Pensions legislation and case law update: the latest developments week ended 30 April 2021
DWP report on statutory review of chair’s statement
The Department for Work and Pension's (DWP) statutory review of the defined contribution (DC) minimum governance legislative provisions which were introduced in 2015 has found that, although the policy objectives for the ‘vast majority’ of the provisions are being achieved, this is not the case for the annual chair’s statement.
The three main conclusions of the review:
- Conclusion 1: The Government and the Pensions Regulator (the Regulator) should consider the audience and role of the chair’s statement
This is because the chair’s statement is not working as a document aimed at ‘multiple audiences’, i.e. to enable trustees to illustrate good scheme governance and as a document providing information to scheme members.
- Conclusion 2: There should be a reassessment of the information to include in the statement
The review found that statements can end up being long, complex and expensive to put in place. Therefore, the content of the statement should be re-examined after the intended audience has been clarified.
Potential changes might include having one document for scheme governance and compliance with legislation and a shorter document for member purposes or perhaps a shorter single document with signposting to other documents.
- Conclusion 3: The mandatory penalty regime should be reviewed
Although not within scope, the review considered the imposition of mandatory penalties by the Regulator for non-compliance. Most responders to the review raised the issue of mandatory penalties being imposed sometimes for minor breaches with the Regulator having no discretion about imposition except in exceptional circumstances. The review recommended that consideration should be given to the legislative requirement for mandatory fines.
The issues identified by the review are not likely to come as much of a surprise to trustees who are required to produce a chair’s statement. Whilst the statement has a role to play in improving DC governance, it has definite drawbacks in its current form as identified during the review. Although the review does not propose any changes to existing legislation, it is hoped that its recommendations will be taken up and actioned as appropriate to ensure that the chair’s statement begins to work in line with its original policy objectives.
PPF confirms changes to S143 and S179 valuation assumptions
The Pension Protection Fund (the PPF) received 13 responses to its February 2021 consultation on updated Section 143 and Section 179 valuation assumptions (see our Insight Update). The responses were ‘generally positive’ and, as a result, the PPF has confirmed that it will adopt most of its proposals with a slight change to the mortality assumptions for Section 143 valuations to ensure that lower mortality rates for higher earners are not double-counted.
As well as updated mortality assumptions, the other main changes to be made include:
- adjusting the post-retirement post-97 discount rates to ‘better reflect current CPI pricing’;
- changing the calculation of wind-up expenses which will increase expenses for smaller schemes and decrease them for larger schemes with a cap of £3m; and
- slightly reducing the benefit installation or payment expenses.
(Section 143 valuations are carried out during a PPF assessment period to ascertain whether a scheme will have to enter the PPF because it cannot provide benefits at PPF compensation levels or above. Section 179 valuations are undertaken by ongoing schemes and are used by the PPF to set the risk-based levy.)
As we reported back in February, the changes are likely to reduce S143 valuation liabilities and improve the S179 funding position, reducing the deficit of schemes in deficit from £253bn to £204bn (as at September 2020). The changes will take place for valuations with an effective date on or after 1 May 2021.
The full response to the consultation can be found here.
Regulator and PPF issue joint consultation on changes to DB asset class information
The Regulator and the PPF are consulting on proposed changes to the asset class information which the Regulator collects from defined benefit (DB) schemes through the annual scheme return. This information is used by the Regulator to assist in measuring investment risk, and by the PPF when calculating the PPF levy.
The idea is to obtain a more detailed asset breakdown so that the Regulator can improve assessment of investment risk in part to reflect the increase in schemes’ allocation to bonds over the last decade and a move to diversified growth funds, and to assist in monitoring the new scheme funding obligations under the Pension Schemes Act 2021. This will also help the PPF charge a ‘risk-reflective’ levy.
A three-tiered approach based on scheme size is being proposed. This will allow for smaller schemes’ resource limitations and a tendency for them to have simpler investment strategies so that only minor changes will be introduced under Tier 1, whilst the largest schemes (Tier 3) will continue to carry out bespoke stress calculations. Schemes can ‘trade up’ tiers and provide more information if they want to do so.
The proposals originate from the more detailed asset category sets used in the bespoke stress calculation for the PPF levy so should be familiar to the one in seven schemes that presently have to provide this information to the PPF.
The consultation closes on 10 June 2021 – respondents can respond to the key proposals in an estimated 10-15 minutes via a ‘quick consultation’ link or provide a more detailed response to the full consultation.
WPC calls for evidence on stewardship and climate change risks
The Work and Pensions Committee (WPC) has launched an inquiry into the Government’s approach to “ensuring pension schemes consider the risks to funds posed by climate change and the role schemes can play in meeting emission reduction targets”.
The inquiry will compare the Government’s approach to international practice coming out of COP26 (the 26th UN Climate Change Conference of the Parties) and the ways in which schemes can be assisted to take ‘climate-conscious’ decisions on investment.
It asks for feedback on certain key questions including, amongst others:
- How should pension schemes contribute to setting COP26 targets and helping to achieve the targets once agreed?
- What role should international standards have in supporting pension schemes to assess climate change risks when considering scheme investments?
- Are there suitable financial products to enable pension funds to make climate-conscious investments? How should such investment be facilitated and supported?
This inquiry follows the DWP’s January 2021 consultation on climate risk (see our Insight Update for details).
The call for evidence closes on 18 June 2021.
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