In The Month In Pensions for December 2021, Ian Chapman-Curry looks at what a return to working from home and the broader shift to agile working means for the pensions industry.
We then round up some of the key legal and regulatory developments from the world of pensions before looking forward to the coming year to examine the developments and themes for the pensions industry in 2022.
Transcript
Hello, and welcome to the Month In Pensions for December 2021, brought to you by the pensions team at Gowling WLG.
I'm Ian Chapman-Curry and I'll be looking at one of the themes that has excited the pensions industry in December before taking you through the key points of this month's main legal and policy pensions developments.
We'll then be taking a look at what developments you can expect in pensions in 2022.
Before we start, just a quick reminder that you can find out more about the pensions team at Gowling WLG and get all of our pension Insights at www.gowlingwlg.com/pensions-uk.
Theme for December 2021 - working from home 2.0
Do you enjoy film sequels? If they work, they can see popular characters return for a welcome cinematic outing. But sometimes they are tired rehashes of the same formula, losing the special spark that made the original so popular. For many in the pensions industry, the spread of the omicron coronavirus variant has meant a full time return to the home office. Are you glad to be back? Or are you missing the taste of freedom afforded by being able to go back to the office?
One thing seems clear - the way that people work in pensions has changed. Some trustees are having more frequent, focused but shorter trustee meetings. Professional advisers have embraced flexible working, with law firms, actuarial practices and investment managers adopting formal hybrid working policies. Some have gone even further by moving to fully flexible working models, reducing the size of offices or even closing some of their bases.
What does this mean for how we run pension schemes in the future? In an XPS survey, 80% of trustees surveyed felt that their meeting formats would now be permanently different. Most (78%) felt that there would be a mixture of meeting formats - video conferences and face to face meetings. Trustees were more bullish on the effectiveness of delivering training in a remote format - 81% favoured bitesize training on relevant topics as a way of meeting their training needs. But only a minority (30%) felt that more frequent video calls were more effective than longer face-to- face meetings.
Two things seem certain in these uncertain times - trustees and their advisers need to be flexible to adapt to changing requirements and the pensions industry will need to get to grips with accelerating trends in ways of working.
This month's main developments
Deadline reminder for trustees to submit compliance statement to the CMA
In 2019 the Competition and Markets Authority (the CMA) issued an order which requires the trustees of a majority of schemes to comply with certain requirements when receiving investment consultancy services and fiduciary management services. These requirements came into force last year and required affected trustees to submit a compliance statement and certificate to the CMA.
This reporting must be carried out annually so affected trustees will need to send a second compliance statement and signed certificate to the CMA. The deadline for this is 7 January 2022.
The CMA's order and reporting requirements.
FCA publishes final rules on facilitating a stronger nudge to Pension Wise guidance
The Financial Conduct Authority (FCA) has published its final rules and guidance for firms regulated by the FCA regarding the measures required to facilitate a stronger nudge to Pensions Wise guidance. Providers must be compliant by 1 June 2022.
Providers must refer consumers to Pension Wise at the point they have made a decision in principle to:
- access; or
- transfer for the purposes of accessing
their pension savings. Providers will also have to:
- explain the nature and purpose of the guidance; and
- offer to book the consumer a guidance appointment.
Where the consumer accepts that offer, the provider must book the appointment or provide the consumer with sufficient information to book their own appointment.
Similar provisions will apply to schemes that are regulated by The Pensions Regulator. These are expected to come into force on 6 April 2022.
The FCA's final rules and guidance on the stronger nudge to guidance.
DWP consults on changes to the charge cap for default funds used for automatic enrolment
The DWP is consulting on proposals to remove performance-based fees from the charge cap that applies to the default funds of occupational defined contribution (DC) pension schemes used for automatic enrolment.
This follows pledges by the government in the Budget to help ensure that DC schemes can access a broader range of illiquid assets.
TPR announces inclusion of the first superfund on its online register
The Pensions Regulator has announced that Clara-Pensions has been added as the first superfund on its online superfunds list. The list includes any superfund which has been assessed by TPR and which has demonstrated, through robust evidence, that it meets several criteria.
Superfunds on the list will be assessed against TPR's key expectations in the following areas of TPR's superfunds guidance:
- people;
- governance;
- systems and processes; and
- financial sustainability mechanisms and processes in respect of business plans, costs, assets and liquidity plan, investment governance and risk management.
Following assessment and inclusion on the list, superfunds will be subject to a further assessment when TPR are notified of an intended transfer into it.
TPR's DB superfunds list and assessment.
TPR issues guidance on the governance and reporting of climate-related risks and opportunities
TPR has issued guidance that will sit alongside DWP's statutory guidance on the governance and reporting of climate-related risks and opportunities. TPR's guidance does not materially add to the position outlined in the regulations and DWP's statutory guidance.
It does, however, set out what TPR expects trustees who are subject to the regulations to have done and the evidence it will look for to determine if this has been done. TPR's guidance also sets out expectations on trustee knowledge and understanding in this area and the penalty and sanction regime that will apply to trustees who have failed to meet their statutory duties.
PPF publishes its final levy rules for 2022/23
The PPF's final levy rules confirm that the final levy estimate has been reduced to £390 million (£130 million less than the 2021/22 levy estimate). The PPF has also introduced a temporary cap for schemes that do see an increase in levy bills. The cap will be set at 25% of the difference between the 2022/23 and 2021/22 levy bills. Electronic contingent asset certificates and scheme returns should be submitted to the PPF by midnight on 31 March 2022.
Are you ready for pensions in 2022?
2022 promises to bring a host of new opportunities and challenges in the world of pensions. With so many consultations, legislative changes and updated pieces of guidance, it can be difficult to keep up with everything. So, this section of The Month in Pensions for December aims to organise next year's range of developments by grouping them into seven key themes. You can read more about the key developments for pensions in 2022 here.
Extending TPR's powers and A Single Code to guide them all
There was a material extension in The Pension Regulator's powers on 1 October 2021 when key provisions of The Pension Schemes Act 2021 came into force.
In 2022, The Pensions Regulator will gain additional powers on 6 April 2022 with the extension to the notifiable events regime to cover certain corporate transactions. This will require sponsoring employers and certain other individuals to notify The Pensions Regulator when a 'decision in principle' is made in relation to certain key corporate transactions. These include:
- the sale of a material portion of the sponsor's business or assets;
- the granting security over assets above a certain value; and
- certain corporate restructuring (e.g. changes in who controls the sponsoring employer).
In addition, new 'notice and statement' obligations will apply to scheme sponsors.
The Pensions Regulator is also expected to complete its criminal sanctions and enforcement policies by issuing the final versions of policies covering:
- what the Regulator will do if there are overlapping enforcement powers available to it;
- the levying of 'high fines' (i.e. financial penalties of up to £1 million); and
- the use of its broadened information gathering powers.
The full set of policies are expected to come into force later this month.
Finally, The Pensions Regulator will consult on the final version of its single code of practice. The single code of practice will bring together 10 out of 15 of the Regulator's existing codes of practice (with the remaining five expected to be incorporated into the single code of practice in due course). The Pensions Regulator is then expected to lay the final code before Parliament in the spring of 2022. The single code is expected come into force in the summer of 2022.
Of these, the extension of the notifiable events regime will be of greatest concern to scheme sponsors. Trustees are likely to be focusing on this and on what is in the final version of The Pensions Regulator's single code of practice.
A new approach to Funding defined benefit schemes takes final shape
In 2021, the Department for Work and Pensions and The Pensions Regulator were expected to publish final regulations and guidance respectively on a new approach to funding defined benefit schemes. The Pension Schemes Act 2021 sets out the legal framework permitting a new scheme funding regime. The detail for the new regime will, however, be set out in:
- secondary legislation; and
- a revised code of practice on defined benefit scheme funding.
The Pensions Regulator published a blog post at the end of 2021 stating that it will need more time to develop its revised code of practice on DB funding. As a result, the second consultation on its revised code of practice will be published in late summer 2022 rather than in spring 2022.
This delay is likely to have an impact on the timing of when the funding regime goes into force. It remains possible that the new regime will come into force at the end of 2022. It does, however, seem more likely that it will be early 2023 before the new funding regime applies.
Under the new regime, trustees will need to:
- determine a scheme-specific funding and investment strategy (also referred to as the 'long term objective');
- have a written statement setting out their strategy; and
- submit a version of the statement of strategy signed by the chair of trustees to The Pensions Regulator.
The existing code and funding regime will remain in place until the regulations and code come into force. When introduced, the changes to defined benefit scheme funding will be forward-looking. As a result, schemes will only be affected for scheme valuations with effective dates that fall on or after the regulations and code have come into force.
Environmental, Social and Governance policies extend their reach
Last year saw the introduction of requirements for certain schemes to report on risks and opportunities to their investments arising from climate change. With the UK hosting COP 26 in Glasgow and a range of other environmental, social and governance policies going into effect, 2021 was a key year for ESG and, in particular, climate change-aware investment.
On and from 1 October 2022, schemes with assets of more than £1 billion will be subject to the climate change governance and reporting regime. This will increase the reach of the regime from the current 100 schemes to approximately 340 schemes. The assets held by this bigger group will be more than double the current amount (increasing from £700 billion to £1.45 trillion). As a result, climate risk monitoring and reporting will enter the mainstream for many in the pensions industry.
In addition, the schemes that are under climate change risk governance and reporting requirements will have an additional reporting metric. On and from 1 October 2022, schemes will have to measure and report on the extent to which their investments align with the Paris Agreement (i.e. the intention to limit the global average temperature increase to within 1.5°C above pre-industrial levels). Amended guidance sets out the detail of how trustees will need to comply with this additional requirement.
The Department for Work and Pensions is also consulting on proposed guidance covering trustee stewardship and how stewardship policies are communicated via Implementation Statements and SIPs. The proposed guidance will come into force in 2022.
A record breaking year for pensions risk transfer
In 2020, a record-breaking £55.8 billion of pension scheme liabilities were transferred. In 2022, this figure is likely to be exceeded. One major consultancy has predicted that up to £60 billion worth of pension scheme liabilities will be transferred in 2022.
The prediction is based on pent-up levels of demand to transact, improvements in DB scheme funding levels, moves to de-risk investments, improvements in data quality and clear plans to address GMP equalisation. And it isn't only the value of transactions that is increasing. Next year is also likely to see:
- a number of extremely large trades; and
- the more widespread use of a range of risk transfer solutions (with longevity swaps being highlighted as becoming increasingly popular).
These predictions align with the experience and expectations of our industry-leading Pensions Risk Transfer team. In the past few years, they have been involved in a number of firsts on risk transfer. We've put together an overview of these risk transfer milestones which you can see here.
In addition to traditional risk-transfer solutions, 2022 will see the development and perhaps even the launch of the UK's first collective defined contribution (CDC) scheme. Royal Mail has just completed a consultation with its unions and staff. Subject to:
- the outcome of that consultation;
- regulations being finalised and made; and
- the Regulator's authorisation
The Royal Mail Collective Pension Plan will be launched this year.
Finally, 2022 is likely to be the year that we see the first superfund transaction. At the end of November, The Pensions Regulator issued its first authorisation for a superfund. In 2022, we could also see the Regulator authorise a second superfund. It could be that developments in this space open the door to more providers to offer superfund propositions.
Getting ready for a revolution in member communications
In 2022, there will be two key developments that will change member communications for certain schemes. The first is that schemes will be required to provide a 'stronger nudge' to pensions guidance. This is planned to come into force on and from:
- 6 April 2022 for schemes regulated by The Pensions Regulator; and
- 1 June 2022 for schemes regulated by the FCA.
Under the draft regulations that apply to schemes regulated by The Pensions Regulator, the stronger nudge requirements will apply:
- on and from 6 April 2022;
- to the trustees or managers of a trust-based occupational or personal pension scheme that provide money purchase benefits;
- where a member aged 50 or over (or a survivor) with accrued
rights to flexible benefits applies to:
- transfer their accrued rights; or
- start receiving scheme benefits.
If this applies, the trustees or managers must:
- refer the member to Pension Wise guidance; and
- offer to book a Pension Wise appointment for them.
Trustees and managers must not proceed with the application unless the member has:
- received appropriate pensions guidance; or
- opted out of receiving such guidance.
The second development on member communications is the roll out of simpler annual benefit statements from 1 October 2022. These will initially apply to defined contribution schemes that are used for automatic enrolment. It is possible that they will gain more widespread use if they are well received by members.
Perhaps the biggest change in respect of how schemes interact with mmebers won't happen in 2022 but in 2023 with the launch of pensions dashboards. However, a huge amount of work will be carried out in 2022 to get ready for this launch. As part of this, we can expect:
- the Department for Work and Pensions to consult on regulations;
- the Pensions Dashboards Programme to issue further calls for evidence, guidance and standards; and
- the Pensions Dashboards Programme to enter the alpha phase of testing and roll out.
Changing charge caps in defined contribution-based automatic enrolment schemes
In 2021, the Department for Work and Pensions issued two consultations on changes to the default fund charge cap for defined contribution-based automatic enrolment pension schemes in certain circumstances. The consultations:
- covered the introduction of a £100 de minimis threshold that will apply to flat fees paid in DC-based automatic enrolment schemes. From 1 April 2022, DC-based automatic enrolment schemes will no longer be able to charge a flat fee to all pension savers; and
- set out proposals to allow trustees of DC-based automatic enrolment schemes to exclude performance-based fees from the regulatory charge cap. This open consultation is part of Budget measures designed to facilitate more investment in illiquid asset classes. 'The government is proposing that trustees will be allowed to exclude 'well-designed' performance fees from the 0.75% charge cap. The consultation closes on 18 January 2022 and the government aims to issue a response in early 2022.
Take two for public sector pension reform
The Public Service Pensions Act 2013 provided for changes to be made to the benefit structure of public service pension schemes. The result was the introduction of new versions of public service pension schemes. A number of trades unions opposed the reforms and backed legal action against the government.'
In two key cases (McCloud and Sargeant), the Court of Appeal held that transitional protections were discriminatory against younger members of the judicial and firefighters' pension schemes respectively. The government acknowledged that these judgments would impact other public service schemes. A consultation in 2020 was followed by a government response in 2021.
The result is that 2022 will see the introduction of reformed public service pension schemes. From 1 April 2022, all those who continue in service will do so as members of the reformed schemes.
Subscribing to The Month In Pensions
And that is nearly all from The Month In Pensions for December 2021. We always finish off with a non-pensions recommendation - something a little lighter than reading the full text of the PPF's final levy rules.
Before we get to that, just a reminder that you can get in touch if there are any items you'd like to see covered in future episodes of The Month In Pensions just contact me, Ian Chapman-Curry and you can get more from the pensions team here.
If you liked this podcast, please rate or review it and, if you hit the subscribe button, The Month In Pensions will appear in your podcast feed each month. Finally, please feel free to share the podcast with colleagues or anyone who might be interested in staying on top of developments in the pensions world.
My non-pensions recommendation for December is both a TV show and a song. They are both called Mandy. I am relatively new to the wonderful world of Barry Manilow, with the superlative Copacabana being the only track I could have previously named.
Along comes the wonderful comedian Diane Morgan, who you might recognise from Charlie Brooker's Screenwipe, Philomena Cunk or as Liz from Motherland. She is the writer and star of Mandy, a surreal but hilarious series of comedy shorts. And, to tie things all back together, the theme song is, of course, Barry Manilow's Mandy. So, a funny TV show and a fantastic song recommendation all in one!
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