• Pensions Regulator issues statement on current market conditions
• Minister for Pensions and Growth emerges
• FRC finalises new rules for money purchase projections
• DC and Collective money purchase schemes – DWP continues to push forward with illiquid investment regulations
• Pension scheme voting rights – FCA provides update
• FCA launches its latest ScamSmart campaign
• New DC transfer guidance from PASA

Pensions Regulator issues statement on current market conditions

On 12 October 2022, the Pensions Regulator issued a statement aimed at trustees of DB and DC schemes and their advisers.  It sets out the main points the Regulator expects trustees to consider in managing investment and liquidity risks in the face of current market conditions – both before the end of the Bank of England’s purchase scheme, due to end on 14 October 2022, and in the near-term as trustees navigate continued market volatility.

The statement recites the usefulness of liability-driven investment (LDI) to DB schemes before going on to set out the impact of current market conditions on both DB and DC schemes – highlighting the unprecedented speed and magnitude at which gilt yields increased towards the end of September.

The statement then lists a number of expectations:

• For DB schemes these focus on various internal reviews – of operational processes, liquidity positions, liability hedging positions and funding and risk positions. There is also mention of how current yields may impact other areas of the scheme, such as transfer values
• For DC schemes the focus is more on providing support to scheme members, particularly those approaching retirement. The ever-present scamming risk is also mentioned

The statement concludes with the promise that the Regulator will continue to monitor the situation closely and will provide further updates to trustees if needed and as the situation develops.

The Work and Pensions Committee has also published a letter of reply sent to it by the Pensions Regulator on 10 October 2022 that provides a useful explanation of the impact on DB schemes of the recent movements in financial markets, and as background for the production of the statement.  The letter concludes by saying that the Regulator is now examining how it can update its guidance for DB schemes and ensure that in light of the current economic conditions its supervision teams are setting out very clearly its expectations on managing liquidity.

Comment

There are no surprises in the Regulator’s statement and many trustee boards, with the support of their advisers, will already be looking at the areas mentioned.  The statement’s existence is useful; it is just a shame it has taken some time to produce it.

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Minister for Pensions and Growth emerges

After a period of uncertainty following Guy Opperman’s departure from the post of Pensions Minister on 8 September 2022, Alex Burghart is stepping into Guy Opperman’s shoes, but with “growth” and other aspects added to his pensions responsibilities.

Mr Burghart had already been confirmed as a Parliamentary Under Secretary of State in the DWP, but his actual role within the Department remained a mystery until it was set out on 12 October 2022.

Comment

With an extended period of inactivity and many initiatives in the pipeline, the new minister has likely been greeted by an overflowing inbox.  While we hope for rapid progression of a number of items that have stalled awaiting ministerial input – eg the Pensions Regulator’s single code – we should bear in mind that the minister may have different ideas on what the highest priority issues to progress might be, especially given that his role ranges beyond pension issues.

It has been reported that when speaking at the PLSA annual conference this week Mr Burghart said his priorities were to support pension schemes through the current financial crisis and then see if anything in regulatory terms can be done to assist future stability.  Beyond that Mr Burghart identified auto-enrolment reform and potentially using pension schemes to help UK growth.

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FRC finalises new rules for money purchase projections

The Financial Reporting Council has announced the changes that are to be made to its technical memorandum that governs how statutory money purchase illustrations (SMPIs) are undertaken, following a consultation that was launched in February 2022 (see Pensions Bulletin 2022/06).  These new-style SMPIs will in turn feed through into estimated retirement income illustrations on pensions dashboards, on which we understand the finalised regulations are imminent.

The new SMPI rules are very close to those on which the FRC consulted, despite significant concerns being raised on a number of aspects of the FRC’s proposals.

Accumulation rate assumptions

The most controversial of these was to set a fund’s accumulation rate according to the volatility group that the fund was placed in, this in turn being determined according to the volatility of the fund’s monthly returns over a 5-year period.  This concept of past volatility being a guide to future performance came in for widespread criticism, including by LCP (see Pensions Bulletin 2022/21).

The FRC indirectly acknowledges, in its Feedback Statement, that 75% of respondents did not support the proposal for a variety of reasons.  Nevertheless, it has chosen to proceed with this approach, on the grounds that there was no clear consensus on a better alternative that would support the objectives that the FRC was pursuing.  The most likely of these was the asset-class approach, but the FRC felt that it would create its own challenges that would be larger than those under the volatility approach.

The FRC has made some adjustments to the proposed method to address implementation challenges or to provide clarity on how the proposed method is to be implemented.  These include the following:

• Allowing volatility group 3 to be used in certain cases where volatility cannot be reliably determined – this will apply to unquoted assets and is also expected to be of particular benefit to SIPP providers
• Clarifying that alternative methods to allow for de-risking or multiple pooled funds may be used where they produce materially similar results

The FRC is also in discussion with fund managers to determine the most suitable way for historical return and volatility data to be delivered to providers.

The accumulation rates and volatility boundaries will be set annually and to this end, the date for performing the calculations will be the 5 years ending on 30 September, any changes to the rates and boundaries will be dealt with via a consultation at the start of November, with the publication of the settled rates and boundaries by 15 February for application in the financial year starting on 6 April.

Annuitisation assumptions

Despite concerns expressed by a number of respondents in relation to the FRC’s proposal that conversion of the projected DC pot into estimated retirement income should be assumed to take place via a single life non-escalating annuity, the FRC has gone ahead with this approach and has clarified that the requirement includes a 5-year guarantee.

The FRC is not going ahead with its proposal that those within two years of retirement should have their illustration determined using market-based annuity rates “given that only a small proportion of individuals will take an annuity at retirement”.

Implementation

As proposed, the now settled version 5.0 of AS TM1 (along with new guidance) will apply to all SMPIs issued on or after 1 October 2023 and, once such an SMPI has been issued, to any money purchase estimated retirement income illustration on pensions dashboards.

The accumulation rates and volatility boundaries are unchanged from those set out in the consultation, but there will be a review of them in 2022/23, with a possibility of revising the assumptions ahead of October 2023.

The FRC will be hosting a webinar on 14 October 2022 to discuss the changes in more detail and has also recorded a podcast with the DWP.

Comment

Many will be disappointed that the FRC has chosen to implement its complex volatility-based approach to setting accumulation assumptions in what is, after all, only an illustration of the possible size of a DC fund in the future.  But the die is now cast and DC schemes and providers will need to schedule the necessary IT work to ensure that they are ready to make available these projections from October 2023.  At least the FRC has given sufficient time for this work to be carried out.

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DC and Collective money purchase schemes – DWP continues to push forward with illiquid investment regulations

The DWP has launched a consultation on broadening DC investment opportunities to facilitate the greater use by such schemes of illiquid investments.  The consultation is in two parts:

• A proposal to exempt certain performance-based fees from the charge cap (as signalled in the mini-Budget (see Pensions Bulletin 2022/35))
• A proposal to amend the Statement of Investment Principles to ensure that certain DC schemes disclose and explain their policies on illiquid investment

Removing performance-based fees from the DC charge cap

Back in March 2022, the DWP decided to take stock on whether to introduce this requirement having received a “mixed reaction” from respondents to an earlier consultation (see Pensions Bulletin 2022/12).  However, Chapter 3 of this latest consultation introduces proposed regulations and statutory guidance, both of which will also apply to collective money purchase schemes.

Under the regulations, schemes will be able to begin to exclude certain specified performance-based fees from the charge cap from 6 April 2023.  The proposed definition can potentially be applied to any asset class.  Where these exclusions operate, the fees must be calculated and disclosed in the annual chair’s statement (as with other costs and charges), and the section of the chair’s statement covering the performance-based fees must be published on a free to access website.

The statutory guidance seeks to ensure that trustees have a fuller understanding of what makes up a specified performance-based fee which they must follow if they want to be able to exclude it from the charge cap.  It also explains the disclosure requirements.

“Disclose and explain” policies on illiquid investment

The DWP consulted on this issue in March 2022 (see also Pensions Bulletin 2022/12), and as a result has decided to proceed.  Chapter 2 of this latest consultation is about whether the proposed regulations and (new) statutory guidance deliver the policy intention and whether the impact assessment fairly reflects the costs and benefits of the proposed measures.

Under the regulations:

• Relevant DC schemes (and collective money purchase schemes) will need to disclose and explain their policies on illiquid investment – for the former, the requirement applies only to the default fund
• Relevant DC schemes will need to disclose and explain the percentage of assets in the default funds allocated to different asset classes in their annual chair’s statement – the Government deciding not to limit this requirement to those schemes with over £100m of assets under management

The statutory guidance is intended to assist trustees with the asset allocation disclosures.

The new disclose and explain requirements will apply on the first occasion when the default SIP, or main SIP for collective money purchase schemes, is updated after 1 October 2023, with a requirement that the policy on illiquid assets must be included in all default SIPs and main SIPS for collective money purchase schemes by 1 October 2024.

Consultation in respect of both parts closes on 10 November 2022.

Comment

The Government’s continued drive to make it easier for DC pension savers to benefit from illiquid asset investments is to be welcomed.  However, there is still a long way to go for these investments to become mainstream for DC schemes and members.  New products are needed that will better fit the retirement aims and needs of scheme members.

The tight deadline for this consultation continues the disappointing trend by the DWP for short consultation periods for DC-related changes.  And, also to note that the accompanying Impact Assessment is overly optimistic on the likely costs of implementing these changes.  For example, for the cost of trustees familiarising themselves with the default SIP illiquid statement requirements, the DWP assumes that each scheme has just three trustees, that each trustee will take just 1.6 hours to become familiar with the new material and that the average trustee wage is £29ph!

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Pension scheme voting rights – FCA provides update

The Financial Conduct Authority has published an update on the work it has done so far in response to recommendations contained in the report of the Taskforce on Pension Scheme Voting Implementation that was published in September 2021 (see Pensions Bulletin 2021/39).

Addressed to Alex Burghart, as the new Pensions Minister at the DWP, the FCA says the following, amongst other things:

• Expressions of wish – there is no regulatory barrier to an asset manager voting in accordance with an asset owner’s “expression of wish” – so pension scheme trustees can issue an expression of wish to their asset managers and asset managers will not breach fund rules when taking this expression of wish into account when voting
• Asset managers’ voting policies – in response to potential shortcomings in the general quality and completeness of asset managers’ voting policies as outlined in the TPSVI report, the FCA will shortly undertake a review of asset managers voting policies to better understand the state of play in the market. The FCA has also begun a multi-firm review of funds that are marketed with various ESG credentials and how they are considering the ESG Guiding Principles published by the FCA in 2021
• Asset manager vote reporting – a Vote Reporting Group is being convened in response to shortcomings in vote reporting under current FCA rules identified in the TPSVI report. The Group is tasked with defining the detail and parameters of a more comprehensive vote disclosure regime for the UK.  Draft proposals are expected by mid-2023, with final decisions by the end of 2023

The update also mentions HM Treasury’s intention to consult on the Competition and Markets Authority’s recommendation to bring the activities of investment consultants within the FCA’s remit.

Comment

The news on the expression of wish issue is welcome and should enable trustees to become more active on voting issues, whilst waiting for many other aspects of the Taskforce’s recommendations to be progressed.

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FCA launches its latest ScamSmart campaign

The Financial Conduct Authority has launched its latest campaign to promote its ScamSmart set of website information and tools, with some worrying statistics showing the extent to which consumers can fall prey to the tactics of pension scammers.

According to an FCA survey of 1,009 adults aged 40 and over with workplace or private pensions:

• 25% would consider withdrawing money from their pension earlier than planned to cover the cost of living
• 44% would take up the offer of a free pension review – which the FCA notes is a classic distraction tactic employed by the scammers
• 54% said that they do not feel confident in how to grow their pension pot and 38% do not feel confident in understanding how pensions work

The FCA concludes by listing some of the most commonly used tactics used by pension scammers.

Comment

This latest campaign’s purpose (which appears to also include mainstream media slots) is to make the general public aware that their pension savings can be at risk from unscrupulous individuals.  We welcome this latest campaign (See Pensions Bulletin 2022/31 for details of the Pensions Regulator’s new scam fighting strategy) and hope that future FCA surveys will show much greater awareness of this issue.

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New DC transfer guidance from PASA

The Pensions Administration Standards Association (PASA) has released ‘good practice’ guidance on DC transfers aimed mainly at pension scheme administrators.

PASA notes that there have been several new legislative changes which impact on pension transfers and the guidance (which it should be said has no legislative basis) sets out a standardised and non-prescriptive process flow for transfers and recommends that trustees agree acceptable Service Level Agreement timescales for transfer with their administrators.  The guidance also contains potentially useful templates for administrators to use for member communications during the transfer process.

PASA hopes that this guidance will improve the overall experience of members through faster and more secure transfers.

Comment

Obviously, schemes will already have their own processes and templates in place, but a drive toward standardised processes and communications could lead to improved efficiency across the industry.  Additionally, smaller in-house schemes could find that using this material saves their own resource costs.

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