What's Happening In Pensions - Issue 106 - Employee Benefits & Compensation

Listen to the introduction to What's Happening in Pensions - Issue 106.

Alongside the Chancellor of the Exchequer's Autumn Statement on 22 November 2023, the Government published various updates on the 'Mansion House reforms' (see WHiP Issue 104) and on the abolition of the lifetime allowance (see the separate item below).

The focus remains on the contribution of pension schemes to economic growth, including by much greater consolidation of DC scheme assets, which the Government believes will also improve member outcomes.

A web page and letters to the Pensions Regulator and the FCA summarise the Government's policy aims, including:

"At Autumn Statement the government has announced a comprehensive package of pension reform that will provide better outcomes for savers, drive a more consolidated pensions market and enable pension funds to invest in a diverse portfolio. These measures represent the next steps of the Chancellor's Mansion House reforms and meet the 3 golden rules:

to secure the best possible outcomes for pension savers
to prioritise a strong and diversified gilt market
to strengthen the UK's competitive position as a leading financial centre

The package sits alongside the government's comprehensive capital market reforms, to boost the attractiveness of markets, and make the UK the best place to start, grow and list a company."

Key points from the various papers affecting pension schemes are as follows:

Options for defined benefit schemes

A short outcome report on the call for evidence on Options for defined benefit schemes announced the Government's next steps as regards:

easing the rules and reducing the tax charge on surplus repayments, to encourage well-funded DB schemes to run on rather than de-risk and, in doing so, invest more in productive assets that support economic growth; and
helping small DB schemes to consolidate and thereby similarly improve the investment opportunities.

There will be public consultation this winter to consider the detail of these measures.

The specific announcements were as follows:

The free-standing 35% tax charge on authorised surplus payments to employers will be reduced. The new figure is not stated in the call for evidence outcome paper but the Chancellor's Autumn Statement paper says that the reduction will be to 25%. Alongside this, measures will be introduced to ensure that members are safeguarded and surplus can be shared with them. Funding levels and covenant strength are cited as factors that will be included in the safeguards.
The revised funding and investment regulations will "will make clearer what prudent funding plans look like, make explicit that there is headroom for more productive investment, and require schemes to be clear about their long-term strategy to provide member benefits".
The Government intends to establish a public sector consolidator by 2026, to focus on DB schemes that are unattractive to commercial providers. (It does not explain what exactly it means by this.) It states that the Pension Protection Fund has the skills and experience to run this new consolidator. There will be no compulsion on any schemes to consolidate. The consultation will ask questions about design of the scheme and eligibility for it. The Chancellor's speech referred to this proposal, perhaps misleadingly, as "opening the PPF as an investment vehicle for smaller DB pension schemes".
Consideration will be given to a proposal for schemes, subject to eligibility criteria, to pay a higher pension protection levy to secure 100% PPF protection for member benefits in the event of employer insolvency.

There was no update on the forthcoming legislation for DB consolidator 'superfunds'.

Trustee skills, capability and culture

An outcome report on the call for evidence on Pension trustee skills, capability and culture included the following announcements:

The Government will support the Pensions Regulator to develop and take forward a register of trustees. This will improve the Regulator's ability to communicate with trustees and collect information, and enable the targeting of trustees and schemes that need additional support or regulation.
The Government strongly encourages all professional trustees to seek accreditation. In the future, if required, legislation may mandate this. A sentence left in square brackets (so perhaps unconfirmed) says: "[TPR's new General Code, once laid, will set accreditation for professional trustees as an expectation.]".
In relation to alternative assets, the Regulator is working on guidance in relation to investment decisions. The Government encourages those who provide training to trustees to consider "expanding their provision of material to ensure it thoroughly covers the full range of assets which trustees are able to invest in".
The Regulator's Trustee Toolkit is currently being reviewed, to align with the latest codes of practice and guidance.
The Government will work with the Regulator to produce information to help employers select a scheme based on value, not just cost.

The call for evidence had also asked questions about the roles of investment consultants and legal advisers. Whilst some respondents' comments in these areas are noted, there is no Government response.

Helping savers understand their pension choices

A consultation outcome on Helping savers understand their pension choices (i.e. DC decumulation) confirms the Government's intention to impose duties on trustees to offer decumulation options to DC members. The new duties will involve trustees offering a range, or "suite", of decumulation products and services that are "suitable" for their members, with 'pension freedoms' remaining as an alternative option where the scheme options do not appeal to a particular member.

The choice of options will be left to trustees, with the Government relying on them acting in line with their fiduciary duties. Schemes will also be required to develop a generic default solution: this would apply if a member accesses their DC pot but does not make an active choice about what to do with it. It is not clear how this scenario would commonly arise: the example given in the consultation outcome is taking the tax-free lump sum only and leaving the rest in cash.

Schemes of all sizes will be allowed to partner with external providers but those without the scale or expertise to offer what will be required are encouraged to consolidate. The Government recognises that there are issues to consider concerning decumulation choices for members with multiple pots across various arrangements. It also notes that clear communications and guidance will be essential and is considering introducing a 'cooling-off' period after a choice is made. It will consider with the FCA how to ensure that communications do not amount to financial promotions or advice.

The Government sees collective DC as a decumulation option that would commonly be offered and so continues to explore how to establish a collective DC decumulation model.

The Government states that a duty will be placed on Nest "to offer a range of decumulation products to its members at the point of access". It believes that Nest should be able to expand on the products it offers at the decumulation stage. In considering Nest's decumulation offer, however, the Government notes that it needs to consider wider market impacts.

The new duties will be introduced "at the earliest opportunity". In the meantime, schemes are encouraged to take voluntary steps in this direction. The Pensions Regulator will produce interim guidance "to show how the objectives of these policies can be met without legislation, and to encourage innovation".

Value for money

The FCA will consult ("next spring", says the Government) on detailed rules for a new value for money framework for DC workplace pensions.

This follows earlier joint papers with the Government and The Pensions Regulator on such a framework. As previously announced, the new 'VFM Framework' will cover investment performance, costs and charges, and quality of services. Schemes will be required to report metrics and comparisons with alternative schemes. Schemes not offering good value will be under pressure to consolidate.

Although the FCA does not regulate occupational pension schemes, the Pensions Regulator is encouraging trust-based schemes to engage with the FCA consultation when it appears, noting that the Pensions Regulator is working with the FCA "to develop their rules in anticipation of legislation for trust-based schemes". It is not clear what the intention is as regards the application of the same or similar rules to occupational pension schemes.

Investment vehicles

The day before the Autumn Statement, an HM Treasury press release announced a "£320 million plan to usher innovation and deliver Mansion House Reforms", involving new investment vehicles to help pension schemes invest in high growth companies.

It said:

"£250 million will be committed to two successful bidders under the Long-term Investment for Technology and Science (LIFTS) initiative, subject to contract. This will provide over a billion pounds of investment from pension funds and other sources into UK science and technology companies.

To complement private investment vehicles, a new Growth Fund will be established within the British Business Bank. The Growth Fund will draw on the BBB's strong track record and a permanent capital base of over £7 billion to give pension schemes access to opportunities in the UK's most promising businesses. This has been welcomed by 8 pension schemes and fund managers as a potentially valuable addition to the market."

The other £70 million will not be of direct benefit to pension schemes:

"The Chancellor is to inject £20 million to foster more 'spin-out' companies, firms created using research done in universities. He is also providing at least £50m additional funding for the British Business Bank's successful 'Future Fund: Breakthrough' programme – that will provide direct investment to support these innovative companies to scale up."

Master trust review

The Government has published a review on Evolving the regulatory approach to Master Trusts, five years after the master trust regulations came into force. The review looks at market segmentation, costs, charges, consolidation, increasing scale, competition and the relationship with the Mansion House Compact (see WHiP Issue 104) and other Government policies and proposals.

The report describes ways in which the Pensions Regulator is responding to the evolving market and areas where the master trust authorisation and supervision regime may need to be updated, with a particular focus on investment governance and working more closely with schemes as they grow.

Small pots solutions

A consultation outcome on Ending the proliferation of deferred small pots is accompanied (in part 2 of the same document) by a call for evidence on "Greater member security and rebalancing risk". Part 1 reaffirms the Government's decision to go ahead with the 'multiple default consolidator' approach to dealing with deferred small DC pots; Part 2 asks for views on later introducing a 'lifetime provider' model.

Multiple default consolidators

The multiple default consolidator model involves providers applying (voluntarily) for authorisation as a default consolidator. A member with a deferred small pot would be transferred, unless they opt out, to a scheme that has been authorised as a default consolidator. If the member is already a member of one of those, that would be the scheme to which the transfer is made. Otherwise, a 'carousel' approach would apply. If the member has pots with more than one of the default consolidators, the transfer would be to the one that holds the member's largest pot.

A central clearing house, unconnected with the pensions dashboards ecosystem, will be set up to enable this information to be checked confidentially.

As previously proposed, a pot will be considered small if it is worth less than £1,000 and deferred if no contributions have been paid for 12 months. The £1,000 figure will be regularly reviewed. A pot will only be eligible for automatic consolidation if it was created since the introduction of automatic enrolment.

In order to be authorised, a consolidator would have to (among other things): be an automatic enrolment qualifying scheme; operate consolidation of pots for the same member within their scheme; demonstrate good value for money; offer decumulation services (including a default); and have sufficient scale.

A new industry delivery group is being established to help with implementation: terms of reference are included in the consultation outcome paper. The group will be examining certain elements of the framework. It is expected to provide proposals to Ministers by late 2024 for consideration and decisions. There will be legislation when Parliamentary time allows.

Lifetime provider

The lifetime provider (or 'pot for life') model on which the Government is seeking input would be designed to halt the creation of multiple new pots in the first place. Employers would pay contributions to a scheme of which the worker is already a member but an exemption would apply if the employer provides a better pension offering, for example a DB scheme, a scheme under which the member has a protected pension age, or DC contributions significantly higher than required by law.

The same clearing house as referred to above could be used by employers to find out where they will need to pay contributions.

The final part of the paper discusses growing the collective DC market to reduce the need for individuals to engage and make complex financial decisions. There is even the suggestion of ultimately requiring schemes to offer collective DC as a decumulation option. The Government suggests that it likes the idea of 'lifetime provider' combined with collective DC.

The Government expects the first collective DC scheme (presumably meaning Royal Mail's) to go live in early 2024. Regulations to allow schemes for unconnected employers are expected later in 2024.

The call for evidence closes on 24 January 2024.

LGPS (England and Wales) investment

The Government has confirmed its proposals for Next steps on investments, including private equity investment allocation and pooling of Local Government Pension Scheme (England and Wales) assets.

LGPS guidance will be revised to increase private equity allocation "ambitions" to 10%. In the Autumn Statement, this is estimated to unlock £30 billion by 2030.

The Government will also amend regulations to require LGPS funds to set a plan to invest up to 5% of assets in levelling-up the UK, and to report annually on progress against the plan.

In addition, the deadline for consolidation of LGPS assets has been accelerated to 31 March 2025. The Government believes the existing pooling exercise, resulting in eight LGPS asset pools which have been operational for a number of years, has delivered substantial benefits and cost savings. But it wants to go further in two key respects which are accelerated consolidation of assets, and even fewer pools. Across LGPS as of March 2022, 39% of assets have been transferred to the pools, with the percentage varying by pool from under 30% (LGPS Central) to over 80% (LPP). The Government wants to encourage transition and noted in its consultation that this has mostly been done through guidance thus far, but that given the inconsistency of progress across schemes and the benefits of pooling, a fixed timetable is appropriate. It was suggested in the consultation that the timeframe would apply to liquid assets, but that transition of all assets should also be considered in this timeframe.

Once the consolidation of assets is complete, the Government had predicted that five of the eight pools would be around £50 billion or higher, and the remaining three pools would be in the £25 billion to £40 billion range. In the Autumn Statement, it was affirmed that the Government wants to set a direction towards fewer pools, each exceeding £50 billion of assets under management, in order to access even greater benefits of scale.

State pensions

The Chancellor confirmed that the 'triple lock' will apply to 2024 state pension increases. This means an 8.5% increase from April 2024, this being the relevant rate of earnings inflation which is higher than the September CPI annual increase and 2.5%.

The full new state pension will therefore increase from £203.85 to £221.20 per week. The full old basic state pension will increase from £156.20 to £169.50 per week.

Earlier in the year, the Government had been considering excluding bonuses from the average earnings calculation, which would have meant an increase of 7.8% rather than 8.5%, which the Government suggested would have saved the Treasury an estimated £900 million over the 2024/2025 financial year.

Implications for salary sacrifice arrangements

The Autumn Statement also included some announcements which have implications for pensions (and other) salary sacrifice arrangements:

The National Living Wage, currently applicable to those age 23 and over, is being raised from £10.42 per hour to £11.44 from 1 April 2024 (a 9.8% increase) and is being extended to 21 and 22 year olds. National Minimum Wage rates, which are lower rates applicable to younger workers, are also increasing. As well as increasing the cost of automatic enrolment minimum pension contributions to employers, employers will need to ensure that any salary sacrifice arrangements do not reduce wages to below the new relevant level for any worker, since it can be illegal to pay a worker less than the National Living Wage or National Minimum Wage (as applicable).
Employee Class 1 National Insurance contribution rates will be reduced from 12% to 10% from 6 January 2024. This means that salary sacrifice arrangements will give a slightly smaller benefit to employees (but the same benefit to employers, whose NICs are not being reduced).

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