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Pensions Bulletin 2022/28

Our viewpoint

DWP responds to its consultation on dashboard regulations

The DWP has published a lengthy response to its consultation on dashboard regulations (see Pensions Bulletin 2022/04).  It has also published a useful and relatively readable summary of the key policies following the consultation.

Overall, and unsurprisingly, the DWP is by and large continuing on the same course but some points of note from the response and summary are as follows:

Some staging dates have been put back

  • The staging deadline for public service pension schemes has been pushed back five months from 30 April 2024 to 30 September 2024
  • The deadlines for the first two staging cohorts have been pushed back by two months from 30 June 2023 to 31 August 2023 for master trusts with 20,000 or more relevant members and from 31 July 2023 to 30 September 2023 for money purchase schemes used for automatic enrolment with 20,000 or more relevant members
  • In addition, the staging date for hybrid schemes will now be based on a “simplified approach” where the deadline is determined by totalling the number of relevant members across both money purchase and non-money purchase sections and using that total to determine the staging deadline as if the hybrid scheme were a non-money purchase scheme. This is a significant change from earlier proposals where the entire scheme would stage based on the earlier of the two sections’ equivalent staging dates

Some data and timing adjustments

  • For members with non-money purchase benefits who are deferred members, trustees or managers must provide an accrued value but this may be calculated using a simplified method in certain circumstances within 2 years of the scheme’s connection date
  • Where a non-money purchase benefit is comprised of tranches, trustees or managers must provide either a combined value, or separate sets of values, depending on what they consider is the best representation of the benefit
  • The DWP is clear that it does not feel it is appropriate for hybrid schemes to get a blanket 10-day response time for providing value data. Therefore in such schemes each benefit should be returned on its own merit (ie within 3 days for a money purchase benefit and within 10 days for a non-money purchase benefit)

Other matters

  • Schemes in wind up will still be required to connect according to their staging deadline. However, connected schemes (or sections of schemes) in wind up should only provide value data (plus contextual and signpost information) if the trustee or manager of the scheme considers it appropriate to do so
  • The criteria for allowing applications to defer a scheme’s staging deadline will not be expanded and therefore, importantly, the deadline for applications to defer must be submitted no more than 12 months from when the regulations come into force – the deadline is not primarily linked to the scheme’s own staging date
  • The DWP states that it will not be seeking to prohibit data export from dashboards in the Regulations and will leave it to the Financial Conduct Authority to address this issue in its own rules

Comment

The first staging dates remain only just over a year away but the change of staging deadline for public service pension schemes may be significant since we understand that the DWP only wants to launch dashboards to the public when a majority of members would be able to use the service.  This was expected to be summer 2024 but if public service schemes have not staged by then this timetable must now be in doubt.

We are pleased that a simplified method for calculations for deferred non-money purchase members has been agreed – this was one of the more controversial areas in the original consultation.  However, we continue to be concerned about the risks posed by allowing the export of data from dashboards to other, possibly less well-regulated, environments and therefore, we hope that the FCA rules will give strong consumer protection in this area.

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PDP consults on dashboard standards

The Pensions Dashboards Programme has launched a consultation on a number of standards relevant to pension providers relating to the operation of pensions dashboards.  These standards have as their purpose “to ensure the security, stability and effective operation of dashboards”.  The standards include those governing data formatting, interfacing with the digital architecture, and service levels.  A full list of the standards is set out in Appendix B of the consultation document and is also available on the PDP’s website here.  The consultation also encompasses some “statutory guidance” and “recommended guidance” documents.

At the same time the PDP has launched a “call for input” on design standards.  These set out requirements for presentation of the pensions data on dashboards and design of the dashboards, including messaging, signposting, and onward customer journeys.

The consultation was signalled by the PDP in January when it published information about the scope of its standards and how it would go about setting them, with some indicative examples of what the standards could contain.  However, it could not formally launch its consultation until the DWP had reached a conclusion in respect of its regulations (see article above).

Consultation closes on 30 August 2022 and the PDP intends to issue its final standards (apart from design standards) as close to the date that the new legislative framework becomes law (the standards cannot come into force before the framework).

Comment

These standards are very technical and as such are likely to be of interest mainly to those who need to dive into the detail of what it takes for a pension scheme or provider to connect and interact with the digital architecture being built for the PDP.

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Second Reading for the Pensions Dashboards (Prohibition of Indemnification) Bill

A Private Member’s Bill, supported by the DWP, had its Second Reading in the House of Commons on 15 July 2022.

The Pensions Dashboards (Prohibition of Indemnification) Bill, sponsored by Conservative MP Mary Robinson, makes it a criminal offence for the assets of an occupational or personal pension scheme to be used for the purpose of reimbursing any trustee or scheme manager, in respect of penalties imposed under pensions dashboards regulations.

The Bill adds to the pensions dashboard provisions introduced by the Pension Schemes Act 2021.  Under the 2021 Act and regulations to be made under it, if the Pensions Regulator takes enforcement action, including a financial penalty, for non-compliance, there is nothing to specifically prevent trustees from reimbursing themselves from pension scheme assets.

Supporting the Bill, Pensions Minister Guy Opperman said: “Additionally, were any amount to be paid out of a scheme’s assets in such a way, the Pensions Regulator would have the power to issue civil penalties to any trustee or manager who failed to take all reasonable steps to secure compliance”.

Comment

This is yet another Government Pensions Bill in all but name, seemingly correcting an oversight when the now Pension Schemes Act 2021 was going through Parliament.

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DWP establishes a taskforce as it responds to its call for evidence on the “S” of ESG

The DWP has responded to its March 2021 call for evidence on the consideration of social risks and opportunities by occupational pension schemes (see Pensions Bulletin 2021/13) with a promise to establish a minister-led taskforce to identify reliable data and metrics “and ensure that focus on social factors continues to grow throughout the investment chain”.

The taskforce’s role

The establishment of this taskforce – the sole action to come out of the Call for Evidence – seeks to address one of the main barriers trustees face to more effective consideration of social factors in investment decisions – a lack of data.  Specifically, the taskforce’s remit is to:

  • Identify reliable data sources and other resources which could be used by pension schemes to identify, assess and manage financially material social risks and opportunities; and which could be used to inform guidance on investment risks from social factors
  • Monitor and report on developments with the International Sustainability Standards Board, and other international standards

No timescales are given within which this taskforce is to operate and reach its conclusions.  The status of any guidance that emerges from this process is also unknown.

Initial thoughts from the call for evidence

The response also provides helpful analysis and commentary on social factors, highlighting issues of relevance to pension scheme trustees and practical actions they could take.  Points made include:

  • Trustees should take into account all considerations that they deem to be financially material throughout the investment process, which can include social risks and opportunities
  • Investors’ thinking on ESG is evolving in light of global events including the Ukraine war. Trustees should recognise this, but their fiduciary duty is paramount and they must not be side-tracked by political activism or political agendas
  • Social topics considered by trustees may include human rights (eg modern slavery) and workforce issues (eg occupational health and safety)
  • Either an integrated approach to ESG, or a standalone policy on social risks and opportunities, is an acceptable approach to take
  • One of the main approaches that schemes are taking to manage social factors is active ownership such as voting and engagement, which the DWP fully supports. However, there is more for trustees to do in this area.  It is not acceptable for schemes that invest in pooled funds to leave all stewardship on social factors to their fund managers
  • Opportunities for schemes to invest in social investments – such as social bonds issued by emerging market corporates and sovereigns – are growing, albeit on a small scale
  • DB trustees need to understand the impact of social risks and opportunities on the employer covenant

Comment

Given that the industry’s thinking on social factors is at a relatively early stage of development, and given the many demands on trustees’ time, we welcome the fact that no policy intervention is planned at this stage, other than setting up the taskforce.  The initial thinking contained in the response is also welcome – in particular the DWP’s focus on active ownership, its encouragement for trustees to recognise the linkages between different ESG factors, and its confirmation that there are a variety of acceptable approaches that trustees might take in relation to social factors.

In the light of this response, trustees should keep their approach to social factors under review as part of their responsible investment and covenant work.

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PPF annual report points to lower levies to come

The Pension Protection Fund has highlighted its strengthened financial position as it published its annual report and accounts for the year ending 31 March 2022.  The PPF’s funding ratio improved again to 137.9% (up from 127.3% a year ago) as a result of strong investment performance coupled with low claims.  The PPF’s reserves increased from £9.0bn last year to £11.7bn this year.  In other words, more than a quarter of the PPF’s funds are surplus to requirements.

Long-term funding strategy

The PPF is currently reviewing its long-term funding strategy and will publish the outcome in the autumn.  Currently, and for some while, this strategy has been couched in terms of being financially self-sufficient by a funding horizon – ie being 110% funded by 2030.  Given the robust financial health the PPF now finds itself in, an emerging conclusion from this review, as highlighted in an accompanying blog, is that the PPF should focus on maintaining (rather than building) financial resilience.  To that end the PPF plans to set out its funding priorities and how it expects future funding decisions will be guided by how its reserves compare to its priorities.

PPF levy

Related to this is that, with substantial reserves, the PPF can now consider bringing down the levy earlier than it had planned without risking its ability to pay PPF compensation to its members.  To enable this it intends to take some limited investment risk for longer than it had envisaged when it set its long-term funding strategy.

In the autumn, the PPF will announce how much it intends to charge in the 2023/24 levy as it consults on the accompanying levy rules.  And in the coming years the PPF promises to set an overall levy that is “meaningfully reduced”.  It also intends to take the opportunity to rethink how the levy is calculated, with a simpler methodology than at present, whilst ensuring the levy is more stable for levy payers and is transparent and predictable.  However, the levy must be flexible, so that the PPF can raise it “in the unlikely event that should be required in future”.  First steps towards this new system are promised for the 2023/24 levy, with the possibility of legislative change in order to arrive at a new levy charging methodology.

Comment

This is great news for levy payers, who currently contribute just over a fifth of the PPF’s annual expenditure.  With a now substantial levy fund of some £42bn and with scheme funding improving, the levy is set to become a less important feature of the financial landscape.

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Nest continues to grow but there are challenges ahead

On 14 July 2022 the Nest Corporation published its annual report and accounts for 2021/22 along with those for the Nest pension scheme.  They reveal the continuing role played by this state-subsidised retirement savings vehicle, set up in response to commercial providers not being able to profitably service a significant section of the new retirement savings market created through auto-enrolment policy.

Over the 12 months to 31 March 2022 Nest membership grew from 9.9 million to 11.1 million members and assets under management grew from £17.6 billion to £24.4 billion – with the bulk of this growth being from contributions rather than investment returns.  As at 31 March 2022 Nest was providing pensions for 975,000 employers (up from the 881,000 it reported last year).

Nest expects to be able to cover its operating costs from scheme member charges from 2024 onwards, and to have repaid its loan from the Government within its 2038/39 financial year.

Nest remains focused on the small employer market with 98% of the employers using it having fewer than 50 employees.  Its default investment strategy – the Nest Retirement Date Fund series – remains vital given that nearly 99% of its 11.1 million members use it.

Comment

Despite these impressive figures, Nest is building up a substantial pool of inactive members – no less than 6.5m of its 11.1 members are no longer saving into their Nest retirement pots, and many of these pots will be ‘small’.  The investment outlook for the year ahead is also challenging.  However, Nest now has the scale to support further diversification to support a membership that now represents around a third of workers in the UK.

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The Pensions Regulator reports on another challenging year

Once again the Pensions Regulator reports on a challenging year, but illustrates how despite this, it has sought to keep its focus firmly on the saver, highlighting amongst other things the initiatives undertaken with a focus of ensuring value for DC savers and the stakeholder panels set up to better understand the needs of the regulated community.  The report also discusses the successful return to ‘business as usual’ in terms of regulating auto-enrolment and the success of its regulatory initiative for schemes where the employer may be in distress.  Charles Counsell, Chief Executive, notes on this point that “… over 40% of those we contacted [took] action as a result of our communication, and over 10% [confirmed] that our message had increased the financial security of the scheme”.

As in previous years, the report covers a number of topics, in particular highlighting numerous consultations published, including on guidance on CDC schemes, climate change, the Regulator’s new Pension Schemes Act 2021 criminal powers, Code 12 (material detriment) and certain aspects of the enforcement policy.  Special mention is made of the launch of the Regulator’s Equality, Diversity and Inclusion (ED&I) Strategy, the launch of the first assessed superfund, collaborative preparatory work on pensions dashboards with the industry and criminal case successes.

Expenditure came in under budget by £7.7m, largely due to reduced temporary staff costs because of the end of some planned projects and savings associated with bringing the majority of the auto-enrolment functions in-house.  The Regulator also achieved 10 of its 14 Key Performance Indicators in the year 2021-2022 and came close with three others, with the one that was missed by a significant margin being of course the failure to complete the second phase of consulting on principles for a revised DB funding code.

Comment

It is unfortunate that we are still awaiting the second consultation on the Code on DB funding and a consultation on updated notifiable events requirements, but in both cases the Regulator is waiting on DWP to deliver the regulations.

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The Pensions Ombudsman continues to increase productivity

The Pensions Ombudsman’s latest annual report and accounts reveals a further increase in productivity with 8% more pension complaints being resolved in the year compared to 2020/21.  This in turn means that, despite receiving 11.7% more complaints than in the previous year, 74% of cases were closed within twelve months, 4% more than the 70% target and therefore – unlike in the previous year (see Pensions Bulletin 2021/31) – easily meeting this key performance indicator.  In fact, the Ombudsman met key performance indicators in most areas, with a notable exception being that only 44.8% of the complaints transferred to the Adjudication Service were closed as compared to the target of 60%.  This is attributed to the more complex nature of those complaints meaning that additional time is taken to allocate and resolve.

The top ten subject areas that the Ombudsman closed complaints on has remained the same over the last three years, but interestingly, 6.5% more of the complaints closed this year have been about non-payment of contributions to pension schemes, which could be attributable to the financial turbulence as a result of the pandemic.

Proud mention is also made of the launch of the new Pensions Dishonesty Unit which was set up on the wake of two high value Determinations – Norton Motorcycles (around £10.5 million) and Henry Davison (around £2.5 million).  The Unit aims to hold wrongdoers to account to repay scheme members all of their lost pension savings.

Comment

It is clear that the demand for the Ombudsman’s services continues to grow and that staffing levels may need to increase to keep pace.  The increased budget allocated to the Ombudsman in the recent Spending Review will hopefully go some way towards resolving this.

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Data Protection Bill published

The Government has published the Data Protection and Digital Information Bill to coincide with the Bill’s First Reading in the House of Commons on 18 July 2022.  The Bill follows on from the Government responding in June (see Pensions Bulletin 2022/24) to its consultation on proposed reforms to the UK’s data protection regime.

The publication of the Bill was announced via a written statement by Matt Warman, Minister for Media, Data and Digital Infrastructure in which he summarised the purpose and main contents of the Bill.  Separately, Nadine Dorries, Secretary of State for Digital, Culture, Media and Sport, announced via a written statement the publication of a paper setting out the Government’s “emerging pro-innovation approach to regulating Artificial Intelligence”.

The Bill itself is lengthy and complex, making a number of changes to the Data Protection Act 2018 and the UK General Data Protection Regulation.  These include streamlining how organisations need to demonstrate compliance with the legislation, amending the threshold at which organisations can refuse to respond to a subject access request, and clarifying the rules on international transfers and cross-border flows of personal data.

Comment

At this stage it appears that only a few of the proposed changes to data protection law have the potential to impact current data protection compliance undertaken by various parties in relation to pension schemes.

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Mid-life MOT initiative expanded

Following the success of private sector pilots and government-funded trials last year, the DWP has announced that it will be putting another £5 million towards extending its “mid-life MOT” initiative (see Pensions Bulletin 2021/05).

The Mid-life MOT is a review intended to help workers in their 40s and 50s take stock of their finances, skills and health, to enable them to better prepare for their retirement and build financial resilience.  First proposed in the 2017 Cridland report, the mid-life MOT portal was launched by the DWP in February 2019.

Now, not only will these MOTs be delivered online, but the expansion will also see staff at jobcentres sit down with jobseekers in this age group to help them examine their retirement planning and also look at how to overcome barriers to retirement and maximise their earnings and savings potential.  The DWP will also work with the Money and Pensions Service to deliver an enhanced digital Mid-life MOT tool.

Comment

This expansion is welcome as is the whole concept, but as ever with these things the issue will be the extent to which those in mid-life take advantage of this free service and are then able to take action to enjoy fulfilling careers for longer and a more financially secure retirement.

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DWP proceeds with employer-related investment easements for large master trusts

The DWP has published a response to its consultation on lifting certain employer-related investment restrictions on large authorised DC master trust schemes.  This was one of the DC topics that the DWP consulted on at the end of March (see Pensions Bulletin 2022/12) and was raised following concerns that the present restrictions could be a barrier to master trusts expanding their investment strategies to include private market investments.  The rules currently mean that master trusts with a larger number of unconnected participating employers need to undertake costly and onerous compliance checks before such investments are possible.

The response makes clear that the DWP is to go ahead with its proposals, with some minor adjustments arising from the consultation.  As a result, the DWP has finalised and laid regulations before Parliament which will mean its proposals to ease these restrictions for master trusts with more than 500 participating employers with at least one active scheme member, will come into force on 1 October 2022.

Comment

These easements seem sensible and pragmatic.  We wait to hear from the DWP regarding the other matters in the March consultation.

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CDC Code of Practice comes into force

On 18 July 2022 the Code of Practice on the authorisation and supervision of Collective Defined Contribution schemes was published in its final form by the Pensions Regulator, following it being laid before Parliament in June (see Pensions Bulletin 2022/23) and completing the necessary 40 days before it can come into force.

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