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Pensions Bulletin 2022/46

Our viewpoint

Chancellor launches “Edinburgh reforms” of UK financial services

On 9 December 2022 the Chancellor of the Exchequer set out a substantial set of proposed changes to the regulation of UK financial services, with some being of direct relevance to pension schemes and pension investment.

The main driver for these changes is the need to replace retained EU law on financial services with a comprehensive UK equivalent as part of the UK adapting to its new position outside the EU – and in so doing, boost the competitiveness of the UK’s financial services industry post-Brexit.  A policy statement Building a smarter financial services framework for the UK summarises the intended changes, which deliver on the Future Regulatory Framework Review that had been undertaken by the Treasury, starting with a first consultation in October 2020.

The main vehicle that will enable the outcomes of this review to be delivered is the Financial Services and Markets Bill that has recently completed its House of Commons stages.  Under it the entirety of EU financial services law that has been brought into UK law will be repealed and various tools will be employed to enable the UK to create a new model of regulation for financial services.  One of these tools is a new “Designated Activities Regime” controlled by the Treasury and the UK regulatory agencies, the PRA and the FCA.  The Government recognises that this transition will be a lengthy and complicated process and will therefore prioritise those areas deemed to be most urgent.

On 9 December 2022, within a further statement given to Parliament, the Chancellor spelt out some of the detailed aspects of this reform.  Insofar as pension schemes are concerned there was a mention of the Government’s plans to reform Solvency II (as announced in the Autumn Statement), intended to facilitate investment by insurers in long-term productive assets.

Under the same heading of “unlocking investment to drive growth across the whole economy” the Chancellor said that:

  • The Government will consult, in early 2023, on new guidance to the Local Government Pension Scheme (LGPS) in England and Wales on asset pooling. The Government will also consult on requiring LGPS funds to consider investment opportunities in illiquid assets such as venture and growth capital, as part of a diversified investment strategy
  • The DWP, alongside the FCA and the Pensions Regulator, will, in the New Year, consult on a new Value for Money framework which will set required metrics and standards in areas such as investment performance, cost and charges and quality of service that all schemes must meet. This had been expected for the end of 2022 (see Pensions Bulletin 2022/20)

There is also a proposal to codify existing policy in relation to the VAT treatment of fund management.  A separate consultation paper sets out the proposals in which it is stated that no change to the policy is intended although the devil may be in the detail.

On sustainable finance issues the Government intends to publish an updated Green Finance Strategy in early 2023, and in the first quarter of 2023 consult on bringing ESG ratings providers into the FCA’s regulatory perimeter.

Finally, there is a promise to lay regulations early in the New Year to remove well-designed performance fees from the DC charge cap.  The DWP consulted on this issue in October 2022 (see Pensions Bulletin 2022/37) and the regulations are expected to be in force by April 2023.

Comment

As so much of the regulation of the UK’s financial services industry stems from EU law it was inevitable that this would have to be an area of focus for the Government following the UK’s departure from the EU.  The reforms are more than simply recasting existing EU law in a form better suited to the UK market, and they are certainly not delivering unfettered deregulation.  This is a huge subject, and as such, those in the pensions industry will need to keep a close eye on the progress of these reforms.

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Regulator challenges smaller DC schemes to shape up or ship out

On 9 December 2022, in a blog that welcomes the recently published guidance on investing in less liquid assets (see Pensions Bulletin 2022/44), David Fairs, Executive Director of Regulatory Policy, Analysis and Advice at the Pensions Regulator, calls on trustees of small DC schemes to increase their investment decision skills and take action to enable pension savers to access the investment opportunities that best support good outcomes – whether in their existing scheme or through consolidation.

Turning to the value for money assessment that trustees of most DC schemes with total assets of less than £100m must now complete every year (see Pensions Bulletin 2021/40), David Fairs says that this should drive significant change, with other recently introduced requirements and initiatives also potentially driving change.

On investing in less liquid assets David Fairs lists five things that DC trustees should do before committing to such investment – namely:

  • Ensure that rigorous valuation governance processes are in place and the proposed valuation data points meet the administration requirements for the scheme
  • Obtain appropriate advice from the investment adviser and the legal adviser and also, potentially consult the scheme auditor
  • Understand the difference between the use of stale and modelled prices and in which circumstance either may be acceptable or necessary
  • Undertake some member movement scenario analysis to understand the practical implications in relation to valuations and attribution of fees and performance; and
  • Undertake some downside valuation scenario analysis to understand the operational issues that would arise in stressed markets or when (fund) assets invested in are subject to, for example, an audit qualification

He concludes that as a result of this and other investment-related issues trustees of DC schemes “need to either upskill or up sticks”.

Comment

This blog plays to the Regulator’s long-standing concern that smaller DC schemes are not capable of delivering good outcomes for their members and that consolidation is very much part of the answer to this issue.  The blog’s timing is also immaculate given the Chancellor’s announcement (see above article) in relation to the value for money framework on which the Pensions Regulator and Financial Conduct Authority have been engaged since at least October 2018.  It does now look as if this framework is coming – and perhaps with some legislative teeth.

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Regulator gives heads up to imminent consultation on new DB Funding Code

On 13 December 2022, in a blog whose purpose is to alert the pensions industry to the imminent arrival of a consultation on the new DB Funding Code, David Fairs, Executive Director of Regulatory Policy, Analysis and Advice at the Pensions Regulator, said that the Regulator will launch its consultation before Christmas.  The draft Code is to explain how the Regulator will interpret the new, yet to be finalised scheme funding legislation (see Pensions Bulletin 2022/38).

The Regulator will also clarify its twin-track regulatory approach, which is to be as follows:

  • Schemes can continue to adopt a scheme-specific funding approach provided it meets the new legislative requirements and the key principles set out in the Code
  • Fast Track (on which there will be a separate consultation document) acts as a filter for the Regulator’s assessment of actuarial valuations, such that if all the Fast Track parameters are met, the Regulator is unlikely to scrutinise the valuation further or engage with trustees

The Regulator intends that under the new regulatory framework it can focus on those cases outside the Fast Track filter, intervening when it identifies schemes that are potentially carrying too much risk.

There is now some urgency to all this as the Code needs to be laid before Parliament by summer 2023 if the new regime is to start in October 2023.

Comment

It has been a very long wait since the Regulator’s March 2020 consultation (see News Alert 2020/02) and the Code that will be seen is intended to reflect what has happened in the interim – not only the economic backdrop, but the Regulator’s learnings along the way.

However, the overall objective remains the same – requiring trustees to reduce reliance on their sponsoring employer as their scheme matures and providing a more workable framework under which the Regulator can tackle those schemes which it believes are not doing the right thing.

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PPF confirms 2023/24 levy proposals will proceed unaltered

The Pension Protection Fund has confirmed that it will go ahead with its proposals for the 2023/24 PPF levy as set out in its consultation document in September (see Pensions Bulletin 2022/36), including the treatment of assets under the new categorisation, as confirmed by the Pensions Regulator in its DB scheme return (see article below).  As a result, the PPF estimates that 98% of schemes can expect to pay less levy in 2023/24, with the majority of those schemes paying a risk-based levy seeing it fall by more than half.

The PPF’s proposals were strongly supported by those responding to the consultation and confirmation that they are to go ahead will be welcomed by PPF levy payers.

Following stakeholder feedback, the PPF has made changes to the insolvency risk portal managed by Dun & Bradstreet, including the introduction of multi-factor authentication, downloadable reports with either the latest score or the mean score and the data used, changes to the alerts function, and re-introduction of the webchat service.

The PPF has also received support for its long-term plan for the levy set out in the September consultation.  It has published a new page on its website, stating its two key objectives of flexibility and simplicity, and its four design principles: increase flexibility on the levy amount collected; increase flexibility to charge through scheme size (such as through the scheme-based levy); reduce levy sensitivity to insolvency risk; and apply different approaches depending on scheme size.  The PPF plans to continue to develop this further over the next few months.

Comment

Now that all the details to provide the Regulator with the required asset splits are available and the treatment of each asset categorisation within the PPF’s levy calculations confirmed, schemes should start to work with their asset managers to ensure that necessary data will be available by the 31 March 2023 submission deadline.

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DB scheme return now requires new asset class information

As is customary around this time of year the Pensions Regulator has published details of the changes to the scheme return for DB and hybrid schemes.

The main change this year is the requirement to supply a new asset breakdown which has followed as a result of a consultation carried out jointly by the Pensions Regulator and the Pension Protection Fund in 2021 (see Pensions Bulletin 2021/45).  Under this each scheme will be assigned to one of three tiers based on their total section 179 liabilities:

  • Tier 1 ("simplified”) – is for those with liabilities of less than £30m. Information required is similar to the 2022 scheme return, although insurance funds, hedge funds and commodities are no longer available as asset categories, and diversified growth funds have been introduced
  • Tier 2 (“standard”) – is for those with liabilities between £30m and £1.5bn. As well as the changes made to Tier 1, a further asset category (absolute return funds) has been introduced to this tier.  Schemes also need to provide more granular information about the bonds and equities they hold
  • Tier 3 (“enhanced”) – is for those with liabilities from £1.5bn upwards. As well as the information required for Tier 2 schemes, schemes also need to provide information on risk factor stresses, which are similar to the calculations underlying the PPF’s bespoke investment stress submissions for such schemes in previous levy seasons

Schemes can choose to “trade up” to higher tiers, on a year-to-year basis, and provide more information as a result.  The Regulator suggests that schemes with highly diversified growth assets or significant hedging programmes may wish to trade up so their asset breakdown can be better reflected within the asset categories.

Other changes to the scheme return include more information on DC additional voluntary contributions, where the scheme accepts these; and additional contact information and consent for the receipt of the PPF levy invoice.

Scheme return notices will be issued from 1 February 2023 and must be submitted by 31 March 2023.

Comment

One of the stated purposes for the new asset class splits is for the Pensions Regulator to collect sufficient information to feed into the new DB funding regime.  While the regime is not expected to be in force until towards the end of next year, much more asset information is now requested from the majority of DB schemes.  There is now a lot of work for these schemes and their investment advisors to undertake in time for the 31 March 2023 deadline.

Separately, neither the DB nor the DC scheme return have been updated for the recent DWP regulations requiring trustees to report aspects of their oversight of investment consultants and fiduciary managers to the Pensions Regulator (replacing the previous CMA Order requirements – see Pensions Bulletin 2022/36).  Either there will be further amendments, or supplements, to the scheme returns, or there will be a gap in schemes reporting on this matter.

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The decline in private sector DB scheme provision continues

The Pensions Regulator’s latest annual landscape report on DB and hybrid schemes, this time as at 31 March 2022, provides further evidence of the decline in such provision in the private sector, reflecting schemes completing the process of winding up, scheme mergers and schemes entering the Pension Protection Fund following employer insolvency.  There were 5,378 such schemes, continuing a year-on-year decline since 2012, with 50% of schemes now closed to future accrual, 37% closed to new members and only 9% open to new members.

Just under 0.8m individuals are now building up benefits in such schemes, down from just over 0.9m a year ago.  Deferred and pensioner memberships also continue to fall – now standing at approximately 4.7m and 4.3m 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 6.8m active members, 4.8m deferred pensioners and 5.6m pensioners.

Comment

Whilst private sector DB provision is increasingly a legacy issue, the future does not have to be entirely DC.  It is now more important than ever that the Government comes forward with its proposals on how it will expand the CDC regulatory environment.

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Pensions Regulator and FCA update their joint regulatory strategy

Four years on from publishing their joint regulatory strategy (see Pensions Bulletin 2018/42), the Pensions Regulator and the Financial Conduct Authority have provided an update, introduced by means of a blog by Sarah Smart, Chair of the Pensions Regulator.

Much of the update is a reporting back on the nature of the joint activity the two bodies have undertaken over the last four years, with phrases employed such as the two organisations operating much closer than before and fundamentally changing how they collaborate.  The joint goal of delivering better outcomes for pensions savers through all this activity is emphasised, with links to their various achievements.

Looking to the future the update outlines eight joint workstreams and the outcomes that the two bodies wish to deliver through them, and how these align to the four joint areas of focus developed in 2018.  Interestingly, five of these workstreams fall under the heading of consumer understanding and decision-making, which neatly illustrates that much of today’s challenges follow as a result of the freedom and choice agenda that came into being towards the end of the 2010-15 Coalition Government.  The new consumer duty that applies to FCA-regulated firms is also mentioned.

The update concludes by setting out the desired outcome and the action that is to be taken for each of the eight joint workstreams.

Comment

The actions that the two bodies intend to take in these eight areas are couched in the most general of terms with no dates by when any of them might be delivered, but they do help to give a clear direction of travel for the two bodies working together in the interest of the pension saver.

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JFAR says goodbye with its final annual report on actuarial risks

The Joint Forum on Actuarial Regulation (JFAR) has published its latest and last annual report on risks to the public interest where actuarial work is central to understanding the risk.

In the 2022 Risk Perspective report, under a theme of the interconnectedness of risks, JFAR has identified five ‘hotspots’ where there is a perceived increase in risk to the public interest, and where actuarial work is central to understanding the risk.  They are:

  • Sustainability – including climate change
  • Inflation – following a long period of low and stable inflation
  • Mortality and morbidity – including the long-term impacts of Covid on both
  • Unfair outcomes for individuals – including the risk that actuaries may not act in the best interests of consumers, either intentionally or unintentionally; and
  • Technology – in particular the changes it will stimulate in areas such as modelling

For each hotspot the report gives a one sentence summary of the risk to actuarial work, before setting out current influences on the risks and key developments over the last two years.  For some hotspots the report sets out a conclusion, which is in the nature of warnings to actuaries to tread carefully.

Unsurprisingly, this year’s report starts off with the risks in LDI strategies that were exposed as a direct consequence of September’s mini-budget.  Although this story has yet to be fully told, the report offers up some questions which actuaries and users of actuarial work may wish to reflect on.

JFAR was created in 2013 and brought together regulators to coordinate the identification and analysis of public interest risks to which actuarial work is relevant.  It is now to be disbanded, with the forum being replaced by informal dialog between former members to continue to identify risks to actuarial work.  The Financial Reporting Council will chair multilateral meetings on specific issues as and when required and will continue to scan the horizon to maintain a knowledge of current and emerging risks from actuarial work.

Comment

The JFAR reports have always been a good read for those of an actuarial bent.  They have also been a service to those who need to take a step back to see where actuarial work is at risk of falling short because of the changing environment in which it is undertaken.  The reports will be missed.

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DWP’s maladministration on State Pension Age changes did lead to injustice

Following a progress report earlier this year (see Pensions Bulletin 2022/32), the Parliamentary and Health Service Ombudsman has now completed stage two of his investigation into the way that the DWP communicated changes to women’s State Pension Age, and associated issues.

He found that there was maladministration in both DWP’s communication about national insurance qualifying years and in its complaint handling, but that there was no maladministration in the Independent Case Examiner’s complaint handling.  He also found that the maladministration identified above did not lead to all the injustices claimed.

The Ombudsman has now considered what action the DWP should take to remedy the injustice that he has found.  This is the third and final stage of the investigation and the Ombudsman’s provisional views on this have been shared with complainants, their MPs, and the DWP, who will have an opportunity to comment.

Once the Ombudsman has considered any further evidence he receives, he will publish his report into the findings of stage two and stage three at the same time.

Comment

The significance of this latest stage is that injustice has now been established as a result of the DWP’s maladministration.  This has allowed the Ombudsman to consider the appropriate remedy, which we should hear about in the New Year.

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Pensions dashboards’ deferral application guidance issued in final form

The guidance for schemes who wish to defer their deadline for connecting to the dashboard ecosystem has been issued in final form.  It had been issued in draft when the dashboard regulations were laid before Parliament in draft form (see Pensions Bulletin 2022/38).

The technical content of the final guidance appears to be same as that issued in draft, with one exception.  The assessment of whether to grant deferral may now also take into account “systemic issues relating to the implementation of the Government's policy, such as any impacts on the wider staging profile and delivery timeline”.

As in the draft, the guidance makes clear that there are essentially two hurdles to pass to be granted deferral:

  • There was an ongoing transfer of data to a new administrator as at 12 December 2022, or a contract was in place to re-tender the scheme administration as at the same date; and as a result
  • It is disproportionately burdensome or would put member data at risk to comply with the connection deadline

The final guidance also confirms that the latest date for making a deferral application is 11 December 2023.

Comment

When the regulations were issued in final form it was clear that deferral would only be entertained in the narrowest of circumstances.  This remains the case.

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Pensions Regulator gains power to disclose information to MaPS

Regulations have been laid before Parliament that enable the Pensions Regulator to disclose “restricted information” to the Money and Pensions Service (MaPS) where the Regulator considers that this would enable or assist MaPS to exercise its functions under the pensions dashboards legislation.

This technical regulation is necessary because any information that the Regulator obtains under its functions cannot be disclosed, apart from under certain circumstances and/or unless it is specifically enabled to do so.

The Pensions Act 2004 (Disclosure of Restricted Information by the Pensions Regulator) (Amendment of Specified Persons) Order 2022 (SI 2022/1285) comes into force on 28 December 2022.

Comment

This regulation was expected, it being mentioned in the further dashboard consultation that was launched in June 2022 (see Pensions Bulletin 2022/25), but it had to await the main DWP regulations being approved by Parliament.  MaPs itself gained the power to share information with the Pensions Regulator through the main DWP regulations.

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Actuaries introduce CDC Scheme Actuary designation

With all the legislation and other regulatory material now in place for employers to set up Collective Defined Contribution Schemes (known as collective money purchase schemes under the legislation), the Institute and Faculty of Actuaries is introducing a new CDC Scheme Actuary Practising Certificate, which is to be a requirement for any member of the IFoA wishing to provide actuarial advice to the trustees of a CDC scheme and who is formally appointed by the trustees for that purpose.

Following a consultation held in July 2022 the IFoA has now settled the details of a revised Practising Certificate Scheme which incorporates CDC Scheme Actuaries, together with a new CDC Scheme Actuary competency framework.  It has also made a number of changes to APS P1 – the professional standard that sets out the duties and responsibilities of IFoA members undertaking work in relation to pension schemes.  The changes to APS P1 extend existing pensions specific ethical and professional obligations to IFoA members providing advice to trustees of CDC pension schemes and introduce some specific obligations for CDC Scheme Actuaries when it comes to the ‘material events’ reporting.  Further details can be found in the response to the consultation.

The revised Practising Certificate Scheme and the new version 4.0 of APS P1 will come into force on 1 March 2023.

Comment

There are some clear differences between the role of the traditional Scheme Actuary servicing DB schemes and that of the CDC Scheme Actuary, most notably that the CDC Scheme Actuary’ s annual valuation will directly impact members’ benefits.  This new designation is necessary, but initially is likely to be taken up by a very select group.

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