As promised by the Chancellor when announcing the Mansion House pension reform package back in July, the Autumn Statement fleshes out how the Government plan to take forward the reforms which all come within an ‘unlocking investment in growth through pension funds’ wrapper.
The Statement was accompanied by a comprehensive package of pensions reform documents which signal potentially radical change ahead. All the reforms focus on delivering ‘greater economic growth’, particularly in productive finance, and all must meet three golden rules:
- securing the best outcome for savers;
- prioritising a ‘strong and diversified gilt market’; and
- building the UK’s position as a financial leader.
As the Government’s letter to the Pensions Regulator (TPR) and the Financial Conduct Authority (the FCA) notes, the reforms form part of the Government’s ‘vision’ for a ‘streamlined’ pensions market by 2030. The Government believes that its objectives can be achieved through a new value for money framework which will improve saver outcomes, consolidation of both the defined benefit (DB) and defined contribution (DC) pensions market and allowing pension schemes to invest in a wider range of assets through the setting up of new investment vehicles and incentivising employers. TPR has welcomed the reforms which it said will help the move towards consolidated pensions provision and better value for savers.
The pensions sector in 2030 may look quite different from how it does today. We provide a comprehensive guide to the reforms below with headlines provided first for those who wish to delve into the detail later.
- Proposed new lifetime provider model for DC.
- DC: Deferred small pot multiple consolidator model to go ahead.
- Requirement for automatic enrolment (AE) schemes to offer collective defined contribution (CDC) mooted.
- Surplus access consultation this winter and reduction of authorised surplus repayments charge to 25% from 6 April 2024.
- PPF-operated DB consolidator vehicle to be set up by 2026 – consultation this winter.
- TPR register for trustees to be set up.
- Accreditation of professional trustees to remain voluntary for the time being.
- Updated TPR investment guidance to be published including alternative assets.
- Lifetime allowance (LTA) abolition to go ahead on and from 6 April 2024.
- The FCA to consult in spring 2024 on rules for the contract-based DC VfM framework.
- Government to go ahead with DC decumulation framework through legislation with interim TPR guidance.
- £320m plan to set up new investment vehicles to allow pension schemes to invest in high growth innovative companies.
- Local Government Pension Scheme (LGPS): introduction of 10% allocation ambition for private equity investments and asset pooling by March 2025.
- Triple lock to be maintained in 2024 – state pension to increase by 8.5% (average earnings growth).
DC: Call for evidence on lifetime provider model, small pots consultation response and CDC
The Government wants to see the DC sector consolidate so there are a small number of larger schemes: “By 2030, the majority of workplace DC savers will have their pension pots managed in schemes of over £30 billion…” Each of the three initiatives below form part of this vision.
Lifetime provider model
We begin with the unexpected and perhaps headline announcement, that the Government is proposing setting up a lifetime provider model under which individuals will have a legal right to require workplace pension contributions be paid into their current pension scheme when switching employer (with default provision being built in to cater for member inertia). The Government believe that a ‘stapling’ pot for life model similar to the one used in Australia could be more beneficial in the long-term than a default consolidator not least because it will help prevent multiple DC and CDC pots being set up in the first place, allow for better data collection, fewer access charges and less administration.
If introduced this could fundamentally change DC provision – to date we have seen a mixed response including concerns raised about the proposals by the ACA and the PLSA. How this proposal develops will be keenly watched by many.
Deferred small pots
We also have the Government’s response to the Department for Work and Pensions (DWP) July 2023 consultation on resolving the issue of deferred small pension pots which confirms that it will implement the proposed multiple default consolidator model under which a small number of authorised schemes will act as consolidators with:
- a central clearing house;
- eligibility for automatic consolidation 12 months after the last contribution;
- an initial maximum pot size of £1,000 (subject to no minimum and statutory review); and
- pots of members with a consolidated pot already going into the same consolidator and pots of members without an existing small, consolidated pot being allocated on a ‘carousel’ basis.
Primary legislation will be needed to set up the system and this will be introduced as soon as parliamentary time permits. A pensions industry delivery group will be set up in early 2024 to consider design issues.
CDC expansion – potential requirement for schemes to offer CDC
The final topic covered in this call for evidence is expansion of the CDC market which the Government is keen to see happen as part of its consolidation drive. The Government wishes to explore whether it would be beneficial to:
- require schemes to offer CDC through the automatic enrolment regime given its perceived benefits (risk spreading, improved investment returns and higher benefits); and
- combine CDC and the lifetime provider model which could increase productive finance investment.
DB options call for evidence response – PPF consolidator model will go ahead and surplus repayment consultation this winter
The pension reforms are not all DC-focused – DB has a starring role with consolidation again seen as key to increasing investment in productive finance.
The DB options call for evidence focused on how DB schemes can invest ‘more flexibly’, and more specifically, increase their investment in ‘productive finance’. One of the things the Government thinks might help drive this is changing the use of surplus and incentivising investment to generate surplus, making access easier and refunds more attractive. The Government also raised the possibility of a public sector consolidator vehicle being set up, perhaps through the Pension Protection Fund (the PPF).
We now have the Government’s response which explains that, overall, there was no agreement as to the road ahead for either surplus extraction or a public consolidator. Despite the mixed response, it appears that, although further work is needed, the Government will be pressing ahead with its plans.
Therefore, there will be a consultation this winter on:
- A suitable framework for easing employer access to surplus which will cover design, eligibility and relevant safeguards. The authorised surplus repayments charge is also going to be reduced from 35% to 25% as from 6 April 2024, a sign that the Government is earnest about easing surplus access.
Easing access does not necessarily mean that trustees will be comfortable with surplus extraction taking into account their duties to members or that there will be increased investment in productive finance but having more surplus flexibility is likely to please employers.
- Allowing 100% PPF coverage for DB schemes which pay an increased levy despite concerns raised during the consultation about feasibility and moral hazard.
- The PPF operating an opt-in statutory consolidator for “schemes unattractive to commercial providers”, so likely to cover smaller and/ or weaker schemes. The Government intends that a PPF consolidator will be up and running by 2026, quite a tight timeframe given that its design and structure have not yet been determined. The PPF has reiterated its support for this initiative, whilst providing reassurance of its commitment to its existing role. TPR has also welcomed both a public consolidator and superfunds.
“We have a fragmented defined benefit (DB) pension schemes landscape with over 5,000 schemes representing some 9 million memberships. I want those members in small schemes to benefit from the security that scale and appropriate risk management provides. That is why we welcome plans for a public sector consolidator and the commitment to bring forward superfund legislation in the future.” [Source: TPR blog – change is coming]
Pension trustee skills, capability and culture – call for evidence response
This call for evidence asked questions around the capability and skills of trustees, the role of advice and ‘barriers’ to the effectiveness of trustees which could affect saver outcomes. There was a particular focus on whether trustees have sufficient knowledge and skills to properly consider investment – not surprising given the Mansion House speech centred around economic growth.
TPR trustee register to be set up
The conclusion reached from the call for evidence is that most trustees are “well-supported, knowledgeable, and hard-working”. However, identified gaps warrant further action and the Government supports a TPR maintained trustee register. Work on this has already started – TPR is seeing if the scheme return can be used to obtain the necessary information.
Professional trustees – accreditation and move towards more professionalism
The Government’s response notes strong encouragement for professional trustees to become accredited. Although not immediately on the cards, legislation requiring accreditation has not been not ruled out and TPR’s new general code of practice will include accreditation as an expectation for professional trustees. The move towards greater professionalism of trustees continues.
“Every trustee body should include someone who meets professional standards, be highly qualified and able to balance competing priorities to deliver the best outcomes for savers, says TPR, adding where this is not possible, trustees should consolidate.” [Source: TPR press release]
Updated TPR investment guidance
TPR will also update its investment guidance and produce materials on alternative investments.
LTA abolition to be implemented in the Autumn Finance Bill 2023
The Statement confirms that the Autumn Finance Bill 2023 will include the necessary legislative measures to remove the lifetime allowance and that the abolition will go ahead as proposed from 6 April 2024 meaning no pause as some in the industry called for (see our Insight).
The Government’s policy paper adds a little detail to the already published draft legislation confirming the position in respect of small lump sums, the introduction of a new pension commencement excess lump (indicating that DB members will be able to take most of their benefits in cash form subject to scheme design), transitional calculations for those who have taken benefits before 6 April 2024, reporting requirements for the new regime, and international matters.
There is not much time until the LTA removal is in place and schemes should check how they will be impacted and communicate with members as necessary if they have not done so already.
DC: VfM framework for DC Schemes
Improving VfM forms a core part of the Government’s plans for enhancing saver outcomes.
The FCA will consult in spring 2024 on rules for the contract-based DC VfM framework. TPR has welcomed both this and the DWP’s master trust review (see below).
The Government will also liaise with TPR to produce information for employers to help them select a scheme using cost, value and service rather than cost alone.
DC: Decumulation and Government response
The Statement confirms that the Government will go ahead with its proposals for a decumulation framework which will help support savers when they take their benefits (TPR supports the initiative). Accompanying the Statement is the Government’s response to the July 2023 DWP consultation on helping savers understand their pension choices. This outlines the Government’s belief that “all members regardless of the occupational scheme they are in will have an in-house offer of products and services”. Those trustees that cannot provide adequate decumulation services will need to consider consolidation.
Most respondents felt that without legislation, decumulation will not happen. Therefore, the DWP will introduce decumulation legislative duties on all trustees of occupational pension schemes ‘at the earliest opportunity’ with TPR guidance in the interim. Trustees will have to offer a “decumulation service with products to members at the point of access at an appropriate quality and price” either through the scheme or through an external partner.
The DWP views CDC decumulation products as forming part of this framework and will liaise with the pensions industry on a suitable CDC decumulation model.
Master trust review
The Government’s review of the master trusts sector which has been operating since 2018 covers both market trends and future regulation and supervision. Headline estimations reveal some quite staggering statistics, that the DC trust-based market could increase from £140bn in 2023 to around £420bn in 2030 in real terms with the five largest master trusts possibly having approximately £300bn in assets. By size, the estimation is that more than three-quarters of DC trust-based members will be in schemes in excess of £50bn by 2030 and master trusts will play an integral role in this given they already cover 90% of DC memberships (with 82% in the largest five schemes).
The Government see master trusts as having an increasingly significant role in the future for consolidation, driving increase in productive finance investment and helping establish the CDC market (with a consultation on allowing multi-employer CDC schemes expected in early 2024).
£320m in new investment vehicles to support investment
The day before the autumn statement came the Chancellor’s (and HM Treasury’s) announcement of a ‘£320 million plan’ to set up new investment vehicles designed to allow pension schemes invest in ‘high growth, innovative companies’ – increasing investment in productive finance being one of the key drivers behind the reforms. The plan involves £250m being provided under the Long-Term Investment for Technology and Science initiative and £70m going to university-based research institutions and the British Business Bank’s ‘Future Fund: Breakthrough’ programme which will provide schemes with access to its ‘pipeline of opportunities’.
Move from low fees towards prioritising long-term pension investment performance
There will be engagement between the Government and the pensions industry on how to move employer incentives from low costs to long-term investment performance – this was recently noted by TPR as being required to ensure that savers are receiving value for money.
The LGPS: Introduction of 10% allocation ambition for private equity investments and asset pooling by March 2025
The Government has confirmed that it will go ahead with its plans and amend the LGPS guidance to introduce a 10% allocation objective for investment in private equity and to set a March 2025 deadline for the acceleration and expansion of asset pooling so that there will be fewer pools each with more than £50bn of assets under management. The Chancellor wants to see all local Government pension funds being invested in pools of £200bn or more by 2040.
Triple lock to be maintained in 2024 – state pension to increase by 8.5% (average earnings growth)
The Chancellor confirmed that the triple lock will be maintained and that the state pension (and pension credit standard minimum guarantee) will be increased in April 2024 by 8.5% (representing average earnings growth over the relevant period).
There is definitely a lot to digest from the Autumn Statement and a great deal for the Government to do in a short timeframe if it wishes to see meaningful progress before the next general election. Whether all of the proposals will come to fruition remains to be seen – certain things could well change should Labour win the next election. Nevertheless, we can see a clear path towards consolidation and perhaps a much different pensions landscape in 2030 than we have now. In the meantime, the industry can expect to be kept busy in the coming months with developments on the reforms including another round of consultations.
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