Pensions Bulletin 2021/50
Our viewpoint
2 December 2021
- The first superfund passes assessment
- DWP proposes removal of performance-based fees from DC charge cap
- FCA puts forward default investment option for non-workplace pensions
- GMP conversion Bill passes crucial Second Reading
- FRC sets out its latest thinking on the review of Technical Actuarial Standards
- More work to be done in raising standards in the tax advice market
- State pension increase confirmed
- Revaluation provisions for 2022 published
- HMRC issues some notes and reminders on pension tax issues
- New Shadow Secretary of State for Work and Pensions
The first superfund passes assessment
The Pensions Regulator has announced that it has completed its assessment of the superfund Clara. It is the first superfund to have met the requirements of the Regulator’s interim framework, the guidance for which it published in June 2020 (see Pensions Bulletin 2020/26).
The Regulator notes that, although schemes can have confidence that its assessment process is rigorous, it is vital that trustees and employers carry out their own due diligence to ensure they are confident the superfund is the right option for their scheme and its members. Before any transfer to a superfund, a scheme will need to approach the Regulator for clearance. The Regulator will assess any such transfer against its “gateway principles”, as specified in the guidance for trustees and employers (see Pensions Bulletin 2020/43). These have been drafted to ensure that only schemes the Regulator considers appropriate can transfer to a superfund.
Comment
This announcement is a major milestone for the superfund market, and for the pensions industry in general. There is now a viable alternative option for pension scheme trustees and sponsors to settle their pension scheme liabilities, on top of the established route of insured buy-out. However, the Regulator will only authorise a transfer to a superfund if there is no realistic route to achieving an insured buy-out over the short or medium term.
DWP proposes removal of performance-based fees from DC charge cap
The DWP has launched a consultation on proposed changes to the charge cap that applies to the default arrangements of occupational DC schemes used for auto-enrolment. This follows the Budget announcement of such a consultation (see Pensions Bulletin 2021/44 for background).
The purpose of the DWP’s latest policy proposals is to “remove any barriers, real or perceived, to investments in any asset classes that could bring benefits to pension savers” and the DWP cites that performance fees have been consistently raised as a key barrier in this context. The pensions minister says that green infrastructure, private equity and venture capital are investments that fit “well with the long-term horizons of DC schemes”, and it is clearly these sort of asset classes that the DWP has in mind.
The DWP’s proposal is simple in concept, namely to add “well-designed performance fees that are paid when an asset manager exceeds pre-determined performance targets” to the list of charges exempt from the charge cap. The DWP is clear that this exemption should only apply to performance fees and not other investment administration fees. It cites the common “2 and 20” fee model as an example where the 2% fixed administration fee component would continue to be subject to the cap.
But the DWP is concerned about unintended consequences and asset managers “gaming” any new rules to their advantage and to the detriment of savers. A number of suggestions are put forward all aimed at preventing such abuse.
The DWP also notes that it has heard of concerns that performance fee structures are asymmetrically biased towards asset managers but does not offer much in the way of solutions to this.
Finally, the DWP notes that if performance fees are to be made exempt from the charge cap then regulatory easements about smoothing performance fees within the charge cap and removing performance fees from the pro-rata measurement of charges under the charge cap, which only came into force from 1 October 2021 (see Pensions Bulletin 2021/40) will no longer be needed and will be removed from legislation.
Consultation closes on 18 January 2022 and, if the DWP proceeds, it intends to consult on draft regulations “early next year” with legislation coming into force in October 2022.
Comment
It is somewhat embarrassing for the DWP to have to so rapidly consult on a set of policy proposals in an area in which it had delivered what it thought was a solution only a few weeks back. It has perhaps come under pressure from other parts of Government to think again so as to unlock potentially significant additional institutional investment in primarily illiquid investments. From the sound of the consultation paper the DWP does not seem to be entirely wedded to the idea. Maybe this is simply because, although it has put forward some ideas for the protection of savers, it doesn’t seem to be completely convinced that they will work.
FCA puts forward default investment option for non-workplace pensions
The Financial Conduct Authority has issued a consultation paper making two proposals in relation to non-workplace pensions (NWPs – eg individual personal pensions and SIPPs), the first of which is that providers offer a “default” investment option to help non-advised consumers save for their retirement. This paper follows on from the FCA’s conclusions published in July 2019 to a discussion paper issued in February 2018 (see Pensions Bulletin 2019/30).
Under the proposals the default option, offered to non-advised consumers, would need to be an appropriately diversified basket of investments and take account of climate change and other environmental, social and governance risks.
This is a similar concept to the requirement for a default arrangement in workplace DC pensions used for auto-enrolment but, importantly, unlike for such workplace pensions, consumers would not be automatically enrolled into the default option if they make no choice. Instead, the default option must be presented alongside other investment choices. Providers will only be able to offer an individual one default option, but this does not have to be the same across the provider’s entire business. The FCA proposes that default options should include lifestyling or target date funds, with the assumption that the saver will access their pension at state pension age, unless stated otherwise.
NWP providers will also need to warn consumers (both advised and non-advised) holding high levels of cash and prompt them to consider investing in other assets with the potential for growth. The aim is to ensure pension savers have as big a pension pot as possible at retirement. For this purpose, providers would be required to send cash warnings to those more than five years away from normal minimum pension age (or a protected pension age if lower) who have more than 25% of their NWP assets invested in cash for more than six months. This is subject to the total cash amount in a saver’s NWP being more than £1,000. The FCA also sets out the nature of the cash warning.
Consultation closes on 18 February 2022. The FCA states that it expects to publish final rules and guidance in 2022 and that providers will have 12 months from publication to implement the new rules.
Comment
This is an interesting consultation which should lead to better outcomes for non-advised consumers of NWPs in particular, since such individuals are often left to fend for themselves and pay little attention to their pension savings until it is too late.
GMP conversion Bill passes crucial Second Reading
Margaret Ferrier’s Private Member’s Bill, that seeks to resolve a number of difficulties with the DWP’s GMP conversion law (see Pensions Bulletin 2021/46), has passed its Second Reading in the House of Commons and will now be analysed in Committee, probably in the early New Year.
The Bill attracted unanimous support by those speaking in the Chamber (mainly from a well-briefed Conservative side), but also from Jonathan Reynolds, Labour’s Shadow Secretary of State for Work and Pensions (at the time of the debate – see article below). Most importantly of all it attracted the support of Guy Opperman, the pensions minister. Speaking for the Government he acknowledged that “it is simply not the case that all schemes can proceed on the basis of the [DWP] guidance” that was issued in April 2019 (see Pensions Bulletin 2019/16) and that as this “technical” Bill would affect a significant number of constituents he was “genuinely keen to progress it” and that it was “with pleasure” that he gave the Government’s backing to the Bill.
Comment
This is very much the legislation that pensions industry representatives, working with the DWP since 2013, had wanted to see. In particular, it addresses the changes to the conversion law that DWP acknowledged back in 2016 might need to be made. So, it is most welcome to see that it is now firmly on its way, after a long delay and albeit through the unusual mechanism of a Private Member’s Bill.
FRC sets out its latest thinking on the review of Technical Actuarial Standards
The next step in the Financial Reporting Council’s post implementation review of its Technical Actuarial Standards has been reached with the publication of a position paper.
This paper summarises the responses to its February call for feedback (see Pensions Bulletin 2021/10), provides an outline (with no great detail) of potential revisions to non-sector specific aspects of the TASs, in particular TAS 100, and lists the next steps, which comprise consulting on a revised TAS 100 in 2022, issuing new guidance “over time”, and publishing a call for feedback in 2022 on the sector specific TASs.
Actions falling within the FRC’s “proposed position” include the following:
- In response to concern that climate change risks may not feature sufficiently in actuarial work, the FRC promises to consult on proposals to revise the TASs to ensure that technical actuarial work “considers all relevant risks in a proportionate way”
- A promise to consult on proposals to revise the TASs, where appropriate, including potentially introducing guidance, to address certain aspects of modelling – five examples are listed
Comment
The FRC is choosing to hold its cards close to its chest (with no indication of what exactly might change), along with providing the vaguest of timetables. It seems that this is a project that its successor may have to bring to a conclusion.
More work to be done in raising standards in the tax advice market
HMRC’s consultation on potentially introducing a requirement for “tax advisers” to hold professional indemnity insurance (see Pensions Bulletin 2021/13) has concluded with a decision not to proceed with this at the current time.
HMRC concluded that such insurance on its own would not be an effective mechanism to raise standards in the tax advice market, nor would it have a significant impact on consumer protection. And wider difficulties with the market for indemnity insurance highlighted potentially significant feasibility and implementation challenges.
However, this is not the end of the matter as a further consultation is promised, in 2022, exploring alternative options to improve the wider regulatory framework around standards in the tax advice market, under the headings of clarity on the standards required of tax advisers, ensuring transparency and effective enforcement. The consultation will also test a potential legislative definition of “tax advice”.
Also in 2022, HMRC will update and publicise the HMRC Standard for Agents and publish the conclusions of an internal review of HMRC’s existing powers to uphold agent standards. A further consultation is also promised in 2022 on ways to tackle the high costs to taxpayers of claiming tax refunds.
Comment
HMRC’s March 2021 consultation has proved to be somewhat of a distraction. HMRC would appear to remain of the view that the tax advice market needs some form of regulatory intervention to improve the way it operates, so we wait to the New Year to find out exactly what they now think should be done. It is worth bearing in mind that mandatory requirements on tax advisers could impact (perhaps unintentionally) widely on the operation of professional advice and the running of pension schemes, depending on how the definition of “tax advice” is framed and what is excluded.
State pension increase confirmed
The DWP has confirmed that next April the basic State Pension and the full rate of the new State Pension will increase in line with the rise in the Consumer Prices Index (for the year to September 2021). This 3.1% increase will result in the basic State Pension becoming £141.85 per week and the full rate of the new State Pension becoming £185.15 per week.
These figures arise through application of the ‘double lock’ legislated for by Parliament in the now Social Security (Up-rating of Benefits) Act 2021 which received Royal Assent on 17 November (see Pensions Bulletin 2021/48). The intention is that the triple lock will return for the April 2023 and future increases.
The DWP has also published the full list of benefit and pension rates for 2022/23.
Revaluation provisions for 2022 published
Regulations have been laid before Parliament setting out the revaluation required on the deferred pension in excess of GMP for those who left pensionable service before normal pension age and will reach their normal pension age during 2022. The Occupational Pensions (Revaluation) Order 2021 (SI 2021/1308) comes into force on 1 January 2022.
As in previous years it sets out revaluation percentages separately for pre and post 6 April 2009 pensionable service as the former is capped at 5% compound whilst the latter is capped at 2.5% compound.
Comment
This latest Order is as expected and in respect of the most recent period reflects CPI inflation to September 2021 of 3.1%.
HMRC issues some notes and reminders on pension tax issues
HMRC’s latest pension schemes newsletter comprises a number of notes and reminders across the following topics: relief at source, migration to the Managing Pension Schemes service, business tax accounts, annual allowance and accounting for tax.
On annual allowance there is a request to remind scheme members who have exceeded their 2020/21 annual allowance and who do not have sufficient unused annual allowance to carry forward to cover the excess, to declare this on their self-assessment tax return.
New Shadow Secretary of State for Work and Pensions
Jonathan Ashworth, Labour MP for Leicester South has been announced as the new shadow Secretary of State for Work and Pensions, following Keir Starmer’s reshuffle. He takes over from Jonathan Reynolds who had held the brief since April 2020 and has now moved across to the Shadow Business and Industrial Strategy brief.
Matt Rodda (who took over from Jack Dromey in January) remains as Shadow Minister for Pensions.