Pensions Bulletin 2021/22
Our viewpoint
27 May 2021
- Pensions Regulator publishes its 2021 statement on DB scheme valuations
- Pensions Regulator publishes its corporate plan for 2021-24
- DWP consults on DC charging structures again
Pensions Regulator publishes its 2021 statement on DB scheme valuations
On 26 May the Pensions Regulator published its latest annual funding statement for DB schemes, aimed at trustees and sponsors of such schemes. The statement is focussed on valuations with effective dates between 22 September 2020 and 21 September 2021 as well as schemes undergoing significant changes that require a review of their funding and risk strategies.
Unsurprisingly, this year’s statement has a fair deal to say on the challenges thrown up by the pandemic, with the Regulator suggesting that the impact it has had on scheme sponsors can be considered to fall under one of three broad categories – limited impact on the business, material impact initially but trading recovering strongly and continued material impact.
The Regulator has also assured everyone that the current scheme funding regime continues to apply for these valuations. However, it uses this year’s statement to remind those it regulates that, as a result of the Pension Schemes Act 2021, big changes are coming, and that schemes would be wise to begin to think about their long term strategic plans in preparation for this.
A News Alert is under preparation which summarises, analyses and comments on the statement.
Comment
The statement follows the general line of approach as in previous years, but with detailed commentary on a number of hot topics including that schemes should be cautious about making big changes to mortality assumptions at the current time in response to the pandemic whilst everything remains uncertain. As ever, the statement makes essential reading for those undertaking valuations at the current time.
Pensions Regulator publishes its corporate plan for 2021-24
The Pensions Regulator has published its Corporate Plan for the next three years, elaborating on how it intends to deliver against the five priorities detailed in its recently published long-term corporate strategy document (see Pensions Bulletin 2021/12). That document in turn set out its blueprint for the future of pension regulation, with the saver at the heart of its work.
The plan details the main areas of focus for 2021/22 under each of the strategic priorities – security, value for money, scrutiny of decision-making, embracing innovation and bold and effective regulation – and then discusses how the Regulator expects to move forward in each area over the following two years. New in this plan are useful activity timings charts for each priority area, showing when work on each activity is expected to start and finish.
The Regulator is at pains to stress that it has “constrained resources available to deliver on … ambitions” and that its “ongoing challenge is to strike an appropriate balance between … capacity and competing priorities”. Reflecting this, in the foreword to the Plan, Charles Counsell, and Sarah Smart, (respectively the Regulator’s Chief Executive and Chair) conclude that “This will mean taking some difficult prioritisation decisions about where to focus … resource, based on … ambition to reduce risk to savers”.
Comment
The Regulator’s optimism that “the economic outlook is one of gradual recovery” is supported by its reversion to a three-year plan (last year it produced only a one year plan – for 2020/21). The detailed activity plans are a useful at-a-glance summary of what we can expect to be seeing from the Regulator over the next three years.
On superfunds the Regulator says that it is expecting the legislative framework (for the authorisation and supervision of such schemes) to be introduced from 2022-23. This is the first time that a timetable has been mentioned either by the Regulator or DWP – and presumes that a new Pensions Bill will facilitate.
DWP consults on DC charging structures again
The DWP has published its latest proposals for default fund charging structures permitted in DC schemes used for auto-enrolment, including draft regulations for consultation. This follows the decision made at the start of the year to introduce a threshold – or ‘de minimis’ – below which the flat fee element of the combination charge, used by some pension providers, cannot operate (see Pensions Bulletin 2021/03).
It is obvious to note that there is a tension between members and providers. For members with small pots, particularly those with deferred pots, there is currently a risk of pot erosion where their pension provider uses a flat fee charge (past research has estimated that the number of deferred pension pots could increase to 27 million by 2035 without further action – see Pensions Bulletin 2020/31). For scheme providers, the issue is around the disproportionality between the cost of administering the increasing number of small pots in comparison to the revenue generated.
The DWP intends that the de minimis will come into force in April 2022 and will initially be set at £100 and apply to all members, both active and deferred. A pot of this value or below will not attract a flat fee charge. If a member has multiple pots within the same provider’s default arrangement which charges a flat fee, the assessment of whether a flat fee can be charged, will be based on the combined value of those pots, rather than on the separate value of the individual pots. In such a scenario, a flat fee can only be levied once per member. Where a member has several small pots of £100 or less with different pension providers, for which a flat fee is chargeable, then the de minimis will be applied according to the value of the member’s pots, for each provider.
The consultation also invites the submission of more evidence on both the financial costs and benefits and the non-financial or indirect impacts on businesses and members of adopting the de minimis.
Additionally, the consultation seeks views on a proposal to move away from the current three permitted charging structures for the default fund to a “universal” charging structure based on a single percentage annual management charge. Under this proposal combination charging, such as that operated by NEST, would no longer be permitted. It is not clear what timescale the DWP has for introducing this, should it decide to go ahead.
The consultation ends on 16 July 2021.
Comment
This may appear quite a low-key consultation, but it could have significant long-term implications about how providers can charge for managing pensions. There may be little sympathy from the general public if pension providers cannot profit from running very small pots, but if they cannot then they may withdraw from doing so. This will consequently affect choice and competition in this market.
There are several regulatory initiatives beginning to pile up on DC providers - others include simpler annual benefit statements, enhanced VFM and consolidation requirements for “small” schemes, improved opportunities to invest in illiquid assets, solving the problem of small pots and the pensions dashboard.
It may be a challenge for some to find resources to comply with them all with April 2022 becoming a particular crunch point for DC regulation. Whilst the DWP’s desire to improve protection for DC savers as soon as possible can’t be argued with, more considered spacing of implementation timetables would be welcomed by many on the provider side.