Pensions Bulletin 2024/09
Our viewpoint
7 March 2024
- Budget 2024 – little by way of pensions policy developments
- PPF sets out its thoughts on the design and operation of the proposed public sector DB scheme consolidator
- Pensions Regulator consults on statement of strategy
- Chancellor signals further DC reforms
- DWP rows back on £10,000 general levy hike for “small” schemes
- Funding and investment regulations laid again
- General Code – it is out with the old!
- Pensions Regulator blogs about its refreshed auto-enrolment declaration of compliance portal
Budget 2024 – little by way of pensions policy developments
On 6 March 2024 the Chancellor, Jeremy Hunt MP, delivered his latest Budget Statement to the House of Commons. The emerging themes of the Chancellor’s speech were a continued focus on investment in the UK and reducing the burden of taxation. And, as expected, the final flourish of the Chancellor’s speech was a 2% cut in the main rates of national insurance for both employees and the self-employed. This will take these rates from 10% to 8% and 8% to 6% respectively and will come into force from 6 April 2024.
There were several announcements about pensions in the Chancellor’s speech and in the accompanying papers. They included the following:
FCA VFM consultation
The FCA’s forthcoming value for money (VFM) consultation (see Pensions Bulletin 2023/47) will include proposals to require the publication of contract-based DC default funds’ historic net investment returns and a breakdown of their UK investments. The Government says it will introduce equivalent requirements for Local Government Pension Scheme funds in England & Wales “as early as April 2024”.
The proposals will also require schemes to compare their performance, costs and other metrics against those of at least two schemes managing over £10 billion in assets. This is an initial level expected to increase significantly over time. These proposals had already been announced over the previous weekend – see the article below.
In coordination with the FCA the Government will legislate at the earliest opportunity to apply the VFM framework across the market and provide the Pensions Regulator with new powers, using secondary legislation if necessary to ensure key disclosures are in place by 2027. “Where schemes are persistently offering poor outcomes for savers, the FCA and TPR will have the full range of regulatory powers available, and the government expects them to use the powers; these include closing a scheme to new employer entrants and, where necessary, winding up a scheme”.
DC Lifetime Provider Model
The Government will continue to explore how savers will be allowed to take their pension pots with them when they change job. This is linked to the recent Call for Evidence on the Lifetime Provider Model (see Pensions Bulletin 2023/47) and we believe that it indicates a softening of the Government’s position.
Raising standards in the tax advice market
The Government has launched a consultation on raising standards in the tax advice market through a strengthened regulatory framework. This includes the potential mandating of consistent processes for registration of tax practitioners. The consultation builds on a promise made in 2021 to explore options to improve the wider regulatory framework in this area (see Pensions Bulletin 2021/50).
Other matters
Schroders and Intermediate Capital Group (IGC) supported by pensions capital from Phoenix Group are the winners of the LIFTS initiative (see Pensions Bulletin 2023/47). This initiative is intended to make it easier for pension funds to invest in UK growth opportunities.
The Government says it is working with the ABI to finalise a framework for monitoring progress on the Mansion House Compact ahead of its first anniversary.
On the triple lock the accompanying papers state “The government is also committed to supporting pensioner incomes by maintaining the triple lock”.
Comment
The further employee NIC cut (on top of that announced in the Autumn Statement) will further 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.
PPF sets out its thoughts on the design and operation of the proposed public sector DB scheme consolidator
The Pension Protection Fund has set out, in a 20-page document, its initial view on how a public sector consolidator (“PSC”) of private sector DB schemes could be designed and operated. The PPF says it has done this in response to the questions set out in the DWP’s consultation paper: “Options for Defined Benefit schemes”, released on 23 February 2024 (see Pensions Bulletin 2024/08).
In the document the PPF sets out its view on aspects of the PSC’s potential design in order to meet the Government’s policy objectives, drawing out differences to commercial models of consolidation (both insurers and superfunds). Key differences include:
- The PSC being required to take on all schemes that approach it (subject to pricing), ensuring that all schemes have a viable end game solution
- Moving to a range of standardised benefits and therefore not replicating all of a scheme’s existing benefits (to make ongoing administration simpler and cheaper) – the PPF acknowledges that trustees and members are likely to have some concerns about this
- In contrast to the “gateway test” for superfunds, there does not seem to be any formal eligibility criteria for schemes, and no need for trustees to prove that they cannot obtain interest from insurers or a superfund. The PSC would be open to all schemes, with the PPF saying that standardised benefits create a difference in distinct design from commercial alternatives
- In contrast to insurers, security and pricing to be similar to superfunds, with no need to comply with Solvency II – this could be attractive to sponsors and trustees who are thinking of a buyout end game given the more attractive pricing, along with potential Government underwriting (see below)
- The PSC agreeing, with the employer, a fixed repayment schedule for those schemes in deficit on the PSC’s pricing basis, over a period that that is affordable for the employer (insurers and superfunds can find this difficult because of their regulatory constraints) – the impact on refinancing and other creditors of the employer (banks, bond holders etc) is not discussed
The document is silent on the approach that may be taken to the market valuation of assets (including illiquid assets) and whether or not all assets will be accepted – this could be another key differentiator with insurers and superfunds. The document also suggests any GMP inequality issue will need to be resolved before the scheme enters the PSC.
The document recognises the competing objectives of the Government to a) increase UK productive finance investment and b) minimise the potential distortion of the current insurer and superfund markets that the PSC might create. The PPF says “It is important to stress that our thinking has been driven by the government’s stated objectives. To deliver all the government’s objectives is not straightforward; much will depend on the relative weight given to each objective. To run a substantive allocation to UK productive finance assets requires the PSC to achieve a significant scale. However, the more steps are taken to achieve scale, the greater the potential impact on the market”.
The PPF then goes on to say that its view of the potential market for the PSC could be around 2,400 schemes with around £120bn in assets. This would include smaller schemes (mainly those with less than 1,000 members), those with weaker funding (but not the weakest as those under 80% funded may find the required repayment schedule unaffordable), potentially larger schemes with weaker covenants, and those with significant illiquid assets. Although, the PPF acknowledges that the PSC may only attract a small proportion of such schemes, these numbers demonstrate the ambition of the PPF and Government to create a very material PSC that can invest in UK productive finance assets.
In terms of risk underwriting, the PPF is of the view that the Government, rather than the PPF’s reserves, should provide a buffer fund. It argues that this is because the PSC is being put forward to meet the Government’s objective of increasing levels of investment in UK productive finance (with the aim of benefitting the UK economy and UK taxpayers). And if the Government provides the buffer, the PPF says it would be legitimate for the Government to determine the level of risk that should be taken in the investment strategy.
The document sets out a detailed tabulation of the proposed benefit structure options, which it describes as a menu of choices. Choosing which of the standard benefit structures to use from this menu will be one of the key considerations (and challenge) for trustees thinking of putting their scheme forward. The document also sets out extensive thoughts on how the onboarding process can be streamlined, particularly with small schemes in mind, whilst recognising the amount of work that will be necessary.
The document concludes with a section on the treatment of schemes with deficits and surpluses on the consolidator’s pricing basis. There are also some separate thoughts on member experience for those that have been onboarded.
The PPF is not formally consulting on its document but is happy to receive thoughts.
Comment
This document demonstrates the ambition of the Government’s policy intentions in this area. Whilst one stated policy intention is to “minimise the potential distortion of the market”, as currently stated in the published document, it appears that a PSC offering lower cost long term security with Government backing could distort the existing bulk annuity and fledgling superfund markets. We expect that insurers, the ABI, and superfunds may have some concerns and will want to see a level playing field established, albeit one with more capacity for smaller pension schemes.
For trustees and sponsors, in due course the PSC could prove an attractive new end game solution for a wide range of schemes, and, as such, they should keep a close eye on developments and consider responding to the DWP consultation.
Pensions Regulator consults on statement of strategy
On 5 March 2024 the Pensions Regulator launched a consultation on its proposed approach to the statement of strategy. This is a key component in the new DB funding regime now being put in place, as it is the principal mechanism through which the Regulator can assess compliance. The consultation, which follows the DWP settling the funding and investment regulations in January (see Pensions Bulletin 2024/04), looks at the proposed form of the statement and the type and extent of the information that will need to be submitted to the Regulator.
In addition to the consultation document itself the consultation pack contains the following:
- An example statement of strategy for a scheme making a Bespoke valuation submission before the scheme’s “relevant date” – ie around the point at which the scheme reaches “significant maturity”
- A worked example illustrating how the Regulator expects maximum affordable contributions to be evidenced where there is a funding deficit to be repaired
- An extensive data list of the information likely to be required for including in the statement
The last of these is presented as a 168-row spreadsheet and sets out who of four separate parties is responsible for providing each data element – the trustees, scheme actuary, investment consultant and covenant adviser.
Key among the proposals are that:
- The statement of strategy has to be supplied in a standard format and follow one of four set templates, varying by whether the trustees are submitting a Fast Track or Bespoke valuation and whether or not the scheme has reached its “relevant date”
- Where a Bespoke valuation has been submitted, trustees will be asked to provide more detailed information in the statement on how their approach is compliant and risks are being managed. Similarly, more information about journey planning and how scheme maturity is expected to change over time will be requested from a scheme that has not yet reached significant maturity. The template included in the consultation is therefore the one that will apply in the scenario where the most information will be sought
- In the interest of proportionality some easements are proposed to the information to be requested from “smaller” schemes – defined as having less than 100 members when considering actuarial information and having less than £30m in section 179 liabilities when considering investment information
- Some additional information around future accrual and maturity and active member cashflows will be requested from trustees of open schemes
The first section of the consultation document looks for input on these overarching proposals and the second section covers the technical aspects of the data trustees will be expected to provide under the new funding regime when it comes into force.
Consultation closes on 16 April 2024.
Comment
We are pleased to see the development of standard templates for schemes to populate, which should make it easier to comply with the new requirements. The proportionality easements for smaller schemes are particularly welcome. However, it is clear that the statement of strategy requirements are likely to prove onerous for many schemes who will need to provide significant quantities of new information compared to current valuations.
Chancellor signals further DC reforms
On 2 March 2024 and ahead of this week’s Budget (when a similar announcement was made) the Chancellor, Jeremy Hunt MP announced new disclosure and other rules for DC pension funds.
Under these proposals:
- By 2027 DC pension funds across the market will disclose their levels of investment in British businesses, as well as their costs and net investment returns
- Pension funds will be required to publicly compare their performance data against competitor schemes, including at least two schemes managing at least £10 billion in assets
- Schemes performing poorly for savers won’t be allowed to take on new business from employers, with the Pensions Regulator and the Financial Conduct Authority having a full range of intervention powers
HM Treasury says that the plans are subject to a consultation by the FCA and build on the Government’s Mansion House compact, that encouraged pension funds to invest at least 5% of their assets in unlisted equity (see Pensions Bulletin 2023/28).
Comment
We have misgivings about these proposals, as LCP partners Steve Webb and Laura Myers explain and until we see the FCA consultation the extent of the Chancellor’s ambition will remain unclear. It has also been reported that the FCA is resistant to some aspects of the Chancellor’s proposals.
Presumably, occupational schemes, such as DC Master Trusts, will also be subject to these requirements through regulations to be made in parallel with the FCA’s rules.
DWP rows back on £10,000 general levy hike for “small” schemes
The DWP has responded to its consultation last autumn (see Pensions Bulletin 2023/39) about changes to the pricing structure for the pension scheme general levy. It has dropped its “preferred” option of a 4% pa increase that also included charging “small” schemes with less than 10,000 members an additional £10,000 premium each year (which it has now made clear it intended to apply only to DC schemes).
Instead, the DWP has decided to proceed with the simpler approach of keeping the current levy structure and increasing each element by 6.5% for each of the next three years from 1 April 2024 to 31 March 2027. This approach, which will see the general levy rise across the board by just under 21% by the third year, was preferred by 97% of the 287 respondents to the consultation.
Regulations to this effect have been laid before Parliament and will come into force on 1 April 2024.
The general levy is payable by the trustees of registrable occupational and personal pension schemes. Three of the DWP’s arm’s length bodies are funded by the levy. The levy recovers the full running costs of the Pensions Ombudsman, the costs of the regulatory work of the Pensions Regulator and the running costs for general pensions guidance and some of the pensions-related activities of the Money and Pensions Service.
Comment
We are pleased that the Government has changed its position on how to raise the general levy in the future and has decided to go with the middle-ground option of a 6.5% pa increase for all schemes, as we argued for in our own response available on our website.
Funding and investment regulations laid again
The draft funding and investment regulations that were laid before Parliament in January (see Pensions Bulletin 2024/04) have been replaced by an amended set whose purpose is to address some technical failings.
In the January set it appeared that new actuarial information within valuation reports and a new principle and factor to take into account in proposing recovery plans could be required in relation to all actuarial valuations that had not been completed by 6 April 2024, rather than only in respect of valuations with effective dates on or after 22 September 2024.
Regulation 20 of the amended regulations makes clear that these new requirements relate only to valuations with effective dates on or after 22 September 2024.
Comment
We had a concern that the January regulations did not reflect the policy intention in this respect and could prove to be troublesome for those completing ‘old regime’ valuations. LCP and others alerted DWP to the issue and it is good to see that it has now been addressed.
General Code – it is out with the old!
The next step in bringing the General Code of Practice into force has taken place with the laying of an Order that decommissions the old Codes of Practice that the General Code is replacing.
The Pensions Act 2004 (Codes of Practice) (Revocation) Order 2024 (SI 2024/273) provides for the revocation from 28 March 2024 of 10 different old Codes (including earlier editions of three of them).
The General Code itself was finalised in January (see Pensions Bulletin 2024/01) and was due to come into force on 27 March, but another Order is needed for this to be achieved.
Pensions Regulator blogs about its refreshed auto-enrolment declaration of compliance portal
In a blog published on 4 March 2024, the Pensions Regulator is promoting its refreshed auto-enrolment declaration of compliance portal, launched in January, for employers submitting their declarations of compliance.
The blog reminds employers that they must re-enrol eligible staff and re-declare their compliance every three years. It also contains all the expected warnings for those employers who do not take their auto-enrolment duties seriously.
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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