Closing the pensions inequality gap
On 30 January 2023, the Department for Work and Pensions (DWP) announced a raft of defined contribution (DC) related measures designed to ‘start closing the pensions inequality gap’ which has arisen following the replacement of defined benefit (DB) benefits with DC for the majority of the workforce with private pension provision.
None of the measures are new – they have just been drawn together for the purposes of the DWP announcement under one umbrella, that of creating ‘fairer, more predictable, and better-run pensions’.
Joint consultation on a value for money (VfM) framework (closes on 27 March 2023)
New VfM framework and intention
A VfM framework has been developed with the Pensions Regulator and the Financial Conduct Authority. The requirements will apply to DC occupational pension schemes and providers and Independent Governance Committees of workplace personal pension schemes which will need to disclose, assess and compare VfM.
The intention behind the new framework is to enhance transparency, comparability and competition across the DC pensions market so that better value is provided, and member outcomes are improved (with increased consolidation where this would be in members’ best interests).
What it will cover
The framework will initially act as an add-on to the existing value for members assessments but will in time replace them. It will cover the principal parts of VfM (investment performance, costs and charges and service quality). Schemes will need to report on wider value metrics and assess the value of their arrangement against comparators. The consultation provides more detail on the suggested metrics and standards together with information of the VfM assessment process.
The new framework will be introduced in stages, with default arrangements used for auto-enrolment and legacy DC schemes going first (legacy DC schemes are schemes which are not used for auto-enrolment but to which an employer has, in the past, contributed on behalf of two or members).
Results of VfM assessment
Trustees and Independent Governance Committees (IGCs) will be required to reach a conclusion that the scheme is:
2. not currently VfM but with identified actions to improve in certain areas that would deliver VfM
3. not VfM”.
The Government is also considering introducing a statutory requirement for an occupational trust-based scheme to have to consolidate where there are ‘repeated underperforming assessment results’ (with a similar requirement under consideration for FCA-based schemes).
Timings and publication
With regards to timings, the intention is that framework data will have to be published by the end of Q1 in a calendar year with publication of the VfM assessment results by the end of October. Although IGCs will have to include VfM results in their annual chair’s statement, occupational pension schemes will not and how the VfM framework and the chair’s statement will interact is going to be looked at further.
The FCA will consult in the future on FCA rule changes and the DWP intends to carry out another consultation regarding regulation amendments.
Response to the consultation on broadening DC investment opportunities
After receiving ‘broad support’ to its proposals and after making minor changes, the Government is going ahead with statutory changes this Spring which will:
- require the majority of occupational pension schemes that provide DC benefits (exemptions include schemes whose only DC benefits are Additional Voluntary Contributions (AVCs)) to disclose and explain:
- their policy on illiquid investment through the statement of investment principles the first time that the SIP is revised after 1 October 2023 or by 1 October 2024 at the latest, and
- their default asset allocation in the annual chair’s statement, starting with the first scheme year ending after 1 October 2023; and which
- from 6 April 2023, will allow trustees to invest in arrangements that include ‘well designed’ performance fees which, if they meet certain conditions, will be exempt from the 0.75% charge cap – trustees will have to calculate and disclose performance-based fee charges incurred by members in the annual chair’s statement and consider them when undertaking the value for members assessment.
As well as publishing its response, the DWP has also published final draft regulations and draft statutory guidance which trustees will need to take into account in respect of the asset allocation disclosures and performance-based fees. How guidance on the SIP disclosures should be provided will be considered further by the DWP and the Regulator.
Consultation on addressing the challenge of deferred small pots (closes on 27 March 2023)
The DWP has also issued a call for evidence to help it work out the best large-scale automated consolidation solution to address the issue of deferred small pots in the auto-enrolment market.
Two solutions are being considered: (1) a default consolidator model under which a qualifying small, deferred pot would automatically transfer to a small pot consolidator with a member being able to opt-out; and (2) a ‘pot follows member’ design under which a deferred pension would automatically move with the member to a new employer’s scheme again with the member having an opt-out choice.
Report on understanding member engagement with workplace pensions
This report sets out the research results from Ipsos following 60 interviews with members in a DC default fund. The main findings include a detached, fearful and complacent attitude, an inactive approach to finding information, engagement barriers, a range of understanding, and being trustful of the employer’s pensions decisions. A few ways in which engagement could be improved are also identified including improving understanding and access to information.
Consultation on CDC schemes (closes on 27 March 2023)
A CDC scheme is halfway between a defined benefit and a defined contribution scheme. In a DB scheme the employer bears the risk whereas in a DC scheme the member bears the risk. In a CDC scheme there is more of a balance with regards to risk.
Rather than having an individual pot as a member does in a DC arrangement, the member is entitled to a proportionate share of the collective assets. However, unlike in a DB scheme, the amount of pension provided is not guaranteed. Instead, there is a target level of pension that is based on a long-term, mixed-risk investment plan whilst the cost to the employer is fixed. By conducting regular valuations and reviewing the funding position, the target retirement benefits can be adjusted accordingly.
The Government is consulting on allowing multi-employer and master trust CDC schemes and how the CDC framework can provide additional design flexibility.
At present CDC schemes can only be set up by single or connected employers but given the “strong appetite to broaden CDC provision”, the Government wants to allow the market to be expanded.
There are a number of key principles that the Government proposes should apply to all CDC schemes including that: (1) benefits must be collective money purchase, (2) provided under a trust, (3) require Regulator authorisation and supervision, and (4) be annually valued and adjusted so that assets and benefits remain balanced.
Unconnected multi-employer CDC schemes
The consultation covers the policy framework that will allow ‘whole-life’ multi-employer schemes which would provide for both accumulation (building up benefits) and decumulation (accessing benefits) schemes to be set up.
There are a number of design challenges to creating this type of CDC scheme including what its features should be, the position in relation to sectionalisation, who should be permitted to set up a scheme, and how resilience and sustainability should be ensured.
It might also be necessary for the present CDC regime to be amended to reflect that certain unconnected multi-employer CDC schemes may be set up by a commercial provider. The consultation refers to the master trust authorisation and supervision framework as being a potential source of help in this respect – for example, in respect of the fit and proper persons requirement, having a credible business plan and whether there should be a scheme funder equivalent to that in a master trust arrangement.
The consultation also looks at how CDC as a decumulation-only option might work. These arrangements which could be set up by either an employer or commercial organisation would give members coming up to retirement an income product that permits them to share investment and longevity risk. The value of the member’s pot when they decumulate will determine income. This means that factors such as market conditions or those sitting behind their projected scheme benefits could impact pot value.
The consultation explains that, as decumulation products have in the past been subject to FCA regulation, allowing a trust-based CDC decumulation scheme is ‘fresh ground’. This means that the DWP need to identify the possible gaps and ensure that there are sufficient member protections suitably balanced with ‘commercial interests’.
There are several key areas in respect of which the DWP seeks views including who would provide initial funding (seed capital) and how enough transfers-in can be ‘attracted to achieve appropriate economies of scale’ (necessary to achieve the benefits and intended target of the CDC product). Also, key is buy-in pricing (in respect of which the DWP wishes to make sure that members are treated fairly) and member communication so that members fully understand the product (which is essential to all CDC schemes given the risks of ‘over-promising’).
There are clearly many issues to resolve before the regime for these types of CDC schemes can be settled and CDC expansion comes to fruition – it may well be several years before the first of these arrangements is set up and operational.
Trustees should familiarise themselves with the new measures although only the ‘broadening investment opportunities’ consultation will require specific action for in scope schemes at the minute – those DC schemes in scope will need to begin preparing for the new disclosure requirements that are being brought in this Spring and trustees that, from 6 April 2023, wish to invest in arrangements with performance fees and exclude them from the 0.75% p.a. charge cap should ensure that they meet the relevant conditions for meeting the charge cap exemption.
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