Claire Hey
2023 will forever be remembered as the year of consultations. In addition to the raft of consultations arising from amendments needed to primary and secondary legislation as a result of the McCloud judgment, the Chancellor’s ‘Mansion House Reforms’ speech in July generated no less than five calls for evidence or outright consultations. In addition, the summer saw several consultation responses published, some of which inevitably led to further consultation.
In this article we cover:
Topics ranged from targeted allocation of investment assets to upskilling pension trustees, with the vague suggestion that the reforms could “increase pensions by over a £1,000 a year in retirement for an average earner who saves over the course of a career”. Probably still not quite enough for the ‘average earner’ to afford their own mansion, but any initiatives which improve member outcomes and facilitate healthy investment returns can only be a good thing.
From a Heywood perspective, while we generally respond only to consultations which directly impact administration of the schemes we provide core pension administration software for (a mere ten responses across seven schemes in 2023), we take a keen interest in the wider pensions sector to seek opportunities for developing new solutions to emerging problems. This includes attending webinars and industry events, as well as forging relationships with new stakeholders and working with industry organisations such as the PLSA and Quietroom , to name but two.
That being said, let’s take a deeper dive into the key themes addressed by the Mansion House Speech and subsequent consultations.
Options for DB schemes
In this call for evidence, the government put forward several options for utilising DB schemes to drive economic growth. These options included providing more investment flexibility, incentives for providers such as the return of surpluses (as an alternative to buy-out), and consolidation of DB schemes where buy-out is not within reach, with government expressing support for the development of superfunds and a potential public sector consolidator.
Some quarters are mooting the possibility of re-risking as an alternative to de-risking – in a strategy termed ‘beyond buy-out’. This emerging trend focuses on the implementation of ‘productive investment’ using surpluses (or running-on), rather than returning them or buying-out. These surpluses could be used to reduce member contributions and/ or improve member benefits, feeding into improved company cash flow. While the more traditional buy-out route is a nil-financial cost, it is also a nil-opportunity cost.
Buy-In, Buy-Outs (BIBOs) are often time-consuming, as the schemes data or benefits may not be readily available or sufficiently ‘clean’. However, it may be difficult to change the trustee mindset of BIBO being the best option, to discharge liability and therefore risk.
The major difference being now that there are asset surpluses where there have previously only been deficits.
While the industry is broadly open to the idea of consolidation, the Pension Protection Fund (PPF) is not the preferred option for a ‘public sector consolidator’ due to the risk that it may undermine its current role and create a potential conflict of interest.
In the government’s response on options for DB schemes, published on 22 November, it confirmed that it will take measures to increase productive investment by making surpluses easier to access, and establish a public sector consolidator by 2026.
Heywood has a range of articles for schemes thinking about buy-in and buy-out strategies Publications | Heywood Pension Tech
Trustee Skills, Capability, and Culture
While my personal experience with trustees (or their equivalents) is limited to unfunded schemes, which still presents its own challenges, this call for evidence looks at trustee capacity through an investment-focused lens. Views were sought on the current position of skills and capability, the role of advice on investment of assets, and any barriers to trustee effectiveness.
Encouragingly, the summary of responses to the call for evidence suggests that awareness of knowledge and understanding requirements, as set out in the Pension Regulator’s Codes of Practice, is generally high and that trustees have a broad understanding of the issues affecting their schemes and where to get appropriate advice.
However, respondents indicated that trustees of smaller schemes may have more limited understanding and that there could be a role for accreditation of trustees or appointment of professional trustees for certain types of scheme.
In concluding its response, the government has committed to several immediate actions to support trustees to consider investment advice effectively and shift focus from cost to value. These include a central register of trustees owned by the Pension Regulator (TPR), accreditation of professional trustees, and updated guidance on investments.
Small Pots
A recommended approach to ending the proliferation of small pots is consolidation, consolidation, consolidation; at least where the value of the pots is small, up to a maximum of £1,000. While the industry is keen to find a solution to this long-standing problem, there are pros and cons to the default model. One further consideration, which works on a voluntary basis across the DB sector, is ‘pot follows member’ or lifetime provider model. Indeed, the Club memorandum was developed to facilitate easy movement of accrued benefits between schemes.
As with any proposals for reform, there are many competing objectives. Any future move to a lifetime provider model will be influenced by the how and the what. The industry appears to welcome the multiple default consolidator approach, which would give savers some choice over the placement of their pots. It is agreed that consolidators must be approved, and that there would need to be some form of ‘clearing house’ entity and/ or a central registry.
With pensions dashboards looming large on the horizon, now seems to be an ideal time for action in this space.
In its response to ending the proliferation of small pots, the government confirmed that it will proceed with the multiple default consolidator approach, supported by a clearing house. An authorisation regime will be developed with the Financial Conduct Authority (FCA) to allow trust-based schemes to act as consolidators. Pots will be automatically consolidated where they are less the £1,000 and have received no contributions for at least 12 months.
As part of the response, the government has launched a further call for evidence on the viability of a lifetime provider model to build on the reforms already announced – in particular to reduce the need for consolidation by preventing multiple small pots being created.
Local Government Pension Scheme (LGPS) – next steps on investments
Proposed next steps for LGPS investments are the transferring of all assets to pools by 2025, with each of the eight pools holding assets of at least £50 billion and investing 10 per cent in private equity; double the current amount. Additionally, up to a further 5 per cent should be invested in projects supporting local areas, to align with the Levelling Up agenda.
There could also be further consolidation of pools to improve efficiency and value for money. In line with the government’s consultation on trustee knowledge and understanding, the Department for Levelling Up, Housing & Communities (DLUHC) also proposed the introduction of guidance setting out a Fund level training policy for pensions committee members to be reported against.
While it is true that pooling allows a more sophisticated operating model and focused expertise and more time dedicated to delivering a sound investment strategy, the timescales suggested are undeniably tight. There are also questions around the government setting statutory targeted asset allocations, which may blur the lines between local and national responsibility, while locally funds also have their fiduciary duty to consider. Good outcomes should be linked to local strategy and returns, not necessarily governed from the centre.
Generally, respondents to the consultation agreed that the LGPS does have a role to play in UK growth and is well-placed to consider more UK allocation of assets; however, this also called into question whether the LGPS has a greater role to play than other sectors and should it be the highest priority for the scheme.
The government response to the consultation can be read here Local Government Pension Scheme (England and Wales): Next steps on investments - government response - GOV.UK (www.gov.uk). All proposals put forward are being progressed with the Department committing to work with the LGPS Scheme Advisory Board to realise its aims.
DC – options for decumulation
The vital piece of this puzzle is ensuring that pension savers understand their retirement choices. The Department for Work & Pensions (DWP) consulted on the provision of products and services at retirement, ideally with a broad alignment across the market. Here, it was felt that trustees have a duty to provide a workable solution to encourage engagement of scheme members and improve retirement outcomes, with a firm focus on signposting, partnering, clear member communications, and robust governance. There was a clear desire for legislation to ensure the delivery of change.
The government response aligns with the policy thinking on small pots, as it will undoubtedly be simpler to explain and understand retirement choices with a single consolidated pot rather than multiple small pots. Yet this serves to highlight the tension between the current direction of travel and previous initiatives such as Freedom and Choice and Auto-Enrolment (AE), which may be further exacerbated by plans to reduce the lower age limit for AE from 22 to 18 and remove the lower earnings limit, meaning that contributions would be deducted from the first pound of earnings.
As CEO of the Pensions Regulator (TPR), Nausicaa Delfas, so brilliantly put it in a recent speech at the launch of a report by PPI on this topic:
“Accumulation has come about by inertia. Decumulation will require activity.”
Look out for interim guidance from TPR in the coming year, providing clarity on its five principles for providing good access to DC savings:
- Value for money
- Help with decision-making
- Best interests of savers at heart
- Innovation to offer choice
- Wrap around and personalised support
The King’s Speech
Following the Chancellor’s ambitious Mansion House reforms, the King’s Speech, which sets the legislative agenda for the upcoming parliamentary session, turned out to be a bit of a damp squib, at least from a pensions’ perspective as it did not include the expected Pensions Bill.
However, the Autumn Statement 2023 included 110 growth measures to facilitate HM Treasury’s Pensions and Growth agenda, and these are anticipated to feed through into 2024 even if we see a change in government.
What more to expect in 2024
- For those employed by or in the public sector, more McCloud.
- Interim guidance from TPR on the key issues surrounding decumulation as well as the long-awaited General Code.
- The DB funding code regulations will be made in Spring and come into force in Autumn.
- Further consultations on value for money, as well as a consultation on the appointment of PPF to the role of consolidator.
- Formation of an industry delivery group to support the government to work through the small pot consolidation framework.
- A continued focus on ‘green taxonomy’ – ESG, TCFD, TNFD, TSF, and a host of other acronyms.
- Onwards and upwards for Pensions Dashboards.
- More political stability, in terms of the LGPS?
- DLUHC (as it is currently known) has had 14 ministers in the last seven years, with a reportedly significant backlog of consultations. Perhaps unlikely with a general election on the cards.
But what we can say, with 100 per cent certainty, is that 2024 is guaranteed to be another rollercoaster year in the world of pensions!
