Pensions Bulletin 2021/52
Our viewpoint
16 December 2021
- Regulator reminds trustees of the need to prepare for emerging risk
- DWP takes the next step with CDC provisions
- Private sector DB schemes continue to shrink
- State Pension Age review to start
- No change to SMPI assumptions once more
- NEST continues to grow
Regulator reminds trustees of the need to prepare for emerging risk
In a blog published on 8 December, Nicola Parish, Executive Director of Frontline Regulation at the Pensions Regulator, wrote about the potential for corporate distress to impact the support provided to DB pension schemes and the need for trustees, as the first line of defence for scheme members, to prepare for emerging risk.
Related to this, the Regulator has contacted more than 400 DB schemes to check they have considered the risk that their sponsoring employer’s ability to support the scheme has weakened and whether they have considered or are going to consider guidance on this topic issued by the Regulator in November 2020 (see Pensions Bulletin 2020/47). These schemes were selected as a result of Regulator analysis suggesting that they may have employers less able to support their DB scheme due to the impact of the pandemic and on-going economic uncertainty.
Whilst initial indications are positive, the Regulator is working with those schemes that have not considered the guidance to ensure that they consider any risk and is asking those who have stated that they do not consider their covenant has weakened to provide evidence to demonstrate this. In addition, 30 schemes considered to be most at risk from a weakening covenant are being subjected to a more in-depth engagement with 9 cases opened for investigation as to whether it is appropriate for the Regulator to take further action to protect savers.
The Regulator also reminds trustees and employers that good engagement between employers and trustees should be the norm, and that the Regulator has a broad package of powers relating to DB funding, notifiable events, investigation and information gathering, as well as high fines.
Comment
When the Regulator published its guidance last year it was anticipating a number of DB scheme sponsors becoming distressed in the months that then followed. The Government’s interventions to support businesses during the lockdown phases of the pandemic have largely mitigated this, but with most Government support now ended this could be a case of a risk deferred rather than resolved. s The Regulator’s guidance is as relevant now as it was last November.
DWP takes the next step with CDC provisions
Regulations have been laid before Parliament that start the process of bringing into force certain aspects of the legislative framework for collective money purchase pension schemes.
The Pension Schemes Act 2021 (Commencement No. 5) Regulations 2021 (SI 2021/1394) bring into force those provisions under which:
- The Regulator must issue a Code of Practice relating to the process for making an application for authorisation of a collective money purchase scheme and the matters that the Regulator expects to take into account in deciding whether a scheme meets the authorisation criteria
- Regulations relating to the administration or governance of such schemes must first be approved by Parliament
- A power to restrict administration charges in schemes is extended so that where a scheme is divided into sections, each section that is a collective money purchase scheme is treated as a separate scheme
Comment
The detailed regulations which were consulted on in July (see Pensions Bulletin 2021/30) are now expected to be laid before Parliament in draft form very shortly. However, we are not expecting the Regulator to start its consultation on its Code of Practice until spring 2022.
Private sector DB schemes continue to shrink
The Pensions Regulator’s latest annual landscape report on DB and hybrid schemes, this time as at 31 March 2021, shows once more the continuing decline in private sector schemes providing such benefits, reflecting schemes completing the process of winding up, scheme mergers and schemes entering the Pension Protection Fund following employer insolvency.
Just over 0.9m individuals are now building up benefits in such schemes, down from just over 1.0m a year ago. Deferred and pensioner memberships also continue to fall – now standing at approximately 4.9m and 4.5m respectively, no doubt as a result of individuals transferring their benefits and schemes undertaking buyouts.
By contrast, the position in public sector schemes is far rosier, with approximately 7.5m active members, 5.4m deferred pensioners and 5.5m pensioners.
Comment
None of this is a surprise, but the decline in private sector schemes and memberships is proving to be a gradual process.
State Pension Age review to start
On 14 December 2021 the DWP announced that the next review of State Pension Age is to begin. The Pensions Act 2014 requires the Government to regularly review State Pension Age, and this latest review must be published by 7 May 2023.
The first review of State Pension Age was completed in 2017 (see Pensions Bulletin 2017/31) and concluded that the next review should consider whether the increase to age 68 should be brought forward to 2037-39, from the currently legislated 2044-46, before tabling any changes to legislation.
As required under the Act, the Secretary of State for Work and Pensions is commissioning two independent reports as follows:
- The Government Actuary will, by analysing the latest life expectancy projections, assess whether those reaching State Pension Age in a specified period can be expected to spend one-third of their “adult life” after this point and if not, the ways in which the rules might be changed to achieve that result
- Baroness Neville-Rolfe will consider recent trends in life expectancy and the range of metrics that could be used when setting State Pension Age. This includes whether it remains right for there to be a fixed proportion of adult life people should, on average, expect to spend over State Pension Age
These reports will assist the Secretary of State in preparing and publishing her own report on the outcome of the review (and also publishing the two reports described above she has received).
Comment
The backdrop to this review is somewhat different to when the first review was commissioned in March 2016 and one of the trickier factors that both reports will have to consider is the extent to which the pandemic, which is far from over, is impacting, either directly or indirectly, life expectancy in both the short and longer term.
No change to SMPI assumptions once more
Once more the Financial Reporting Council has concluded, after carrying out a review, that it does not need to make any changes to the assumptions used in the benefit projections required to be provided on an annual basis to members of occupational, personal and stakeholder pension schemes with rights to money purchase benefits.
The FRC is currently responsible for supporting guidance that sets out how such projections should be constructed and the assumptions they should use. Following the review, the current version 4.2 of Actuarial Standard Technical Memorandum 1 is to remain in force until further notice, with the FRC confirming that it will be used for SMPIs produced in the year beginning 6 April 2022.
The FRC says that it is in the process of considering the continued appropriateness of AS TM1 in anticipation of the start of pensions dashboards and hopes to address other potential adjustments at the same time.
Comment
This is an aspiration that may not be achieved. It is not clear when the MaPS pensions dashboard will become available and with compulsory data submissions starting no earlier than 2023 it could be 2025 before the dashboard goes live and the need for an updated or modified AS TM1 becomes pressing. It seems unlikely that the FRC will be able to hold to a no change policy on the projection assumptions for all this time.
NEST continues to grow
On 9 December 2021 NEST Corporation published its annual report and accounts for 2020/21. Along with the annual report and accounts for the NEST pension scheme and the 2021-24 corporate plan, these reports mark the 10th anniversary of NEST receiving its first contribution in July 2011.
Over the 12 months to 31 March 2021 membership grew from 9.1 million to 9.9 million members and assets under management grew from £9.9 billion to £17.6 billion. As at 31 March 2021 NEST was providing pensions for 881,000 employers (up from 803,000).
NEST expects to be able to cover its operating costs from Scheme member charges from 2024 onwards (moved forward from the 2026 estimate last year), and to have repaid its loan from the Government by 2039 (unchanged).