In this week’s update, we report on the progress of the Pension Schemes Bill, the Pensions Regulator’s interim response to the DB funding code consultation, updated Regulator COVID-19 DC guidance on transfers and gated funds, the DWP’s position on the default fund charge cap and the banning of flat fees on small pension pots, the PPF 7800 Index, the appointment of Matt Rodda as shadow pensions minister and the joint FCA, DWP and MaPs memorandum of understanding.
Pension schemes bill ready for royal assent
Development:
The Pension Schemes Bill (the Bill) returned to the House of Lords on 19 January 2021 for the final Parliamentary stage before Royal Assent. Both Houses have now agreed the text of the Bill and the Bill is awaiting the final stage of Royal Assent which, at the time of writing, had not yet been scheduled.
Key point:
The legislation will make significant changes to several different areas of pensions law including extending the powers of the Pensions Regulator (the Regulator), amending the defined benefit (DB) scheme funding regime, changing statutory transfer provisions to improve member protection, new climate change disclosure provisions, the introduction of pension dashboards and establishing the legal framework for collective defined money purchase schemes.
Even when the Bill does receive Royal Assent, it is likely to be months before the necessary secondary legislation, Regulator codes of practice and guidance are produced, and it is not until these are available that we will obtain a clearer idea as to how the primary legislative provisions will actually be implemented.
The scheme funding powers will most likely not be fully operational until 2022 (see next article) and the Pensions Minister confirmed just a couple of weeks ago that the regulations governing the new Regulator powers will not be made available until this Autumn.
Interim response to the DB funding code consultation published by the regulator
Development:
The Regulator has published a six-page interim response to the first of its two consultations on the new DB scheme funding code of practice.
As a reminder, the first consultation set out the new proposed regulatory approach (a twin-track route to show compliance: Fast Track or Bespoke), the underpinning principles and how the new principles should be applied in practice. The second consultation will focus on the draft code itself and will include a full summary of the responses received and an impact assessment.
There have been 127 responses to the consultation (32% of which came from advisers and 21% from pension trustees) and 6,000 comments in total. The response and accompanying press release explain that there has been 'general support' for the principles and proposed regulatory approach but some concerns have been raised as to the application of the principles in practice. These concerns include:
- risks connected with the setting of the Fast Track guidelines (for example, the risk that some schemes might 'level down');
- possible loss of flexibility;
- the Fast Track guidelines for open schemes;
- increased evidential requirements around the submission of a Bespoke valuation and perception of the Bespoke route as 'second-best; and
- covenant reliance being diluted and concerns as to the meaning of enhanced covenant visibility for schemes that can rely on covenant beyond the medium term.
The Regulator says that certain concerns have arisen from "misunderstandings around what we had proposed" and that these will be clarified in communications and the second consultation. It noted that certain points on open schemes have already been clarified in a recent Regulator blog – our Gateley Insight Article provides more detail.
Key point:
The Regulator has confirmed once again that it will consider the current difficult economic circumstances when producing the Fast Track guidelines and assess potential impacts 'carefully'. However, it is not yet ready to consult on the code in detail or undertake an impact assessment until the associated legislation, the Pension Schemes Bill and relevant secondary legislation, is introduced because of the need for consistency. This means that the Regulator does not expect to publish the second DB funding code consultation until the second half of 2021 making it unlikely that the code will be brought in before 2022.
The regulator updates guidance on COVID-19 and defined contribution (DC) scheme investment in relation to gated funds
Development:
The Regulator's updated DC scheme management and investment COVID-19 guidance now includes a section on transfer requests where all or part of a member's investment is gated.
Some investment funds, such as property funds, were temporarily closed ('gated') as a result of the pandemic until the market normalised. The guidance already contained a section on when a temporary closure of funds creates a default arrangement and the 'Member transfers' section has now been expanded to cover transfer value requests.
Key point:
The Regulator is aware of the difficulties of implementing a transfer where investment funds are gated. However, it does not believe that the law allows it to grant an extension to the statutory timescales for payment of a CETV and notes that trustees may face a potential fine if they do not take 'all reasonable steps' to pay the transfer value within the six-month timeframe. The guidance does note that where only part of the benefits are gated, reasonable steps might include seeing if the receiving scheme would accept a partial transfer with the gated assets following after the fund has re-opened.
It seems that the Regulator's hands are somewhat tied on this point as broadly it is only able to grant an extension where one of six statutory grounds apply. It is important that trustees facing difficulties ensure they report any significant failures to pay transfer values within the statutory period.
DWP response on review of default fund charge cap and standardised cost disclosure published
Development:
The Department for Work and Pensions (DWP) has published the Government's response to its June 2020 call for evidence on the review of the default fund charge cap, charging structures and the increased take-up and use of standardised cost disclosure templates. The response confirms that:
- the 0.75% charge cap remains at the appropriate level and will not be altered;
- transaction costs will not be incorporated into the charge cap;
- the charging of flat fees on pension pots under £100 will be prohibited; and
- the take-up of standardised cost disclosure templates will be closely monitored but will not be made compulsory.
Key point:
The related findings of the Government's 2020 Pension Charges Survey revealed that the DC market is working competitively and administration charges on average fall well below the cap with an average charge of 0.48% across all members in auto-enrolment schemes and 0.53% for other workplace schemes.
Respondents had concerns regarding the market effect of the pandemic and the need to keep some headroom in the cap to deal with the challenges and to allow flexibility for innovation. Acknowledging these concerns the Government has decided to keep the cap unchanged. The Government also noted little appetite from respondents to bring transaction costs within the remit of the charge cap.
The decision to ban flat fees on small pots is designed to prevent such pots being depleted by charges and administration costs. The minimum level will be kept under review. This should work in tandem with the drive to consolidate small pots so that over time the number of small pots decreases significantly.
Standardised cost disclosure is being encouraged to remove inconsistency and uncertainty which in turn makes assessing value for money more difficult. Legislation will be considered should voluntary take-up levels be unsatisfactory.
PPF 7800 index for January 2021 shows deficits have increased between the end of November 2020 and December 2020
The PPF 7800 index for January 2021 shows that the estimated aggregate section 179 deficit of the 5,318 schemes in the index increased during December 2020 to £86.4bn from £78.8bn at the end of November 2020. The deficit of the schemes in deficit increased from £221.4bn at the end of November 2020 to £230.3bn at the end of December 2020.
Matt Rodda confirmed as the new shadow pensions minister
Following a New Year shuffle of Labour's shadow ministerial team, Matt Rodda has been appointed as the shadow pensions minister in place of Jack Dromey MP, who had been in the role since January 2018 and who is now moving to the shadow cabinet office. Rodda has been the MP for Reading East since June 2017 and was previously the Shadow Minister for Buses and Local Transport.
Memorandum of understanding between FCA, DWP and MaPS published
Development:
The Financial Conduct Authority (the FCA), the DWP and the Money and Pensions Service (MaPS) have published a joint memorandum of understanding setting out the co-operation and co-ordination arrangements between the different organisations to cover their respective roles and responsibilities, standards for MaPS and information sharing arrangements.
Key point:
The memorandum is designed to ensure that each organisation works effectively in meeting its statutory objectives, clarity as to the respective roles and responsibilities is provided and that communications to the public on matters of common interest are coordinated appropriately. It will be reviewed on an annual basis and updated as necessary.