8 September 2022
- RPI reform – application for judicial review rejected
- Climate change risks and reporting proposed for the Local Government Pension Scheme
- Institute and Faculty of Actuaries issues risk alert on inflation
- New Pensions Ombudsman appointed
On 1 September 2022, the High Court dismissed the judicial review claim brought by three large occupational pension schemes in respect of aspects of the decision to align the Retail Prices Index (RPI) with the housing cost-based version of the Consumer Prices Index (CPIH) from 2030.
The trustees of the BT Pension Scheme, Ford Pension Schemes and Marks and Spencer Pension Scheme had challenged the following:
- The February 2019 decision (confirmed in November 2020) of the UK Statistics Authority (UKSA) to align the RPI with the CPIH by bringing into the RPI the methods and data sources of the CPIH
- The Chancellor of the Exchequer’s October 2020 decision (following a March 2020 public consultation) to withhold consent to such alignment taking place before 2030
- The Chancellor’s November 2020 announcement (following the March 2020 public consultation) that the Government would not pay compensation to the holders of UK index-linked gilts
As background to the challenge the Court reported the following two assertions:
- The anticipated 1% reduction in the RPI from 2030 onwards, affecting future interest payments to holders of index-linked gilts, had resulted in the value of such investments falling by around £90-£100 billion
- The majority of the 10.5 million people in the UK with private sector defined benefit pensions, had payments linked to the RPI and that such individuals would receive reduced payments amounting to 4-9% of their lifetime benefits, with women expected to have a greater disadvantage because of their longer lifespan
The arguments made by the pension schemes included acting unlawfully, failing to take into account the impact on index-linked gilt holders and those entitled to RPI-linked pensions, and failing to carry out certain consultations.
In a 50-page judgment the High Court rejected all these arguments, finding that the UKSA and the Government had acted lawfully, and that it was right for the UKSA to focus on statistical quality, rather than seek to balance competing interests of winners and losers should the RPI be changed (as was decided) or be left alone (as seemingly desired by the pension schemes). The High Court also dismissed the claim that the Chancellor was legally obliged to consult on whether compensation should be paid, stating that the pension schemes had failed to demonstrate any legal basis for their assertion.
This outcome was expected, and it seems that the pension schemes are not intending to take the case any further. RPI reform, which was long in the delivery, will now go ahead, as planned in 2030, with no compensation for those adversely affected.
For pension schemes it seems that there should be little, if any changes necessitated by this judgment, given that the working assumption by many had been that this reform would be delivered in 2030.
The Department for Levelling Up, Housing and Communities (DLUHC) has published a consultation on new requirements for the Local Government Pension Scheme (LGPS) administering authorities in England and Wales to assess, manage and report on climate-related risks, in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).
The proposals are broadly similar to the requirements for the largest private sector occupational pension schemes and master trusts imposed by the DWP (see the 23 June 2022 LCP briefing note) and encompass the same four areas of governance, strategy, risk management and metrics and targets. However, a key difference is that the requirements will apply to all administering authorities regardless of fund size (although only a handful of authorities have fund sizes less than £1bn).
Under the proposals, administering authorities will need to:
- Establish and maintain, on an ongoing basis, oversight of climate-related risks and opportunities, including maintaining processes by which they can satisfy themselves that officers and advisors are assessing and managing climate-related risks and opportunities
- Identify climate-related risks and opportunities on an ongoing basis and assess their impact on their funding and investment strategies
- Carry out two sets of scenario analysis which must involve an assessment of the authorities’ investment and funding strategies. One scenario must be Paris-aligned (meaning it assumes a 1.5 to 2 degree temperature rise above pre-industrial levels) and one scenario will be at the choice of the administering authority. Scenario analysis must be conducted at least once in each triennial valuation period
- Establish and maintain a process (integrated into the overall risk management process) to identify and manage climate-related risks and opportunities related to their assets
- Report on four metrics as defined in supporting guidance (covering absolute emissions, emissions intensity, data quality and Paris alignment)
- Set a non-binding target in relation to one metric of their choice, against which progress must be assessed once a year, and the target revised if appropriate. The chosen metric may be one of the four metrics above, or any other climate-related metric recommended by the TCFD
Each administering authority will be required to publish an annual Climate Risk Report that summarises their work outlined above. Scheme members will need to be informed that the report is available. The Scheme Advisory Board will publish its own annual Scheme Climate Report which will aggregate figures for the four mandatory metrics for the whole LGPS and include a link to each individual administering authority’s Climate Risk Report.
Finally, each administering authority will be required to take “proper advice” when making decisions relating to climate-related risks and opportunities and when receiving metrics and scenario analysis.
Consultation closes on 24 November 2022. Regulations (which have not been published) are expected to be in force by April 2023. The first reporting year (for all administering authorities) will be the financial year ending 31 March 2024, with the first reports required by 1 December 2024.
Although the headline requirements are similar to those for occupational pension schemes, the devil will be in the detail. We await that with interest, to see whether the DLUHC has learnt from the early experiences of DWP’s regime.
Initial indications are positive. The length and language of the document implies that the DLUHC is seeking to take a simpler and less detailed approach. One welcome innovation is its proposal to define the metrics requirements in the supporting statutory guidance, so they can be updated more easily as market practice evolves. We hope that the DWP takes note for the review of its own regime next year.
The Institute and Faculty of Actuaries has issued a risk alert to its members on the impact of high inflation on actuarial practice. Such alerts are issued when the IFoA feels that it needs to draw a topic to the attention of its members because of the consequences of actions actuaries are taking or not taking in the advice they give and the calculations they undertake.
The high inflation alert asks all actuaries to consider and adjust their work by taking appropriate consideration of expected future inflation, different types of inflation, the impact of the current high inflation environment on underlying methodologies, and the quantification of uncertainty to ensure that the potential range of plausible and possible outcomes can be understood by users of actuarial advice.
In relation to pensions, the alert sets out five aspects that may need to be considered. These include potentially reviewing retirement factors for deferred pensioners to ensure they are appropriate and consistent with preservation legislation, the impact of any caps and collars on cashflows and possible member or political pressures to ignore caps or apply discretionary increases, especially where the cost of living is outstripping pension increases.
We have been in a high inflationary environment for some while now and actuaries should already be reacting to this situation in the work they undertake. Nevertheless, this is an important reminder that, for at least a temporary period, the low inflation environment which formed the backdrop to much actuarial work, is a thing of the past.
The DWP has announced that Dominic Harris has been appointed as the next Pensions Ombudsman and will succeed the current Ombudsman, Anthony Arter, on 16 January 2023.
Dominic Harris is currently a Partner in the Pensions Team at law firm CMS. He also serves as Chair of the Investment and Defined Contribution Committee of the Association of Pension Lawyers.
The announcement comes after the DWP proposed in July 2022 that Dominic Harris should take up the role (see Pensions Bulletin 2022/27), following which a pre-appointment hearing by the Work and Pensions Select Committee was successfully concluded.
The incoming Ombudsman is predicted to face an increasing workload, but with a number of reforms having been undertaken by his predecessor with the aim of improving the customer experience, and the DWP agreeing to commit more resources, the future is looking positive for this important service.