Pensions Bulletin 2021/45

Our viewpoint

DWP consults on portfolio alignment metrics and stewardship guidance

The DWP has published a consultation that proposes the addition of a fourth metric to the climate-related disclosure requirements for larger schemes, as well as new guidance about reporting on stewardship and other topics, such guidance being applicable to all occupational pension schemes.

Consultation on both aspects closes on 6 January 2022.

Portfolio alignment metric

This June the DWP finalised its proposals requiring large schemes to disclose their approach to managing climate-related risks and opportunities, in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (see Pensions Bulletin 2021/24).

The DWP is now proposing that its requirements, that started to come into force on 1 October 2021 for the largest schemes, are adjusted with effect from 1 October 2022.  It had signalled this as a possibility during an earlier consultation.  Now that the TCFD has (on 14 October) updated its 2017 recommendations in a number of areas, the DWP is proposing to incorporate two of the updates into its climate change regulations and statutory guidance for large schemes.

Specifically, the DWP proposes to:

  • Require trustees to collect and report data on a fourth climate-related metric for scheme assets: a portfolio alignment metric
  • Amend its guidance regarding trustees’ choice of “additional climate change metric” (for which the DWP currently recommends using portfolio alignment, Climate Value at Risk or data quality) to remove portfolio alignment metrics from the recommended list and add six new options from the TCFD’s updated recommendations

DWP defines “portfolio alignment metric” as “a metric which gives the alignment of the scheme’s assets with the climate change goal of limiting the increase in the global average temperature to 1.5 degrees Celsius above pre-industrial levels”.  An example is the proportion of companies in the portfolio with Science Based Targets initiative (SBTi)-accredited targets to reduce their greenhouse gas emissions.

Stewardship guidance

The proposed stewardship guidance is a mixture of non-statutory guidance relating to Statements of Investment Principles (SIP) and statutory guidance relating to Implementation Statements (IS).

The DWP’s stated aims include improving the quality of SIP policies and developing best practice for IS reporting.  The guidance highlights that trustees should take responsibility for both documents and much of it seems aimed at discouraging boilerplate wording and a tick-box approach.

The guidance comments on various aspects of the SIP and IS but focuses on voting and engagement since the DWP regards these as the weakest areas.

Points to note include the following:

  • Trustees are expected to either set their own voting policy or to acknowledge responsibility for the voting policies that asset managers implement on their behalf
  • A suggestion that trustees select some topics as “stewardship priorities” which they summarise in their SIP and use as their focus when overseeing and reporting on the voting and engagement carried out on their behalf, including when selecting significant votes to report in their IS
  • Trustees are encouraged to have a mechanism by which members may express views about the consideration of non-financial matters

The DWP has said it will review the impact of the guidance in the second half of 2023 and there is a threat of regulatory intervention if it is not being followed.

The DWP does not indicate when the guidance is likely to come into force, so our guess is that the final guidance will be published in the second or third quarter of 2022.  Further guidance on stewardship is also expected from the Pensions Regulator next year as part of the new modular Code of Practice on which the Regulator consulted earlier this year.


We believe portfolio alignment metrics are useful climate risk management tools, as they provide information that complements the emissions metrics that are required under the current regulations.  Although it is proposed that four rather than three metrics will be collected in future, we do not expect this will significantly increase the compliance burden and hence the benefits should outweigh the costs.

Turning to the stewardship guidance, much of this is consistent with our current view of best practice, including in relation to manager selection, monitoring and engagement.  We concur with DWP’s view that stewardship is an integral way by which trustees can seek to improve investment returns and therefore that raising stewardship standards is in members’ best interests.  However, the guidance does go significantly beyond typical scheme practice, so meeting DWP’s expectations is likely to require extra focus from trustees over the next year or two.

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DB scheme return asset class information to change in 2023

Following a consultation jointly run by the Pensions Regulator and the Pension Protection Fund, proposed changes to the asset class information collected each year by the Regulator from DB schemes through their scheme return are to go ahead broadly as proposed.

In particular, the three-tiered approach proposed in April (see Pensions Bulletin 2021/19 for details) will operate.  However, in the light of feedback received, the Tier 1 to 2 boundary, at which more granular information is required, is to be initially set at £30m of section 179 liabilities, although this will be kept under review with the possibility of it reducing to the proposed £20m (or less) in future.  The Tier 2 to 3 boundary of £1.5bn is unchanged.

The hedge fund category is still being removed but the assets previously in this category will not simply be moved to “Other”.  There will be guidance in due course on where those assets should be allocated.

The new data collection will operate from the 2023 scheme return.

The PPF’s proposals for keeping a simplified approach to the roll-forward methodology used in PPF levy calculations is to be taken forward, with the PPF likely to consult on the necessary rule changes as part of its 2023/24 levy consultation (ie in autumn 2022).  Importantly, the stress factors associated with each asset class will also be consulted on at that time.


The consultation response notes that “the changes herald a greater focus for trustees and TPR on investment risk and planning”.  For those schemes that already delve into greater detail on their investment strategy, these proposals give an idea of where the Regulator may be heading with its supervisory approach.

From a PPF levy perspective, the results of the consultation are interesting but will mean more when the associated stresses are proposed next autumn.

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FCA finalises long-term asset fund rules

The Financial Conduct Authority has finalised the rules and guidance that will govern how a new category of authorised open-ended fund, focussed on higher risk and illiquid in nature assets that need to be held for the long term, will operate.  It has also responded to the consultation it launched on this topic in May (see Pensions Bulletin 2021/20).

The new rules create a Long-Term Asset Fund (LTAF) regime – a new FCA-regulated fund that is designed specifically to help investment in assets including venture capital, private equity, private debt, real estate and infrastructure.

The LTAF is aimed at DC pension schemes which may be interested in investing in such assets as part of their default fund offering.  It also offers long-term investment opportunities to sophisticated investors and some high-net-worth individuals.

In order to reflect potential difficulties in selling the underlying investments LTAFs cannot permit redemptions more frequently than monthly, with a notice period of at least 90 days.

The permitted links rules, relating to unit-linked long-term insurance products, have also been amended to enable DC schemes to access a LTAF.

This news delivers on the Chancellor’s commitment, in his statement to Parliament on the then Financial Services Bill on 9 November 2020, to regulate for such a fund.  The LTAF also formed part of the recommendations of the Productive Finance Working Group’s (PFWG) roadmap, published in September (see Pensions Bulletin 2021/40).

The new rules come into operation on 15 November 2021 from which point FCA will be open to receiving applications for authorisation of such funds.

The FCA will be consulting next year on the potential for widening the distribution of the LTAF to certain retail investors, with safeguards to ensure retail investors understand the risks involved.


This is welcome news.  However, it is likely to be some time before a market in LTAFs has sufficiently developed that DC scheme trustees can begin to contemplate adjusting their default fund offering.

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The Compensation (London Capital & Finance plc and Fraud Compensation Fund) Act 2021

The Bill that will enable the DWP to make loans to the Pension Protection Fund to assist the latter meet substantial claims on the Fraud Compensation Fund has received Royal Assent.

The Compensation (London Capital & Finance plc and Fraud Compensation Fund) Act 2021 also establishes a compensation scheme for bondholders of London Capital & Finance plc as a result of the Financial Conduct Authority not effectively fulfilling its statutory objectives with regard to its regulation of the now insolvent company.

The PPF needs this loan facility as a direct result of the High Court case of PPF v Dalriada Trustees last November concerning a test case that involved fraudulent occupational pension schemes designed for “pension liberation” (see Pensions Bulletin 2020/47).  The PPF’s annual accounts for the year ending 31 March 2021 suggest that the Fraud Compensation Fund is now vulnerable to claims of over £400m from these sorts of frauds – way in excess of the £33.9m in the Fund at this point.

The DWP expects this loan to be repaid by the PPF, with the PPF itself raising the funds through an increase in the Fraud Compensation Fund levy.  In April the PPF announced that the 2021/22 levy would triple to 75p per member of every occupational pension scheme (with authorised master trusts being charged 30p per member).

Regulations currently require the levy to be determined by reference to the total number of members of the scheme on a reference day with 75p being the maximum permissible per member charge.  However, we are expecting the DWP to consult soon on how this levy will be adjusted in order that the PPF can repay the loans that it can now receive.


The pensions minister has said that were the PPF to continue to raise a levy at the current rate it could take 30 years to plug the deficit in the Fund.  With the DWP looking to receive its loan back in 10-15 years this suggests that we could be looking at a doubling or even tripling of current rates.

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The Health and Social Care Levy Act 2021

The Bill to help pay towards the cost of health and social care has received Royal Assent.  It was introduced shortly after the Government published its plan for health and social care in September.

The Health and Social Care Levy Act 2021 introduces, from 2023/24, a new health and social care levy of 1.25% of the amount of earnings or profits in respect of which national insurance contributions are paid or would be paid were it not for the fact that the individual had reached state pension age.  It also contains transitional provisions so that for the tax year 2022/23 only, most national insurance contribution rates increase by 1.25%.

Levying an NIC-equivalent on the earnings of those above state pension age is a significant break with the past.  Currently anyone receiving earnings after state pension age does not pay national insurance contributions on those earnings, but their employer does.

The Government’s plans include a 1.25% increase in dividend tax rates.  This tax, payable by individuals (not pension schemes), will be legislated for in the Finance Bill to follow the 27 October Budget.


This new levy and the temporary increase in national insurance contributions makes more attractive salary sacrifice arrangements under which employees don’t directly contribute to a registered pension scheme, but give up part of their salary sufficient for the employer to make that contribution in their stead.  This is because whilst salary is subject to NICs, employer pension contributions are not and it appears that the same will apply in respect of this levy.

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Pensions dashboards team provides latest progress report

Nearly six months on from its last report (see Pensions Bulletin 2021/21) the Pensions Dashboards Programme (PDP) sets out what has been achieved over this period and what is to come.

In its October 2021 progress update report the PDP highlights the bringing on board of a supplier to build its central digital architecture and says that its main focus over the next six months is “the build of the digital architecture, procurement and integration of the identity service and the onboarding of alpha test participants and further testing of the ecosystem”.

The DWP consultation on regulations on how the dashboard infrastructure will operate and how organisations will need to make individuals’ data available to them, is billed as arriving this winter.  Readers of the report are exhorted to “take action now” in preparation for when regulations will start to compel schemes and providers to connect to the dashboard (intended to start from April 2023 – see Pensions Bulletin 2021/23).

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This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.