Pensions Insight: 10 to 17 July 2023

In this Insight we provide our usual round-up of pension developments including The Pension Regulator’s (TPR) and the Pension Protection Fund’s (PPF) response to the Mansion House pension reform package and their 2022/23 annual reports and accounts. 

The Pensions Regulator round-up

TPR response to Mansion House pension reforms

The Pensions Regulator has welcomed the Mansion House pension reforms that were announced by the Chancellor on 10 July 2023, noting that they “support our ambition for pension savers to be in large, well-run schemes that deliver good outcomes at every stage of their retirement journey”. In particular, the Regulator believes that the reforms will improve focus on value, encourage wider investment, and allow innovation.

The Regulator’s 12 July blog provides further detail on its thoughts on the reforms. The Regulator agrees with the Government’s views on consolidation and wants to see “fewer, larger, well run schemes” which should improve governance and, because of the benefits of scale, also lead to better saver outcomes. 

With consolidation there needs to be a “fundamental mindset shift throughout the pensions industry” on investment governance, scale for better efficiency and a move to more trustee professionalism. 

The Mansion House reforms are geared around not just consolidation but driving economic growth, in particular increasing investment in ‘productive finance’, an umbrella term for equity capital and finance for UK companies including start-ups, infrastructure and private equity, and illiquid assets. The Regulator notes that this type of investment “has a part to play in a diversified portfolio”. With this in mind, it will be taking three specific steps:

1. updating its defined contribution (DC) guidance to include reference to the new trustee duty to disclose and explain the illiquid investment policy in the statement of investment principles (must be included by the first date on which the default statement is revised after 2023 with a long-stop date of October 2024) – timescale: soon;
2. publishing new guidance on productive finance investment and updating the defined benefit (DB) and DC investment guidance – timescale: autumn; 
3. clarifying in the revised DB funding code the position on growth asset investments – timescale: expected to be in force April 2024.

TPR annual report and accounts 2022/23: strong achievements with four missed KPIs 

The Pensions Regulator also issued a press release to accompany its latest annual report and accounts (2022/23). The message the Regulator wishes to convey centres around its ‘achievements’ which include its ESG and equality, diversity and inclusion guidance, ‘strong’ LDI guidance, pension scam work and the joint VfM framework consultation. The Regulator met 19 out of 23 key performance indicators – three of the four missing KPIs related to the DB funding code, the general code and pensions dashboards which have been delayed by the Government and the remaining one related to call centre service levels which dropped for four months but have since returned to above target levels.

PPF round-up

Response to Mansion House call for evidence on DB options

The PPF has also welcomed the Options for DB schemes: call for evidence which seeks views on how DB schemes can invest ‘more flexibly’, and more specifically, increase their investment in ‘productive finance’, and includes options for a public consolidator, which could include the PPF. 

The PPF notes that the call for evidence “recognises our skills, capabilities and proven track record could be harnessed to deliver new solutions”. Any change to the PPF’s role would require legislative change but the PPF are clearly in support of an expanded remit.

Annual report and accounts 2022/23 published

The PPF’s 2022/23 annual report and accounts includes a number of interesting points in addition to revealing that the PPF’s total consolidated reserves were £12.1bn at 31 March 2023 (+£0.4bn from last year) and that its funding ratio has increased by 18.1% to 156%:

• The PPF reached its target of completing uplifting and arrears payments for 80% of members impacted by the compensation cap Hughes and Hampshire court cases (see our Insight). The remaining payments will be made in 2023/24. In Hampshire, the Court of Justice of the European Union (the ECJ) found that the PPF must pay compensation equivalent to 50% of the value of the member’s accrued benefit entitlement. In Hughes the compensation cap was found by the Court of Appeal to be age discriminatory, but the court authorised the PPF’s approach to compensating members for the impact of Hampshire.
• The PPF is liaising with the Department for Work and Pensions (DWP) as regards its approach on the 2019 Bauer ECJ decision which confirmed that receiving at least 50% of the value of the benefits accrued under a pension scheme from the PPF could be ‘manifestly disproportionate’ if this meant the member would be living under a Eurostat at-risk-of-poverty threshold. The Retained EU Law (Revocation and Reform) Act 2023 means that there will be ‘no potential liabilities’ for the PPF from the Bauer case where sponsoring employers experience a qualifying insolvency event after 31 December 2023 but there is ‘uncertainty’ as regards the impact on and from 1 January 2024 where employers entered qualifying insolvency before that date.
• The PPF decided against increasing how much post-97 compensation increases by, to account for the recent cost of living pressures but will continue to monitor the position.

Legislation round-up

Finance (No. 2) Bill receives Royal Assent

The Finance (No. 2) Bill received Royal Assent on 11 July 2023. This is the Act that implements many of the changes that were announced at the Spring 2023 Budget including most of the pensions tax allowance changes (but not the removal of the lifetime allowance which has not yet been implemented and will be legislated for separately) (see our Insights (1) and (2)).

Securitisation Regulations – near-final version published 

On 11 July 2023, HM Treasury published a near-final version of the Securitisation Regulations 2023 which form part of the Government’s December 2022 Edinburgh Reforms, a package of over 30 regulatory reforms aimed at delivering the Government’s vision for an “open, sustainable and technologically advanced” UK financial services sector in the post-Brexit environment and which build on the Mansion House 2021 roadmap. 

As the policy note explains, securitisation involves pooling exposures as a financial instrument that permits lenders (for example, banks) to transfer the risks of loans or assets (for example, mortgages or consumer loans) to other banks or investors.

The regulations replace the UK version of the EU Securitisation Regulation following a review in 2021 that identified various reforms that would improve the regime. With regards to occupational pension schemes, the 2023 regulations ‘restate and amend’ the due diligence requirements which apply when such schemes invest in securitisations directly and in doing so act as institutional investors. 

Where a scheme delegates its investment management decisions and due diligence requirements as regards securitisation investment to another institutional investor, sanctions for failure to comply will fall on the managing rather than delegating party (the scheme). However, where, rarely, an FCA or Prudential Regulatory Authority (PRA) firm delegates to a scheme, sanctions will be imposed on the delegating party, not the scheme as a managing party – this is because Financial Conduct Authority (FCA) and PRA firms are better able to deal with due diligence.

The Pensions Regulator is responsible for overseeing and enforcing compliance on certain securitisation matters. However, overseeing compliance when schemes act as an originator, sponsor, original lender, Securitisation Special Purpose Entity or seller is being transferred to the FCA.

Trustees should liaise further with their investment advisers should they wish to find out more about the impact of securitisation and the reforms on their scheme. 

Draft Pensions Dashboards (Amendment) Regulations 2023

The House of Lords’ 12 July 2023 Grand Committee consideration of the draft Pensions Dashboards (Amendment) Regulations 2023 highlights that, although the staging timetable which will now be set out in guidance rather than legislation will not be mandatory, trustees are already statutorily required to have regard to it when registering and connecting the scheme to the dashboards system.

The amending regulations will introduce the new single connection deadline of 31 October 2026. The next stage is for them to be formally approved by the House of Lords – they have already been approved by the Commons.