• New standards for sustainability reporting
• DC simpler annual benefit statements pushed back to October 2022
• Pensions dashboard – summary of responses to staging timetable consultation published
• PPF reports healthy financial position for year ending 31 March 2021
• September’s CPI sets the scene for next year’s pension benefits and limits
• Pensions Ombudsman talks about best practice for communicating with scheme members

New standards for sustainability reporting

HM Treasury, along with the DWP and the Department for Business, Energy and Industrial Strategy, has published a roadmap to sustainable investment setting out details of new Sustainability Disclosure Requirements (SDR) that, in addition to applying to certain large businesses, will also apply to pension schemes (both occupational and personal), investment products and asset managers and other asset owners.

SDR

SDR, first announced by the Chancellor in his Mansion House speech in July, is intended to bring together and streamline existing UK sustainability reporting requirements – such as those aligned with the Task Force on Climate-related Financial Disclosures (TCFD) – and go further.

The roadmap explains that the Government’s plan for greening the financial system can be seen in three phases:

• Phase 1 – informing investors and consumers
• Phase 2 – acting on the information
• Phase 3 – shifting financial flows across the economy

The roadmap represents the Government’s strategy to deliver Phase 1.  SDR will apply across the economy and will expand the existing TCFD reporting plans, using the same four pillars as TCFD (governance, strategy, risk management, and metrics and targets).

Three types of disclosure will be required:

• Corporate disclosure – “certain” UK registered and listed companies will be required to make sustainability disclosures in line with international standards and the UK Green Taxonomy (see below)
• Asset managers and asset owners (including occupational pension schemes) will need to make disclosures on how they take sustainability into account
• Investment product disclosure – a new sustainable investment labelling scheme will be introduced

These will be phased in from 2022.  For occupational pension schemes, implementation will be by expansion of the TCFD requirements already underway – in 2-3 years’ time for schemes with more than £5bn of assets and more than 3 years’ time for schemes with more than £1bn (although exactly when this clock will start to tick is not yet clear).

Under this expansion, occupational pension schemes will be required to disclose their sustainability-related risks, opportunities and impacts in a way that enables clear communication with savers.  Subject to consultation, information will be combined with TCFD reporting on climate-related risks and opportunities, and will stand separate from, but linked to, the annual report and accounts. The scope and detail about the timing of requirements for pension schemes, and the reporting detail, will be determined following consultation.

UK Green Taxonomy – defining what counts as green

To address potential consumer harms such as “greenwashing” (defined as “misleading or exaggerated sustainability claims made by firms”) a UK Green “Taxonomy” will be implemented.  This will clearly set out the criteria which specific economic activities must meet to be considered environmentally sustainable and therefore “Taxonomy aligned”.

The Green Technical Advisory Group will oversee detailed standards known as Technical Screening Criteria for each economic activity included in the Taxonomy.  To be considered Taxonomy-aligned an activity must meet three tests – make a substantial contribution to one of six listed environmental objectives, do no significant harm to the other objectives, and meet a set of minimum standards.

Stewardship

The roadmap also includes a strong endorsement of stewardship with five expectations for the pensions and investment sector, progress against which will be reviewed at the end of 2023.

International harmonisation

There is also a strong emphasis on international harmonisation with a drive to integrate international sustainability reporting standards, when available, into UK corporate reporting and for the UK to use its influence to encourage the international adoption of sustainability reporting on a consistent basis.

Comment

The roadmap is a helpful document drawing together many strands relating to sustainability disclosures, for both companies and investors, showing how they fit together and their sequencing.

No immediate action is required by trustees of occupational pension schemes apart from to note that those with assets over £1bn can expect their TCFD reporting to extend to broader sustainability reporting in due course.

The UK Green Taxonomy will bear a strong resemblance to the EU Taxonomy, at least at a high level.  It is not yet clear what the practical implications of multiple taxonomies will be on investors’ ability to understand and report on the sustainability alignment of their investments if companies are reporting their activities under different regimes.

The push for international harmonisation will be welcome to pension scheme trustees who invest internationally and need sustainability information for all of their investments.

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DC simpler annual benefit statements pushed back to October 2022

The DWP has published its consultation outcome on simpler annual benefit statements for schemes providing money purchase benefits only that are qualifying for auto-enrolment purposes together with final statutory guidance and regulations.  This follows the consultation in May (see Pensions Bulletin 2021/21).  As a brief reminder, the Government’s view is that shorter, simpler statements (albeit containing the same information as is required under the current disclosure regulations) will improve scheme communication with members and members’ understanding and engagement.

The principle that the simpler statement should not exceed one double-sided sheet of A4 paper has been retained.  The idea is that this will enable members to easily understand across each of their schemes:

• How much money they have in their scheme and what has been saved in it in the statement year
• How much money they could have when they retire
• What they could do to give themselves more money at retirement

Additional information can be provided to that required by the regulations, but this must be through separate documents.

The implementation date for these requirements has been pushed back six months to 1 October 2022 – any benefit statements within scope issued from 1 October 2022 onwards must comply with the new requirements.  The transitional provision that reset the starting point for new regime statements where an old regime statement was issued before 6 April 2022 has been dropped.   Various other minor changes have also been made following feedback received.

The Government has confirmed that these requirements do not apply to hybrid or DB schemes but does encourage schemes not in scope to “apply the same principles of brevity and simplicity set out in the statutory guidance” to their own benefit statements.  They also only apply to members not in receipt of pension benefits.

The new requirements could well be extended in future as they will be subject to review every five years with the first report needing to be published before 1 October 2027.

Comment

We are pleased that the Government has pushed back the implementation date by six months – as we noted in our comments in May, April 2022 was in danger of becoming quite a crunch point for DC legislation.

However, trustees should not wait until the “last minute” before considering how to make these changes to their benefit statements – substantial work may be required, and trustees should engage with their communication consultants to understand the detailed work to be done.

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Pensions dashboard – summary of responses to staging timetable consultation published

The Pensions Dashboards Programme (PDP) has published a summary of responses to its May 2021 consultation on how pension providers will be onboarded to its ecosystem (see Pensions Bulletin 2021/23).

The summary reveals broad support for the PDP’s proposals, but with concerns as to whether the timescales will prove to be too ambitious given a number of areas where significant uncertainty about the operation of the dashboard continue to exist.  These include what view data will have to be returned, data protection and liability, connection requirements, response times, the identity verification and assurance process, matching protocols, ISP market dependency, McCloud for public service schemes, and competing priorities – with GMP equalisation, simpler annual benefits, small pots and transformation programmes all named.

There is a specific worry about the ability of the pensions industry to supply estimated retirement income (ERI) figures, particularly for DB schemes, and also the likelihood of consumer confusion when presented with incomparable projections.  A number of major providers argued for the dashboard to be launched initially with only the ability to find pension providers, allowing time for standardisation of how ERI amounts are calculated before they are also displayed on the dashboard.

The summary of responses is just that, with no indication as to whether the PDP’s proposals will now be adjusted.  However, the responses to the consultation will inform further policy work at the end of which the formal ‘staging proposition’ will be set out in the DWP’s consultation on draft regulations for occupational pension schemes, expected at the end of 2021.  The FCA’s consultation on draft rules for providers of personal and stakeholder pensions will then follow.

The PDP acknowledges that “further certainty and reassurance” is needed in order to drive action by pension providers and in this regard says that in winter 2021/22 it will publish technical and operational standards for data providers.  The PDP is also carrying out further research and user testing on what data should be displayed, with four prototypes listed, starting with something quite basic and ending with two variants of ERI figures.

Comment

The messages coming through in the response summary are not a surprise.  There is clearly more work for the PDP to do, but it is certainty that the pensions providers crave (within the realm of what is practicable).  Right now, it is far from clear as to whether the DWP can wrap this all up in time for a Christmas package of regulations that will command support.

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PPF reports healthy financial position for year ending 31 March 2021

The Pension Protection Fund has paid out over £1bn in compensation for the first time, as it reports a healthy financial position in its latest annual report and accounts for the year ending 31 March 2021.

The PPF’s funding ratio improved to 127.3% (up from 113.4% a year ago), as a result of very strong investment performance on its growth assets (17.6% pa compared to -4.9% a year ago) and an increase in bond yields.  Growth assets constitute around 60% of its portfolio.  This investment performance in turn helped to contribute to an increase in reserves from £5.1bn last year to £9.0bn this year.

Claims were also relatively low thanks to Government support for business.  However, the risk from new claims remains high and the PPF expects claims to materialise over the coming year due to the Covid-19 crisis.

This good news from the PPF follows on from the surprisingly low levy bill proposals that the PPF set out for consultation just a few weeks ago (see Pensions Bulletin 2021/40).  By contrast, the Fraud Compensation Fund is now vulnerable to claims of over £400m, well in excess of the current assets available (c.£33.9m) and the PPF is awaiting a Bill to complete its passage through Parliament that will enable it to receive a loan from the DWP for the shortfall.

Comment

The PPF is rightfully proud of paying out more than £1bn in PPF compensation over the financial year, but perhaps more impressive is the improvement in the funding position over the Covid-19 affected year.  Growth assets returning around 5 years’ worth of returns in a single year coupled with rising bond yields has seen a very healthy jump in reserves, and the PPF’s “probability of success” measure has climbed to 95% (from 83% last year).

Care is clearly still needed though – whilst there has yet to be the wave of pandemic-related insolvencies many had feared, should there be a series of insolvencies amongst the largest sponsors in the PPF universe that £9bn could diminish very quickly.

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September’s CPI sets the scene for next year’s pension benefits and limits

The announcement on 20 October that the Consumer Prices Index rose by 3.1% over the twelve months to September 2021 sets the scene for the calculation of a number of pension benefits and limits for the next tax year.  Over the same period the Retail Prices Index rose by 4.9% and the CPIH by 2.9%.

State pensions

With the earnings growth element of the “triple lock” guarantee suspended, the Basic State Pension (currently set at £137.60 pw) and the Single Tier State Pension (£179.60 pw) will increase next April by 3.1% as this is the higher of the CPI figure of 3.1% and 2.5%.

SERPS and S2P entitlements will also increase by 3.1% next April.

Occupational pensions

Next year, schemes that apply the Limited Price Indexation rules to pensions in payment will have to increase them by at least 3.1% for the pension that accrued between 6 April 1997 and 5 April 2005 and by at least 2.5% for the pension that accrued after 5 April 2005.

GMPs that accrued after 5 April 1988 will increase by 3.0%.

The one-year minimum revaluation of that part of a deferred pension in excess of any GMP will be 2.5% for the 2.5% capped order and 3.1% for the 5% capped order.

Pensions tax

Following the Budget 2021 statement back on 3 March 2021, the lifetime allowance for pensions tax purposes is frozen at £1,073,100 until 6 April 2026.

For those accruing defined benefits or cash balance, the increase in the CPI of 3.1% is effectively the inflation allowance made before the annual allowance starts to be used up in the 2022/23 tax year.

Comment

Price inflation has clearly been on the rise these last 12 months, although due to a technicality the 12-month September CPI figure is slightly down on that for August.  Market expectations are for significant further rises as we go into the winter, with the gilt market signalling breakeven RPI inflation over the next 12 months above 6% - the highest figure seen in decades.  How sticky this period of inflation will be is the key question for policymakers over the coming months.

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Pensions Ombudsman talks about best practice for communicating with scheme members

The Pensions Ombudsman has published its thoughts on best practice for communicating with pension scheme members, based on the experience and expertise it has built up over the years. This is the latest in a series of guidance documents in response to stakeholders asking for more guidance materials to be provided on its website.

Amongst other things this handy two-pager directs readers to “How to avoid the Ombudsman” – a new section on the Ombudsman’s website which contains guidance on some common complaint areas with links to relevant publications, Determinations and case studies.  The guidance also sets out some “Top tips on how to avoid the Ombudsman” which are largely based around effective communication and listening skills, along with meeting customer service expectations.

Comment

All very sensible stuff which if followed ought to reduce the number of disputes and complaints that end up at the Ombudsman’s door.

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