In this edition of our Insight, we provide an update on Pensions Regulator developments including the launch of the revised DB scheme funding code, our usual Pension Protection Fund (PPF) round-up and summarise all other key pensions news.
The Pensions Regulator round-up
The new DB scheme funding code – second consultation launched
Consultation documents: On 13 December 2022, the Pensions Regulator launched its second consultation on a revised draft DB funding code of practice together with a consultation document on its Fast Track and a twin track regulatory approach and a response to the first consultation. The consultation period will last 14 weeks, closing on 24 March 2023.
What is in the code? The draft code sets out how the Pensions Regulator interprets compliance with the new funding and investment requirements of the Pension Schemes Act 2021 and the draft funding and investment regulations (see our in-depth insight). These legislative provisions will require that trustees set a long-term funding and investment strategy and outline this strategy in a statement which will need to be sent to the Regulator along with the triennial actuarial valuation. The code provides further detail on the key concepts set within a new twin-track compliance regime (fast track and bespoke). Fast track does not appear in the legislation so is not included in the draft code, hence the separate consultation document specifically on this.
Twin track regulatory approach: Fast track will act as a ‘filtering’ mechanism with those schemes which adopt this simplified valuation approach unlikely to see further Regulator involvement. Schemes that cannot or do not wish to adopt fast track parameters will go down the bespoke route. Bespoke valuations that meet legislative requirements and Regulator expectations will be compliant but schemes that do use this approach will need to provide suitable supporting evidence and explanation in the statement of strategy dependent upon the “level and complexity of the risk being undertaken” and can expect to see Regulator involvement.
Timing: As regards timing, it is expected that the new legislation and funding code will come into force in October 2023 (and apply to valuations with an effective date as from then). Valuations with an earlier effective date will be assessed in relation to the current legislation and code of practice 03: Funding defined benefits.
Further update: There is a lot of information in the consultation to digest – we are currently reviewing the documents in detail and will provide a more in-depth update in the New Year.
Update on 2023 scheme return process
The Regulator’s updated scheme return webpage provides detail of relevant changes and updates to the 2023 scheme return. The principal change is to the asset breakdown which will require information dependent upon tiers, with tier 1 (liabilities of less than £30m) having to provide ‘simplified’ information (similar to that required in respect of the 2022 scheme return), tiers 2 (liabilities of £30m to less than £1.5bn) and 3 (liabilities of £1.5bn or more) needing to provide more bond and equity information and tier 3 also having to give details of risk factor stresses.
Schemes in lower tiers can ‘trade up’ a tier – this will mean both the Regulator and the Pension Protection Fund will have more information for the Regulator to assess investment risk and the PPF to calculate the PPF levy. Guidance for the changes can be found in the example scheme returns and here.
Schemes should ensure the contact details for Exchange are up to date by 31 December 2022 and should receive the scheme return notice from 1 February 2023. The return must be submitted by 31 March 2023.
Blog on DC member outcomes
The Regulator has also published a blog on member outcomes for defined contribution (DC) schemes. It focuses on trustees improving their skills and considering governance especially around investments. The Regulator welcomes guides produced by the Productive Finance Working Group on illiquid investments. It also considers the recent introduction of a more detailed value for members assessment for small DC schemes (total scheme assets of less than £100m) (see our insights (1) and (2)) explaining that these requirements should ‘drive significant change’ towards consolidation.
Of particular note, is the concluding paragraph: “even where trustees believe their scheme offers value for members, they should consider whether their members might be better served by consolidation with larger scale providers if they believe these have the potential for better member outcomes”.
Pension Protection Fund round-up
PPF final 2023/24 levy rules confirm significant reduction in the levy
The Pension Protection Fund (PPF) has confirmed that the 2023/24 levy will be almost halved from £390m in 2022/23 to £200m which means that 98% of schemes should see a levy reduction with the majority seeing a reduction of more than half (see our insight for details of the September 2022 draft determination). The reduction is possible because of the PPF’s strong financial position.
The PPF’s policy statement also confirms that it will be going ahead as consulted on the proposals to:
- change the levy methodology to halve the increments between levy bands and to reduce the levy scaling factor by 23% and the scheme-based levy multiplier by 10%; and to
- implement the asset and liability stresses which stand behind the more detailed asset information which will be required for the scheme return (see Regulator update above).
PPF 7800 Index Report shows decrease in funding and increase in deficits
The latest PPF 7800 Index Report setting out the estimated funding position on a section 179 basis as at the end of November 2022 of the eligible 5,131 DB schemes shows that:
- the aggregate surplus of these schemes decreased over the month to £371.5bn from a surplus of £379.1bn at the end of October 2022;
- total assets were £1,472.8bn and total liabilities were £1,101.3bn;
- the funding ratio fell from 136.0% at the end of October 2022 to 133.7% at the end of last month; and
- the aggregate deficit of the schemes in deficit increased to £5.8bn, up from £4.8bn at the end of October 2022.
There has been an update in the calculation of the Index following a move to the new Purple Book 2022 dataset which means an increase in the funding ratio of 2.4 percentage points as at 31 October 2022. The Report also notes that the methodology used means that, although the liability effect of government bond yield movements is caught, because asset allocation and leveraged LDI portfolio changes are not, the effect on assets may not be as accurate.
Antony Arter to stay on as part-time Deputy Pensions Ombudsman
Antony Arter’s term as Pensions Ombudsman will finish on 15 January 2023 when Dominic Harris will take over. However, it has been announced that Mr Arter will stay on as interim Deputy Pensions Ombudsman for up to a year so that he can finish the Pensions Dishonesty Unit oral hearing cases that he has been dealing with, attend to any conflict matters relating to the new Ombudsman and oversee transition.
Pensions dashboards: DWP guidance on deferred connection
Schemes may defer their pensions dashboards staging deadline by up to a year in limited circumstances – essentially where before 12 December 2022 (the date the Pensions Dashboards Regulations 2022 came into force) the scheme was transitioning to a new administrator or there was a contractual requirement to retender the scheme’s administration which conflicts with the staging deadline. The trustees would also need to be able to demonstrate that complying with the staging deadline will be either disproportionately burdensome or will put the personal data of members at risk. Therefore, switching administrators as a reason by itself will not be enough to meet the deferral requirements.
The Department for Work and Pensions (DWP) has now published a final version of its non-statutory guidance on deferred connection which outlines when an application can be made (see above), how applications will be considered by the DWP (including more detail around transition, retendering and what might constitute a disproportionate burden and risk to personal data), deadlines, how to apply and the decision process. There have been no material amendments to the draft version of the guidance.
We would recommend that trustees considering deferral liaise with their advisers to obtain assistance with the deferral process.
Chancellor’s financial services reforms: pensions aspects
On 9 December 2022, Jeremy Hunt, Chancellor of the Exchequer, made a statement setting out a number of UK financial services changes, called the Edinburgh Reforms. A number of these reforms relate to pensions:
- DC – value for money framework: there will be a new value for money framework for defined contribution schemes – a joint FCA/Regulator/DWP consultation will be published on this next year. See our insight for details of the May 2022 feedback statement on these proposals.
- DC – performance fees: the DWP regulations which will remove ‘well designed’ performance fees from the default DC auto-enrolment charge cap will be laid in 2023. The idea is that doing this will remove certain barriers to investment in illiquid assets. Our insight has further information on the draft regulations that will bring these changes into effect.
- Local Government Pension Scheme: there will be a government consultation on asset pooling in early 2023.
- VAT treatment of fund management services reform: HM Treasury and HMRC have published a joint consultation on reforming the legislation relating to the VAT treatment of fund management to provide clarity and certainty on the application of the VAT exemption on the management of funds which satisfy certain special investment fund criteria.