UK pensions news summary Q1 2024

• In response to its consultation on proposed revisions to its DB Funding Code, the DWP published its, long-awaited, draft Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024, as a precursor to the full Code. The regulations, which are set to come into force from April 2024 and are “designed to improve the security and sustainability of” DB schemes, set out the requirements for DB schemes when determining their funding and investment strategy and new statement of strategy (see below) and will apply to scheme valuations from 22 September 2024. The key takeaways are:
  • • once a scheme is “mature” it should be in a state of low dependency on the sponsoring employer.
    • adopting a softer stance than previously, determining when a scheme is ‘significantly mature’, with reference to the duration of its liabilities, will be set by TPR in its Code of Practice. Although tbc, a duration of less than 12 years seems likely.
    • in setting a low dependency funding basis, the value of assets relative to liabilities should be “highly resilient to short-term adverse changes in market conditions” (a requirement which TPR had previously said “could be consistent” with investing 20%-30% in growth assets). Previously, the proposal was for schemes to be broadly cashflow matched. The wording appears to exempt surplus assets from this highly resilient requirement.

See: www.legislation.gov.uk/ukdsi/2024/9780348256901/contents

• TPR issued a consultation on the new statement of strategy DB trustees will have to complete for TPR – setting out their long-term funding strategy and their approach to managing associated risks – alongside their actuarial valuation. TPR’s consultation proposes that the statement of strategy should be in a standard form and follow a set template, depending on how the scheme is approaching its valuation, which TPR will provide. Smaller schemes will provide less information than larger schemes. The consultation closes on 16 April. See: https://tpr-prdsitecore-uksouth-cd-staging.thepensionsregulator.gov.uk/en/media-hub/press-releases/2024-press-releases/statement-of-strategy-consultation-published-by-tpr
• TPR launched its, long awaited, General Code of Practice as an opportunity to ensure trust-based schemes are fit for 21st century. As an overarching document covering all areas of pension scheme governance, the General Code merges 10 of TPR’s existing Codes of Practice, in some cases expanding on the various pieces of guidance currently in effect, into a new single Code, with the other six to be incorporated at a later date. Key to its 171 pages is the requirement for schemes to review and enhance, as appropriate, their governance and risk management and then document these as an Effective System of Governance (ESOG) and Own Risk Assessment (ORA). Each part of the ESOG should be reviewed at least every three years, or sooner if there’s a material change in scheme governance or the risks faced. The ORA, which assesses the risk management processes and controls applied to the qualitative and quantitative risks a scheme faces, needs to be completed at least every three years. Suffice to say, TPR expects scheme governing bodies to challenge themselves to improve their process and controls and be able to demonstrate, given the size and complexity of the scheme, that they have appropriate procedures and policies in place and no gaps exist. Trustees of schemes unable to meet TPR expectations will be required to consider whether DC savers would be better off in a larger, better-run scheme, and whether DB savers would see higher standards of governance in a consolidation arrangement. The code is expected to come into force on 27 March. See: https://www.gov.uk/government/publications/the-pensions-regulator-general-code-of-practice 
• Building on its 2023 Options for Defined Benefit schemes: a call for evidence, the DWP launched its consultation on easier corporate DB surplus extraction (this includes a proposed statutory override of scheme rules to allow surplus extraction) and the creation, by 2026, of a legally separate strand to the PPF to act as a public sector consolidator of smaller DB schemes unattractive to commercial endgame providers. The consultation closes on 19 April. See: https://www.gov.uk/government/consultations/options-for-defined-benefit-schemes/options-for-defined-benefit-schemes
• On DB surplus extraction, Isio suggested that scheme surplus could be “gradually shared between the employer and members over the medium to long-term” for those 40% of schemes with “very strong funding positions” reaching a “target buffer above full buyout funding”. Returning around 17% of their assets to sponsors and members over the next 10 years, Isio suggested that these schemes could, in “continually replenishing surpluses”, release “an average of around 2% to 2.5% of assets per year without taking excessive levels of risk”, with payments only made if they are “less than the surplus and accompanied by a simultaneous discretionary increase to members’ benefits”. See: https://www.isio.com/app/uploads/2024/02/Purposeful-Run-On-PRO-%E2%80%93-a-new-destination-for-DB-schemes-v3.pdf
• Meanwhile, HMRC has formally reduced the new authorised surplus payment charge from 6 April 2024 to 25%, from 35% (the rate it’s been since 2006). This charge is made to scheme administrators and is payable even if the employer to whom the surplus extraction is paid, is making tax losses.
• TPR CEO Nausicaa Delfas confirmed what we already know by saying that “the era of consolidation is here” for both DB and DC, as the pensions industry evolves towards fewer, larger and, by TPR’s implication, better-run schemes.
• The DC scheme consolidation net was cast even wider with Jeremy Hunt announcing three reforms the government wants to make to how DC (both trust and contract-based) schemes operate in the UK, with a view to improving saver outcomes, principally through improved value for money:
  • Disclose costs and net investment returns, publicly comparing performance data against competitor schemes, including at least two schemes managing at least £10bn in assets. (This feels a lot like a mirroring of the Australian Super performance league tables).
  • Stop schemes that are performing poorly for savers from taking on new business from employers, with TPR and the FCA having a full range of intervention powers.
  • Disclose the level of investment in “British” businesses.

These proposed reforms will be subject to consultation but to date have largely met with criticism from the pensions industry, e.g. Sir Steve Webb suggested that the threat of effectively shutting down pension schemes whose investment returns are relatively poor runs the risk of causing the whole industry becoming very risk averse. There are also big issues about what constitutes “British” investment, as most British businesses are global in nature. Moreover, Cowan v Scargill (1984) confirmed that restricting investment to the UK isn’t permissible, if better risk-adjusted returns are available elsewhere. Also, having to report something doesn’t necessarily change behaviour.

• Separately, new Local Government Pension Scheme (LGPS) reporting requirements, effective from April 2024, will require LGPS funds to provide a summary, on a standardised data return, of their asset allocation, UK equity investment and progress on pooling.
• The Finance Bill 2023/24 set the foundation for the abolition of the Lifetime Allowance (LTA) from 6 April 2024. The individual maximum tax-free cash lump sum allowance is set at £268,275 (25% of the £1,073,100 LTA) and individual death benefit allowance at £1,073,100.
• The DWP released its annual findings on the Auto Enrolment earnings trigger, maintaining both the lower and upper limits at £6,240 and £50,270, respectively. See: https://www.gov.uk/government/publications/automatic-enrolment-review-of-the-earnings-trigger-and-qualifying-earnings-band-for-202425/review-of-the-automatic-enrolment-earnings-trigger-and-qualifying-earnings-band-for-202425-supporting-analysis

• In 2023, DB pension scheme buyouts amounted to, what is being touted as a new normal of, £50bn, with Royal London being one of two widely expected new entrants to the bulk annuity market and Rothesay Life agreeing to buy Scottish Widows’ £6bn bulk annuity portfolio, subject to regulatory approval.
• Superfund Clara agreed its second transaction, taking the 10,400 member, £600m Debenhams Retirement Scheme out of the PPF. Having been approved by TPR, members will now receive 100% of benefits, with back payments made to those whose pensions were reduced while in payment during the PPF assessment period. With the scheme already fully funded, Clara will provide £34m of funding to the scheme to provide “increased certainty on the journey to an insured buyout in five to ten years’ time.”

• Trustees are required by law to take all financial factors into account in their investment decision making. However, whether sustainability-related issues constitute financial factors largely remains a grey area. Addressing this head on, the newly formed and broadly constituted Financial Markets Law Committee (FMLC) issued a report suggesting that as sustainability-related issues can clearly impact an investment’s risk and return, then such issues are financial factors. Moreover, the report, by homing in on systemic risks, such as climate change and nature loss, noted that pension schemes cannot fully insulate themselves from systemic risks simply by diversifying or relying on governments and regulators to do so on their behalf. See: Pension Fund Trustees and Fiduciary Duties: Decision-making in the context of Sustainability and the subject of Climate Change. Financial Markets Law Committee. 6 February 2024. See: https://fmlc.org/publications/paper-pension-fund-trustees-and-fiduciary-duties-decision-making-in-the-context-of-sustainability-and-the-subject-of-climate-change/
• In Q423, to help pension schemes better integrate financially material social factors into investment decisions, the DWP Taskforce on Social Factors, chaired by Luba Nikulina, consulted on 35 recommendations for the pensions industry to better assess financially material social risks and opportunities. A draft guidance document was issued shortly after, which was well received by the pensions industry. This has now been followed by the launch of the final DWP Taskforce on Social Factors’ guide on how the pension industry can better integrate social factors into its decision making. Reinforcing the conclusions of the FMLC report (see above), p.6 of the guide notes, “The nature of systemic risks [which includes some social factors] means they cannot be avoided or mitigated by diversifying an investment portfolio away from them. They will impact across economies as a whole, wherever and however investors choose to invest. So asset owners need to seek to address these systemic risks directly and it is increasingly recognised that market participants can influence systemic issues.” See: Considering Social Factors in Pension Scheme Investments: a guide from the Taskforce on Social Factors at https://lnkd.in/dvZUeN_W
• Nature and biodiversity are our most precious assets but they don’t consciously feature, in a risk or return sense, in most pension fund portfolios. In this edition of Columbia Threadneedle Investment’s Pensions Watch, we define nature and biodiversity, reflect on the importance of the biosphere in underpinning sustainable economic activity and determine what needs to change. Ultimately, we consider how the pensions world can play its part in moving the world to a position where nature and biodiversity is replenished, and not continually depleted. See: www.columbiathreadneedle.co.uk/en/inst/insights/pensions-watch-29/

• The PLSA Retirement Living Standards (RLS)2024, compiled in conjunction with Loughborough University’s Centre for Research in Social Policy, reflecting the increased cost of living over the last 18 months and changes to the public’s view of what goods and services should be included, has resulted in some quite stark uplifts in the costs of each RLS level. This is especially true of moderate RLS. The figures shown below are the amounts of expenditure required to achieve a given living standard outside of London (within London). The State Pension triple lock acts as a crucial safeguard against rising retirement living costs. With a significant 8.5% increase to just over £11,500 annually from April 2024, the State Pension remains a substantial foundation of retirement income. The State Pension triple lock, alongside improved annuity rates, will help median earners be able to achieve most aspects of the Moderate level. NB. Depending on your circumstances, you may need to add other costs, such as mortgage payments, rent, social care costs and any tax on pension income to these expenditure numbers. See: https://www.retirementlivingstandards.org.uk/details

Minimum

£14,400 for a single person (London £15,700)

£22,400 for a couple (London £24,500)

Moderate

£31,300 for a single person (London £32,800)

£43,100 for a couple (London £44,900)

Comfortable

£43,100 for single person (London £45,000)

£59,000 for a couple (London £61,200)

• The Resolution Foundation published a new paper entitled, Precautionary Tales – Tackling the problem of low saving among UK households. Its key finding was that despite overall improvements in household balance sheets since the onset of the pandemic, the UK still has a long-standing problem of remarkably low precautionary savings. As many as 30% of working age adults live in families with savings below £1,000, leaving them financially vulnerable and ill-equipped to respond to financial shocks. 45% of those in the bottom third of the income distribution had savings below £1,000 compared to just 18% of those in the top third of the income distribution. See: resolutionfoundation.org/app/uploads/2024/02/Precautionary-tales.pdf
• The International Longevity Centre released a 70-page research paper into and the impact of longevity changes. The paper notes that between 1950 and 2010, UK life expectancy at age 50 increased to 32.7 years – an increase of 8.8 years but began to stall from 2013. By 2018, life expectancy for those aged 50+ was one year lower than the trend. Crucially, every year of life expectancy lost translates into an average of 2.6 years of healthy life expectancy lost. See: https://ilcuk.org.uk/wp-content/uploads/2024/01/One-hundred-not-out-report-final.pdf
• NOW Pensions published their 2024 Gender Pensions Gap report. Largely as a consequence of taking career breaks, today women retire with average pension savings of £69,000, while men on average retire with a pot of £205,000. To achieve parity, women need to build up benefits for an additional 19 years on average. See: https://www.nowpensions.com/app/uploads/2024/02/gender-pensions-gap-report-24.pdf