In this insight we provide a round-up of the latest Pensions Regulator developments, and updates on all other key changes since 15 August, including the forthcoming review of the Pensions Ombudsman and the latest on public sector pension schemes.
Pensions Regulator round-up
Pensions Regulator updates defined contribution (DC) code and guidance for investment regulation changes
On 24 August 2023, the Pensions Regulator updated its DC code of practice, DC investment guidance and DC communications and reporting guidance to incorporate reference to new regulatory requirements that came into force on 6 April 2023. Under The Occupational Pension Schemes (Administration, Investment, Charges and Governance) and Pensions Dashboards (Amendment) Regulations 2023 trustees of most defined contribution trust-based schemes must:
- include in the default statement of investment principles (the SIP) their policy on investments in illiquid assets (these being defined as assets that cannot easily or quickly be sold or exchanged for cash and including assets in a collective investment scheme). The policy must be included from the earlier of the first date that the SIP is revised after 1 October 2023 and 1 October 2024. There are specific matters that need to be included if the policy is to invest in illiquid assets. If the scheme does not invest in illiquids the SIP must say why and if there are any plans to invest in illiquid assets in the future;
- disclose in the annual chair’s statement, from the first scheme year ending after 1 October 2023, the percentage of assets in the scheme’s default arrangements in respect of eight asset classes;
- include in chair’s statements covering scheme years ending after 6 April 2023 any performance-based fees relating to each default arrangement and assess the extent to which the fees represent good value for members as part of the costs and charges assessment.
Action: Trustees of DC arrangements should liaise with their advisers to ensure that they meet the new requirements. As well as familiarising themselves with the updated code and guidance, trustees will also need to have regard to the Department for Work and Pensions (DWP) statutory guidance when reporting on asset allocation and performance-based fees (see our insight).
Blog on limitations of climate change scenario
The Pensions Regulator’s 29 August 2023 blog on climate scenario analysis sets out steps trustees can take to facilitate improvement of the climate scenario analysis used by trustees when preparing their annual climate change reports. This comes off the back of recent research, including from the Institute and Faculty of Actuaries, which criticises some of the analysis used and reveals certain limitations. The analysis has “tended to downplay the full scope of risks and uncertainties” and some outcomes “appear to seriously underestimate the financial risk from climate change and are at odds with the established earth and climate science.” Uncertainty in climate change model output can be significant.
The climate change governance and reporting requirements apply to schemes with £1bn or more of relevant assets, master trusts and collective defined contribution schemes. They must carry out scenario analysis “as far as they are able” of the effect of at least two global average temperature increase scenarios on the scheme on a triennial basis with a requirement to consider if new analysis is appropriate in intervening years.
So what can trustees do? They “do not need to be climate experts” but must “feel confident to question and challenge their advisers” and should:
- make sure they have sufficient knowledge and understanding of climate matters including having sufficient training;
- consider regularly the climate-related competencies of advisers and whether specialist support is needed;
- understand their scenarios and be able to rationalise the outputs; and
- review the most recent analysis in years where a new analysis is not required and look at whether to carry out more analysis.
Action: Although only trustees of schemes within scope are required to take specific action in response to the blog (a first step being liaising with their advisers as to what steps need to be taken) all trustees should keep up to date with developments on this area given the importance of climate change.
Pensions Ombudsman review in 2024
The Pensions Ombudsman is scheduled to have its independent arms-length body review in 2024. The review forms part of the Cabinet Office review programme for public bodies and will consider matters such as efficacy, governance, accountability and efficiency.
The 2024 review will also include ensuring that “all aspects of people’s interactions with their pensions have an adequate route of appeal.” This picks up on the concerns recently raised by The Public Accounts Committee when reviewing the AEA Technology (AEAT) pension case regarding appeal routes for pension complaints and availability.
AEAT (the commercial arm of the UK Atomic Energy Authority) was privatised in 1996 and its 4,000 employees could retain their pension benefits in the public sector scheme or transfer them to the employer’s new scheme – some of the 90% who transferred will receive less than if they had not because of the scheme entering the Pension Protection Fund after the company went insolvent. Affected members have faced difficulties finding routes of appeal regarding complaints about the information they received when deciding whether to transfer.
Public sector scheme update
Tax regulations laid before Parliament
The Public Service Pension Schemes (Rectification of Unlawful Discrimination) (Tax) (No. 2) Regulations 2023 were laid before Parliament on 17 August 2023 and will come into force on 14 September 2023 – many provisions have retrospective effect to cover the McCloud remedy period. They are the second set of tax regulations that change the tax treatment of individuals impacted by the remedy in the McCloud case. You can read more about the tax regulations here and here.
On 18 August 2023, HMRC published a further Newsletter on the public service pensions remedy. This provides a recap of developments since HMRC’s last Newsletter in May 2023. It discusses the tax regulations that are reported on above and several other topics including the new separate reporting framework through which individuals will report their 2022/23 annual allowance position and pensioners being able to make a scheme pays election where they have an increased annual allowance charge because of the McCloud remedy.
Regulator guidance on annual benefit statements and McCloud remedy
The Regulator has also published guidance on the interplay between the annual benefit statements that public service schemes must provide members with by 31 August each year and the remedial service statements that need to be sent to affected McCloud members for the next two years. The Regulator emphasises the importance of members not receiving ‘confusing or misleading’ information which could happen because some of the information required may conflict – the information requirements need to be considered holistically and material breaches should be reported to the Regulator in the usual manner for public service schemes. The Regulator will take a risk-based, practical approach to breaches.
Valuation and employer cost cap directions
On 31 August 2023, HM Treasury published valuation and employer cost cap directions together with an accompanying technical explanation and correspondence between HM Treasury and the Government Actuary. The directions came into force on 31 August 2023.
The directions revoke and replace previous directions concerning how actuarial valuations of public service pension schemes are carried out – the valuations work out benefit costs and in turn employer costs. The amendments are needed to implement adjustments to the cost control mechanism (see our insight) so that the 2020 valuations can be undertaken using updated actuarial methods and assumptions reflecting consideration of reformed schemes only (so not including legacy schemes) and economic factors before introduction of changes where the mechanism is breached.