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Pensions Bulletin 2020/51

Our viewpoint

Pension Schemes Bill delayed again

A month has now passed since the Pension Schemes Bill left the House of Commons for what was likely to be a formality in the House of Lords ahead of Royal Assent (see Pensions Bulletin 2020/47) and, as the countdown to the holiday season takes place, getting this Bill over the line before the Christmas recess is proving to be as elusive as the Brexit trade agreement.

No reason for the further delay with the Bill has been given but it is almost certainly due to non-Brexit Parliamentary business having to make way for Brexit-related business.

Meanwhile, in a short debate in the House of Lords around a question on the Arcadia Pension Fund the Government came under pressure to state when the new routes to contribution notices, new criminal offences and new information-gathering powers would be available to the Pensions Regulator and whether they would then be retrospective.  Baroness Stedman-Scott promised to write on the issue.

Separately, in a debate on the future of pensions policy at Westminster Hall, Guy Opperman announced that the Pensions Regulator would be very happy to meet a cross-party group of Lords who remain concerned about how the funding of open DB schemes will be regulated under the Bill, in order to explain how the proposed regulations are going to work.

Comment

The Bill could yet achieve Royal Assent before Christmas, but the odds are lengthening.  However, one thing is clear – 2021 will be a very busy year for the DWP as it puts into force various aspects of the new Act -  and very busy for trustees, corporates and advisers in responding to the new law.

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PPF confirms major 2021/22 levy proposals will proceed as intended

The Pension Protection Fund has confirmed that it intends to push forward with the major proposals from its 2021/22 levy consultation document (see Pensions Bulletin 2020/40).

In a press release and statement published this week the PPF confirmed that:

  • The small scheme adjustment, which reduces the risk-based levy for schemes with smoothed liabilities of less than £50m by up to a half, will be implemented
  • The reduction in the risk-based levy cap from 0.50% to 0.25% of smoothed liabilities will go ahead
  • Insolvency risk, calculated by Dun & Bradstreet or assessed via credit ratings, will continue to be measured on the basis that has been in use since April 2020

The levy scaling factor of 0.48 stays the same, and the levy estimate of £520m is also unchanged.

Comment

Aware that the late finalisation of the 2021/22 Levy Determination does not leave schemes long to implement levy saving actions, the PPF has tried to give an extra element of certainty to the PPF Levy formula.  This will be welcomed by many schemes, as will the small scheme adjustment and the reduced risk-based levy cap being maintained.

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DWP tries once again to gather more from the General Levy

The DWP is seeking substantial increases in the general levy once more having held back from implementing proposals set out in October 2019 (see Pensions Bulletin 2019/40).

The deficit in respect of the financing of the core activities of the Pensions Regulator, the activities of the Pensions Ombudsman and part of the activities of the Money and Pensions Service has not gone away and will continue to build unless action is taken.  Under the current levy levels the accumulated deficit is expected to reach £80m by 2021 and grow at around £50m pa thereafter.

Currently there are two levy scales – one for occupational pension schemes (whether DB or DC) and another for personal pension schemes.

Three options are now put forward, with the first being that preferred by the DWP:

  • Option 1 – increase rates and introduce separate levy rate scales for three types of occupational pension scheme – DB, DC and Master Trust – alongside Personal Pension schemes.  Under this proposal there would be moderate increases in the levy for 2021/22, at 10% for DB and DC schemes and 5% for Master Trusts and Personal Pension schemes.  Higher increases would then follow in 2022/23 and 2023/24 for DB and DC schemes with DB schemes having the largest increases
  • Option 2 – as for Option 1 but not separating DB and DC schemes.  Both scheme types would then share equally in the pain of the higher increases in 2022/23 and 2023/24.  Master Trusts and Personal Pension schemes would be treated as in Option 1
  • Option 3 – retain existing levy structure and increase rates.  No further detail is given on this option

The first two options see substantial increases in levy revenue, shouldered in essence by DB and DC occupational pension schemes, as the increases proposed for Personal Pension schemes and Master Trusts are modest.  Over three years the increase for DB schemes is 120% under both options.  For DC schemes the increase is 50% under Option 1 and 120% under Option 2.

Both options aim to bring levy income into balance with levy expenditure over the medium term, currently forecasted by 2025, and to recover the accumulated deficit by 2030.  They differ only in that under Option 1 DB schemes take some of the pain that under Option 2 would be passed to DC schemes.

The intention is to introduce the settled option to run for three years from April 2021 and to consult again if it subsequently proposes to change the rates for any of these years or for any of the years that follow.

Consultation closes on 27 January 2021 and presumably we will know the result ahead of regulations needing to be laid in March.

Comment

This was a problem deferred but still needing to be addressed so we are not surprised that this consultation has come out just before the Christmas break.  There is a logic in accepting that separate levy rates need to be introduced, but whether what is being proposed is a fair way of apportioning these costs is something that will need close scrutiny.  As things stand under either Option 1 or 2 DB schemes will be plugging the lion’s share of the funding gap and in pretty short order.

Finally, the consultation refers to changes in the regulatory landscape being one of the reasons that the levy-funded pension bodies have seen an increase in expenditure – yet there is no mention that the pension schemes being regulated have also seen an increase in expenditure for that same reason!

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Pensions dashboard – data standards guide published

As promised, the Pensions Dashboards Programme of the Money and Pensions Service has published its data standards guide following a consultation which concluded in October (see Pensions Bulletin 2020/37).  The package comprises a lengthy guide, an overview, a video (which is well worth looking at) and a blog.

The guide is aimed at a technical audience responsible for working on pensions data and includes definitions of the overall process, the high level data elements and a technical breakdown of each data element, plus examples of how the data elements should work, using example data.

The data itself is divided into two types:

  • Find data – this includes a person’s first name and surname, date of birth, address and national insurance number.  This data is necessary so that users can be matched, via an identity service, to the pensions they hold.  One potential issue with the find data is that providers may be able to use different combinations of data in order to achieve a match, which in turn could mean that a user might not be able to find all their pension benefits that are available
  • View data – this is the data that the pension provider will display to the user and includes a person’s pension arrangement and the name of the pension provider.  View data also includes estimated retirement income (ERI) and the date payable for each pension, as well as the current value of a person’s DC pension pot.  A clear issue with the view data relates to the all-important ERI on which existing disclosure regulations are not sufficiently comprehensive in coverage (for DB), enable different approaches to be used (for DB) and allow different assumptions to be used (for DC).  It seems that there will be scope for schemes to continue to use different approaches and different assumptions

The blog by Chris Curry stresses that the data standards guide is “just the beginning of the conversation on data standards” setting out a relatively simple list of find and view data elements, recognising what is possible at this stage.  He acknowledges that more work needs to be done, especially to enable users to view an ERI that has a degree of consistency between one provider/scheme and another.  But in order to deliver to the agreed plan they are to push forward with the data elements set out in the guide whilst working on a solution to the ERI issue.

For the first iteration of pensions dashboards all UK-based pension schemes are in scope.  This includes state pensions, DB pensions (including cash balance schemes) and DC pensions (whether occupational or personal, including a remaining balance after any uncrystallised funds pension lump sums have been withdrawn).  Pensions that are currently paying out, annuitised or in drawdown are out of scope.  So, for example, individuals that have reached State Pension Age will not be able to view their state pension on pensions dashboards.

Comment

With the publication of the data standards guide the call is now going out for schemes and providers to ‘get dashboard data ready’ ahead of the compulsion to supply such data which will follow through regulations after the Pension Schemes Bill is enacted.

Now does seem to be the time for the topic to get on to trustees’ agendas and for working groups to be set up to assess the quality of the data that schemes will in due course be required to supply.  But we are not at the end of the data journey and there could be a number of challenges ahead if there is to be progress on ERI consistency and comparability.  There is also a clear risk that in order to meet the 2023 ambition MaPS will accept an initial dashboard that is somewhat disappointing in coverage and content, but in short succession thereafter seek to make improvements that will necessitate schemes and providers doing more work in order to supply more data.

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Covid-influenced 2020 mortality not a useful guide to future mortality experience

The Institute and Faculty of Actuaries’ Continuous Mortality Investigation is to modify the method used in the next version (CMI_2020) of its mortality projection model in order to remove distortions that would otherwise flow through as result of the coronavirus pandemic.

A new parameter is to be introduced which applies a weight to 2020 mortality data.  Significantly, the CMI is placing no weight on 2020 data in its ‘core model’.  This is because the 2020 mortality experience, impacted by the coronavirus pandemic, has been well outside the range of year-on-year changes seen in the past 40 years and in the CMI’s view likely to be an outlier and not indicative of the future path that mortality rates will follow.

The CMI consulted on this proposal in September and a modification was strongly supported by respondents.  The model is updated each year and normally operates on the premise that recent changes to mortality rates are a reasonable guide to short-term future changes in mortality (and so have 100% weight).  However, there would have been substantial falls in projected life expectancies had it continued with this approach for 2020 data, and these would have been in excess of what most users of the model would consider reasonable.  By placing no weight on 2020 data the new ‘core model’ will result in a much more modest fall in life expectancy compared to the CMI_2019 model.

CMI_2020 is due to be released in March and will enable actuaries to apply their own weights to 2020 data should they wish to depart from the ‘core model’.  Future versions of the model will also have weights for future years, but the CMI’s default position is to use a weight of 100% for each year’s data unless there are clear signs of exceptional mortality, linked to a particular cause.

Comment

The CMI mortality projection model is widely used by pensions actuaries to project future mortality experience.  We support a modification to the core model in light of the pandemic to avoid a significant fall in projected life expectancies had the CMI continued with its business-as-usual approach.

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Thematic review of actuarial factors advice published

The Institute and Faculty of Actuaries has published its first review of the standard of work carried out in practice by scheme actuaries.  The review was undertaken as part of the Actuarial Monitoring Scheme launched in September 2019.

The review looked at actuarial factor advice in the context of transfer values and commutation at retirement – both areas in which actuarial advice influences the benefits received by DB scheme members.  It found that commutation rates are often well below transfer values, which may lead to poor value for members.  For example, the median transfer value at age 65 was £29 for £1 pa of pension compared to the median commutation rate of £18 per £1 pa of pension.  There are a variety of reasons for these differences, including the role of trustees and sponsors, the inclusion of a spouse’s pension in transfer values, and the impact on funding.

One of the key recommendations of the report is that sound rationale and clear communication needs to be prioritised when advising scheme trustees.  Another is that when advising trustees, actuaries should focus on explaining the range of factors affecting calculations for transfer values and commutation rates and the reasons for the difference between the two.

Standards of advice were found to be generally high, but the report contains a number of suggestions as to how the quality of advice can be further improved.  The report also calls on actuarial standards to be clarified in a number of areas and for further research to be carried out, including the compilation of industry-wide benchmarking.

Comment

There are many reasons why there are differences between the assumptions used for transfer values and those to derive commutation factors and so communicating these reasons is clearly important in order to equip trustees to weigh up whether they risk delivering poor value to those members who wish to turn part of their pension at retirement into a lump sum.  This has become particularly important in recent years as falling yields have driven up transfer values and as more members close to retirement weigh up whether to transfer almost certainly to DC provision or take benefits from their DB scheme.

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Insolvency and company law temporary easements extended again

In recent weeks the Government has made regulations extending yet again some of the temporary measures contained within the Corporate Insolvency and Governance Act 2020.  Some of these build on the extensions announced on 24 September (see Pensions Bulletin 2020/40).

Comment

These extensions are yet further evidence of the support being given to companies as they face up to the economic downturn unleashed by the pandemic.

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Pension claims guidance published by the Insolvency Service

Guidance has been published by the Insolvency Service setting out how insolvency practitioners, working with pension scheme administrators, should go about making a claim against the National Insurance Fund for certain employee and employer contributions.  This is in relation to a longstanding piece of legislation, under the Pension Schemes Act 1993, through which the following amounts are payable in respect of occupational or personal pension schemes:

  • Employee contributions – those deducted from pay in the 12 months prior to insolvency but not passed to the scheme
  • Employer contributions – the least of (a) unpaid employer contributions in the 12 month period prior to insolvency; (b) an amount certified by the actuary (in relation to salary-related schemes only) as necessary to meet the scheme’s liability for benefits on dissolution; and (c) 10% of the total pay (whether paid or payable) to the relevant employees in the 12 months prior to insolvency

If a payment is made by the NI Fund to the scheme, the State will then have a preferential claim on the employer in respect of this payment.

Comment

It can often be the case that when an employer goes bust there are contributions outstanding to pension schemes.  This legislation provides some useful protection in respect of such contributions and the publication of this guidance is a helpful reminder that this money can be available when an employer fails.

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Benefit and pension rates for 2021/22 published

The DWP has published its list of benefit and pension rates for 2021 to 2022.  Amongst other things this list confirms that the new State Pension increases to £179.60 per week whilst the Basic State Pension (called the old State Pension in the publication) increases to £137.60 per week with the married addition increasing to £82.45 per week.  There is also confirmation that SERPS/S2P benefits in payment will increase by 0.5% as will the post-88 aspect of the contracted-out deduction.

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Marking Brexit

At the time of writing we do not know whether or not a free trade agreement will be agreed between the UK and the EU before the transitional period ends at 11pm on 31 December.  What does seem certain though is that this is the last LCP Pensions Bulletin that will be published while the UK is still subject to the full “acquis communautaire”, the full body of EU rights and obligations.  Despite EU legislation having been largely onshored this is momentous.  The way in which the UK has made law for nearly half a century will fundamentally change.

We do not expect any significant changes to this onshored EU law insofar as pension schemes are concerned in the short term, although it may be that the law will develop in future along a different course than it would have if the vote in 2016 had gone the other way.

Comment

As yet another Brexit deadline approaches there may be more financial market turbulence, adverse economic impacts on sponsors and administrative challenges to test trustees’ and sponsors’ risk management and preparedness.  LCP stands ready to help our clients with any last-minute issues.

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Christmas and New Year break

This is the last edition of the Pensions Bulletin for 2020.  It will return after the Christmas and New Year break.  May we wish readers a merry Christmas and a prosperous and healthy New Year!

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