Pensions Bulletin 2021/01

Our viewpoint

DWP Working Group offers solutions to DC “small pots” problem

The working group set up by the DWP in the autumn (see Pensions Bulletin 2020/39) to tackle the proliferation of small DC deferred pension pots has made its recommendations to the pensions minister, and on 17 December these were published.  To briefly recap, one of the side effects of the success of auto-enrolment is that the number of deferred pension pots in Master Trust schemes could increase from 8 million to 27 million by 2035.  This creates challenges both for members in keeping track of their old pension pots and not suffering erosion of them due to charges and for providers in administering them efficiently.  To put this into context, DWP data analysis suggests that 74% of all deferred pots in the largest DC pension providers are smaller than £1,000 and 25% are smaller than £100.

Given this evidence, the working group believes that fundamental process reform is needed to enable large-scale transfer and consolidation solutions and has made several recommendations and narrowed down the potential solutions set out in the Pension Policy Institute’s paper on that subject in summer 2020 (see Pensions Bulletin 2020/31).

The group’s recommendations are that:

  • Member-led opportunities for consolidation of small pots continue to be explored, although the group acknowledges that this is unlikely to be enough by itself
  • Pension providers should implement a single consumer-facing account for life, even if multiple pots are held in the back office.  This could be achieved, following scoping work in 2021/22, through adoption of best practice and regulatory guidance
  • The pensions industry should establish operational focussed groups, to investigate and address administrative challenges – including identity and verification, data standards and a low-cost transfer process – with the aim of publishing an update in summer 2021.  This will be necessary to underpin mass transfer and consolidation systems that can be delivered at scale within the auto-enrolment market
  • A proof of concept exercise for “member exchange” involving a small number of Master Trusts should be implemented, starting with a feasibility report in summer 2021.  This is where a trusted third party carries out regular exercises to identify where for an individual one provider holds a small deferred pot and another holds an active pot.  The deferred pot is then transferred to the active pot, with appropriate safeguards during the process
  • Two consolidation models should be prioritised for low-value small pots – the default small pot consolidation scheme (also known as “default consolidator”) and the automatic pot follows member model.  The recommendation is to develop a cost/benefit analysis of these options starting in the first half of 2021

The idea of the default consolidator is that everybody has one of these and deferred pots would be transferred and consolidated into it.  The Government believes this could be delivered within the existing pensions framework, although there are choices around how members are allocated a default consolidator which need to be explored in more detail.

Member exchange and automatic pot follows member are similar in concept in that both result in a person’s deferred pot being transferred to their active pot, but they each have different advantages and disadvantages.  For example, member exchange may be quicker to implement amongst Master Trusts and would not need involvement of an employer, but legislative change would likely be needed to extend it to the whole of the market including contract-based schemes, and trustees would need to be comfortable that the receiving scheme offers suitable value for money.

The Coalition Government passed legislation for pot follows member in the Pensions Act 2014, but in 2017 the then Government decided it was not the right time to introduce it.  The present Government is now reconsidering the idea given that auto-enrolment, the DC charge cap and the Master Trust authorisation regime have all now bedded in.


The working group has made a sensible range of proposals to be further investigated.  The DWP now needs to keep the momentum going so that the erosion and misplacing of small pots is reduced as quickly as possible.  It is vital that at least one of the solutions is implemented as soon as possible – in this case “done is better than perfect”.

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Furlough scheme extended once more

On 17 December, the Government announced that the Coronavirus Job Retention Scheme will be extended until the end of April 2021, and will continue to provide the current level of support throughout.  This means that the Government will continue to pay 80% of an employee’s usual salary for hours not worked subject to a monthly cap, with employers only required to pay national insurance and pension contributions in respect of these hours.

It had previously been announced that the furlough scheme would run until March and that the level of support provided would be reviewed in January in the hope that economic circumstances would be sufficiently improved that employers could be asked to increase their contributions (see Pensions Bulletin 2020/46), but this review has been brought forward in order to allow businesses to plan ahead.  As the Government expects to set out plans for the next phase of support for business in the Budget Statement, which is due to be delivered on 3 March, businesses should have adequate time to factor in any changes even if support is scaled down from the start of May.

Businesses will also now have until the end of March to access the Bounce Back Loan Scheme, Coronavirus Business Interruption Loan Scheme, and the Coronavirus Large Business Interruption Loan Scheme.  These had been due to close at the end of January.


This extension again signals significant expenditure by the Chancellor, but businesses under pressure will welcome the certainty of a few more months of respite.  They will also likely take comfort in the fact that this support will continue unchanged for the almost two months within which they will need to respond to any changes announced in the Budget.  The move may save jobs and businesses and keep more pension schemes out of the PPF.

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FCA finalises climate-related disclosures for UK premium listed commercial companies

The Financial Conduct Authority has issued a policy statement containing finalised rules and guidance following a consultation launched in March setting out a new climate-related disclosure rule for many UK-listed companies (see Pensions Bulletin 2020/10).

Under the finalised rules UK premium listed commercial companies are required to include a statement in their annual financial report setting out whether their disclosures are consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), or explain in the report if they have not done so.

The accompanying guidance (integrated with the rules in appendix 1 of the policy statement in response to feedback through the consultation process) is intended to help such listed companies determine whether their disclosures are consistent with the TCFD’s recommendations as well as clarifying the (limited) circumstances in which the FCA would expect companies that are in scope to explain rather than disclose.

The rule will apply for accounting periods beginning on or after 1 January 2021 – so the first annual financial reports subject to this rule should be published in spring 2022.

The policy statement also includes a Technical Note clarifying how existing requirements applicable to all listed companies may already require climate and other sustainability-related disclosures in certain circumstances.

The FCA has also confirmed that in the first half of 2021 it intends to consult on:

  • Potentially extending the scope of this rule to all issuers of standard listed shares (excluding listed funds)
  • Potential TCFD-aligned disclosures by UK-authorised asset managers, life insurers and FCA-regulated pension providers designed to better inform their clients and end investors


The fact that these rules will apply for annual financial reports published from spring 2022 chimes neatly with the DWP’s separate proposals (expected to be mandated via provisions in the Pension Schemes Bill currently before Parliament) requiring that large schemes must disclose their approach to managing climate-related risks and opportunities by 2022 (see Pensions Bulletin 2020/35).

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Frozen state pensions in the spotlight again

The All-Party Parliamentary Group (APPG) on Frozen British Pensions has released a report from its enquiry into the UK Government’s policy of not uprating UK state pensions where the pensioner lives in a country that does not have a reciprocal uprating agreement with the UK.  The APPG contains many parliamentarians across the political spectrum.

The report is based on over 800 submissions of evidence gathered between 30 June and 3 August 2020 from stakeholders ranging from individuals living on a frozen pension to governments with residents impacted by the policy and concludes, with supporting evidence and argument, that this policy “is illogical, unfair and causes significant distress”.  Significantly, the governments of both Canada and Australia submitted evidence in which they indicated that they had already made representations to the UK Government on behalf of UK pensioners in their countries and have expressed a readiness and willingness to work with the UK Government to end this policy.


The rationale behind UK state pensions being frozen in payment where pensioners emigrate to some countries but not to others has long been a bone of contention, and the logic for the differential treatment is arguably hard to defend, in particular given that the UK will now continue to uprate pensions for UK pensioners who choose to live in the EU, including those newly moving to the EU (see article below).

This report gives an insight into the very real difficulties created by this policy, not just for the pensioners who have “done their time” and “paid their dues” and therefore justifiably feel entitled to a full and uprated pension, but also to those foreign governments that feel duty bound to subsidise British pensioners living in their countries who are impoverished by this policy.  This issue can only be resolved at the political level, legal avenues having been exhausted some years ago.  With the Brexit and ‘Global Britain’ dynamic added it will be interesting to see whether there will now be any movement in this area by the Government.

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Brexit and State pensions – uprating to continue for all

In guidance updated on 24 December, State pensions will be uprated for those newly moving to live in the EU, Iceland, Liechtenstein, Norway and Switzerland from 1 January 2021.

When the UK left the EU last January the Government’s uprating promise was limited to those who had moved to these countries or would do so before the end of the transition period (see Pensions Bulletin 2020/04).

It has also been confirmed that relevant social security contributions made in EU countries will count towards the qualifying conditions for a UK state pension.


This is a welcome decision and is required under the UK-EU Trade and Co-operation Agreement but contrasts starkly with the treatment of many who retired to Commonwealth countries (see article above).

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Cross-border schemes in regulatory limbo

The ending of the Brexit transition period at 11 pm on 31 December 2020 has resulted in the UK law governing UK/EU cross-border occupational pension schemes falling away.  Specifically, regulations made in February 2019 which revoke all the UK law governing such arrangements came into force at the end of the transition period.

The now defunct law set out the requirements for UK occupational pension schemes to accept contributions from employers in respect of members who are subject to the social and labour laws of another European Economic Area (EEA) state and to make or receive cross-border bulk transfers.


At this stage it is not clear what this means for those schemes operating on a cross-border basis, such as the still significant number of Anglo-Irish schemes.  The Regulator issued “no deal” guidance in October 2019, but didn’t revise it when we left the EU last January with a withdrawal deal.  In December, as the transition period drew to an end, the Regulator promised to revise this guidance in early 2021.  Meanwhile, trustees of such schemes are asked to periodically check the Regulator’s guidance, and also with the relevant authority in the host EU member state in which their scheme operates, for further updates.

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SMPIs: accumulation rate survey

The Financial Reporting Council has published its latest annual survey of the accumulation rates being assumed (for the broad asset classes of equities, government bonds, corporate bonds and cash) in producing statutory money purchase illustrations (SMPIs) to project DC funds to retirement under the actuarial standard (AS TM1) that sets the framework.

Based on responses received between July and October 2020 from 18 providers (who collectively issue over 26 million SMPIs), the research shows that accumulation rates for all four asset classes used for illustrations issued after 6 April 2020 have in general reduced for those participating both this year and last year.

The survey also reveals that fewer than half the respondents included general guidance to recipients concerning the impact of the pandemic on investment values.  Separately, respondents indicated that they felt it was too early to anticipate what changes might be needed to SMPIs as a result of the Pensions Dashboard.


These annual surveys are intended to encourage transparency around the accumulation rates used and the rationale underlying the rates chosen and also encourage feedback on the findings and approach to setting the assumption.  The question of who will take over ownership of the assumptions underlying SMPIs from the FRC is of course yet to be resolved (see Pensions Bulletin 2020/43) and whether the change of ownership will bring substantial changes to the approach used for setting these assumptions remains to be seen.

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Survival guide to pensions on divorce published

A comprehensive and readable guide for the general public about pensions and divorce has been published by the Law for Life charity on its Advicenow website.  This new “survival guide” sets out what individuals should consider about pensions when getting divorced, including how the Courts deal with pensions in this situation, before setting out a seven-stage process through to resolution.  These stages include finding out how much the pensions held by the divorcing parties are worth, sharing information, and working out if expert help is needed and if so where to get it from.

The guide follows on from the technical guide published in 2019 by the multi-disciplinary group focussing on this topic (see Pensions Bulletin 2019/26).


Divorce is a life-changing event and insofar as pensions are concerned can be very difficult for the divorcing parties to appreciate the issues and the sums at stake.  This guide is therefore most welcome to help people navigate through these matters.  Trustees, consultants, HR and pensions managers would do well to direct individuals caught up in this maelstrom to this invaluable resource.

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Pensions Regulator’s scam campaign gathers pace

The Pensions Regulator’s scam busting campaign, launched in early November (see Pensions Bulletin 2020/46) has seen more than 100 pledges to combat pension scams.

Among the 117 pledges reported to have been made just before Christmas were three master trusts (representing 50,000 savers).  37 of the 117 have also self-certified to confirm that that they have adopted the six actions expected from pledgers on due diligence, member warnings and reporting scams.

The Trustee Toolkit Scams module, that was launched as part of the campaign had also seen 1,220 take-ups at the same date.


It is heartening to see the pensions industry getting behind this Regulator campaign with such gusto – and we look forward to the speedy enactment of legislation to enable trustees to turn down proposed transfers to schemes where they have well-founded scam concerns.

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This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.