page-banner

Pensions Bulletin 2023/04

Our viewpoint

DWP launches multi-pronged initiative to improve private sector pensions

On 30 January 2023, the DWP published a slew of documents taking forward a number of policy initiatives, mainly regarding DC pensions.  We cover each of these in the four numbered articles below.  Separately, a research report was published on member engagement with workplace pensions and understanding of pension charges which is also covered later in this Bulletin.

The Pensions Minister, Laura Trott, announced these developments as a “shake-up of private pensions to create fairer, more predictable, and better-run pensions”, with particular focus on addressing the pension inequality that has arisen in the private sector between those with secure retirements thanks to DB pension provision and those facing much more uncertainty thanks to the overwhelming trend to DC.  However, much of what was published had been expected in some form of another, in some cases for quite some while.

Comment

There is a common theme running through these documents, which is about obtaining more from the application of the same level of DC savings, whether through investment returns, charges, bringing together disparate pots, or the means by which retirement income is accessed.  But the big issue with DC right from the start has been that the contribution rates have not approached that associated with DB provision.  At some point DC contribution adequacy is the nettle that will have to be grasped.

Back to the top

1.  DC Value for Money framework proposed

The DWP has launched a joint consultation with the Pensions Regulator and the Financial Conduct Authority about a new proposed Value for Money (VFM) framework.  This follows the joint feedback statement issued by the Regulator and the FCA last May (see Pensions Bulletin 2022/20).  As this is a new and important development we have prepared a separate News Alert on the topic.

Comment

This is probably the most interesting of the DC-related DWP announcements to come out this week and if the proposals come into being they will radically shake up governance arrangements for both trust-based and workplace contract-based DC pension schemes and therefore are of interest for anybody involved in running DC schemes.

Back to the top

2.  DC and CDC schemes – illiquid investment initiatives going ahead

The DWP has responded to its October 2022 consultation (see Pensions Bulletin 2022/37) in which it proposed to introduce “disclose and explain” illiquid investment policy requirements for certain DC (and CDC) schemes and to remove certain performance fees from the charge cap applicable to certain DC (and CDC) schemes.

The Government says that it has considered the suggestions it received during the consultation and has made minor amendments as a result.

Finalised statutory guidance has also been published and the regulations have been published in draft form.  The guidance (and the regulations) states that the exemption for performance-based fees will take effect from 6 April 2023 and that the “disclose and explain” illiquid investment policy requirements will take effect from the end of the first scheme year after 1 October 2023, along with a requirement (for certain DC schemes only) to disclose and explain, in their annual Chair’s Statement, the allocation of assets to different asset classes in their default arrangement(s).

Comment

These regulations are part of the Government’s attempts to make illiquid assets more attractive for DC schemes to invest in, with the intention that this will produce better member outcomes.  All schemes in scope will have to start complying with the “disclose and explain” requirements and those schemes interested in setting up investments with performance fees built-in will have to get to grips with the statutory guidance.

Back to the top

3.  DC small pots – the Government steps back in

The DWP has issued a call for evidence to “deepen the evidence base” around the problems of small deferred pots.  The call concentrates on two large-scale automated consolidation solutions, namely a “default consolidator” and “pot follows member”.

As brief background, the issue of “small pots” is a side-effect of the success of auto-enrolment and has resulted in millions of low-value pension accounts being created.  Some of the concerns about this are: that savers can lose track of them as they move between jobs, multiple small pots will not provide as much “buying power” as a combined pot, and that the pots are expensive for providers to administer.  Therefore for several years the industry has been trying to find solutions to this, resulting in the Small Pots Co-ordination group issuing its second report about it last June (see Pensions Bulletin 2022/25).  One of the conclusions of that report was that legislation will be needed to make any solution work effectively.

It is clear that this problem is being considered in the round with other aspects of DC pensions policy such as Pensions Dashboards, VFM (see our News Alert) and Stronger Nudge guidance (see Pensions Bulletin 2022/20).

The call for evidence notes that there are two aspects to the problem: “stock” small pots which have already been created, and reducing the continued “flow” of new small pots that are being created.

One of the key questions in the call for evidence is what the threshold should be below which pots would be eligible for automatic consolidation.  Research by the earlier DWP-led Small Pots Working Group in 2020 found that 74% of deferred pots were smaller than £1,000 with as many as 25% being smaller than £100.  The call for evidence asks whether the threshold should be between £1,000 and £10,000.

The issue of whether “micro” pots should be refunded rather than consolidated is also raised again.  There is also consideration of how “deferred” should be defined for the purpose of when a “deferred small pot” would trigger automatic consolidation.  The preferred definition is a prescribed period in which no further member or employer contributions are paid to the pot, but other options are considered.

The call for evidence also notes the difficult issue of maintaining protected pension ages after an automatic transfer and implies that transfers made for the purpose of small pot consolidation would maintain such protections, although it notes that this may result in receiving schemes having to change their scheme rules to accommodate this.  This issue came to light during the Co-ordination Group’s work and was considered to be a major problem in finding a solution.

The call for evidence closes on 27 March 2023.  No timescale is given for when the Government’s next steps are likely to follow.

Comment

This issue has been building for a decade since the introduction of automatic enrolment.  We welcome the Government’s renewed interest in it and hope it will take action quickly to improve the outcomes of affected members since it is time to get off the fence and take action as we have separately commented.

Back to the top

4.  CDC scheme legislation to be extended

In a much anticipated consultation, the DWP is examining ways in which the current collective defined contribution law, which has been built on a single or connected employers’ model, can be extended to accommodate unconnected multi-employer schemes, including those set up on a master trust basis.  The consultation also looks at the possibility of CDC schemes acting as decumulation-only vehicles into which individuals could transfer their retirement savings shortly before retirement.

Extension to multi-employer schemes

The consultation notes the significant interest in enabling these other forms of CDC schemes to become a possibility, with the DWP having held many discussions with a wide range of stakeholders to explore the issues arising.

The DWP notes the appetite for benefit designs that differ from that currently permitted, so there is greater flexibility to allow, for example, differing contribution or accrual rates, and flexibility to vary contribution (and accrual) rates over the lifetime of the scheme.  The DWP takes this as its starting point and puts forward a number of key principles for these new types of CDC scheme before getting into the detail.

Much of the consultation then steps through aspects of the existing law to see what needs to be modified to best address different designs, as well as aspects that arise as a consequence of schemes being set up for a multiplicity of unconnected employers, whether they have some commonality, such as by operating in the same industry, or are simply vehicles set up by commercial providers.

What is coming through in this part of the consultation is that this is something that the DWP is very much minded to deliver and is now testing out its detailed proposals ahead of the necessary regulations to come.  The Pensions Regulator will also have to adjust its authorisation and supervisory approaches.

Decumulation-only vehicles

By contrast, this part of the consultation seeks to establish whether there is significant appetite for decumulation CDC products, set up on a trust basis, and to further the DWP’s understanding of the specific challenges their designs might pose.

Such vehicles had been mentioned in the earlier consultation covering decumulation in DC schemes (see Pensions Bulletin 2022/23), with it being thought that they could provide better returns, through investment and longevity risk pooling, than the traditional options for DC funds of contract-based annuitisation or drawdown.

The DWP is minded to include an expectation that such CDC schemes provide inflation-linked increases to pension income.  It also envisages that these schemes are likely to be set up by commercial operators, rather than employers.  It goes on to pose some questions around initial capitalisation, achieving sufficient scale, fair pricing, member communications and marketing.

Consultation closes on 27 March 2023.

Comment

The Government had always intended that the CDC legislation would not stop at the single-employer design, but until this had been settled, it could not go on to address other potential designs.  Although no timescales have been set out, it does now seem that the multi-employer extension will happen, which will be welcome news to many.

Much more work needs to be done on the decumulation-only design, but once it becomes a reality, these schemes could be very attractive to the current generation of private sector savers who have only ever known DC schemes, especially if, as hoped, they can offer significantly higher starting pensions than traditional annuities.

Back to the top

Chancellor hints at pensions tax reform

In a speech delivered on 27 January 2023, Jeremy Hunt, Chancellor of the Exchequer, in speaking about the “Four ‘E’s of economic growth and prosperity” – enterprise, education, employment and everywhere – called for everyone who can participate in the economy to do so and, in this respect, that the Government will look at the conditions necessary to make work worth an individual’s while.

This is being widely reported as signalling that pension reforms to encourage the over 50’s back into the workplace, or not to leave it, are on the cards.  Quite what these reforms might be has not been spelt out by the Chancellor, but various sources are suggesting that it could include raising the lifetime allowance, currently standing at £1,073,100 and frozen until 6 April 2026, and expanding ‘mid-life MOTs’ to include pensions guidance for those considering retiring early.

Comment

An increase in the lifetime allowance would be most welcome, but it would have to be substantial to engender the behavioural changes that are being sought.  The Chancellor has separately stated that there is no headroom for major tax cuts and that business tax cuts would be prioritised.  But there is a Budget on 15 March 2023, followed by a Finance Bill.  In theory at least, there is nothing to stop the Chancellor legislating for the course of the LTA over say the next five years, just as his predecessor bar two did two years ago in freezing it.

Back to the top

The DC market puts on further growth and consolidation

The Pensions Regulator has published its latest landscape report on the DC occupational pension scheme market, showing the number, membership and assets of schemes in this market, using schemes on its register as at 31 December 2022.  As in previous years the report shows a market that continues to grow, consolidating in terms of the number of schemes and assets under management as it does.

Amongst the noteworthy statistics are the following:

  • Consolidation in the non-micro DC market (ie schemes with 12 or more members) continues with the number of such schemes falling by 11% from 1,370 a year ago to 1,220 now. This consolidation is occurring in all segments of this market, including the very largest (schemes with 5,000 or more members)
  • Asset values of DC schemes (excluding micro and hybrid schemes) are £143.0bn – up from £113.5bn last year
  • The average assets per membership was £5,787 – up from £5,212 last year
  • The 36 authorised master trusts (as last year) now have 23.5 million DC memberships (including deferreds) and over £105.3bn in assets (compared with 20.7 million and £78.8bn this time last year)

Comment

The DC occupational pension scheme market outside the micro sector has been utterly transformed over the past decade, with a small number of mega schemes now dominating the market.  These clear winners of the auto-enrolment policy now look after 98% of the DC memberships.  However, it will be some time before they deliver DC pots of any significant size to their members.

There are no statistics in this report on the small pot issue, but one can’t help but think that it has worsened over the last year.  Although active membership of non-micro DC schemes (including hybrid) increased by just over 1 million to 11.18m, deferred membership increased by almost 2 million to 15.17m over the same time.  With scheme consolidation largely completed, action must now turn to pot consolidation.

Back to the top

"Detachment, fear and complacency” are barriers to engagement with pensions

This is the headline finding of research carried out on behalf of the DWP into member engagement with workplace pensions and understanding of pension charges.

The research found that attitudes towards pensions were quite negative with a sense of detachment from pensions, although participants in the research did report that they trusted their employer to have chosen the best scheme for them.  There is a lack of understanding about pensions, but the importance of employer contributions is understood and that is a significant concern if considering switching pension provider.

When it comes to charges, there was a preference for charges to be shown in pounds and pence rather than percentages.

The research findings about communication are mixed.  Annual statements are the most strongly recalled piece of information whereas monthly emails are unlikely to be engaged with and quarterly magazines were found to be “quite long and overwhelming”.  In contrast, regular summary statements of 2-3 pages were found to be easy to engage with and digest.  Participation in online pension accounts also varied with passwords and login details acting as barriers to engagement, but once these were overcome participants were “pleasantly surprised by how accessible the information was”.  However, participants were unsure what to do with it.

Comment

This research is interesting to read, if slightly depressing.  There is lots here to shape future pension communications exercises.

Back to the top

Carillion – Regulator throws in the towel

The high profile collapse of Carillion plc in January 2018 (see Pensions Bulletin 2018/20) exposed failures in the regulation of DB pension schemes, particularly in relation to scheme funding, and led to the enactment of new powers for the Pensions Regulator and new criminal offences.

Five years after the event the Regulator has released its regulatory intervention report describing its investigation into Carillion.

The Regulator’s investigation focused on whether there were grounds to use the anti-avoidance powers they had then, specifically their power to issue a Contribution Notice.  They reviewed transactions leading up to the insolvency to establish if there was any evidence of avoidance activity, working with other regulatory agencies along the way.

Ahead of the collapse substantial proceeds of disposals were received by Carillion.  These were used to provide essential liquidity, also enabling Carillion to support the schemes by paying deficit repair contributions under existing recovery plans for a longer period.  Therefore, the conclusion was that there was no “material detriment” justifying a Contribution Notice.

Carillion had published misleading information about its financial performance.  Indeed, the Financial Conduct Authority has censured Carillion for contraventions of the Market Abuse Regulation and the Listing Rules, stating that it would have imposed a financial penalty of nearly £38m if it wasn’t in liquidation.  The FCA is also imposing substantial financial penalties on three former Carillion executives.  However, the Regulator has concluded that the financial misstatements and dividends consequently paid out do not meet the material detriment threshold necessary for a Contribution Notice.

The Regulator has therefore concluded that there is no basis for using their powers and has decided to close its investigation.

Comment

It is easy to understand why the Regulator gets a bad press in respect of high-profile corporate failures leaving underfunded pension schemes, but it is really the case that in this instance they simply did not have any effective powers when they were needed.

What is perhaps more pertinent in 2023 is whether the new criminal offences would act as a deterrent if the same events were underway today.  Possibly – and it has been five years now and we have not yet seen a repeat.  Also, if the new scheme funding framework had been in force for years before things went wrong with the company, the Carillion schemes might have been better funded, possibly to the extent that some of them wouldn’t have fallen into the Pension Protection Fund.

Back to the top

Auto-enrolment parameters frozen once more

The Government has published the analysis supporting its review of the earnings trigger and qualifying earnings band to be used for auto-enrolment purposes for 2023/24.  The earnings trigger above which individuals must be auto-enrolled will continue to remain frozen (as it has been since 2014/15) and the band of earnings on which minimum contributions are based will continue to be aligned to the Lower and Upper Earnings Limits for national insurance purposes.  Therefore for 2023/24:

  • The automatic enrolment earnings trigger will be maintained at £10,000 pa
  • The lower limit of the qualifying earnings band will remain at £6,240 pa
  • The upper limit of the qualifying earnings band will remain at £50,270 pa

The analysis states that freezing the earnings trigger will maintain current private sector participation at 15.3 million in total and will keep total annual contributions at £74bn.

The results of this review have been announced in Parliament by Laura Trott, with a statement that ends with “The Government are considering what more can be done to enable people to have greater financial security in retirement”.

Comment

This Pensions Bulletin article is a near identical copy of our reporting of last year’s review, reflecting the fact that it is Groundhog Day once more with the auto-enrolment earnings trigger and qualifying earnings band.  Even the ministerial statement is remarkably similar to Guy Opperman’s this time last year.  And quite when spring will arrive for the implementation of the results of the 2017 auto-enrolment review seems to be a secret that even Punxsutawney Phil cannot divine.

Back to the top

FRC firms up on new SMPI assumptions

The Financial Reporting Council has decided that the projection assumptions that it provisionally put forward when consulting on the new framework for the production of annual statutory money purchase illustrations (see Pensions Bulletin 2022/37), will go ahead unaltered.  As a result, there is no change to the proposed accumulation rates and volatility group boundaries that govern how accumulation rates are determined for illustrations issued from 1 October 2023.  These will remain in force until at least 5 April 2024.

The FRC has also published a technical paper detailing the analysis supporting its conclusions.

Back to the top

HMRC pension schemes newsletter published

HMRC’s first pension schemes newsletter of 2023 covers similar ground to many of its previous newsletters, with articles on relief at source, the latest pension flexibility statistics, the Managing Pension Schemes service and Accounting for Tax returns.

For a long while this newsletter has been largely administrative in nature and Newsletter 146 is no different.  Highlights include further details of the lengthy transition away from the Pension Schemes Online service to its Managing Pension Schemes replacement.  In particular:

  • From April 2023, it will no longer be possible to compile and submit any new event reports for the tax year 2023/24 onwards on the old service – but event reports for previous tax years (including 2022/23) can still be submitted and amended on it
  • In summer 2023, it will be possible to create, compile and view an in-year event report on the new service (there will be a period between April 2023 and summer 2023 when 2023/24 event reports cannot be submitted on either service)
  • In 2024, on a date as yet unannounced, the new service can be used to submit a pension scheme return for the 2023/24 tax year onwards

The newsletter also carries a reminder that the filing deadline for Accounting for Tax returns for the quarter ending 31 December 2022 is 14 February 2023.  These need to be submitted on the new service, as has been the case for a number of years.

Back to the top

On point papers

The place to access all our latest analysis on the UK pensions and finance agenda

Investment insights

A collection of news and insights from our team on topics related to investment.