Pensions Insight: 19 to 26 June 2023

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In this Insight we cover the WPC’s LDI inquiry report and its recommendations, the DWP’s review of the transfer regulations, the latest on the Retained EU Law Bill, the Bank of England’s forthcoming system-wide exploratory scenario exercise and the PDP’s FAQs on the new dashboards connection date.

WPC DB with LDI report contains a number of recommendations

On 23 June 2023, the Work and Pensions Committee (WPC) published its report on defined benefit (DB) pensions with liability driven investments (LDI). The report contains various conclusions and recommendations which we outline below.


The WPC began its LDI inquiry on 24 October 2022 following the marked increase in gilt yields that was experienced after the 23 September 2022 ‘mini-Budget’ which forced certain LDI funds in which pension schemes were invested to sell gilts in an illiquid market when urgent collateral calls could not be met. This led to the Bank of England having to step in to provide support due to financial instability.

Purpose of the inquiry

The inquiry was set up to investigate the impact of these events on DB schemes, whether the Pensions Regulator had appropriately approached LDI regulation and monitoring, DB schemes’ governance, if LDI is still ‘fit for purpose’ and if any policy or governance changes are required. Evidence from key pensions and investment bodies and regulators was heard.

Key messages from the report

There are two key messages from the report:

  • that there were systemic risks within the LDI market that were not picked up by either regulators or the LDI investment sector; and
  • there were also governance issues within DB pension schemes, particularly small and medium sized schemes.

These issues all need to be addressed – there should be “more systematic, regular and comprehensive gathering” of LDI data and governance throughout the investment chain needs to be improved. The WPC sets out a number of recommendations to ensure that suitable lessons can be learnt – it believes that some steps have been taken to deal with the ‘exposed’ weaknesses but that more can be done.

Conclusions and recommendations of the WPC

DWP, TPR and PPF account of impact

  • Conclusion: Although the Regulator’s analysis shows that most schemes have improved funding, external inquiry questions the robustness of this conclusion – Pension Protection Fund (PPF) data shows aggregate scheme asset values as being £400bn less at the end of 2022 than at the beginning. The impact of the LDI events should be determined so that system improvements can be made if need be.
  • Recommendation: The DWP, the Regulator and the Pension Protection Fund should produce an “account of the impact on pension schemes of the LDI episode” (Deadline: By the end of 2023)

Reporting LDI data

  • Conclusion: Many respondents believe that there is still a place for LDI and that it remains ‘fit for purpose’. However, because of increased resilience requirements, there may be lower use of leveraged LDI or less allocation to non-bond assets going forward. Also, schemes in deficit which use LDI may take longer to reach the long-term objective and some schemes will face difficulties in assessing future use of LDI.
  • Recommendation: The Regulator should collect information on LDI use and connect with relevant schemes more closely off the back of the results.

Improving governance

  • Conclusion: The Regulator could not determine whether schemes were following its LDI guidance and should have placed more emphasis on the risks and mitigation working with the DWP. Although scheme consolidation will improve governance (improving governance being a key theme coming out of the report) as the Regulator has noted this “needs to be into a safe vehicle, which requires legislation”.
  • Recommendations:
    • The DWP should respond to its 2018 consultation on DB consolidation (Deadline: By the end of October 2023).
    • The DWP should work with the Regulator to improve scheme governance. In the meantime, it should look at whether LDI use should be restricted, e.g., using a test of the trustees’ understanding.
    • The Government’s plans to include investment consultants within the Financial Conduct Authority’s (FCA) regulatory perimeter should be brought forward (Deadline: Before end of current Parliament).
    • The Regulator and the FCA should look at whether the FCA’s April 2023 guidance is being implemented properly and is allowing trustees to effectively monitor LDI.

Managing system risks

  • Conclusion:
    • The Regulator is not yet fully digitally enabled and does not have the data needed to monitor if schemes are complying with its LDI guidance.
    • The WPC supports the Financial Policy Committee’s (FPC) recommendation that the Regulator set out minimum LDI resilience levels and, together with other regulators, oversees compliance.
    • The WPC notes two concerns with the revised DB scheme funding regime: (1) in its present form, it could stifle open schemes; and (2) there is a risk of investment ‘herding’.
    • The WPC agrees with the Financial Policy Committee that the Regulator’s statutory remit should be extended to cover financial stability considerations.
  • Recommendations: The DWP and the Regulator should:
    • report to the WPC on how they intend to monitor LDI resilience and its maintenance (Deadline: by end of October 2023);
    • provide a timescale for the Regulator’s plans to become a ‘more digitally enabled and data-led organisation’;
    • consult on whether including LDI disclosure requirements in the trustees’ annual report or investment statement would improve governance and the disclosure data that would be required;
    • work with other regulators and the Bank of England to analyse collected LDI data (Deadline: by end of October 2023);
    • delay the introduction of the revised DB scheme funding regime until a full impact assessment has been completed.
  • The DWP should report to the WPC on how it intends to take forward the FPC’s recommendation that the Regulator’s statutory remit include financial stability considerations (Deadline: By end of January 2024).

Next steps

The WPC report does not require any specific action to be taken by schemes that use LDI – the recommendations are for the Government and the Regulator to address, and we will have to wait and see what the Government’s reaction is.

Some recommendations pick up on actions that are already in the offing – for example, the Regulator’s plans as regards to monitoring of LDI use and resilience and data collection. Schemes should prepare themselves for LDI usage to be monitored more closely and for data to have to be provided. Other WPC recommendations may also lead to scheme changes if and when taken forward, for example, the suggestion that the revised DB scheme funding regime be put on hold. For now, schemes should ensure that they are taking relevant action following the Regulator’s April 2023 LDI guidance (see here) and look out for future developments.

DWP review of the November 2021 transfer regulations: DWP to consider amending the regulations to address concerns on overseas investments and incentives

On 21 June 2023, the DWP published its review of the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 that came into force on 30 November 2021. Under the regulations trustees must determine if the transfer is a first condition transfer (one to a public service scheme, authorised master trust or collective money purchase scheme) and if not, if scam indicators in the form of red or amber flags are present (see our Insight). The presence of a red flag indicates a material scam risk, and the transfer cannot proceed, and an amber flag indicates a potential risk meaning that the member must take scams guidance before the transfer can go ahead.

The Government was required to review the regulations within 18 months to check how they are operating in practice, whether they remain appropriate and their effectiveness. The review has been particularly awaited because of concerns that have been identified regarding the application of the regulations where a transfer involves overseas investments (an amber flag) and incentives (a red flag) (see our Insight).

20 pension schemes, administrators and industry bodies were involved in the review with 11 providing data returns which cover over 10 million members.

Concerns raised

Concerns raised during the review include:

  • the overseas investment amber flag should be clarified or removed because at present there can be an amber flag even where a scheme has no concern;
  • incentives are unnecessarily preventing transfers because certain providers are not interpreting them consistently;
  • because of due diligence checks and wait times for pension scam guidance appointments, transfers are ‘taking longer’;
  • a number of people are having to go to more than one safeguarding appointment – e.g. where separate schemes are picking up flags even in consolidation cases;
  • the information needed to demonstrate an employment link can be a lot for members to have to provide.

DWP’s findings

Overall, the review indicates that regulations appear to be working as intended to protect savers from transferring to a scam arrangement whilst allowing most transfers to go ahead without unjustified interruption. The policy intent remains appropriate, and the regulations are the most appropriate way in to achieve this.

However, issues with both overseas investments and incentives have been identified during the review – to address this, the DWP will liaise further with both the industry and the Pensions Regulator to decide whether any changes may be needed to the regulations whilst maintaining their original policy intent.

Concluding remarks

The detailed survey results are of interest, but it is by far the confirmation that the regulations appear to be working as intended and that the DWP is alert to the issues on overseas investments and incentives and may amend the regulations if necessary that most will be interested in. It is also noteworthy that no other significant issues appear to have been identified with the working of the regulations and that, by and large, they appear to be operating successfully which is of course positive news for members and schemes alike.

The Pension Scams Industry Group (PSIG) will be revising its Pension Scams Code of Good Practice following the DWP’s review and PSIG indicated that they expect to publish an updated version by the end of 2023. We will provide an update on this in due course. You can read more about PSIG’s March 2023 Interim Practitioner Guide here.

Retained EU Law (Revocation and Reform) Bill: Lords’ consideration

In the ongoing ping pong stage of the Retained EU Law (Revocation and Reform) Bill, the House of Lords has reviewed why the House of Commons rejected the House of Lords’ suggested insertion of additional scrutiny of certain statutory instruments and agreed a different scrutiny provision. However, on 21 June 2023, the Commons decided once again to reject the alternative. This change together with the reason for the Commons’ rejection of another Lords’ clause on environmental protection will now be considered further by the Lords.

BoE to undertake SWES exercise of banks and non-financial institutions

On 19 June 2023, the Bank of England (BoE) announced the launch of a new system-wide exploratory scenario exercise which will test how banks and non-financial institutions such as insurers, central counterparties, pension funds, hedge funds and asset managed funds react during a stress global financial market scenario. It follows the September 2022 gilt market turbulence and the significant and potentially wide-reaching effect it had on financial markets.

The BoE has worked with both the Financial Conduct Authority, the Pensions Regulator, and other relevant regulators on the exercise. Later this year, it will test the impact of a ‘severe but plausible stress to global financial markets’ in two rounds.

The BoE emphasise that the exercise is not designed to test the resilience of the individual contributors. The aim is to improve understanding of how the different institutions work in stressed financial market conditions and how their behaviour might “interact to amplify shocks in UK financial markets that are core to UK financial stability”.

The results of the exercise will be used to develop system-wide (and sector) understandings which could not be achieved through individual assessments, in turn allowing vulnerabilities to be addressed.

PDP publishes FAQs on the new connection approach

The Pensions Dashboards Programme (PDP) has published some FAQs on the new approach to connection, following the 8 June 2023 Government announcement and amending dashboards regulations that will introduce a new statutory single connection date of 31 October 2026 (with the staging deadlines to be set out in guidance rather than in legislation). 

The PDP notes that the staging dates will not be mandatory. However, complying with the guidance is the best way to ensure dashboards can be introduced as soon as possible and trustees will “be expected to demonstrate how they have had regard to the guidance”.

The Financial Conduct Authority will also change the deadlines for FCA regulated pension providers in line with the new October 2026 connection date when the amending regulations have been approved.

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