It's that time of year again, and in the pensions field, we're anticipating a flurry of announcements, consultations and draft regulations and a general uptick in activity levels following the Autumn Statement. This is in addition to the ever-growing to-do list of the Pensions Regulator and DWP as we await progress on some long-touted pensions reforms.
This briefing reminds you of the key pensions changes currently in the pipeline. We also assess the likelihood of relevant legislation appearing and policy developments being finalised before the next General Election. There's a theme: the Government's agenda, as set out in the Mansion House speech and the Autumn Statement, is to improve opportunity for investment in alternative UK assets by pushing for consolidation.
The Pensions Regulators General Code of Practice
The General Code is now expected to be in force for April 2024. The Regulator's proposed new, overarching pension governance code aims to consolidate and simplify numerous existing codes and raise the bar on occupational pension scheme governance.
The draft version presented trustees with more onerous obligations than prescribed by the regulations which enable the code, so concern remains for the details of the new effective system of governance and own risk assessment requirements.
Pensions dashboards
All schemes with 100 or more relevant members at their scheme year end between April 1, 2023, and March 31, 2024, must now be connected to a dashboard by the revised deadline of October 31, 2026.
Schemes' staging deadlines will be set out in guidance, now expected next year. It is clear the Pensions Regulator intends to come down hard on any scheme missing their deadline without a really good excuse.
Abolition of the lifetime allowance
The LTA charge was dropped for the 2023/24 tax year. The LTA as a whole will be removed by the Autumn Finance Bill 2023-24. The Bill includes new limits in relation to existing tax free lump sums and lump sum death benefits but the timeline is tight for implementation in April 2024. The Labour Party has stated that if it were to win the next General Election, it would reverse these plans and reinstate the LTA.
Two new tax allowances will be introduced. The first will apply to authorised lump sums, imposing a lifetime cap of £268,275 (that is, 25 per cent of the current standard LTA) on the maximum tax-free lump sum. The second will limit the lifetime tax-free element of certain authorised lump sums and authorised lump-sum death benefits to £1,073,100, where the LTA would have applied.
Excess payments will be subject to marginal-rate income tax so trustees will have to provide statements to individuals telling them how much of their allowances are used when relevant lump sums and lump sum death benefits are paid.
HMRC will provide further guidance through the period of implementation of the changes through a future dedicated LTA newsletter.
The DB Funding Code and Funding Regulations
The new Funding Regulations (the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations) are expected to be in place for April 2024, with application to schemes with valuations in November 2024. Implementation is dependent on the Regulator's revised DB funding code of practice being laid around the same time to come into force before November. The Regulator will also produce revised covenant guidance.
The timing is tight for compliance. However, we do expect a number of improvements to the final Funding Regulations, including a fixed date for economic factors, greater flexibility on asset matching and some recognition of high quality contingent assets.
The low dependency investment allocation for "significantly mature" schemes envisaged by the draft code and Regulations does not dovetail easily with Government plans for pension schemes to have the flexibility to invest in growth assets. However Nausicaa Delfas, the Regulator's Chief Executive, has asserted that the revised funding code will not hinder growth investment for schemes, and the DWP has confirmed the revised Regulations will make it explicit that there is headroom for more productive investment.
DB superfunds – the first transfer happens at last
The Government sees superfunds as a route to greater investment in UK illiquid assets. The trustees of the Sears Retail Pension Scheme have entered into an arrangement with Clara-Pensions: the UK's first DB-to-superfund transfer.
In November 2021, Clara-Pensions became the UK's first DB superfund to complete the Regulator's assessment process. It operates a "bridge to buyout" model using the benefits of scale to reduce costs and invest appropriately in preparation for a future buyout with an insurance company.
Following Regulatory clearance and a statutory 30-day notice period, the Sears transfer took place on November 28, 2023. Clara-Pensions has announced that the transfer includes an additional £30 million of employer-provided ring-fenced funding to support the scheme members.
Relaxation on surplus refunds
In the Autumn Statement, the Chancellor announced that the tax charge on repaying DB scheme surplus to employers will be reduced from 35 per cent to 25 per cent from April 6, 2024. The Government's response to its consultation of March 2023 promises consultation "this year" on the return of surplus rules and protections for members.
DB scheme consolidation
The DWP says that it will establish a DB consolidator by 2026, for schemes which are not attractive to buy-out providers. A consultation is due "later this year" on details of the scheme design and a possible PPF underpin. The timetable is challenging though.
The PPF itself has welcomed government recognition that it has the necessary skill and experience to adopt this function in addition to its current role. However, the PPF's skillset lies in asset management and standardised compensation. A common investment fund model may succeed, but whether the PPF could take on myriad non-standard benefit structures and dual record GMP equalisation remains to be seen.
Potential for change to transfer conditions framework
The DWP has reviewed the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 to ensure they remain effective. These are the regulations blocking red flag transactions and requiring members proposing amber flag transactions to be referred to MoneyHelper for an appointment.
The Pensions Ombudsman has published its first determination relating to an amber flag connected to overseas investments. Almost all UK schemes have some overseas element to their portfolio. Schemes have taken a varied approach to this trigger, with some trustees interpreting the requirement strictly and applying to any overseas investment, as in this case. In dismissing the member's complaint regarding a delayed transfer as a result of being directed to obtain MoneyHelper advice before the transfer could proceed, the Ombudsman decided that the trustees' literal interpretation of the Regulations was "not unreasonable" and did not amount to maladministration. This language was deliberate: the PO did not suggest that a MoneyHelper appointment would be appropriate in all similar cases.
The PO noted that "the wording of the Regulations and the intended practical application may not be aligned". The Government is now due to consider possible changes to improve the pension transfer experience, without undermining the policy intent.
Driving value for money in DC schemes
Value for money is here to stay, as part of a drive to force small and inefficient DC schemes to consolidate. The DWP, Regulator and FCA's joint response to their consultation states that the value for money framework is likely to be phased in for different categories of scheme over time, with workplace pension default arrangements prioritised. The Regulator and FCA will consult in H1 2024 on a new value for money framework for DC workplace pensions.
The new framework will require primary legislation "when parliamentary time allows" and the Government and regulators will consult on draft regulations and FCA rules for the detailed requirements.
DC decumulation
Trustees of DC schemes will no longer be able to wash their hands of DC pots at retirement. They will be required to offer decumulation services supporting individuals on how to use their private pension savings at the point of access.
The DWP's response to its July 2023 consultation confirms that DC savers in trust-based schemes should be put into a "backstop" decumulation arrangement in the absence of any active member choice. That means trustees must either provide their own drawdown/annuity arrangements, or partner with a provider. Legislation to require this must wait until when Parliamentary time allows. In the meantime, the DWP hopes to encourage schemes to offer these services voluntarily.
Extending CDC schemes
Following the January 2023 consultation on extending collective defined contribution (CDC) provision to multi-employer schemes, a new call for evidence with the Autumn Statement looks at using CDCs alongside a lifetime provider model (see further below).
Regulations to extend CDC provision to whole-life multi-employer schemes are now expected "later in 2024".
Ending proliferation of deferred small pots
The DWP's consultation response on an automated DC consolidation solution to address the growth of deferred small pension pots came out with the Autumn Statement.
The DWP plans to establish a clearing house consolidator framework, with a small number of authorised commercial consolidators. Members who have not made an active choice for a small pot left behind would see their pot consolidated into a scheme where they have an existing pot, or, if none, the member would be allocated a consolidator on a carousel basis. The FCA is to develop a similar regime for contract-based schemes.
"Pot for life"
The Government is looking at moving the pension market to the model of a "pot for life" from a lifetime provider. A call for evidence proposes a mechanism whereby an employee designates a pension arrangement into which successive employers' contributions could be directed. This would help prevent the creation of multiple new pots when employees change jobs, but the tension with incentivising employers to provide better quality arrangements will need management if there is not to be a dive to the bottom. The call for evidence closes on January 24, 2024.
The necessary legislative framework could fall victim to a lack of Parliamentary time prior to the next General Election.
Proposed changes to the general levy
The structure and rates of the general levy payable by occupational and personal pension schemes are to change, but how remains to be seen. The proposed new options are:
- Continue with the current levy rates and levy structure until tax year 2026/27. This option is generally thought to be unsustainable.
- Keep the current structure but increase rates by 6.5 per cent per year. The consultation notes that this option will reduce the deficit to a "compliant level" by 2031.
- Increase rates by 4 per cent per year and apply an additional premium of £10,000 to small schemes with memberships under 10,000 from April 2026. This would allow for a lower initial increase across all schemes, while still reducing the deficit and supporting the consolidation of "smaller schemes".
Trustee capability advice and duties
The DWP's response to a call for evidence, published with the Autumn Statement, includes some actions around trustees.
- The Regulator will develop a trustee register.
- Trustee accreditation is not yet to be required but the DWP will keep this under review. Accreditation is expected to feature in the General Code.
- The Regulator is producing additional guidance on investment decisions and alternative assets, such as productive finance, expected "by the end of 2023". The Regulator will also update its trustee toolkit.
- A new focus for the DWP and the Regulator is on getting employers to focus on best value and long-term outcomes rather than pure cost when selecting schemes for auto-enrolment.
Extension of access to auto-enrolment pension arrangements
Power now exists to reduce the qualifying age for auto-enrolment to 18 and remove the lower earnings limit for enrolment (the Pensions (Extension of Automatic Enrolment) Act 2023). Current expectations are for regulations coming into force in 2026.
Changes to the notifiable events regime?
Draft Regulations issued in September 2021 were to make changes to the events affecting the sponsoring employer of an occupational DB pension scheme that must be notified to the Regulator.
The draft Regulations specified three notifiable events that would trigger the new requirement:
- The intended sale of a material proportion of an employer's business or assets.
- The intended granting or extension of relevant security over the employer's assets where this would have priority over the scheme.
- The intended relinquishing of control of an employer by a controlling company.
The draft was deeply flawed and the changes are in doubt. A timeline for the final Regulations is still not available due to "significant uncertainty around delivery".
Comment
There's a positive tsunami of potential change heading our way over the coming months. Legislative time is now short before the next election and it is possible that these plans could all be progressed in short order. However, the absence of a proposed new Pensions Bill in the 2023 King's Speech does raise questions on how some of the proposals could be introduced. Hold onto your hat – a lot could happen in short order.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.