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: TPR issues new guidance on managing leveraged LDI; TPR corporate plan announces DB funding code delay; TPR publishes 2023 Annual Funding Statement; HMRC Pension Schemes Newsletter; The Gender Pensions Gap: what it is and how to fix it – 23 May 2023.

TPR issues new guidance on managing leveraged LDI

The Pensions Regulator (TPR) has published new guidance for trustees on managing risks when using leveraged liability-driven investments (LDI).

In late 2022, regulators including TPR issued guidance on managing GBP-denominated LDI risk; the European regulators stated that following the volatility in autumn 2022, yield buffers of around 300-400 basis points had been built up and that any reduction in resilience in individual sub-funds of pooled funds was not appropriate. TPR’s previous guidance stated that the same level of resilience should be maintained for segregated leveraged LDI mandates and single-client funds, as they face the same market risks and operational challenges.

In its latest guidance, TPR clarifies that collateral buffers should comprise two elements:

• an operational buffer that is sufficient to manage day-to-day volatility in the market for the specific LDI arrangements – TPR says that this should at least reflect gilt yield volatility in normal market conditions; and
• a market stress buffer of (as a minimum) 250 basis points. The minimum market stress buffer assumes that trustees are able to provide additional cash or assets to replenish the buffer within five days – if longer is needed (or the assets held in the buffer are more volatile than those typically used), then a larger buffer may be appropriate.

TPR’s new, more detailed, guidance also sets out specific steps that trustees should be taking when investing in LDI, including:

• considering where LDI fits within a scheme’s investment strategy;
• setting, operating and maintaining a collateral buffer (for example, agreeing in advance which assets are sold and in what order to raise cash to maintain the buffer when required; and clearly defining and recording any delegated selling powers);
• testing and monitoring the resilience of LDI investments and processes; and
• making sure the right governance and operational processes are in place.

Separately, the Financial Conduct Authority has issued guidance and recommendations for LDI asset managers.

Read TPR's LDI guidance.

Read the FCA’s guidance and recommendations for LDI asset managers.

TPR corporate plan announces DB funding code delay

TPR’s latest corporate plan (2023-24) highlights a focus on its work with the Financial Conduct Authority and the Department for Work and Pensions (DWP) to develop a value for money framework, and confirms that the launch of the new defined benefit funding code has been pushed back to April 2024.

Other focus areas include quality outcomes for DC savers (including in decumulation), supporting schemes to prepare for connecting to pensions dashboards, and continuing to tackle scammers through the Pension Scams Action Group. TPR also intends to look at whether there should be a professional trustee on each trustee board and whether professional trustees should be accredited or subject to an authorisation process.

Read the corporate plan.

TPR publishes 2023 Annual Funding Statement

The latest Annual Funding Statement has been published, setting out key messages that:

• many schemes will be experiencing improved funding levels (in which case trustees should consider whether to apply funding gains towards reducing risk in their funding and investment strategy);
• for schemes where funding levels have fallen (including as a result of the volatility in gilt yields in autumn 2022), funding and investment strategies will need to be reset and governance processes should be reviewed, in line with the new LDI guidance referred to above; and
• schemes should avoid complacency when monitoring the employer covenant (revised TPR guidance on monitoring the employer covenant is due later this year).

The statement is particularly relevant to schemes with valuation dates between 22 September 2022 and 21 September 2023, as well as for schemes undergoing significant changes that require a review of their funding and risk strategies, and schemes that are receiving requests for reduced contributions, changes to contingent asset arrangements and proposals for other use of surplus (including member requests for discretionary increases).

It includes commentary on rethinking funding strategies, including options for schemes where funding is now at or above buy-out level and an expectation that schemes where the funding level is above technical provisions but below buy-out should consider aligning with the key principles of the draft funding code and/or getting ‘insurance-ready’. It also sets out TPR’s views on rethinking investment strategies, covenant considerations and other factors including longevity and inflation; and highlights potential risks around the refinancing of sponsor debt facilities, and how trustees should respond to this. As in previous years, the statement includes tables identifying TPR’s key expectations for schemes in different circumstances, depending on scheme and employer characteristics.

Read the Annual Funding Statement.

HMRC Pension Schemes Newsletter

HMRC has published its latest Pension Schemes Newsletter (no. 149), confirming (as we reported two weeks ago) that changes announced in its 27 March 2023 lifetime allowance (LTA) newsletter to the way that defined benefits lump sum death benefits and uncrystallised funds lump sum death benefits are paid will not go ahead. Instead, schemes can continue to use the current process for taxation of those payments until HMRC develops a longer-term position for the abolition of the LTA.

The newsletter also includes a reminder of the annual return submission deadline for schemes using relief at source; and information on submitting pension scheme returns on either Pension Schemes Online or the Managing Pension Schemes service.

Read the newsletter.

The Gender Pensions Gap: what it is and how to fix it – 23 May 2023

The Gender Pensions Gap – the difference between the pension incomes that men and women can expect at retirement – is estimated to be twice the size of the Gender Pay Gap. Why is that, and how can we close the gap? Join us at our offices on Tuesday 23 May 2023 when we will be welcoming Legal & General Investment Management’s (LGIM) Stuart Murphy, Co-Head of DC, and Alexandra Miles, Senior DC strategist, to discuss the gap and what can be done to address it.

Sign up here.