Pensions insight: 2 to 16 October 2023

In this insight we provide our usual update on all key pensions developments. This edition includes updates on the DWP general levy consultation, a data protection round-up and a new banking lending tool for pension schemes.

DWP consultation on changes to the general levy

The Department for Work and Pensions (DWP) is consulting on proposed amendments to the structure and rates of the annual general levy on occupational and personal pension schemes designed to address the ongoing levy funding deficit over tax years 2024 to 2027.

The general levy is used to cover the funds provided by the DWP to the Pensions Regulator, the Pensions Ombudsman and the pensions activities of the Money and Pensions Service. It is calculated by reference to member numbers and reviewed annually by the DWP. You can read about recent changes to the levy here. A deficit has arisen because of ‘increased activity’ of relevant bodies resulting in additional expenditure being required and former delay in implementing increases. The Government plans to remedy the deficit by 2030/31.

The consultation puts forward three options for industry feedback which have been agreed by government ministers:

• Option 1: continue the current levy rates and structure which would mean an increase in the deficit with larger future increases;
• Option 2: keep the current levy structure but increase rates by 6.5% each year – this would reduce the deficit to a ‘compliant level’ by 2031; and
• Option 3: increase rates by 4% per year for all schemes with a premium for schemes with under 10,000 members from 2026 – this allows the deficit to be paid off through a lower starting increase whilst at the same time ‘supporting the consolidation of smaller schemes’, a policy theme that the Government is actively pursuing at present (see our insight).

The consultation period runs from 2 October to 13 November 2023.

Data protection update

Adequacy regulations for transfer of personal data to USA

The Data Protection (Adequacy) (United States of America) Regulations 2023 came into force on 12 October 2023. They specify the USA as a country with an “adequate level of protection of personal data for certain transfers for the purposes of” UK data protection legislation.

The effect of the regulations is that personal data can be transferred to US persons who enter into the UK Extension to the EU-US Data Privacy Framework Principles with no requirement for authorisation and without a data controller or data processor having to implement additional safeguards such as contractual agreements, provided that the personal data will be subject to that Framework upon receipt.

Having these adequacy regulations provides a more clear-cut method for transferring personal data to the US. Nevertheless, although the Information Commissioner’s Office (ICO) believes that it is reasonable for the Secretary of State to assess the UK Extension as providing an adequate level of data protection, it has identified four risk areas which might present risk to data subjects and recommends that these are monitored by the Secretary of State going forward.

The Government’s Factsheet notes that UK organisations may need to update privacy policies and review processing activities if they will be using the regulations to transfer data to the US. It has also produced an explainer document which can be accessed here.

Action: Trustees should liaise with their advisers for further assistance on this development.

ICO new subject access service

The ICO has set up a new subject access request service which an individual can use to make a subject access request. Its aim is to make it easier to make a request – the service sends an email to the organisation with the reply going directly to the data subject without this being seen by the ICO.

ICO consultation on draft data protection fining guidance

The ICO is also consulting on new draft data protection fining guidance which covers relevant statutory background, when it might be appropriate for the ICO to issue a penalty notice and calculation of the fine. The consultation closes on 27 November 2023.

Bank of England lending tool for pension schemes

The Bank of England (the BoE) is designing a new lending tool for non-bank financial institutions (NBFIs), which will begin with UK insurance companies and pension funds. The aim is to “address dysfunction in core sterling markets in the exceptional circumstances where there is a threat to UK financial stability”.

It comes off the back of several recent destabilising events including the onset of the COVID global lockdown in 2020 and the autumn 2022 liability driven investment fund crisis. During these events existing bank lending structures proved insufficient because the banks could not lend to NBFIs in enough magnitude. This led to ‘unconventional’ solutions which although successful raised potential risks such as to market incentives.

The BoE believe that the multitude of stress scenarios, e.g. margin calls on derivatives, in which temporary liquidity may be required, warrants an NBFI lending tool against high quality assets such as gilts. The BoE is going to begin this work straight away and will liaise ‘closely’ with insurance companies and regulators on the project.

Comment: This could prove to be a useful function for pension schemes should a need for short-call lending in a stress scenario arise again in the future, albeit, the availability of such a tool may be some way off – the project is referred to as a ‘journey of 1,000 miles’ and the launch of the project is just the beginning.

PPF 7800 Index shows scheme funding has increased

The latest Pension Protection Fund (PPF) 7800 Index Update setting out the estimated funding position on a section 179 basis as at the end of September 2023 of the eligible 5,131 DB schemes shows that:

• the aggregate surplus of these schemes increased over the month to £446.9bn from a surplus of £441.1bn at the end of August 2023;
• total assets were £1,387.5bn and total liabilities were £940.6bn;
• the funding ratio increased from 146.2% at the end of August 2023 to 147.5% at the end of last month; and
• there were 461 schemes in deficit and 4,670 schemes in surplus.

PDP – blog on dashboard common questions

The Pensions Dashboards Programme’s (PDP) latest blog sets out some commonly asked questions and answers including:

• How is connection guidance different to the connection deadline? (Guidance will set out different connection dates – connection deadline of 31 October 2026 is the longstop date set in legislation for all providers and schemes in scope.)
• When will guidance be published, and how will PDP engage with the industry? (In good time but timescale not yet known.)
• Are there any examples of how dashboards will look? (Not yet.)
• Will smaller schemes (1-99 members) be required to connect in the future? (Not yet determined.)

McCloud remedy: HMRC newsletters

1 October 2023 saw the implementation of the McCloud remedy which is intended to remove the impact of historic discrimination in transitional reform pension arrangements of certain public sector schemes for the period April 2015 to April 2022.

Shortly following implementation, HMRC issued a 5.10.23 newsletter covering relevant annual and lifetime allowance matters for members and the launch of a new calculate your public service pension adjustment service for calculating allowance repayments and allowances and reporting relevant information and interactive guidance for members to check if they are affected by the remedy. Member guidance and scheme administrator guidance on the remedy was also published on 5 October 2023 as well as guidance for private sector schemes affected by the remedy which can pay, discharge or request a refund of a member’s lifetime allowance charge if this has altered.

PLSA Made Simple guides on buy-in/ buy-out and cashflow driven investment

The Pensions and Lifetime Savings Association (PLSA) has produced two further guides in its Made Simple portfolio; one on how trustees consider and prepare for buy-ins and buy-outs and another on cashflow driven investment, a strategy designed to provide predictable cashflows that meet liabilities as they fall due without a need to disinvest (especially during periods of market uncertainty).