• Chancellor sets out three sets of pensions reforms to take forward his Mansion House proposals
• DC value for money framework consultation in spring 2024
• DC small pots – next steps on multiple default consolidators
• DC “Lifetime Provider Model” Call for Evidence
• DC decumulation services – trustees asked to default members into decumulation solution
• Review of regulation of Master Trusts published
• Options for DB schemes – a tax reduction and two more consultations to come
• Trustee capability, advice and duties
• Update on LIFTS initiative
• Lifetime Allowance abolition to proceed
• Triple lock safe for another year
• Big increase in National Living Wage
• National Insurance contributions to be cut

This Autumn Statement Special summarises and comments on announcements made on 22 November 2023 which are of potential relevance to pension schemes and their members.

For our regular weekly update see Pensions Bulletin 2023/46.

Chancellor sets out three sets of pensions reforms to take forward his Mansion House proposals

Following on from the Mansion House announcements in July 2023 (see Pensions Bulletin 2023/28) the Chancellor has announced updates to that package along with some additional measures.

Providing better outcomes for savers

The DWP is to introduce the multiple default consolidator model for DC schemes, to enable a small number of authorised schemes to act as a consolidator for eligible pension pots under £1,000.  The DWP is also launching a call for evidence for DC schemes on a lifetime provider model under which individuals will be able to move towards having one pension pot for life, and on a potential expanded role for Collective Defined Contribution schemes in future.

There is also an update from the DWP on the proposal that DC occupational pensions trustees should have a duty to offer decumulation services and products at an appropriate quality and price.

Driving a more consolidated market

The Government is welcoming the current trend of DC pension fund consolidation and is expecting to see a market in which the vast majority of savers belong to schemes of £30 billion or larger by 2030.  The Government is also welcoming the FCA and Pensions Regulator announcements on next steps towards implementing the Value for Money framework in the DC workplace pensions market.

The DWP has published a review of the DC master trusts market and will be consulting this winter on how the Pension Protection Fund can act as a consolidator for DB schemes unattractive to commercial providers.

The Department for Levelling Up, Housing and Communities is confirming a March 2025 deadline for the accelerated consolidation of Local Government Pension Scheme (England and Wales) assets, setting a direction towards fewer pools exceeding £50 billion assets under management, and implementing a 10% allocation ambition for investments in private equity.

Enabling pension funds to invest in a diverse portfolio

The DWP is consulting this winter on whether changes to rules around when DB scheme surpluses can be repaid, including new mechanisms to protect members, could incentivise investment by well-funded schemes in assets with higher returns.  As part of this it intends to reduce the authorised surplus payments charge from 35% to 25% from 6 April 2024.

The Government welcomes the announcement that the Pensions Regulator will implement a register of trustees and update the trustee toolkit.

The Government is engaging with industry on proposals to ensure all aspects of the pensions industry are supporting best outcomes for savers, including how to shift employer incentives away from low fees towards long-term pension investment performance.  It is also committing £250 million to two successful bidders in the Long-term Investment for Technology and Science (LIFTS) initiative, subject to final agreement, and confirming the intention to establish a Growth Fund within the British Business Bank.

All this activity has been usefully wrapped up by means of joint letters to the FCA and Pensions Regulator from the Chancellor and Secretary of State for Work and Pensions, that make clear what the Government wants delivered.  The letters recognise that all the above (and more) form a long-term agenda and will need significant work to deliver.

Comment

Once again, an extensive package to which much of this special edition of the Pensions Bulletin has been devoted.   Some can be delivered relatively soon, but many initiatives will need primary legislation in relation to which the Government has pretty much run out of time to deliver before the General Election.

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DC value for money framework consultation in spring 2024

In an announcement clearly co-ordinated with the Autumn Statement, the Pensions Regulator and the Financial Conduct Authority have let it be known that in spring 2024 the FCA will consult on detailed rules for a new value for money (VFM) framework for DC workplace pensions.  This follows on from confirmation in July 2023 that it is to go ahead (see Pensions Bulletin 2023/28).

Both organisations restate that their intentions are that the new framework is consistent across all DC schemes, whether trust-based or contract-based and the Pensions Regulator goes on to make the point that “trust-based schemes should engage with the FCA consultation so that there are no barriers to implementing the value for money framework in the trust-based environment”.

Comment

Whilst the FCA can impose VFM on contract-based pension providers, it will take primary legislation for the DWP to do the same on occupational schemes and there is no indication that it intends to do this.

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DC small pots – next steps on multiple default consolidators

The DWP has responded to its consultation about how to solve the problem of DC small pots (see Pensions Bulletin 2023/28) and has given further clarity on the outline of its proposed multiple default consolidator framework, reaching the conclusions set out below.

There will be a clearing house to underpin and support the framework.  An industry delivery group (see below) will be tasked to carefully consider the role, remit and design of it as a priority.

Where a member has not made an active decision about which default consolidator to use, then in the first instance attempts will be made to consolidate them into a scheme where they already have a pot (or to the scheme with their largest pot if they have multiple pots).  Where the individual does not have a pot with an authorised consolidator, they will be allocated one based on a carousel approach.

An authorisation and supervisory regime for trust-based schemes to act as consolidators will be developed and options will be investigated, working with the FCA, for a similar framework for contract-based schemes.  Consolidators will need to satisfy several conditions to be authorised.

Pots that are eligible for consolidation must have been created since the introduction of auto-enrolment, must be within auto-enrolment workplace pensions within charge-capped default funds, must have had no active contributions for at least 12 months and must be valued at £1,000 or less.

The DWP intends that the industry delivery group will be launched in early 2024, and the group will provide an interim update by spring/summer 2024 with proposals in late 2024 for ministerial consideration and decisions.

Comment

It still appears that it will be at least a year before legislation can begin to be drafted to implement this.  As with many current pension initiatives, the spectre of the forthcoming General Election looms over this.

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DC “Lifetime Provider Model” Call for Evidence

The DWP has issued a Call for Evidence about a radical proposal that will fundamentally alter the UK (DC) workplace pensions system if it is introduced.

In summary, the proposal is that a “Lifetime Provider Model” could improve member outcomes by giving employees more agency and control over their own pension by allowing employees to choose the pension scheme to which their employer contributions are directed to.  This is a far-reaching idea which the DWP is keen to explore further.

On the face of it, the idea of giving employees such a choice should empower them to take more control of their own pensions and lead to greater consolidation.  It could also help solve the problem of proliferation of “small pots” which has been intractable for several years now.

However, as the Call for Evidence acknowledges, there are several potential challenges to implementing this.  These include:

• What central architecture will be needed to make this work
• What will the impact be on employers currently sponsoring pension schemes
• How much employee engagement will be needed for this process
• How will employees know which pension provider is offering the best value for them

If this proceeds then it is likely to take several years to implement and there is also the wider political landscape to consider, with a General Election looming.  It is not clear how much cross-party support there is for this proposal.

The Call for Evidence closes on 24 January 2024.

Comment

We have severe reservations about this proposal as do others in the pensions industry.  LCP partner Laura Myers outlines some of her concerns in this commentary.

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DC decumulation services – trustees asked to default members into decumulation solution

The DWP has now responded to its July 2023 consultation on its proposals for DC trustees to offer decumulation services to members (see Pensions Bulletin 2023/28) and “strongly believes” that the measures it outlined in July are, at the present time, the most appropriate “to secure a strong later life for occupational pension members”.

The key point to note is that the DWP has decided that members in trust-based schemes should be placed into a “backstop” decumulation solution by their pension scheme unless they make an active choice.  The DWP believes that this will ensure every member of an occupational pension scheme has access to a decumulation solution if they cannot or do not want to make the often-complex decisions when accessing benefits.  The DWP acknowledges this approach does raise issues when members have multiple pots but believes there are mitigations that are in train or could be put in place to address this concern.

The DWP intends at the earliest opportunity, to introduce legislation, when parliamentary time allows, to place duties on trustees to offer a suite of decumulation products and services, which are suitable for their members and consistent with pension freedoms.

However, ahead of this, the DWP says that it will encourage schemes to voluntarily develop a decumulation offer or enhance their current services.  To support this the Pensions Regulator will issue interim guidance to show how the DWP’s objectives outlined in its consultation can be met without legislation, and to encourage innovation.

The DWP for its part intends to monitor, with industry and consumer representative groups, the range of products and services being offered and whether these are giving members what they need, with the intention to consider, if in the future, there is a need to adopt a more prescriptive approach to that set out in this latest consultation response.  It will also continue to review the potential for CDC schemes to feature more significantly in the solutions being offered.

Comment

The consultation response is somewhat muddled as on the one hand it talks about placing a decumulation services duty on trustees “at the earliest opportunity” before concluding that it is to go down the voluntary approach for now.  And although the idea of a “backstop” decumulation solution is simple in concept, more detail about what this means and, importantly, legislation containing safeguards both for members and trustees is needed.

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Review of regulation of Master Trusts published

Five years after the legislation governing the then new DC Master Trust authorisation regimes came into being, the DWP and the Pensions Regulator have published a detailed joint review of the Master Trust market looking at market segmentation, costs, charges, consolidation, increasing scale, and the relationship with the Chancellor’s Mansion House compact and other DWP policies and policy proposals.  The review describes ways in which the Pensions Regulator is responding to this evolving market, and areas where the Master Trust authorisation and supervisory regime may need to be updated, with a particular focus on investment governance and working more closely with schemes as they grow.

It is the DWP and Regulator’s expectation that the Master Trust market will become more concentrated with a few very large schemes and that therefore the Regulator’s approach can change from primarily seeking to prevent failure of a scheme “to a collaborative supervisory approach, challenging schemes to be in a mindset of continuous improvement”.

Some of the recommendations made by the review include that the Pensions Regulator will:

• As part of an enhanced focus on investment governance, build on the current provision of investment data, seeking an increased flow of more timely investment information.  This will be used to drive better performance of Master Trusts
• Expect Master Trust trustee boards to have appropriate levels of expertise in investments
• Work to define and identify Master Trusts reaching systemically important size and consider what additional oversight these schemes may require
• Consider how to mitigate against potential conflicts of interest arising from multiple trustee appointments

The DWP will support the Pensions Regulator in these objectives and will keep under consideration any further changes that may be needed to the Master Trust authorisation regime.

Comment

We welcome the review of a key growth area of the UK DC savings market.  We believe many Master Trusts are well run with strong boards but believe it is essential that all meet that requirement.  The eye-catching point in these recommendations is the one about identifying Master Trusts that reach systemically important size.  One can only hope that lessons from the 2008 banking crisis have been noted.

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Options for DB schemes – a tax reduction and two more consultations to come

The DWP has published its response to the call for evidence on Options for Defined Benefit schemes that it launched in July 2023 (see Pensions Bulletin 2023/28).

The response takes three areas in turn: DB investment in productive finance, building surplus and a public consolidator.  While the responses received showed general support for the first of these, it seems there was no overall consensus as to a way forward with regard to the second or third – which are intended to support the productive finance agenda.

Therefore, the DWP says that it will launch a consultation in the winter to consider in more detail measures to make surplus extraction easier and more attractive (including design, eligibility, safeguards and the viability of a 100% PPF underpin).  Headlining the proposals around surplus extraction is the announcement that the rate of tax on refunds of surplus to employers (the “authorised surplus payments charge”) will reduce from 35% to 25% from 6 April 2024.

The DWP also says that it will establish a public sector consolidator by 2026, focussing on schemes that are unattractive to commercial providers, and that it will also launch a consultation this winter to consider the design and eligibility for such a consolidator.  It goes on to say that any such consolidator should support employers with DB schemes while delivering the best possible outcomes for members, and notes that it feels that the PPF would be well placed to run such a consolidator addressing a specific market failure.

Comment

Both the building surplus and public consolidator ideas require primary legislation, so again, they are topics that can only be delivered after the General Election.

On the building surplus topic, LCP has argued for more flexibility on surplus extraction, together with more security for members with the 100% PPF underpin.  LCP partner Steve’s Webb’s commentary provides more background on this topic, welcoming the fact that the announcement about the tax reduction shows that the Treasury is serious about the building surplus idea.  We await the DWP’s winter consultations with great interest.

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Trustee capability, advice and duties

In its response to the July 2023 call for evidence (see Pensions Bulletin 2023/28) the DWP has announced that it will take four measures forward, none of which appear to require legislation:

• The DWP will support the Pensions Regulator in their delivering a trustee register
• The DWP strongly encourages professional trustees to gain accreditation and will continue to review whether legislation is needed to mandate accreditation.  The upcoming General Code will set accreditation as an expectation
• The Regulator expects to publish additional guidance in relation to investment decisions and alternative assets by the end of 2023.  The Regulator’s toolkit is also being updated
• Alongside the Value for Money initiative the DWP believes that that it will be helpful to provide employers with further information when selecting a pension scheme for auto-enrolment, focussing on the DWP’s idea that best value and long-term outcomes should be considered rather than a narrow focus on costs and charges.  DWP will work with the Regulator to take this forward

Otherwise, the response merely consists of a summary of the responses received.

Comment

This response is perhaps more notable for what it does not say, in particular silence on the highly topical areas of the influence of advice and interpretations of fiduciary duty on trustee investment decisions leaves us none the wiser on whether or not there will be changes in the law.

We also have our doubts as to the efficacy of a mandatory accreditation regime for existing professional trustees in improving trustee performance as LCP partner Nathalie Sims explains in this commentary on the DWP’s decisions.

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Update on LIFTS initiative

Under the heading of a “£320m plan to drive innovation and unlock the first tranche of investment” in the Chancellor’s Mansion House Reforms, the Treasury has provided an update on the promise made in May 2023 (see Pensions Bulletin 2023/22) to provide up to £250m to incentivise pension schemes to invest in science and technology firms through the Government’s Long-Term Investment for Technology and Science (LIFTS) initiative.  There are now two (unnamed) successful LIFTS bidders who intend to create two new investment vehicles accessible to pension schemes.

There is also mention of a new Growth Fund to be launched by the British Business Bank “to give pension funds access to investment opportunities in the UK’s most promising businesses”.  This initiative is supported by eight named pension funds.

To coincide with this announcement, the British Business Bank put out a supportive statement.

Comment

The details of these well-meaning initiatives remain somewhat opaque and so it is not clear at this stage whether pension schemes will choose to utilise them when they become available.

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Lifetime Allowance abolition to proceed

Amongst the materials released alongside the Autumn Statement is a policy paper on the abolition of the Lifetime Allowance.  This follows on from the initial announcement of the intention to abolish the Lifetime Allowance in the Spring Budget 2023 (see Pensions Bulletin 2023/11) and the July 2023 release by HMRC in draft of some of the legislation required (see Pensions Bulletin 2023/30).

The policy paper (and elsewhere) confirms the changes will take effect from 6 April 2024.  Much of the detail contained in the policy paper is already known, and there are only brief details on the additional areas required to fill in the missing gaps.  We will have to wait for the release of the now promised “Autumn Finance Bill 2023” to see the full details of changes.  This is expected to be published in two weeks’ time.

One key policy decision that has been confirmed is a U-turn on the intention announced in July to apply income tax on unused defined contribution benefits on death before age 75.  These will now broadly continue to be paid income tax-free, unchanged from the current position.

Comment

The confirmation that the Lifetime Allowance is to be removed from 6 April 2024 is despite many in the industry hoping that the implementation would be delayed, due to concerns about the ability for pension schemes to implement the necessary changes to systems and member communications in sufficient time for members to draw their benefits from April.

We will wait and see whether there are any further surprises contained in the Finance Bill, when pension scheme administrators will (hopefully) be able to see the full extent of the work required to implement these changes.  And, of course, we await HMRC guidance explaining its interpretation of the new law and how it applies in practice.

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Triple lock safe for another year

Despite various rumours over the past few weeks (see Pensions Bulletin 2023/41), the Chancellor has confirmed that both the Basic State Pension and Single Tier State Pension will increase by 8.5% in April 2024.  This is in line with the annual increase in Average Weekly Earnings for May to July 2023, the highest measure under the triple lock mechanism (earnings, September’s CPI or 2.5%).  This means that the full Basic State Pension will increase from £156.20 per week to £169.50 per week, and the full Single Tier State Pension from £203.85 per week to £221.20 per week.

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Big increase in National Living Wage

The National Living Wage for those aged 23 and over is to increase from £10.42 per hour to £11.44 an hour from 1 April 2024, and is to be extended to 21-22 year olds who currently are protected by the lower National Minimum Wage of £10.18 per hour for those in this age band.  National Minimum Wage rates for younger workers will also increase with, for example, the rate for 18–20 year olds increasing from £7.49 per hour to £8.60 per hour.

Chief Secretary to the Treasury, Laura Trott announced this decision as implementing in full the recommendations of the Low Pay Commission.

Comment

For pension savers receiving earnings no greater than these minima, this announcement should also have the effect of increasing both employer and employee pension contributions.  And for those pension schemes that turn employee into employer contributions through a salary sacrifice scheme, as ever, they will need to ensure that the sacrifice does not take the individual’s pay below these national minima.

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National Insurance contributions to be cut

The final flourish in the Chancellor’s speech was the announcement that the main rate of employee Class 1 National Insurance contribution rates will be reduced from 6 January 2024 and will fall from 12.0% to 10.0%.  Employer Class 1 NICs remain unchanged at 13.8%.

For the self-employed Class 2 NICs will be abolished from 6 April 2024, whilst the 9% main rate of Class 4 NICs will be cut to 8% also from 6 April 2024.  In relation to Class 2 abolition, the Government is to provide more details on how it should not result in a loss of access to contributory benefits including the State Pension.

Comment

This employee NIC cut will reduce the NIC savings that can be achieved through salary sacrifice arrangements that are used to convert what otherwise would be a member pension contribution into an employer contribution with the member giving up part of their salary as part of the arrangement.  However, these arrangements will still deliver significant NIC savings and so are unlikely to reduce in popularity.

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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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