Pensions Bulletin 2021/26
Our viewpoint
24 June 2021
- DWP finalises its latest rules on DC scheme governance including value for members and consolidation
- DWP targets consolidation of larger DC schemes “up to £5bn”
- FCA consults on further climate-related disclosure rules
- GMP conversion – Private Member’s Bill has First Reading
- Further Covid-19 influenced adjustments to insolvency and company law announced
- Cost of pensions tax relief – delay and revision to HMRC statistics
DWP finalises its latest rules on DC scheme governance including value for members and consolidation
On 21 June 2021 the DWP published a joint response to two separate consultations – on its September 2020 consultation on improving outcomes for members of DC pension schemes (see Pensions Bulletin 2020/38) and on its March 2021 consultation on incorporating performance fees within the charge cap (see Pensions Bulletin 2021/13).
These responses can be found separately on its website containing the first and second mentioned consultations but both responses are contained within the same document.
Improving member outcomes
The September 2020 consultation proposed that:
- Trustees of all ‘relevant schemes’, regardless of size, will be required to state in the Chair’s Statement the net investment (performance) returns for their default(s) and self-selected funds
- Trustees of DC schemes with total assets of less than £100m and that have been operating for at least three years will be required to assess key elements of the value achieved by their scheme on behalf of members. They will then need to report on the outcome of that assessment in their annual Chair's Statement and to the Pensions Regulator via the next scheme return. This includes outlining next steps, where trustees conclude that their scheme does not provide good value for members; either immediate improvement or consolidation/wind-up
- Schemes with assets of £100m or more will continue to comply with the current requirements for assessing value for members by reviewing the extent to which member-borne costs and charges represent good value, although they will be able to choose to voluntarily adopt the new form of assessment
These proposals are to go ahead, but with some important changes in relation to the value assessment. These include pushing back the implementation date from October to the first scheme year ending after 31 December 2021, and clarifying that hybrid schemes where the total assets (DB and DC together) are below £100m are in scope, but only the DC element is subject to the assessment. Also, schemes in the process of winding up will be exempt if they have informed the Pensions Regulator at any time before the next Chair’s Statement is due of their winding up.
The statutory guidance for trustees of relevant occupational DC schemes on completing the annual value for members’ assessment and reporting of net investment returns issued in draft form in September has now been finalised.
Incorporating performance fees
The proposals in the March 2021 consultation on smoothing the performance fee element of the charges regime over five years is to go ahead as proposed, subject to some drafting changes to the regulations.
On the call for evidence on ‘look-through’ costs for close-ended funds and pooled vehicles, contained within the March 2021 consultation, the consultation response says that as a minimum, the current requirement needs to be clarified and may need to change to remove the requirement to look-through. An announcement about the DWP’s revised position will be made in Parliament before the summer recess. This will set out any formal next steps, be it revised guidance or regulatory reform, and a timeline for when any revised position would come into force.
Costs and charges disclosure and illustration
The September 2020 consultation proposed amendments to the statutory guidance for trustees of occupational pension schemes on reporting costs, charges and other information. These are to go ahead, but with a number of adjustments. The updated statutory guidance has now been finalised.
Other changes
The September 2020 consultation proposed three other changes:
- Extending the requirement to produce a default Statement of Investment Principles to those DC schemes containing ‘with profits’ default arrangements
- Extending the costs disclosure requirements to funds that are closed to future contributions
- Excluding wholly insured schemes from some requirements of the Statement of Investment Principles to do with the trustees’ policies regarding asset managers
These are also to go ahead broadly as proposed – with schemes in the first category having more time to complete their default SIP.
Draft regulations to give effect to all the measures covered in this article were laid before Parliament on 21 June 2021. The Occupational Pension Schemes (Administration, Investment, Charges and Governance) (Amendment) Regulations 2021 are intended to come into force on 1 October 2021 as are the two separate statutory guidance documents mentioned above.
Comment
Overall, we are content with these proposals and appreciate the changes the DWP has made to the value assessment from its draft proposals. However, there are some points of detail – such as around reporting net returns – that will need to be considered by some schemes in specific circumstances.
We are also supportive of the suggestion that schemes larger than £100m may wish to voluntarily adopt the enhanced value assessment to ensure they are offering good value for their members.
DWP targets consolidation of larger DC schemes “up to £5bn”
As well as the consultation responses described above, on 21 June 2021 a separate call for evidence on further DC consolidation was published. This is intended to understand the barriers to further consolidation of the occupational trust-based DC market in the UK – ie in the £100m to £5bn segment.
The call for evidence is notable since the DWP states that it believes there will only be around 1,000 (non-micro) DC schemes operating in five years’ time but thinks this is still too many and wants to further accelerate scheme consolidation.
The call for evidence sets out the background to the current situation, offering some initial analysis and proposals and invites views on how a “similar but more tailored” approach to that settled on for schemes below £100m could be applied to schemes in the £100m - £5bn range. It is not clear whether the Government is targeting only pure DC schemes or hybrid schemes in this range.
The DWP asks various questions such as how the Government can incentivise schemes with assets between £100m and £5bn to consolidate and how important consolidation is in driving better member outcomes. Consultation closes on 29 July 2021.
Comment
If you are running a scheme larger than £100m with DC assets you may have thought you were “safe” from the Government’s intention to consolidate the DC market. However, this call for evidence makes it very clear that the Government’s ambitions are not over yet with the pensions minister stating that “there is no doubt in my mind” that there must be further consolidation and that “further action will follow”.
Mr Opperman states that “it is not my intention to stop at £5 billion” but we think there is a debate to be had about what is an appropriate upper level to force scheme consolidation since a £5bn threshold would catch all but the very largest of DC schemes.
FCA consults on further climate-related disclosure rules
The Financial Conduct Authority has published two sets of proposals on Taskforce on Climate-related Financial Disclosures (TCFD) disclosure rules for certain regulated firms and listed companies.
Asset managers, life insurers, and FCA-regulated pension providers
In the first of these, the FCA is proposing to introduce TCFD-aligned disclosure requirements for asset managers, life insurers, and FCA-regulated pension providers, with a focus on the information needs of institutional clients and end-user consumers.
The proposals are intended to be broadly consistent with the DWP’s now-settled requirements for the largest of occupational pension schemes (see Pensions Bulletin 2021/24) – both to aid consumer understanding of climate-related financial information about their pension products irrespective of provider, and to align with occupational pension scheme trustees’ information needs.
Under the proposals, firms will be required to publish, annually, an entity-level TCFD report on how they take climate-related risks and opportunities into account in managing or administering investments on behalf of clients and consumers. These disclosures must be made in a prominent place on the main website for the firm’s business and will cover the entity-level approach to all assets managed by the UK firm.
In addition, firms will also be required to produce, annually, a baseline set of consistent, comparable disclosures in respect of their products and portfolios, including a core set of metrics. Depending on the type of firm and/or product or portfolio, these disclosures will either be published in a TCFD product report in a prominent place on the main website for the firm’s business, while also being included, or cross-referenced and hyperlinked, in an appropriate client communication (such as a periodic client report), or be made available upon request to certain eligible institutional clients.
These new rules are intended to be phased in with the largest of firms (in terms of assets under management) being subject to them from 1 January 2022, with first disclosures required by 30 June 2023. The second tier (for remaining firms with assets under management above £5bn) will be subject to the new rules from 1 January 2023, with first disclosures required by 30 June 2024.
Standard listed equity shares
In the second consultation the FCA is proposing to extend the application of its TCFD-aligned Listing Rule, settled for premium-listed commercial companies in December 2020, to issuers of standard listed equity shares.
These issuers will be required to include a statement in their annual financial report setting out whether they have made disclosures consistent with the TCFD’s recommendations and recommended disclosures. Where they haven’t, an explanation is required of why, what steps they are taking to make these disclosures and over what timescale. If some or all of the disclosures are to be found other than in the annual financial report, an explanation is required of why. The annual financial report must also point to where the disclosures can be found.
The FCA proposes to issue guidance to assist those in scope of this new requirement, but this is not being consulted on currently.
The new rule is intended to take effect for accounting periods beginning on or after 1 January 2022.
Other proposals and next steps
Alongside both these proposals, the FCA is also seeking views on other topical environmental, social and governance issues in capital markets, including on green and sustainable debt markets and the increasingly prominent role of ESG data and rating providers.
The FCA is inviting feedback to both consultations by 10 September 2021 and intends to confirm its final policy on climate-related disclosures before the end of 2021. It will separately consider stakeholder views on the ESG-related discussion topics in capital markets, with a view to publishing a feedback statement in the first half of 2022.
Comment
We welcome the proposals that UK-regulated asset managers will be required to report greenhouse gas emissions and other useful climate-related information to their clients. This will be extremely useful for trustees seeking to understand the climate-related exposures of their assets, especially those within scope of the DWP’s new climate requirements. It is unfortunate that the first disclosures will not be required until after some of these schemes have had to complete their first annual metrics exercise, but we recognise that managers need time to set up their reporting systems. We support the move to standardise the metrics reported, including the way they are calculated, as this will help trustees compare the reporting provided by different managers.
The quality of climate data that managers will be able to report remains to be seen. At present, there are significant gaps in the data reported by investee entities. We therefore view it positively that the FCA is proposing to extend TCFD reporting to more UK-listed companies and that momentum is building behind international reporting standards in this area.
We also support the proposal to require TCFD reporting by contract-based DC schemes, so that members will have access to broadly equivalent information about their scheme’s climate practices, regardless of whether it is a contract- or trust-based scheme.
GMP conversion – Private Member’s Bill has First Reading
An independent MP, formerly of the SNP, is sponsoring a Private Member’s Bill that aims to amend and clarify existing GMP conversion legislation “helping to reassure occupational pension schemes that they are able to use the methodology published in DWP guidance to level the effective differences between pension amounts paid out to men and women”.
Margaret Ferrier MP came 12th out of 20 successful MPs in a ballot, the results of which were announced on 16 June 2021 with each Bill then having its First Reading in the House of Commons – a formality ahead of each Bill being ordered to be printed.
Details of the Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill are awaited – with its Second Reading not due to take place until 26 November 2021.
Comment
It has been known for many years that the GMP conversion legislation, designed to convert GMPs into normal scheme benefits, rather than as a means to effect GMP equalisation, has some rough edges to it that have become problematic for those seeking to use GMP conversion as their equalisation solution. And survey after survey shows that GMP conversion, in some shape and form, is preferred over the far more complex ‘dual record’ solution.
Hopefully this Bill will iron out these conversion rough edges, including the treatment of contingent survivor benefits post conversion, which employer needs to consent to the exercise, and the current need to notify HMRC that conversion has taken place. So, a cautious welcome to this development because Private Members’ Bills have a long distance to travel and only a few succeed.
And if a Bill can iron out known difficulties with GMP conversion law, might we see changes to pensions tax law to address some of the more fundamental challenges to using GMP conversion as a means to resolve the GMP inequality issue?
Further Covid-19 influenced adjustments to insolvency and company law announced
On 16 June 2021 the Government announced that the moratorium on the eviction of tenants of commercial properties for non-payment of rent, which was due to end on 30 June 2021, is to be extended once more – this time to end on 25 March 2022. The moratorium first came into being in March 2020 and has been extended four times. As a result of this moratorium some significant debts have built up.
Steve Barclay, Chief Secretary to the Treasury, also announced that the Government would bring forward legislation in the 2021/22 Parliamentary session to support the orderly resolution of debts that have arisen as a result of Covid-19 business closures, in particular “to establish a backstop so that where commercial negotiations between tenants and landlords are not successful, tenants and landlords go into binding arbitration”.
On the same day the Government also announced that regulations would be laid to extend the suspension of the normal ability of creditors to issue statutory demands and winding-up petitions. This suspension arises where a company has been prevented from paying its bills by the pandemic. This suspension had also been due to end on 30 June 2021 but will now be extended to 30 September 2021. These regulations were laid on 21 June 2021.
By contrast the current suspension of the ‘wrongful trading’ aspects of insolvency law will come to an end on 30 June 2021.
Comment
Although this latest news is predominantly one of further extensions, the Government is seeking to gradually bring to an end the various employer-friendly temporary adjustments to insolvency and company law, whose purpose was to provide much needed relief as the pandemic took hold in March 2020. These adjustments and their unwinding may well be important for DB scheme trustees when keeping an eye on the scheme sponsor’s covenant.
Cost of pensions tax relief – delay and revision to HMRC statistics
In past years, HMRC has issued annually its assessment of the tax relief cost of registered pension schemes – the so-called “PEN6” or “Table 6” costings – alongside certain personal pension statistics. The last release was In September 2019 bringing the Table 6 figures up to date to cover relief for 2017/18 (there is necessarily a time lag to get information from tax returns etc). The 2018/19 figures should have been released in September 2020 alongside various other statistics including two tables relating to personal pensions.
After several messages of delay, HMRC has now announced that the 2018/19 update will be delayed yet again to be published alongside the 2019/20 statistics in September 2021. Furthermore, the delay is to allow HMRC to investigate issues, and that “errors in the data” may also impact the published 2017/18 figures on all three tables – so that HMRC “recommend a cautious use of these figures while they are under investigation”.
Comment
Table 6 contains the statistics that are used in policymaking (the source of statements such as “pensions tax relief costs £x bn”), so particularly interesting given recent rumours of a possible tax raid.
Collecting meaningful information for Table 6 has always been a challenge, particularly regarding occupational pension schemes, where there is no direct data (eg DC contributions are deducted from pay before any returns to HMRC, and there are a lot of arguments disputing the approach taken to value the relief given for DB accrual). And the notes to the table have always said “The figures are based on HMRC administrative data and information compiled from a variety of sources by the Office for National Statistics (ONS). Costs are subject to large revisions and have a particularly wide margin of error”.
It is not clear what the data errors might comprise. But it is worrying that there may be data errors in personal pension statistics – an area where one might have expected clear information sources.