In depth

Pensions Insight: weeks ended 10 & 17 June 2022

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DWP publishes response to investment consultants and fiduciary managers consultation

DWP response: On 6 June 2022, the DWP published its response to the 2019 consultation on delivering the Competition and Markets Authority (CMA) recommendation for trustee oversight of investment consultants and fiduciary managers.

Recap: Following the CMA's 2018 investigation into and report on the provision of investment consultancy (IC) and fiduciary management (FM) services, a CMA Order was brought into force as from 10 December 2019. The CMA Order requires trustees, with certain exceptions applying, to undertake a tender process for FM services and to set objectives for investment consultants when agreeing IC services. An annual compliance statement must be sent to the CMA by 7 January. The aim of these changes is to improve engagement and value for money.

Regulations: The intention of the Government has been to integrate the relevant CMA Order requirements (with small changes) into pensions legislation and to allow the Pensions Regulator to have regulatory oversight of the duties. Draft regulations which made the necessary amendments were issued for consultation in 2019. They track the CMA Order to a large extent subject to certain changes which reflect policy differences – for example, the regulations will not apply to the Local Government Pension Scheme although the CMA Order brought them within scope – for further information on this see page 5 of the impact assessment.

Response detail: The DWP response confirms that:

  • Timing of the regulations: they are expected to come into force on 1 October 2022;
  • Application of the regulations: they will replace parts of the CMA Order with various adjustments. There are four minor policy;
  • Schemes in scope: the regulations are slightly wider in scope than the CMA Order, for example, they cover in-house occupational pension scheme firms which were not covered under the CMA Order. They will apply to occupational pension schemes set up under trust with 2+ members subject to limited exceptions including non-registrable schemes, executive pension schemes, relevant small schemes, public service schemes and, in respect of the requirement to undertake a competitive FM service tender, schemes where the employer, trustee (or scheme strategist or scheme funder in the case of a master trust) provide FM and/or IC services to the scheme; 
  • Changes to the draft regulations: the final regulations will be largely in the same form as the draft ones although the DWP has taken into account certain matters raised by respondents. Changes made include amending the definition of IC and FM services, clarifying that 'high level commentary' provided an actuary does not of itself fall into the remit of IC services, and refining which assets which should not be regarded as scheme assets when determining if the obligations apply;
  • Mandatory tendering for FM: the regulations will require trustees to carry out a 'qualifying tender process' before a FM provider is appointed or the amount of assets managed by a FM provider is increased where the 'asset management threshold' is met (essentially where 20% or more of the scheme's 'manageable assets', excluding buy-in policies and asset-backed contributions, are managed by FM providers with the threshold for sectionalised schemes being calculated for the whole of the scheme);
  • Setting objectives for IC: these must be set with regard to the statement of investment principles, the performance of the IC provider against the objectives must be reviewed at least every 12 months, and the objectives should be reviewed at least every 3 years and without delay after any significant change in investment policy. Objectives that have been put in place under the CMA Order already are to be regarded as set under the regulations when they come into effect;
  • Reporting compliance: Schemes will need to answer certain additional questions on the scheme return so that the Regulator has the requisite IC and FM details that are not included in the CMA statement to effectively oversee compliance. It is understood that reporting via the scheme return will replace the need to submit an annual compliance statement to the CMA but the position has not yet been formally confirmed by the CMA - the CMA has previously stated that when the regulations are in place it will provide an update on the effect these will have on the need to submit compliance statements.
  • The Pensions Regulator's guidance: the Regulator has issued guidance to assist trustees with the requirements of the CMA Order: see choosing an investment governance model, setting objectives for your investment consultant, tendering for FM services and tendering for IC services. The guidance will be updated to reflect the regulations before they come into force. The Regulator will also issue guidance on the penalties for non-compliance.

Trustees have already been complying with the CMA Order since 10 December 2019 and so, for most, there should not be a significant amount of new content to get to grips with other than the additional questions that will be included on the scheme return.

The Pensions Regulator round-up

Regulator lays new CDC code of practice before Parliament

The Pensions Regulator has confirmed that its new code of practice on the authorisation and supervision of collective defined contribution pension schemes was laid before Parliament on 9 June 2022. This means that the Regulator remains 'on track' for the submission of CDC applications as from 1 August this year, with the trustees of the Royal Mail Collective Pension Plan expected to be the first to make such an application (see our Insight for further details). Certain changes have been made to the final version of the code to take account of some of the responses received during the code's consultation - the Regulator's response to the draft code can be found here.

Regulator blog on climate change

The Regulator's recent blog on climate change reporting provides commentary ahead of the reports which 100 schemes are expected to make in the coming months in keeping with their obligations under the climate change governance and reporting regulations.

The blog notes the importance of addressing climate change, the practical challenges that some may experience in drafting the disclosures and explains that the Regulator will be producing a review report of the upcoming reporting which should provide assistance to schemes and which will also be used by the DWP when reviewing the regulations in late 2023.

The Regulator does not expect to issue any penalty notices other than where a report is not published which will attract a mandatory penalty and where "it is clear the trustees have not made a genuine effort to comply".

Regulator published new Corporate Plan

The Regulator has published its Corporate Plan setting out its priorities over the next two years and how the Regulator will 'deliver' the five strategic priorities within its 15-year Corporate Strategy which was published last year (see our Insight).

Of particular note from the Corporate Plan are the following Regulator plans:

  • Defined benefit funding code of practice: the Regulator plans to publish the second consultation on the new DB funding code in Autumn 2022, with the code coming into force from September 2023 (although these timings are not definitive);
  • Pensions dashboards: there will be a continued focus on pensions dashboards including a Regulator education programme emphasising the action schemes need to take to comply;
  • Value for members framework: it will continue its work with the DWP and the Financial Conduct Authority on a Value for Money Framework (see our Insight) which aims to help drive competition and improve value in the DC pensions market; and
  • Auto-enrolment: the Regulator plans start five regulatory initiatives during 2022 and 2023 whereby it will engage with schemes and employers on specific risks and review its bulk enforcement process.

DWP consultation on understanding pension choices

The DWP has issued a consultation on helping savers understand their pension choices. The call for evidence looks at what members need to assist them in making informed pension savings decisions, what is currently available, and what could be provided in the future. Input is requested from members, service providers, trustees, and other interested pension stakeholders. The consultation closes on 25 July 2022.

Latest PPF 7800 index shows funding has increased

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

  • the aggregate surplus of these schemes increased over the month to £261.6bn from a surplus of £206.2bn at the end of April 2022;
  • the funding ratio increased from 114.0% at the end of April 2022 to 118.9% at the end of May; and
  • the aggregate deficit of the schemes in deficit decreased to £28.2bn from £47.8bn at the end of April 2022.

HMRC newsletter 139 – reminder of requirement to migrate onto HMRC's new Managing pension schemes service

HMRC's newsletter 139 reminds schemes of the need to migrate from the Pension schemes online service to the Managing pension schemes service. Migration does not take place automatically and action is required. Furthermore, in the majority of cases, it will be the trustees themselves in their capacity as 'scheme administrator' for Finance Act 2004 purposes, that have to undertake migration rather than the scheme's administrators. If trustees have not done so already, they should check what needs to be done to complete migration for their scheme(s). Further HMRC guidance can be found here.

PLSA Made Simple guide on defined benefit de-risking

The PLSA has published a guide on Defined Benefit De-Risking Made Simple which aims to assist pension schemes to 'choose the most appropriate option for their circumstances' by providing guidance on the various de-risking options that are available.

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