2020/27).  They relate to collective money purchase schemes, pension dashboards and the funding of open DB schemes.  At this stage it is not clear whether the Government intends to accept some of the arguments that led to these amendments being carried and reflect them in another way outside the Bill, or simply wishes to use its majority in the Commons to reverse them.  More should become apparent when Committee stage is held, which remains unscheduled.

Comment

At Second Reading Guy Opperman stated that he was open to the concerns being expressed in relation to the open DB schemes funding issue, so it is possible that it will be the Regulator’s guidance that will bend, rather than wording in the Bill.

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Investment Association claims success in tackling high executive pensions

The Investment Association has announced that significant progress has been made on bringing executive pension contributions (when expressed as a percentage of pay) in line with those received by the majority of the workforce.  The Association states that its data for the 2020 AGM season shows that:

• 98% of FTSE 100 companies analysed have now either aligned the pension contributions of new directors with that of the workforce or committed to doing so
• 14 FTSE 100 companies reduced pension contributions for existing directors during the year and a further 43 committed to reduce contributions in future years.  Six FTSE 100 companies are increasing their workforce rate as part of their effort to align pension contributions

However, in keeping with its policy set out last October (see Pensions Bulletin 2019/37), ten FTSE 100 companies were issued a red-top by the IA’s Institutional Voting Information Service (IVIS) service for having at least one existing director receiving a pension contribution of 25% or more with no commitment to align this with the rest of the workforce by the end of 2022.  A further two companies were issued a red-top for not committing to align the pension contributions of new directors with that of the workforce.

Comment

The Investment Association’s gradual tightening, in keeping with the July 2018 corporate governance code, has had the desired effect, certainly as far as new directors are concerned.  It may be a while longer before contribution rates for existing directors are brought into line with those received by the majority of the workforce but the direction of travel is clear.

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