Pensions Bulletin 2022/21

Our viewpoint

Restoring trust in audit and corporate governance – the Government decides

The long-awaited Government response to the March 2021 White Paper on a number of reforms to the UK’s audit and corporate governance regime (see Pensions Bulletin 2021/13), designed to prevent a repeat of the failures seen at BHS and Carillion, has been published, ahead of a draft Bill that was signalled in the Queen’s Speech last month, but for which no timescale is yet available.  In fact, such is the complexity of the now settled reforms, involving a range of actors, that no implementation timescale has been set out – not even an indicative one.

This latest document sets out (over nearly 200 pages) some themes coming through in the consultation responses along with the course of action that the Government has now decided upon.  As expected, at the core of all this is the establishment of a new regulator to replace the Financial Reporting Council – the Audit, Reporting and Governance Authority (ARGA) “to implement high-quality regulation and high standards and encourage improvement by regulated entities and individuals”.

In the interests of proportionality, the focus of the regulation to come will be on “the most systemically important companies and organisations, which are designated as Public Interest Entities (PIEs)”.  The current audit regulatory regime is based around such entities.  In future PIEs will include large private companies with both 750+ employees and an annual turnover of £750m + (significantly less than had been anticipated by the White Paper).

Internal controls, fraud and dividends

The UK Corporate Governance Code is to be strengthened to provide for an explicit directors’ statement about the effectiveness of the company’s internal controls and the basis for that assessment.  The Government intends to legislate to require directors of PIEs with 750+ employees and an annual turnover of £750m+ to report on actions they have taken to prevent and detect fraud.  This is in contrast to the White Paper’s proposal for directors to report on a company’s internal controls and fraud prevention measures, with auditors providing assurance on the latter.  The Government’s decision not to proceed with this has drawn criticism from the FRC.

ARGA is to issue guidance on what should be treated as realised profits and losses for the purposes of determining distributable reserves.  The Government then intends to legislate to require PIEs with 750+ employees and an annual turnover of £750m to disclose their distributable reserves and explain the board’s long-term approach to the amount and timing of shareholder returns.  The Government also intends to require directors of such companies to make an explicit statement confirming the legality of proposed dividends and any dividends paid in-year.

Actuarial oversight

The Government has confirmed that ARGA will undertake oversight and regulation of the actuarial profession in place of the FRC.  The settled approach is broadly as proposed but with one important modification.  ARGA’s responsibilities will extend to “all individuals that undertake actuarial work in the public interest”.  By this it intends to use PIEs as its reference for the public interest – ie the same approach as is used for the regulation of auditors.  Large pension schemes and large funeral trusts will also sit within this regulatory perimeter.

ARGA will decide what specific technical actuarial work done by, or for, PIEs, large pension schemes and large funeral trusts, will be regulated and will publish, and keep under review, such a list.  ARGA may also require individuals undertaking such public interest actuarial work to comply with the Institute and Faculty of Actuaries’ ethical standards, even if they are not members.

ARGA will also be able to set legally binding technical actuarial standards for all UK members of the Institute and Faculty of Actuaries in relation to their actuarial work, including non-public interest work.

The proposal that ARGA monitor compliance with technical standards is being limited to public interest actuarial work.  ARGA will similarly be limited when it comes to taking action against individuals for breaches of technical actuarial standards.  And the FRC’s current disciplinary function regarding public interest cases will be restricted to public interest actuarial work by or for PIEs, large pension schemes and large funeral trusts.

Other matters

There is also to be:

  • A new statutory Resilience Statement and a new statutory Audit and Assurance Policy – to apply to PIEs with 750+ employees and an annual turnover of £750m+
  • Greater supervision of corporate reporting by ARGA, including new intervention powers
  • ARGA to be able to investigate and, if necessary, sanction directors of PIEs for breaches of their corporate reporting and audit-related duties and responsibilities
  • Improvements in audit quality and to competition in the audit market


This is a substantial package that will take a number of years to deliver.  The focus on PIEs (and large pension schemes and large funeral trusts) in relation to the regulation of actuarial work is an interesting development.  Also, the fact that it will encompass all individuals, rather than just members of the Institute and Faculty of Actuaries in this regard, should help to address what could have been a “deterrent effect” on membership of what may turn out to be a more demanding regulatory regime than as at present.

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Annual funding statement analysis shows improved funding position likely for many schemes

The expected valuation positions of “tranche 17” DB pension schemes (ie those with valuation dates between 22 September 2021 and 21 September 2022) is explored in analysis carried out by the Pensions Regulator to give context to the Annual Funding Statement 2022 published in April (see Pensions Bulletin 2022/16).

Overall, the Regulator’s modelling suggests that schemes undertaking valuations at 31 December 2021 and 31 March 2022 will show improved funding levels on average from those reported three years previously and the current recovery plan will on average be on track to remove the deficit by the end date. This is mainly due to large additional returns across asset classes, deficit repair contributions paid over the period and the alignment of RPI to CPIH from 2030.

The changes in real yields are expected to result in a much larger increase in liabilities for schemes with valuations as at 31 December 2021 compared to those as at 31 March 2022.  The Regulator estimates that 61% of schemes have a funding surplus at 31 March 2022.  There will, of course, be much variation in how individual schemes have fared around these averages.

The Regulator’s modelling also suggests that if tranche 17 schemes all had 31 March 2022 valuation dates, in order to retain their recovery plan end dates (or for those schemes nearing the end of their recovery plan period to make a modest increase in the remaining recovery plan length to bring it to three years) 68% of schemes in deficit at both current and previous valuations would be able to retain their deficit repair contributions at the same level or less, while just 1% would need to increase them to more than three times their current level.

However, the Regulator notes that its analysis does not factor in how the Russian and Ukrainian conflict, Covid-19 and Brexit may have impacted the strength of the employers’ covenant.  Any such weakening should result in technical provisions needing to be strengthened which in turn will adversely impact a scheme’s funding position.  It may also impact the extent to which employers can afford to make deficit repair contributions.  The Regulator has also not quantified the potential impact of Covid-19 on schemes’ mortality experience or assumptions.


This brief analysis adds useful context to the matters discussed in the annual funding statement published in April.  Once more there is an improved outlook compared to last year, but as ever, this is subject to any need to reappraise the employer covenant.

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FRC’s proposed changes to SMPI projections draw criticism

The Financial Reporting Council’s consultation on changes to its technical memorandum that governs how statutory money purchase illustrations (SMPIs) are undertaken closed on 31 May 2022 – a few weeks after the original closure date (see Pensions Bulletin 2022/06).

The intention is that the new approach will apply from 1 October 2023, to all future SMPIs and money purchase estimated retirement income illustrations on pensions dashboards.  However, a number of concerns have been raised by respondents to the consultation.  For example:

  • The Association of Consulting Actuaries has concerns including the proposals on accumulation rates, the form of benefits at retirement and annuity rates at retirement
  • LCP also has concerns, saying that the new rules “could generate ‘perverse and unrealistic’ results which could confuse the public”; and
  • The Pensions and Lifetime Savings Association in its response has reservations about using volatility to underpin growth assumptions and does not agree with using a single life level annuity for decumulation assumptions


The FRC will now need to take stock of the responses it has received and decide how to proceed.  Should it decide to drop its volatility-based approach to determining accumulation rates it seems that an asset class-based approach will be needed, perhaps requiring a further consultation.

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Chancellor confirms return of the triple lock

Rishi Sunak has confirmed in his economy update, given to the House of Commons on 26 May 2022, that the triple lock will apply to the uprating of state pensions in April 2023.  Both the Basic State Pension and the Single Tier State Pension are required by legislation to increase in line with any increase in national average earnings, but for a number of years the Government has applied a triple lock measure of the highest of the increase in earnings, the increase in prices (as measured by the CPI) and 2.5%.

It is very likely that the 2023 increase will be driven by CPI inflation, which when we get to the September 2022 measurement point could well be significantly higher than 10%.


When the Government suspended the triple lock for the April 2022 increase (by legislating to remove the earnings linkage for one year only), it made clear its intention to return to the triple lock in 2023.  The Chancellor has now delivered on this.

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