Pensions Insight: week ending 14 October 2022

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In this edition of our Insight, we focus on recent economic and political developments including the Pensions Regulator’s expectations for schemes in the current economic climate.

Economic and political developments

There have been further economic and political developments since our last Insight. Here we cover the period up to and including 17 October 2022.

Ending of Bank of England support, a new Chancellor and the Medium-Term Fiscal Plan

The Governor of the Bank of England confirmed on 17 October 2022 that, as previously announced, its intervention ceased on 14 October 2022. This was despite concern raised from various parties about assistance ending too soon (see, for example, the PLSA’s statement which warned that pension funds were concerned about this).

We have seen a number of political changes in recent days aimed at providing reassurance on a number of fronts and stabilising the economy.

Jeremy Hunt replaced Kwasi Kwarteng as the Chancellor of the Exchequer on 14 October 2022 – Mr Kwarteng’s appointment was extremely short-lived having only begun on 6 September 2022. Mr Hunt has been busy since his appointment having made various announcements including an £18bn u-turn on corporation tax (it will increase from April 2023 to 25% as already legislated for rather than remaining at 19%) and the surprise confirmation that he would bring forward measures from the Medium-Term Fiscal Plan from 31 to 17 October 2022.

The Chancellor’s 17 October 2022 statement announced a “reversal of almost all of the tax measures set out in the Growth Plan that have not been legislated for in parliament”. That means, amongst other measures, the basic rate of income tax will stay at 20% “until economic conditions allow for it be cut”, dividends tax will not be cut by 1.25 percentage points and the reforms to the 2017 and 2021 off-payroll working rules (IR35) will remain. (There has already been an announcement on corporation tax and an earlier one that the removal of the additional rate of income tax would not go ahead.) The changes are estimated to be worth approximately £32bn a year.

The full Medium-Term Fiscal Plan will be delivered on 31 October 2022 (brought forward from 23 November 2022) when the Office for Budget Responsibility will also publish its forecasts.

17 October 2022 will therefore be a key date for financial markets being the day that markets first reopened without support from the Bank and the date of the ‘interim’ Medium-Term Fiscal Plan. As at the date of writing, whether the attempts by the Bank of England, the Prime Minister and the Chancellor to stabilise the economy are successful remain to be seen. Early indications are that the markets responded positively to Mr Hunt’s 17 October 2022 announcement.

The Pensions Regulator – statement on its expectations in the current economic climate

The Pensions Regulator issued a statement (the Statement) on 12 October 2022 covering its expectations for trustees and advisers on managing investment and liquidity risk in the current economic climate.

The Statement – a summary of the Regulator’s expectations for DB schemes

Integrated risk management
  • Investment: Liaise with investment advisers to understand the current position of the scheme and to identify steps that may be required. This will include an assessment of hedging levels – although this will be a ‘key consideration’ for those schemes that use LDI and which have faced liquidity issues because of additional collateral calls, the Regulator notes that this is an issue for all schemes in the present economic environment.
  • Liquidity position: Trustees should consider liquidity with their advisers and look at cash management and disinvestment plans so they can be adjusted if need be. The Statement discusses employer-provided collateral and the option of borrowing from the sponsoring employer. Company borrowing is subject to certain conditions and it is essential that legal and financial advice is taken by trustees before they agree to this form of funding.
  • Funding: Consider the scheme’s funding position and the likely future impact of yield movements. Many schemes will have seen improvements in funding because of higher long-term gilt yields and may be nearing funding triggers which require action or buy-out. Longer-term objectives may be met before expected. Risk profiles should also be reviewed.
  • Covenant: Review whether the employer’s covenant can ‘support investment risk’ and how it may have been affected by recent market events.
Operational matters Schemes need to make sure that their processes and procedures are sufficiently robust to allow them to respond to developments as and when they arise – this will include the processes and procedures around liquidity and cash management. Investments may need to be sold and bought and decisions may need to be made at short notice. 
Other affected areas High inflation and recent yield movements impact other areas of the scheme including the appropriateness of the factors and assumptions used for early retirement and transfer values. Trustees should consider these also and remain alert for pension scams, the risk of these occurring is heightened in current conditions. 

The Statement – a summary of the Regulator’s expectations for DC schemes

Trustees should:
  • consider recent financial market events with a ‘long-term’ view;
  • make sure that they review investment strategy and look at operational matters (see the comments above on DB schemes);
Member communications
  • communicate with members coming up to retirement to let them know about their options and to reiterate the importance of taking regulated financial advice;
  • encourage members to take financial advice or contact MoneyHelper before deciding about pension benefits; and
  • remain alert to scams and suspect transfers.


The Regulator – response to WPC queries

The Regulator has also responded to queries raised by the Work and Pensions Committee on LDI queries. The response provides useful detail on the impact of recent financial markets’ movements on defined benefit pension schemes.

In particular, the Regulator explains that the media report of schemes being at ‘risk of collapse’ are inaccurate, in fact most schemes have seen funding level improvements because of the increase in gilt yields. The Regulator has emphasised the importance of this message being conveyed to members especially to avoid members being ‘spooked’ into taking steps they could subsequently regret.

The issue facing schemes with LDI strategies has predominantly been one relating to short-term liquidity rather than funding. The ‘size and speed’ of gilt price movements, meant that LDI funds requested additional collateral “at a greater speed and scale than in any previously experienced market move”. By way of illustration, LDI managers will usually stress test against a 1% increase in long-term gilt yields over a period of weeks, but recent events saw yields increase in excess of 1.5% in less than three days. The typical LDI contingency plan had not scoped for such an unprecedented event.

The impact on schemes has been varied – some have been able to carry on with LDI strategies whilst others may have been negatively impacted due to having to sell assets at a reduced price and repurchase at a higher cost.

The Regulator refers to its consistent reminders to schemes of the importance of having contingency plans and the monitoring and management of liquidity especially because of likely interest rate rises. It has also previously warned of the potential risks involved with LDI funds and collateral calls (see, for example, the Regulator’s August 2022 blog and our Insight here).

In addition to its Statement, the Regulator will see whether new guidance is required as a result of any future Bank of England announcements.

Key message for trustees

If they have not already done so, trustees should liaise with their advisers as soon as possible to make sure that they are taking the right steps for their scheme in light of the current economic environment – our colleagues at Entrust Pension Limited have produced an article on the key issues that schemes should be considering which you may find useful – it can be accessed here.

The Pensions Regulator – update on second consultation on DB funding code

It has been reported that, in his speech to the PLSA Annual Conference, David Fairs, TPR Executive Director of Regulatory Policy, Analysis and Advice has confirmed that the Regulator will be publishing its second consultation on the revised DB funding code of practice “this side of Christmas”. He also noted that the Regulator is considering its proposals to use duration as a measure of maturity – recent financial market events have led to concerns regarding these plans.

Pensions dashboards: DWP publishes response to consultation and draft guidance

On 17 October 2022, the DWP published:

  • its response to a June 2022 further consultation in which it sought views on two additional pensions dashboards matters that were not covered in the initial consultation (the Dashboards Available Point (the DAP) and information disclosure) (see our Insight); and
  • draft guidance on deferred connection.

The further consultation

  • The DAP: The DAP is the point at which the services will be made available to the public. As proposed, the DAP will be provided for in the pensions dashboards regulations and will be such a date as set by Secretary of State for Work and Pensions (with an advance notice period of at least 6 months rather than the 90 days initially put forward); and
  • Information disclosure: As proposed, the pensions dashboards regulations will provide the Money and Pensions Service with the power to disclose information to the Pensions Regulator. Provision will also be made in the Pensions Act 2004 allowing the Regulator to share restricted information with MaPS.

Draft guidance

The draft guidance (non-statutory) is for trustees when considering applying for the scheme’s dashboards staging deadline to be deferred. Deferral for up to 12 months can be made under the regulations where trustees can show that:

  • they had started a transition to a new administrator; and/or
  • they had contracted to retender scheme administration services and the reasonable transition timetable conflicts with the staging deadline.

Deferral will only be granted where to comply would be disproportionately burdensome or put personal data of members at risk.

The guidance covers the deferral circumstances, how the DWP will consider applications, deadlines, how to apply, decisions and review of decisions. Although referring to the guidance when considering a deferral is not a statutory requirement, trustees are ‘encouraged’ to do so, and we would recommend that trustees consider the guidance if they are thinking of making a deferral application.

Latest PPF 7800 Index Report shows funding has increased

The latest PPF 7800 index update setting out the estimated funding position on a section 179 basis as at the end of September 2022 of the eligible 5,215 DB schemes shows that:

  • the aggregate surplus of these schemes increased over the month to £374.5bn from a surplus of £313.8bn at the end of August 2022;
  • the funding ratio increased from 125.1% at the end of August 2022 to 134.8% at the end of September; and
  • the aggregate deficit of the schemes in deficit decreased to £5.3bn, down from £14.3bn at the end of August 2022.

Alex Burghart MP confirmed as the Parliamentary Under Secretary of State for Pensions and Growth

Our recent Insight reported that Alex Burghart MP had been appointed as the new Pensions Minister in place of Guy Opperman. A little over three weeks later, the Government has confirmed his appointment as the Parliamentary Under Secretary of State for Pensions and Growth, a new role within the DWP.

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