Pensions Bulletin 2021/18
Our viewpoint
29 April 2021
- State pension correction – update on progress
- MPs press Government to ‘green’ pension provision
- Consultation closes on contribution notice and information gathering powers regulations
- DC Chair’s statements – good news possibly on the horizon?
- HMRC legislates for real time reporting of certain death benefits
- PPF settles on new basis for valuations
- Sarah Smart confirmed as Regulator Chair
- Parliament rises
State pension correction – update on progress
Pensions minister Guy Opperman has updated Parliament on the work underway to correct historic underpayments of the state pension to many older women, the need for which was exposed in a report published last May by LCP Partner Steve Webb (see Pensions Bulletin 2021/11). The Work and Pensions Committee has also separately published a response from Mr Opperman in response to its letter challenging various aspects of the progress being made on this exercise.
Neither the statement nor the response gives any more concrete information on the actual scale of the issue in terms of either numbers affected or the costs involved, but both confirm that the DWP is aiming to complete this exercise by the end of 2023. Also, that to this end, it intends to add an extra 360 staff to the existing team of 150 currently dedicated to working on the correction activity. The letter to the Committee also confirms that the DWP has started to review cases where the individuals are alive, focussing on older individuals and those who have been widowed. The earliest occurrence of an underpayment identified at this time is from 1992.
Comment
While the DWP is reluctant to release more information about the actual numbers and costs involved until they have been further refined, it is clear – not least from the extra resources to be committed to the exercise – that the scale of the problem is indeed far greater than expected.
MPs press Government to ‘green’ pension provision
The Treasury Committee of MPs has published a report entitled “Net Zero and the Future of Green Finance” as part of its decarbonisation and green finance enquiry. The report references pensions in three distinct areas.
DC default funds
Most notably it highlights the adverse impact that inertia among DC scheme members (with the majority staying in the scheme’s ‘default’ fund) combined with the lack of compulsion for such funds to move to “greener” alternatives can have on sustainable investment. Amongst the evidence that the Committee heard was the view that that the charge cap of 0.75% in auto-enrolment schemes is a potential barrier to offering sustainable funds as charges for nearly all ESG funds are higher as they need to be actively managed.
The Committee calls for the Government to resolve the contradiction between the Treasury’s view that default funds should not be required to move to more green alternatives, while also maintaining that consumers should not have to switch out of the default fund to invest sustainably. The Committee also suggests that the Treasury should report regularly on the proportion of pension holders in DC schemes who remain in the default fund, and the extent to which those default funds are aligned with a path to Net Zero.
Smaller DB schemes
In terms of DB schemes, where members have no choice as to how their assets are allocated, the Committee’s main concern is how best to get smaller schemes to acknowledge ESG concerns. These concerns are framed in the context that the Pension Schemes Act 2021 and associated regulations concentrate on mandatory climate change governance and disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures for larger pension schemes only (see Pensions Bulletin 2021/04).
The Committee calls on the Government to set out how these smaller funds will be encouraged to integrate climate governance and reporting requirements.
Long-term asset fund
Finally, the report discusses the “long-term asset fund” that the Chancellor announced last November, stating that it would launch within a year. The long-term nature of pensions would make such funds particularly suitable for pension scheme investment, but the Committee did hear evidence that there is talk of extending access to sophisticated segments of the retail market in addition to institutional investors, which could delay the launch. Also, the Investment Association recently announced that a regulatory consultation from the Financial Conduct Authority was required before any new fund could launch.
The Committee calls for clarity about who will have access to the LTAF when it launches and the timing of its launch.
Comment
Default funds in DC schemes – which are chosen to be appropriate for most members – are already required to manage material financial risks and opportunities to members’ pensions savings. This includes risks and opportunities relating to sustainability. Measures that ensure DC pension schemes are meeting this requirement are to be welcomed.
Consultation closes on contribution notice and information gathering powers regulations
Today is the deadline for responses to the DWP’s consultation on two aspects of the extension of the Pensions Regulator’s powers (see Pensions Bulletin 2021/13) and from the responses so far seen, there is concern that, in relation to the proposed employer resources test, insufficient information is set out in the consultation to enable respondents to assess how these new powers will operate – and perhaps more importantly, that the test itself is not fit for purpose.
The Association of Consulting Actuaries calls for further clarity on the intended impact of the employer resources test, through there being sufficiently comprehensive guidance, in order that corporates can assess whether actions they are likely to take could depress the proposed profit measurement to such an extent that it would leave the Regulator to only determine whether pursuing a contribution notice was “reasonable”.
The Society of Pension Professionals takes issue with the proposed profit measurement test, suggesting that it be replaced with a range of tests incorporating profitability, balance sheet and cash flow, with the triggering of any one, or a combination, to lead the Regulator to make an assessment as to whether it is appropriate to issue a contribution notice.
The ACA also calls for the Regulator to provide guidance on how its extended interview powers are likely to operate from the point of view of those being called for interview.
Comment
Whilst there is support, in principle, for the additional powers accruing to the Pensions Regulator through the Pension Schemes Act 2021, as we get closer to implementation, a number of concerns are being raised. Despite these contribution notice provisions being known about from the moment the then Bill was introduced to Parliament, it seems that the all-important secondary legislation, guidance etc remains a work-in-progress.
DC Chair’s statements – good news possibly on the horizon?
The DWP has published its first 5-year post-implementation review into the DC governance requirements introduced in 2016, as required by legislation. This review focussed on the requirements for the DC Chair’s statement and was based on feedback received from industry practitioners (including LCP), pension providers and representative bodies.
The review has identified that the policy objectives in relation to the Chair’s statement are not being achieved within the current approach. In particular, using a single instrument – the Chair’s statement – to try to achieve multiple policy goals, in respect of scheme governance and member engagement does not work.
The review found there was a lack of clarity about whether the Chair’s statement is intended primarily for members, or as a compliance tool for the Pensions Regulator – and as it is caught between these two targets it is therefore failing both. A suggested solution was to split the Chair’s statement into two distinct areas – governance and the information required in compliance with legislation and a very short document containing information of relevance to scheme members.
The review also recognises the concerns raised that the Chair’s statement is far too long, complex and costly to produce. Feedback received by the DWP included that the cost of producing a statement could be £15,000 to £20,000 and the statement itself could be nearly 100 pages long. This cost is largely driven by the mandatory penalty regime for non-compliance and the lack of discretion for the Regulator in this area. The fear of receiving a mandatory penalty – and the consequences of reputational damage to trustees and providers – leads to “over-engineering” of statements and excessive costs.
In conclusion, although no timescale is given, the review states:
- The Government and Regulator should consider the audience and role of the Chair’s statement in relation to scheme governance and member communication
- The information to be contained in the Chair’s statement should be revisited
- Whilst not within the scope of this review, consideration should be given to the legislative requirement for the Regulator to issue mandatory fines in relation to the Chair’s statement and whether there should be an amendment to allow it to use discretion
Comment
We welcome the findings of this review which appears to show the concerns of practitioners - including LCP - about the Chair’s statement have been heard. The concept of the statement to improve governance of DC schemes is, of course, admirable, and has led to improvements.
But the lack of member engagement due to the over-complication of the statement together with spiralling costs of production and legal review means that some modifications are needed. We look forward to DWP announcing its proposals to make the Chair’s statement work better for the benefit of members, trustees and providers.
HMRC legislates for real time reporting of certain death benefits
Regulations have been made that provide for the mandatory reporting by registered pension schemes to HMRC, through the Real Time Information (RTI) system, of certain non-taxable payments these schemes make. These payments are currently not required to be reported to HMRC under existing legislation.
The payments covered are the following, where they are not treated as PAYE pension income:
- The continuation of the payment of a pension or annuity for the balance of a guarantee period following the member’s death
- A pension payable on the member’s death (other than that outlined above), or on the subsequent death of a dependant, nominee, or successor of the member
- A lump sum death benefit payable on the member’s death, or on the subsequent death of a dependant, nominee, or successor of the member – other than a defined benefits lump sum death benefit, or an uncrystallised funds lump sum death benefit
The regulations cover how real time returns are made, the penalties for failure to comply, provisions around electronic communications and the information that needs to be contained within each return.
As a result of these regulations HMRC should have full and complete information about both taxable and non-taxable payments which should ensure that an individual pays the correct amount of tax based on all their income for PAYE purposes. As HMRC shares income details with the DWP, it will also mean that the DWP will be able to take into consideration both taxable and non-taxable income when calculating certain means-tested benefits.
The Pension (Non-taxable payments following death) (Real time information) Regulations 2021 (SI 2021/506) come into force on 6 April 2022. Ahead of this it is intended that HMRC will update its guidance so as to cover the reporting of these non-taxable payments. HMRC has also published a policy paper about these changes.
Comment
This appears to be a step forward in the saga which is the reporting of non-taxable death benefits which has taken up quite a lot of space in a succession of HMRC pension schemes newsletters since the Government announced a change to the tax rules for lump sum death benefits in the Summer Budget of 2015. We look forward to seeing the guidance.
PPF settles on new basis for valuations
The Pension Protection Fund has chosen to implement its proposed changes to assumptions used in various PPF valuations with one minor change. This follows a consultation which closed back in March (see Pensions Bulletin 2021/06).
The new assumptions will apply to both PPF levy (section 179) and PPF entry (section 143) valuations with an effective date on or after 1 May 2021 – and the updated assumptions guidance documents to that effect are now available. The only change from that proposed is for section 143 valuations the very light mortality table will not be used for those with the largest pensions.
The new assumptions mean that the proposals for relatively higher wind-up expenses for smaller schemes, relatively lower wind-up expenses for the largest schemes, an update to the mortality tables used and an adjustment to some of the post-97 pension discount rates are going ahead. These changes reflect the PPF’s understanding of the terms available in the buyout market.
Comment
The change to the proposal will have only a modest impact on most pension schemes. We remain supportive of the changes in basis as we believe they will better align the PPF assumptions with competitive buyout pricing.
Sarah Smart confirmed as Regulator Chair
The Work and Pensions Committee has endorsed the appointment of Sarah Smart as Chair of the Pensions Regulator. Ms Smart has been the interim Chair since Mark Boyle’s second term in the role – which has strategic leadership responsibility – ended on 31 March.
Parliament rises
Parliament is being prorogued today as the 2019-21 Parliamentary session comes to an end. The State opening of Parliament will take place on 11 May 2021, marking the beginning of the second session of this Parliament.
Comment
From a pensions perspective there have been two significant Acts that gained Royal Assent during the 2019-21 Parliamentary session – the Pension Schemes Act 2021 of course and the Corporate Insolvency and Governance Act 2020. All pensions eyes will now be on the Queen’s Speech to see what matters requiring primary legislation have found their way to the top of the list.