Welcome to your weekly update from the Allen & Overy Pensions team, covering all the latest legal and regulatory developments in the world of workplace pensions.
This week we cover topics including: Mansion House pension reforms; Call for evidence: trustee skills, capability and culture; Call for evidence: options for DB schemes; Response and further consultation: helping savers understand their pension choices in decumulation; Consultation response: new value for money framework; Consultation response: extending opportunities for CDC schemes; Consultation response: DB superfunds; Response and further consultation: small pots; TPR’s response to Mansion House reforms; Finance (No.2) Act 2023 receives Royal Assent.
Mansion House pension reforms
The Chancellor, Jeremy Hunt, has announced a range of pensions initiatives as part of his Mansion House speech, triggering publication of a number of consultation responses, new consultations and calls for evidence. The common theme running through the proposals is the facilitation of investment by pension schemes in high-growth UK companies (‘productive finance’), with all of the related documents stating that they are ‘part of a wider government agenda to improve opportunity for investment in alternative assets including in high growth businesses and improve saver outcomes’. More detail on the relevant proposals is set out below. The deadline for responses to each of the calls for evidence and consultations is 5 September 2023 and final decisions on the initiatives will be made ahead of the Autumn Statement later this year.
Read the speech.
Call for evidence: trustee skills, capability and culture
This call for evidence considers trustee effectiveness, seeking input on three areas: trustee skills and capability, the role of advice and other barriers to trustee effectiveness. It focuses throughout on trustees having the right knowledge and skills to consider investment in the full breadth of investment opportunities, in particular to engage with productive assets. In particular, it:
- seeks to inform potential policy options around trustee registration, accreditation requirements (perhaps requiring every board to have a certain proportion of accredited trustees), and the role and qualifications of professional trustees (stating that the DWP’s ‘long-term vision is to have a smaller number of schemes, each with a professional trustee’);
- looks at the role of investment consultants and others in advising trustees (particularly in relation to decisions on whether to invest in unlisted equities);
- asks whether the current framework and guidance on fiduciary duty is sufficient to help trustees make decisions in the best long-term interest of savers; and
- asks whether trustees are given sufficient time and support by employers to be able to perform their duties effectively.
Read the call for evidence.
Call for evidence: options for DB schemes
This call for evidence considers whether there is scope to enable greater flexibility in how DB pension scheme assets are invested. The context is the shift in DB investments into bonds and away from equities – and away from UK equities to a more global allocation.
The government’s objective is to offer sponsoring employers and scheme trustees more consolidation options or more choices regarding how they invest DB assets (specifically including productive finance). The government stresses that changes to the investment of DB assets can have considerable effects on the economy so it needs to proceed with caution.
Questions include how to incentivise DB investment in productive assets; how restrictions on the return of surplus might affect risk-taking in investment strategies; and the potential benefits and drawbacks of a public sector consolidator for schemes with no realistic prospect of buyout (including the expansion of the PPF’s remit to allow it to take on this role).
Read the call for evidence.
Response and further consultation: helping savers understand their pension choices in decumulation
This document is both a response to a previous (June 2022) call for evidence and a further consultation on support and products to be made available to occupational pension scheme members when taking their benefits (decumulation). It sets out proposals for, and seeks views on, a decumulation framework that will provide support at the point of access, including an offer of a CDC arrangement in retirement. There will be a separate response to the part of the earlier call for evidence that focused on information, guidance and communications.
The government aims to ‘establish a broad alignment in the service offer among different providers where every pension scheme, either directly or through a partnering arrangement, provides decumulation solutions for their members’, and wants schemes to consider how CDC could feature in this (with a suggestion that legislation will follow). Questions include how the government can help a CDC-in-decumulation market to emerge; what minimum requirements trustees should put in place for members facing decumulation; what key metrics would need to be included if the VFM framework (see below) was extended to decumulation; and what partnering arrangements might look like.
The government intends to legislate, when parliamentary time allows, to introduce duties on trustees to consider the needs of their members when they want to access their pension pot and develop ways to deliver those needs. In the meantime, it will work with the Pensions Regulator (TPR) to issue guidance to meet those objectives. There is a possibility that legislation might be introduced only for master trusts in the first instance; the government also asks how the same duties should be applied to Nest.
Read the response and consultation.
Consultation response: new value for money framework
The DWP, FCA and TPR have published a joint response to their January consultation on a new ‘Value for Money’ (VFM) framework. The consultation sought views on proposals to require DC schemes and master trusts to disclose data and to assess and compare the VFM provided by their scheme under a consistent framework across the whole market. The proposals, combined with increased TPR powers to require underperforming schemes to wind up and consolidate, are designed to shift focus away from simple cost consideration towards a more holistic and longer-term value assessment. This is intended to help drive value and consolidation (where this is in the best interests of savers). For larger schemes and providers, the aim is to improve performance and encourage competition in the interest of savers.
The framework will go ahead largely as consulted on, with some details to be finalised with further input from the industry. It will cover metrics on investment performance, costs and charges, and quality of services (including communications and administration). Schemes will then be expected to use these metrics to assess their VFM in comparison with other schemes, following a step-by-step process and resulting in a red, amber or green rating.
Reporting will be required annually; data will need to be published by the end of Q1 each year (based on data to the previous 31 December), with the VFM assessment reports published by the end of October. There will be a standardised reporting template and a requirement to communicate the scheme’s VFM assessment to the employer of savers in the scheme where a scheme is underperforming.
The new requirements are intended to replace current Value for Members assessments. As there is some duplication with the Chair’s Statement, the requirements of the latter may be managed down/phased out over time.
The government intends to implement the VFM framework in phases, beginning with workplace default arrangements. Primary legislation will be needed to bring the framework into force (to be brought forward ‘when Parliamentary time allows’), as well as further consultation on draft regulations and FCA rules for the detailed requirements.
Read the response.
Consultation response: extending opportunities for CDC schemes
A response has been published to the January consultation on a policy framework for broadening CDC provision. The consultation sought views on extending CDC beyond single or connected employer schemes to accommodate multi-employer schemes including master trusts and the role of CDC in decumulation, particularly the potential for CDC decumulation-only trust-based schemes and products.
The government intends to consult on draft regulations to extend CDC provision to whole-life multi-employer schemes, including master trusts, in autumn 2023. The consultation response discusses a range of details around how extended CDC arrangements will work, such as authorisation and supervision, scheme design requirements, financial sustainability requirements, employer and member communications, and valuations and adjustments. The government is also committed to moving forward with creating provision for CDC decumulation-only products.
Read the response.
Consultation response: DB superfunds
The government has also published its response to the consultation on consolidation of DB schemes into DB master trusts or ‘superfunds’. The government believes that superfunds offer a good option for schemes that are not sufficiently funded to buy out with an insurer, but with enough funding to afford the price of entry (typically schemes with 70% to 90% funding on a buy-out basis) in order to end dependency on the employer covenant. It will also explore legislative changes to allow superfunds to be an option for schemes coming out of PPF assessment, where they would currently have to secure reduced benefits with an insurer. In line with the theme of all of the Mansion House proposals, facilitating investment in productive finance is a driver, with the response noting that ‘superfunds are likely to invest in a more productive way than many closed DB schemes’.
The response includes a summary of the key features of the proposed regime. The DWP expects and encourages the industry to develop different models, but common characteristics will include the link to a ceding employer being severed or substantially altered, the employer covenant being replaced by a capital buffer provided through external investment, and a mechanism to enable amounts to be payable to persons other than members or service providers (allowing investors to receive returns). The intention is that superfunds will be authorised and supervised by TPR, with TPR being required to produce an enforceable code setting out the relevant requirements. The response discusses other details such as the acceptable level of risk, triggers for intervention and profit distribution, and financial adequacy requirements.
Eligibility for transfer to a superfund would be governed by gateway principles (in addition to trustees’ fiduciary duties). Schemes that can buy out through an insurance provider or that are assessed as being able to afford this in the ‘foreseeable future’ (five years) would be excluded, and a move to a superfund would need to increase the likelihood of scheme members receiving full benefits.
The government will bring forward primary legislation as soon as parliamentary time allows, providing for a new compulsory framework applicable to superfunds (with secondary legislation setting out further detail). The government ‘strongly recommends’ that providers come to market in the meantime using TPR’s interim superfunds guidance.
Read the response.
Response and further consultation: small pots
The final Mansion House document deals with ending the proliferation of deferred small pots, in two parts. Part 1 sets out responses received to the government’s January call for evidence on various issues relating to consolidation solutions, including pot size thresholds and benefits/risks of different consolidator approaches. Part 2 is a consultation on a proposal for a multiple default consolidator model which would reduce the current numbers of deferred small pots and enable the consolidation of those that are created in the future. This envisages a small number of authorised consolidator schemes. The government is looking to work with interested parties to develop a viable and cost-effective automatic consolidation transfer process. Again, there is a focus on productive finance, with the consultation noting that ‘these small number of consolidators, will be able to generate scale at a greater rate opening opportunities to invest in productive finance benefitting the wider economy’.
The proposal is that members would be given the option to choose their designated consolidator, with the option to opt out of consolidation if they believe that it is not in their best interest. This would also require the creation of a central clearing house or registry of members’ pots to allow schemes to match them for consolidation. The aim would be for members to make an active choice of consolidator, but with a system for default consolidation (in what is anticipated to be the majority of cases). Pots with a maximum value of £1,000 (no minimum) would be eligible for automatic consolidation 12 months after the last contribution was made.
The government will look to take forward primary legislation to implement a statutory framework as parliamentary time allows, with further detail underpinning this to be covered in secondary legislation, which will be subject to formal consultation. The consultation also notes that the government will be reviewing the Master Trust authorisation regime, introducing higher VFM standards (see above) and reassessing duties.
Read the response/consultation.
TPR’s response to Mansion House reforms
TPR has published a blog post welcoming the Mansion House announcements. TPR states that ‘productive finance of course has a part to play in a diversified portfolio’ and ‘trustees should be conscious of and manage risks, but also take advantage of new opportunities’. The blog post announces that TPR will ‘soon’ update its DC guidance to reflect new duties on trustees to report on their policy on illiquid investments and to support trustees to make well-informed decisions. In the autumn, TPR will provide new guidance on investing in productive finance and update its existing investment guidance for DB and DC schemes. The post also states that the new DB funding code will also clarify where DB schemes are able to accommodate investment in growth assets, particularly for open and immature schemes.
Read TPR’s blog post.
Finance (No.2) Act 2023 receives Royal Assent
The Finance (No.2) Act 2023 has received Royal Assent. The Act puts into legislation the changes announced in the Spring Budget, including abolition of the Lifetime Allowance charge and increases to the annual allowance, money purchase annual allowance and adjusted income threshold for the tapered AA (read more). The final version of the Act has not yet been published, but the only change made to the pensions sections as it has progressed through Parliament is a clarification in relation to stand-alone lump sums (SALS), to make clear that any amount of SALS in excess of the 5 April 2023 maximum may still be paid to the member as a SALS and, where there is an excess, this is subject to the member’s marginal rate of income tax.
