Pensions Insight: 4 to 11 March 2024

In this week’s insight we report on the Spring Budget 2024, TPR’s consultation on the statement of strategy that will be required under the revised DB funding and investment regime, an interesting data protection case involving incorrectly issued benefit statements, a Taskforce on Social Factors guide, and the Government’s confirmation as to how the general levy will be changed.

Spring Budget: Chancellor announces further changes to DC arrangements

The Chancellor’s Spring Budget 2024 was relatively quiet on pensions which is perhaps not surprising given last year’s pensions-related Budget measures including the shock removal of the lifetime allowance on and from 6 April 2024 and the significant pension reforms announced in the Autumn Statement 2023 are still being implemented.

Four pensions measures announced

Just four pensions measures were included in the 6 March 2024 Budget:

• three proposed changes to the defined contribution (DC) value for money (VfM) framework that were pre-announced by the Chancellor on 2 March (further detail provided below);
• confirmation of those who will receive funding under the Government’s Long-term Investment for Technology and Science (LIFTS) initiative;
• a reiteration of the Government’s commitment to “exploring a lifetime provider model” for DC schemes – this involves savers having one pension scheme for their working life; and
• confirmation that the Government together with the Association of British Insurers will set up a framework to monitor progress of the Mansion House Compact.

VfM proposals

Under the VfM proposals which will be subject to a Financial Conduct Authority (FCA) consultation this spring:

• by 2027, DC pension schemes will be required to publicly disclose the level of investment in UK equities with equivalent requirements for the Local Government Pension Scheme being introduced perhaps as soon as April 2024;
• DC schemes will have to publicly compare performance data against two competitor schemes with assets of at least £10bn (with levels expected to materially go up in the future); and
• ‘poorly performing’ DC arrangements will not be allowed to take on new business from employers – the Pensions Regulator and the FCA will be given a suite of associated intervention powers including both the power to close a scheme to new joiners and, if appropriate, wind up a scheme.

Comments

The DC proposals form part of the Government’s drive to increase investment in UK businesses. They are also designed to improve VfM and increase consolidation (the latter of which the Government sees as an integral way in which investment in the UK will increase and saver outcomes can be improved).

The Government wishes to see more transparency on UK investment data. Notable in this regard is the reference in the Budget to the Government reviewing “what further action should be taken if this data does not demonstrate that UK equity allocations are increasing.”

ESG ratings

Another Budgetary measure of interest to the pensions sector was the announcement that the Government will regulate Environmental, Social and Governance (ESG) ratings providers where assessments are “used for investment decisions and influence capital allocation”. ESG ratings providers will be brought within the regulatory perimeter of the FCA.

The announcement follows a March 2023 consultation on the future regulatory regime for ESG ratings providers with the full response to follow later this year.

TPR consultation on statement of strategy for revised DB funding regime

On 5 March 2024, the Pensions Regulator (TPR) published a consultation pack on the statement of strategy (the Statement) that trustees will need to send to TPR under the revised defined benefit (DB) funding regime that is “designed to improve the security and sustainability of” schemes and which will apply to valuations with effective dates on and from 22 September 2024. The pack consists of:

• a consultation document;
• an example draft Statement template for a scheme with a Bespoke valuation – under the new regime, TPR will set a new twin-track compliance framework, Fast Track for schemes that adopt set parameters for a valuation and Bespoke for those which cannot or do not wish to use Fast Track;
• a worked example of how TPR expects maximum affordable contributions to be evidenced, where necessary; and
• a data list of the information that schemes will need to include in the template.

The consultation documents explain what information TPR is proposing to gather from trustees in the Statement which it is intended will be provided in template form. It is proposed that the information that will be required will differ depending upon scheme-specifics including whether a Fast Track or Bespoke approach is adopted and with adaptations for small schemes. TPR seeks views from trustees and advisers on its proposals.

The consultation closes on 16 April 2024. We have produced an in-depth insight with further detail which you can access here.

Police Pension Scheme administrators not liable for data misuse after sending benefit statements to incorrect addresses

In the case of Farley v Paymaster (1836) Ltd [2024], the High Court has dismissed all but 14 of the 400 claims brought by current or former police officers for breach of data protection legislation and/ or misuse of their private information following the issuing of benefit statements by the administrator of the Police Pension Scheme to out-of-date member addresses.

The unsuccessful claimants could not demonstrate that their statements had been “opened and read by a third party” – this was an essential element of both the misuse of private information and data protection claim, the latter because the necessary processing would not have taken place.

This left just 14 claimants who had a “real prospect of demonstrating” that the incorrectly issued statement had been opened and read. However, the court noted that they may struggle to show that it had in fact been read and certain elements of their claims for loss and damage were referred to as ‘hopeless’ because without the unintended recipient taking a copy, misuse could not be proven. Furthermore, making ‘exaggerated’ claims as to the effect of a third party reading the statement would not help. Nevertheless, these claims were permitted to proceed to trial when the court will decide on whether a threshold of seriousness applies in such cases – as the judge noted, just because any damages claim might be ‘modest’ did not impact whether the claim was ‘viable’.

Issues of this nature are not unusual in a pensions context and member communication is at times issued to an incorrect recipient. In most cases, other than immediate resolution of the issue through contacting the relevant parties and asking that the communication is destroyed/ returned and addressing any systemic issues, no further action is required. It is therefore interesting to see such a case before the courts – we will keep an eye out for the judgment from the trial itself and will report further on the outcome.

HMRC LTA guidance newsletter – March 2024

HMRC’s latest lifetime allowance (LTA) guidance newsletter sets out 36 further FAQs on the LTA removal in relation to lump sums and lump sum death benefits, protections and enhancement factors, reporting requirements, transitional tax-free amount certificates, the standard transitional calculation, and member statements. It also includes updates on pension commencement excess lump sums (PCELS), enhanced and primary protection and the overseas transfer allowance.

There are several references to regulations being introduced to deal with various matters – this was expected both from the Government and the industry given the short lead-in time until the primary legislation comes into effect and the complexities of the changes being made.

The newsletter explains that schemes do not have to offer the new PCELS. It goes on to explain that schemes which do want to offer this benefit, and which cannot introduce rule changes in time, can make use of the statutory override in the Finance Act 2024 which permits references to the lifetime allowance excess lump sum to be read a reference to the PCELS.

Taskforce on Social Factors’ guide

The DWP has published the final version of the Taskforce on Social Factors’ Guide on social factors and pension scheme investments together with a two-page quick start guide for pension trustees. The final guide closely follows the draft which was consulted upon in October 2023.

There are four main sections in the guide: (1) an explanation of why material social factors are important investment-wise – the guide refers to the Financial Markets Law Committee’s recent paper on sustainability and climate change trustee decision-making; (2) a framework for addressing social factors by reference to Baseline, Good and Leading practice markers and a focus on modern slavery; (3) a materiality assessment framework; and (4) social factor data that trustees can refer to when managing social factors in investment.

Confirmation on general levy from 2024/25

The Department for Work and Pensions’ 4 March 2024 general levy consultation response confirms that, following concerns regarding its preferred option (4% annual increase with premium for -10,000 member schemes) the Government is going to adopt the second of its three proposed options for amending the annual general levy (see our insight for further information).

This means that, as from 1 April 2024, the current levy structure will be kept but rates will be increased by 6.5% each year (2024/25 through to 2026/27) – this will reduce the deficit to a ‘compliant’ level by 2031. The regulations introducing the changes can be accessed here.