13 July 2023
- Chancellor signals major pension investment reforms to boost returns for savers and to increase investment in British businesses
- DC value for money framework to go ahead
- DC small pots – the Government decides
- DC trustees will have a duty to provide decumulation services to members
- CDC scheme expansion given the green light
- New options for DB schemes examined – with a productive finance tinge and including an LCP policy proposal
- DB superfunds: new possibilities
- Trustee capability, advice and duties to be examined
- Finance (No.2) Act 2023
- Pensions Regulator launches trustee diversity and inclusion survey
- Midlife MOT website relaunched
Chancellor signals major pension investment reforms to boost returns for savers and to increase investment in British businesses
The Chancellor of the Exchequer, in his Mansion House speech on 10 July 2023, has set out a number of pension reforms, headlined with a two-prong plan to increase pension fund investment in “high growth businesses” to the tune of £75bn by 2030.
- The first element is to be delivered by the Mansion House Compact, in which nine of the UK’s largest DC providers, representing over £400bn in assets and the majority of the UK’s workplace DC pensions market, have committed to the objective of allocating 5% of assets in their default funds to unlisted equities by 2030 (up from around 1% currently). Given the likely development of the DC market, the Chancellor says that the Compact could result in up to £50bn of investment in high growth companies by 2030 if all the rest of UK DC schemes follow suit. The Chancellor also says that this in turn could result in pensions built up in DC pots over the course of a career by a typical earner increasing by over £1,000 pa (equivalent to such savers’ pension pots increasing by up to 12%, or as much as £16,000). These costings come from a DWP-published document containing various high-level estimates of the impact of an increased private equity allocation to DC pots. The estimates take into account the other DC-oriented elements of the package alongside the planned automatic-enrolment 2017 review measures, for which a Private Member’s Bill is currently going through Parliament (see Pensions Bulletin 2023/09). The assumed investment returns used in this analysis are not readily discernible
- The second element, covering the other £25bn, is expected to come from Local Government Pension Schemes doubling their investment in private equity to 10% by 2030. There is also to be an acceleration of the consolidation of LGPS assets, with a deadline of March 2025 for all LGPS funds to transfer their assets into local government pension pools. Further details are set out in a consultation from the Department for Levelling Up, Housing and Communities, which closes on 2 October 2023
To facilitate such investment, the British Business Bank has been asked to explore the case for Government to play a greater role in establishing investment vehicles, drawing upon the Bank’s skills and expertise. The Bank, for its part, has provided a supportive statement and is doing separate work in this area (see Pensions Bulletin 2023/22).
The Chancellor’s reforms also include the following which we look at below:
- Moving ahead with a new Value for Money Framework
- Encouraging more CDC schemes to be set up
- Exploring how trustees can be supported to improve their skills, overcome cultural barriers and realise the best outcomes
- Introducing a permanent superfund regulatory regime “to provide sponsoring employers and trustees with a new way of managing DB liabilities”
- Seeing whether there is a role that the Pension Protection Fund and DB schemes can play in productive investment “whilst securing members’ interests and protecting the sound functioning and effectiveness of the gilt market”. We’re delighted that this call for evidence includes questions on an LCP policy proposal
On 11 July 2023 the full Mansion House package was published. From a pensions perspective this also includes the consultation responses on DC small pots (and a further consultation) and DC decumulation, which we also cover below.
The Chancellor says that final decisions on all of the above will be made ahead of the Autumn Statement this year.
This is an extraordinary package which has clearly been brewing for some time. We devote much of this week’s Pensions Bulletin to these announcements which if progressed could have major ramifications for UK pension provision, driving consolidation across DB, DC and Local Government and opening up possibilities for greater “productive investment” in each sector. However, many elements need primary legislation, possibly in the form of a Pensions Bill, but it is unclear whether one is being lined up for the King’s Speech this autumn.
The new proposed value for money framework for workplace DC schemes, on which the DWP jointly consulted with the Financial Conduct Authority and the Pensions Regulator in January 2023 is to go ahead (see Pensions Bulletin 2023/04 and our separate News Alert for details). However, this will take time, involve a lot more policy work, and will also need primary legislation followed by regulations and FCA rules. The Framework is also to be implemented in phases. There is no timeline for any of this.
In a lengthy response to the consultation, many aspects of the framework as proposed back in January are reprised, this time alongside the nature of the responses received. Although the Government has addressed some key concerns (including those over the volumes of data by settling on a gross investment performance metric), it is clear that there is much more work to be done to ensure that the process doesn’t become a cumbersome compliance document. One positive outcome seems to be the ending of the DC Chair’s Statement on which DWP published a review in April 2021 (see Pensions Bulletin 2021/18). This is to be “managed down, and ultimately phased out” as the Framework is phased in.
A framework, if built well, should be a positive step in building and maintaining trust and confidence in DC pensions. However, there is little hard news in this response to the January 2023 consultation, other than that the framework is going ahead, but on what could well be an extended timescale.
But importantly, and as made clear by the Chancellor in his speech, in this new regime, DC occupational schemes that are not achieving the best outcome for their members will face being wound up by the Pensions Regulator (with a similar ability for the FCA to support or enforce transfers in the contract space).
The DWP has responded to its earlier call for evidence on addressing the challenge of DC deferred small pots (see Pensions Bulletin 2023/04) with a decision to take forward an “authorised and multiple default consolidator model” (explained below), which the DWP feels will align more effectively with its desire for a more consolidated workplace pensions market and be less prone to the risk of detriment to members than the “pot follows member” alternative. However, the DWP recognises that this solution, whilst addressing the current “stock” of deferred small pots, will not eliminate the future “flow” of new deferred small pots. To address this, a more fundamental change to the automatic enrolment framework may be needed, but this is left for another day.
The DWP has gone on to launch a further consultation on its proposed framework, the main elements of which are as follows:
- Each consolidator would need to be authorised to act as such, with the intention that all authorised DC master trusts will be required to apply. No further details are given as to what it will take to become authorised, nor for that matter, who grants the authorisation
- A central clearing house is created whose purpose is to match eligible deferred pots with a member’s chosen consolidator and allocate a consolidator where the member doesn’t take a decision, and act as a central point of contact for both sending and receiving schemes
- Pots become eligible for automatic consolidation (ie “deferred”) 12 months after the last contribution was made to the pot
- Pot size will initially be limited to £1,000, with a statutory requirement on the Secretary of State to review this limit at regular intervals
The DWP’s proposals will need primary legislation, with further detail to be set out in regulations. No timescale is intimated for this, but a delivery group is to be set up later in 2023 to explore the design and implementation of the default consolidator framework.
Consultation closes on 5 September 2023.
After a decade of debate we have a decision on the way forward, but there is much to be done before the Government’s chosen model can be made available and as such this latest announcement appears to be not much more than a statement of intent. Until the design is thoroughly bottomed out there can be no primary legislation and with no timescale for the latter it is far from clear when this will be delivered. Meanwhile, many more small, deferred pots (by any measure) will continue to be generated.
The DWP has responded to that part of its earlier call for evidence on decumulation dealing with the availability of decumulation products and services for DC occupational pension scheme members (see Pensions Bulletin 2022/23).
The response includes a new consultation which sets the aim of establishing a broad alignment (rather than precise consistency) in the decumulation services offered by schemes so that every DC scheme, either directly or through a partnering arrangement, provides decumulation solutions to their members.
To achieve the stated aim, the intention is to place a duty on trustees to offer decumulation services which are suitable for their members and consistent with pension freedoms. The service must meet the needs of the generality of a scheme’s members with members having the option to either choose this default service or access products and services elsewhere.
The DWP also states that it would like collective defined contribution schemes to provide a market for decumulation solutions and that DC trustees should consider how CDCs could feature in their decumulation offer to members.
The DWP’s intention is to legislate for the new duty, “when parliamentary time allows”, implying that primary legislation will be needed, but it appears keen to encourage DC schemes to support decumulation options in the meantime. The DWP intends to work with the Pensions Regulator to issue guidance to show how the policy objectives can be met without legislation being in place. It also intends that this new duty will apply to Nest, which may require changes to legislation relating to this entity.
There are a series of consultation questions about the form of the trustee duty. Consultation closes on 5 September 2023.
Given the limited innovation in the decumulation space so far this all seems very sensible. There have been a lot of initiatives to improve the performance of DC schemes during the accumulation phase, but their effectiveness will be limited if members make bad choices about what to do with their money when they come to draw it.
While default or default-like solutions have their place we would hope that they do not take the pressure off the industry to design post-retirement strategies which could include a whole range of innovative new options, from LCP’s flex-first, fix-later proposal to decumulation CDCs.
The DWP is to deliver an extension to its Collective Defined Contribution legislative framework, so that unconnected employers can pool assets in new multi-employer CDC schemes. This is the key decision from the DWP’s response to its January 2023 consultation (see Pensions Bulletin 2023/04). At the same time, and as stated in the article above, the DWP will consider ways to introduce CDC decumulation only products to give DC savers a more cost-effective option to turn their pension pot into a regular income.
Much of the consultation response fills in details of the Government’s policy on whole-life multi-employer CDC schemes, including adjustments required to the single- and connected-employer CDC regime currently in force, and consistency with the DC Master Trust framework where applicable. The DWP intends to consult on draft regulations to extend CDC provision to whole-life multi-employer schemes, together with amendments to current single- and connected-employer regulations, this autumn.
The consultation response also gives a clearer picture of the direction of travel for decumulation-only CDC schemes, with a promise of further work to come, including further engagement with stakeholders, working with the FCA to ensure a joined-up approach is taken between trust-based CDC arrangements and similar contract-based products, and consistency with the proposed DC Value for Money framework.
It’s mostly good news for trustees and employers considering setting up or joining whole-of-life CDC schemes, especially given that the DWP is moving this forward separately from the decumulation-only products, which therefore won’t hold up progress. As usual, the devil will be in the detail, and we hope the proposed regulations will show an appropriate balance between a carefully set out framework, and flexibility for innovation.
New options for DB schemes examined – with a productive finance tinge and including an LCP policy proposal
In a new call for evidence, the DWP is looking into whether more can be done with the £1.7 trillion of assets held by DB pension schemes. This could include more choices in how trustees invest DB assets that would help them to generate greater surpluses, or more consolidation options. Both are intended to increase the level of investment in productive assets.
First up are a set of questions relating to what might be needed to incentivise existing DB schemes to undertake greater investment in productive assets and to invest for surplus, how such surplus could be used, and whether the Pension Protection Fund would need to lend some support to this through guaranteeing greater PPF compensation. All these questions are built around LCP’s “powering possibility in pensions” proposal available on our website (for those who would like to know more, our FAQ document that is included there might be of particular interest), and LCP Partner Sir Steve Webb was name checked in the Chancellor’s speech.
Next are two sets of questions relating to DB consolidation. The commercial superfund idea is addressed elsewhere and so in the first set the DWP first asks about the potential benefits and drawbacks of setting up a new public sector consolidator, for example something like a sovereign wealth fund, which in turn may facilitate greater investment in productive assets than had the DB schemes continued to stand separately. Inevitably the questions asked include those around how such a public sector consolidator could work alongside superfunds and insured solutions such as buyout. In the next set the DWP then goes on to look at whether the PPF could act as a public sector consolidator given its track record of investing for long-term objectives. This was the idea that was floated a little while back (see Pensions Bulletin 2023/22), most notably by the Tony Blair Institute for Global Change.
Consultation closes on 5 September 2023.
This is a fascinating initiative which could in time lead to a game-changing approach to managing DB scheme assets. Although we are at the foothills of what could well be a long drawn out process, we are delighted that the LCP policy proposal, developed over the last 12 months, has clearly found favour at the heart of Government.
The Government is to go ahead with a new authorisation and supervision regime for commercial vehicles offering to consolidate DB pension schemes. This was first proposed in March 2018 and since then an interim regime has been put in place by the Pensions Regulator which has had limited success.
The Government’s response to a consultation that closed over four years ago (see Pensions Bulletin 2018/50) focuses mainly on Superfunds, which the DWP hopes will appeal in particular to larger schemes that cannot yet afford full insurance buyout, but are also suitably funded – ie 70% to 90% on a buyout basis – to avoid introducing too much risk into the regime.
Although the intention is for a more detailed definition to be worked up with industry input in time for further industry consultation, for now a Superfund is seen to be a vehicle whose characteristics fit within some or all of the following:
- An occupational pension scheme set up for the purposes of consolidating DB pension schemes’ liabilities
- With the link to a ceding employer being severed or substantially altered following the transfer to (or by the involvement of) the Superfund
- Where the employer ‘covenant’ is replaced by a capital buffer (which in the context of Superfunds is the money ringfenced by the employer and investors)
- Where returns can be payable to persons other than members or service providers
The key structural question for Superfunds is whether to divide the schemes between multiple standalone sections (with ringfenced capital requirements), or to pool all incoming schemes together. There are pros and cons to either approach. A segregated approach could reduce the overall risk to scheme members (and the PPF) and will lessen the impact of ‘cross subsidisation’, but a co-mingled Superfund will benefit from economies of scale. The DWP is minded to permit either variety to exist.
The intention is that Superfunds will be authorised and supervised by the Pensions Regulator. Since June 2020 Superfunds have been governed by an interim regime overseen by the Regulator, but this is currently under review. In a segregated model the authorisation criteria will apply to the Superfund as a whole, rather than to individual sections, but each section will be required to individually meet capital adequacy requirements.
A few other points to note:
- The Superfund’s regulatory technical provisions should be based on a best estimate of future cash-flows. However, they would be required to hold explicit reserves for member expenses and against adverse longevity experience particularly with regard to future improvements in life expectancies
- From a governance perspective, the DWP considers an acceptable level of risk to be a 2% chance of a scheme within a Superfund not paying full benefits (up from 1% that in 2018 it thought was a reasonable starting point) – and subsequent modelling by the Government Actuary’s Department along these lines allows for an entry price into a Superfund approximately 10% below the price of insurance buyout
- Having considered the responses to the consultation carefully, the DWP does not think that Superfunds should be required to target buyout with an insurer
The next steps are that primary legislation will provide for a new compulsory framework applicable to Superfunds (and other potential consolidation models) and further details will be set out in secondary legislation in order to enable greater flexibility to respond to the changing market and enable more detailed consultation with industry.
We are delighted to welcome the long-awaited response from the DWP to its 2018 consultation in this area that can benefit so many schemes that are otherwise caught between a rock and a hard place. We appreciate that this is a tricky area in which to make judgement calls that tick all the boxes but are confident that, handled appropriately and with positive industry engagement, this initiative could be a game changer in the world of DB pensions. We wonder whether the Pensions Regulator will not revise its interim guidance in the short term to better align with this latest development in DWP thinking.
In a new call for evidence, which closes on 5 September 2023, the DWP and HM Treasury are seeking to understand trustee skills and capability, the role of advice, and barriers to trustee effectiveness.
Trustee skills and capability
The call for evidence makes a series of observations about the current trustee landscape, including that trustees are expected to have the skills and capability to look after retirement savings properly, that some trustees aren’t up to the job, and that improving capability, particularly for DC trustees, would improve their ability to consider investment in a full range of assets, including unlisted equities.
The document seeks views on the current state of trustee capability. It explores how well existing trustee knowledge and understanding requirements are working, how capability varies, and how it can improve. Particular solutions canvassed include:
- Compulsory registration for all pension trustees
- Requiring every trustee board to have a certain proportion – one? 50%? All of them? – of accredited trustees
While confirming that there will be no requirement for trustee boards to have a professional trustee (demand outstripping supply for the foreseeable future), the Government’s long-term vision is to have a smaller number of schemes, each with a professional trustee. A definition of “professional trustee” along with the standards to meet the definition may be on the way.
There is also a question about whether trustees have enough time (including time off work for lay trustees) and support to carry out their duties.
The role of advice
This section covers the role of “ancillary professionals” – actuary, auditor, fund manager, investment consultant, and legal adviser – on trustee decision-making, with a particular emphasis on why so few trustees decide to invest in unlisted equities.
The roles of investment consultant and legal adviser are specifically discussed. The question is asked whether there is a deficiency of knowledge or expertise by investment consultants which may influence allocations to unlisted equities. There appears also to be a suggestion, for which evidence is sought, that legal advice promotes a culture of risk aversion.
Barriers to trustee effectiveness
This section examines how trustees’ duties to act in the best interests of beneficiaries may run counter to the Government’s aim for schemes to invest in a wider range of investments including unlisted equities.
In a section headed “risk aversion and fiduciary duties” it is stated that “…to ensure that savers get the best possible outcomes, it’s important that trustees in DC schemes move away from a short-term focus on cost to one that focuses on delivering long-term, holistic value for savers” and that “As part of their duties, trustees should consider investing across a wide range of assets that can deliver enhanced returns for savers. Failing to consider the full range of investment options, where this is appropriate, is a failure of governance and a failure to fulfil fiduciary duty”.
No policy proposals are included in this section.
The direction of travel towards the professionalisation of trustee boards has been apparent for some time and it seems clear that this will accelerate.
There is a palpable frustration that long-established trust law principles governing the investment of trust property may not align with the Government’s desire for more investment in unlisted and / or illiquid investments. It is not clear what the Government has in mind to square this circle.
The Finance Bill that followed this year’s Budget (see Pensions Bulletin 2023/11) has obtained Royal Assent.
The Finance (No.2) Act 2023 contains, in sections 18-23, legislation to implement a number of changes to the pensions tax regime. They are exactly as we reported them earlier (see Pensions Bulletin 2023/13), other than section 23 where some changes have been made to solve an initial drafting error in relation to stand-alone lump sum provision (as we described in Pensions Bulletin 2023/24).
The effect of all these changes is backdated to 6 April 2023. So, since this date:
- The Lifetime allowance charge has ceased to apply (but the Lifetime allowance continues to operate). Any lump sums that exceed the member’s remaining LTA are treated as pension income and taxed accordingly
- The Annual allowance has been raised from £40,000 pa to £60,000 pa, the Money purchase annual allowance from £4,000 pa to £10,000 pa and the adjusted income level for the tapered annual allowance from £240,000 pa to £260,000 pa
- Anyone who, before Budget Day (15 March 2023) applied for, and holds, on 5 April 2023, any of Enhanced Protection or the Fixed Protections from 2012, 2014 or 2016, is protected from losing them if they contribute to, join, or transfer to, a pension scheme on or after 6 April 2023. Unfortunately, this is not available to those who apply after Budget Day
There are also new limitations on the tax-free lump sum (PCLS) for those with Enhanced Protection with Lump Sum Protection, and on the tax-free element of the niche “stand-alone lump sum”, as we have previously reported.
With this first phase in changes to pensions tax law on the statute book, the Government is now moving on to the second phase, likely to be much more challenging, where the Lifetime allowance itself will be repealed. We wait to hear more about this, likely on 18 July 2023 when some clauses for next year’s Finance Bill are published for technical consultation.
The Pensions Regulator has announced the launch of its first survey of occupational pension scheme trustees on diversity and inclusion matters. The online survey, which was flagged by us a few weeks ago (see Pensions Bulletin 2023/24), seeks to:
- Explore the proportion of trustees with protected characteristics, their academic and socio-economic backgrounds and work experience
- Discover trustees’ views on diversity and inclusion, in a measurable way allowing for the Regulator to detect changes in sentiment over time
- Understand what diversity and inclusion data about trustees is being recorded by schemes and its intended use
- Record actions being taken to ensure diversity and inclusion among trustees in their work and whether information on benefits for savers is being captured
- Measure awareness of the Regulator’s equality, diversity and inclusion (EDI) action plan that was published last September (see Pensions Bulletin 2022/35)
Email invitations to the survey are expected to be sent out later this month, and the deadline for responses is 4 August 2023. The Regulator hopes to release results from the survey before the end of 2023.
There may not be much time between receiving the electronic invitation from the Regulator and the deadline, but we would still encourage all trustees to engage with this important initiative.
The DWP has launched a new Midlife MOT website whose purpose is to help older workers with financial planning, health guidance, and to assess what their skills mean for their careers and futures. This appears to replace the website launched by the DWP in February 2019 and is a step towards fulfilling the Government’s promise in the March Budget to improve its midlife MOT offerings (see Pensions Bulletin 2023/11).
The new website includes a financial tool hosted by MoneyHelper, aimed at those between 45 and 65 living and planning to retire in the UK, that provides a personalised report to help people understand what to prioritise to improve their financial position through to retirement.
This latest tool works by seeking answers to a number of quite straightforward questions, with the answers being used to generate a report that is no more than a series of links to various topics that may be relevant for the enquirer to go on to examine.
This development was signalled by the DWP last July (see Pensions Bulletin 2022/28). The tool is an improvement on the one issued in 2019, which was no more than a general navigation aid to existing websites and which (confusingly) remains available here.