Pensions Bulletin 2023/24
Our viewpoint
15 June 2023
- Government sets out new delivery approach for schemes to connect to pensions dashboards
- PASA publishes dashboard values guidance
- Good news expected for most schemes performing their triennial valuation this year
- Pensions Regulator to survey trustees to measure diversity and inclusion issues
- Finance Bill amendment tackles stand-alone lump sum issue
Government sets out new delivery approach for schemes to connect to pensions dashboards
On 8 June 2023 Pensions Minister Laura Trott updated Parliament on the timetable for pension providers and schemes to connect to pensions dashboards. This had been paused in March when issues were discovered with the dashboard ecosystem being built for the Money and Pensions Service (see Pensions Bulletin 2023/09).
Repeating her message from March that “more time is needed to deliver this complex build”, she announced that regulations were being laid setting out a new delivery approach. The draft regulations were published the following day and they will need to be approved by both Houses of Parliament before they can be finalised. They relate only to occupational pension schemes.
The draft regulations do the following:
- Remove completely the staging timetable and associated connection windows for occupational pension schemes, only finalised last year
- Introduce a 31 October 2026 backstop by which all occupational pension schemes with 100 or more members (excluding pensioners) at a reference date need to connect. The reference date itself changes from the scheme year ending between 1 April 2020 and 31 March 2021 to the scheme year ending between 1 April 2023 and 31 March 2024
- Allow all such occupational pension schemes to ask for a 12-month extension to this backstop, but only under very narrow circumstances
- Remove the ability of occupational pension schemes to ask to connect early relative to the now removed staging timetable
The existing regulations require occupational pension schemes to “have regard” to connection guidance from MaPS and the Pensions Regulator. This guidance has yet to be issued. The amending regulations add the Secretary of State to the list of potential authors of the guidance. Consultation is promised for later this year on the nature of this guidance. It is conceivable that it will reprise some of the material that has now been removed from the regulations, but only when we see it will it become clear what the new connection timetable will be and what level of compulsion attaches to it.
To accompany this announcement, the Pensions Regulator has collapsed that part of its initial guidance that deals with the staging timetable and the DWP has put a warning on its deferral guidance as it will need to be rewritten. The Financial Conduct Authority has also acknowledged that it will need to amend its rules settled last year that explain when FCA-regulated pension providers have to complete connection of their personal and stakeholder pension schemes to the ecosystem.
Comment
What has been announced is a necessary sticking plaster so that the largest of schemes don’t fall foul of a law with which they cannot comply. But three months on from the “reset” announcement, we are no nearer knowing the scale of the difficulties being faced by those building the ecosystem, still less by when it will be able to accept the first connections.
Although the new 31 October 2026 backstop is precisely a year later than when the smallest of occupational schemes with 100 or more members were required to stage, it doesn’t necessarily follow that when we see the guidance, everything will be as before, but put back one year.
As for when the system goes live for public use, the Pensions Minister implies that this could happen once the vast majority of memberships are on board, but before some of the smaller schemes are asked to connect. She also makes clear that the Government remains committed to the project. As such, we encourage schemes to continue with their preparations.
PASA publishes dashboard values guidance
The Pensions Administration Standards Association has published new guidance setting out good practice approaches to providing value data to pensions dashboards. The guidance is designed for use by both DB and DC schemes and covers twenty topics including possible approaches for dealing with issues such as late retirements, underpins, partial retirements and split normal retirement ages.
PASA says that the dashboard regulations and the Pensions Dashboards Programme standards intentionally do not provide a complete level of detail as to what to provide, so that schemes can decide the best approach according to their rules and circumstances. The PASA guidance is designed to assist schemes in this respect and in particular help them avoid considering the same issues from scratch.
Comment
Although this extensive guidance carries no legislative standing it will be welcomed as a start to establish “good practice” in many areas by those at the sharp end of generating (and continuing to generate) the all-important individual member benefit information. This in turn will enable dashboard enquirers to establish what they can broadly expect to receive from their various pension savings vehicles. Although the principle of what needs to be shown is clear from the regulations, there is much devil in the detail, especially in relation to individual defined benefit rights.
Good news expected for most schemes performing their triennial valuation this year
The Pensions Regulator has issued its analysis for this year’s DB annual funding statement (see Pensions Bulletin 2023/17), which relates to “Tranche 18” schemes with valuation dates between 22 September 2022 and 21 September 2023.
Overall, the Regulator’s model suggests that in aggregate, schemes in this tranche will show improved funding levels from those reported three years ago, primarily driven by significantly higher gilt yields which act to reduce technical provisions. As at 31 March 2023, the Regulator estimates that 76% of Tranche 18 schemes are in surplus. Almost 70% of schemes in deficit at the previous valuation are expected to show a surplus as at 31 March 2023, and of the schemes that are expected to continue to be in deficit, only 21% are expected to need to increase their deficit reduction contributions.
However, this good news is tempered by the fact that for some employers, the Regulator recognises that affordability will have been significantly reduced since the last valuation and will be the limiting factor for deficit reduction contributions, at least in the short term.
The Regulator states that individual schemes’ funding positions are likely to vary greatly compared to the aggregate estimates, pointing out two aspects in particular:
- The most important is expected to be the extent to which schemes hedge interest and inflation rates, and the extent to which they are invested in growth asset classes. Schemes that had not hedged interest rate risks are expected to have improved their funding levels more than fully hedged schemes
- The major asset classes invested in by UK pension schemes experienced a wide variety of returns over the period since the previous valuation which also differed depending on which three-year reference point was being used. In particular, there was large market turmoil in the final two weeks of March 2020 in the lead up to the first Covid-19 lockdown period, which would have had a significant effect on schemes with the previous valuation date of 31 March 2020
Covenant strength of employers is likely to have been affected differently by economic conditions (including the war in Ukraine, Brexit, Covid-19, higher inflation and higher interest rates), and as with last year, the Regulator has excluded trends in employer affordability from this year’s analysis. Further, as many schemes may have now reached their long-term funding target, trustees may put different emphasis on covenant strength when setting assumptions.
Comment
As with last year, the Regulator’s analysis once again gives encouraging news for many schemes performing their triennial valuations this year. However, the level of uncertainty for individual schemes also increases. This is unsurprising, given the increasing volatility in the market in recent years, with the turmoil in the gilt market and high inflation in 2022 adding to the continuing crises from Covid-19 and the war in Ukraine.
Pensions Regulator to survey trustees to measure diversity and inclusion issues
The Pensions Regulator is taking further steps on its future of trusteeship and governance project with the launch of a survey which we understand is intended to enable it to establish a baseline on diversity and inclusion issues amongst occupational pension scheme trustees. This survey stems from its September 2022 action plan (see Pensions Bulletin 2022/35) in which the Regulator set out the need to gather such data, and undertook to decide on a mechanism to collect diversity data by the end of 2023/24.
We understand that this survey request will be sent out initially, via a pilot exercise, to tease out any issues with accessibility, navigation and understanding of the questions. The main survey is intended to be rolled out in July. All those contacted will be required to complete the questionnaire.
Comment
We welcome this initiative and encourage all trustee boards to engage with it. We look forward to seeing the results of the survey and the Regulator’s take on the current trustee landscape on these important issues.
Finance Bill amendment tackles stand-alone lump sum issue
The Government is to move an amendment to one of the pensions tax clauses in the Finance Bill that should resolve some issues in relation to “stand-alone lump sums” that came to light shortly after the Bill was published (and as we noted in Pensions Bulletin 2023/13). These niche benefits relate to those who still have rights that accrued prior to 6 April 2006 to take all their retirement benefits in a scheme as a tax-free lump sum, provided they have not grown beyond stated bounds.
As part of the “phase 1” implementation of the overall Budget policy to cap off scope for tax free cash generally, Clause 23 of the Bill had simply capped what could be paid under this tax label by reference to what the scheme could have paid on retiring on 5 April 2023. The amendment provides that any excess right over the new “5 April 2023 cap” when the member finally comes to draw the benefit – provided it satisfies the original conditions for being a stand-alone lump sum – can still be paid as such but is taxed as if pension income.
Comment
The amendment deals with concerns from industry that the original clause blocked payment of a scheme benefit due to these members (and potentially, for technical reasons blocked even partial payment) – so is welcome.
Scheme administrators who manage such benefit rights will need to review processes, including identifying the new “2023 cap” on the tax-free element for each case. Guidance from HMRC would be welcome on their reading of the principles of how this calculation should be done.