• LDI – Government responds to MPs’ report
• DB transfers out – DWP to explore making changes to the independent advice requirements

This Pensions Bulletin covers our normal weekly round-up of regulatory and other developments.  It has been issued ahead of today’s Autumn Statement.  A separate Bulletin is being issued that will look at Autumn Statement-related announcements which are of potential relevance to pension schemes and their members.

LDI – Government responds to MPs’ report

The Government has responded to the Work and Pensions Select Committee’s June 2023 report on its inquiry into the use of liability-driven investments in DB pension schemes (see Pensions Bulletin 2023/26).

The Government has welcomed the MPs’ report and accepts the Bank of England’s earlier recommendation that the Pensions Regulator should incorporate financial stability considerations in its decision-making and balance them with its objectives as a pensions regulator (see Pensions Bulletin 2023/14).  The response also discusses the progress made to date, and the Government’s proposals for future work, to address all ten recommendations made by the MPs.  The latter include the following actions to be undertaken by the Pensions Regulator:

• New questions to be added to the scheme return which DB scheme trustees are required to submit annually – aiming to improve the Regulator’s oversight of asset liquidity outside LDI mandates, so that it can have confidence that buffers can quickly be replenished in the event of severe market movements
• Data to be collected from LDI managers on a regular basis, including through a collaborative framework with the FCA and the Bank of England – expected to be up and running by the end of 2023
• Investment consultants and schemes to be surveyed to check for compliance with the Regulator’s LDI guidance (see Pensions Bulletin 2023/17) – with the information obtained enabling the Regulator to address poor practice with individual schemes and their advisors

In response to the Committee’s recommendation that the DWP and Pensions Regulator should halt delivery of a new scheme funding regime “at least until it has produced a full impact assessment for the proposals, including the impact on financial stability and on open DB schemes” the response merely says that the DWP intends to lay the Funding and Investment Strategy Regulations before Parliament in due course and that a full impact assessment will accompany these draft regulations.

Stephen Timms MP has welcomed the Government’s response to his Committee’s report, but says that what is now needed is a clear timeline for taking the measures forward.

Comment

As we had anticipated, the Government’s response is largely positive to the MPs’ recommendations; it clearly being necessary for the Regulator to have the tools to be able to regulate in this area.  However, there appear to be few actions falling squarely within the DWP’s remit.  We are also no further forward in knowing when the new scheme funding regime will be delivered, it now being over a year since the DWP’s consultation on the draft regulations closed, with no sign of a response still less the laying of the regulations in their final form.

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DB transfers out – DWP to explore making changes to the independent advice requirements

The results of the first review of the ‘appropriate independent advice’ requirements have been signposted by the new pensions minister, Paul Maynard, in an answer to a parliamentary question which asked whether those subject to these requirements should be able to opt out of receiving advice.

Since 6 April 2015 regulations have provided that pretty much anyone wishing to transfer out of their DB scheme – and in so doing giving up their DB pension promise for a pension pot whose prospective investment performance is not guaranteed – needs to demonstrate to the scheme’s trustees that they have taken independent advice about the matter.  This advice requirement does not apply where the value of the individual’s DB rights do not exceed £30,000.

The regulations contained provision for regular review of these requirements.  The first review should have been published before 6 April 2023.  Although the review was signed off on 4 April 2023, it has only now come to light.

The review, whilst concluding that the regulations are delivering the policy intent of making potential transferees aware of the risks of exchanging their ‘safeguarded’ benefits for ‘flexible’ benefits, through the independent advice requirement, concludes that the advice requirements may be a disproportionate response to low risk transfers some members wish to make.  As a result, the DWP is to conduct further work with the Pensions Regulator, the FCA, HMRC and industry representatives to consider if changes can be made to improve the potential transferees’ experience without undermining the policy intent.  It is not clear over what timeframe this further work is to be carried out.

Comment

The regulations have been a technical success in that they have driven potential transferees to taking advice.  However, that advice has proved to be more expensive and less available than originally thought, with the risk that many people may be unnecessarily locked into a DB pension that does not meet their retirement income aspirations.

It is too early to guess at how the regulations may be modified, but the MPs suggestion that members should be able to opt out has been met with a firm ‘no’ by the pensions minister.

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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.

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