The DWP is pushing ahead with its proposals to require trustees of large occupational pension schemes (£1 billion or more in relevant assets), master trusts and collective defined contribution schemes to calculate and disclose a portfolio alignment metric for climate-related disclosures. The DWP’s consultation response on Climate and investment reporting: Setting expectations and empowering savers sets out how the new performance metric is intended to align scheme investments with the goal of limiting the increase in the global average temperature to 1.5 degrees Celsius above pre-industrial levels.
The DWP has not made changes to the timings of the new requirement, which will be effective from 1 October 2022, despite trustees having to report on alignment metrics that asset managers do not yet have to report on. Trustees will have to report against the new metric within seven months of the end of the scheme year which is under way on that date. In its response, the DWP says “All trustees in scope of these Regulations should have the necessary governance capacity and expertise to calculate at least a binary portfolio alignment metric, especially when considering there are open-source tools available and they are guided by the ‘as far as they are able’ principle.” This principle helps address data availability concerns in relation to certain assets when calculating the metric and gives trustees the flexibility to obtain data within the boundaries of what they regard to be reasonable and proportionate for their holdings.
Alongside its response, the DWP published amending regulations and revised statutory guidance on the governance and reporting of climate change risk for trustees of those schemes within scope of the new requirements. In addition, it has published new guidance on stewardship and ESG matters in the statement of investment principles (non-statutory) and implementation statement (statutory) which are summarised below.
The "Stewardship guidance: Reporting on Stewardship and other topics through the Statement of Investment Principles (SIP) and the implementation statement" has been produced to "address deficiencies in scheme governance in relation to stewardship and [ESG] best practice" and to set out the expectations of the DWP on the implementation statement. The focus is on stewardship, but financially material ESG factors and non-financial factors are also included. Trustees must have regard to the parts of the guidance that are statutory (signposted ‘SG’) and are 'encouraged' to take account of the parts that are non-statutory as 'good practice'. This guidance is wider reaching in that it covers, broadly, occupational schemes with 100 or more members and is effective for scheme years ending on or after 1 October 2022.
There will be a number of actions for trustees as a result. The DWP recommends that schemes identify stewardship priorities, ideally covering both voting and engagement policies, and that they consider how these are combined in the SIP and how they align with the UK Stewardship Code. Trustees will therefore need to identify their investment managers’ stewardship policies, engage with them ahead of the “most significant votes” and then include in the implementation statement how the voting activity links to any stewardship priorities identified. Trustees will also have to consider how often to review their managers’ stewardship policies and performance against their scheme’s priorities.
Both the Pensions Climate Risk Industry Group Guidance and the Pensions Regulator’s Climate Change Governance and Reporting guidance will be updated to reflect this new requirement. The DWP also states that it will review the extent to which the guidance has been understood and followed in the second half of 2023.
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DWP have published "Pensions dashboards: further consultation". This includes draft legislation which would require the Secretary of State to consider matters such as security and conformance testing and consult with the Money and Pensions Service (MaPS), The Pensions Regulator (TPR) and the Financial Conduct Authority before setting the launch date (the “Dashboards Available Point” (DAP)). The DAP is the point at which pensions dashboards services will be made available to all members of the public. DWP must give 90 days’ notice of the DAP.
The consultation also provides draft legislation for the disclosure of information from MaPS to TPR and a stated intention for similar legislation for disclosure from TPR to MaPS.
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The small pots working group convened by the Association of British Insurers (ABI) and the Pensions and Lifetime Savings Association (PLSA) has published its Spring 2022 report containing recommendations on how to consolidate the large number of small dormant defined contribution pots generated since automatic enrolment. It concludes that member-initiated transfers are unlikely to materially reduce the number of small pots.
Consequently, the group suggests that a combination of three models may work best to achieve this aim, but that further research is needed to explore these options. The group has discounted a single consolidator fund on the grounds of the potential for market distortion and anticipated costs. It proposes that a combination of the following approaches be developed:
Further work is required on which of the above solutions could be expected to reduce the overall number of small pots and the degree to which these models could impact the financial sustainability of the automatic enrolment market over time.
The working group states that legislation will be needed to effect any solution, including defining the size of deferred pots (there is some consensus about £500) and schemes in scope, setting standards to identify eligible receiving schemes, compelling schemes and providers to implement whichever solution(s) is/are chosen, to allow non-consensual transfers from contract-based plans and to define the liability model for trustees. The co-ordination group’s timeline suggests mass consolidation in 2025-26 at the earliest.
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The Pensions Regulator has laid the Code of practice: Authorisation and supervision of collective defined contribution schemes before Parliament and has also published a response document following the consultation on the draft earlier this year. The code sets out how trustees can apply for authorisation and how TPR will assess schemes against the authorisation criteria, both at the initial application stage and then through the ongoing supervision.
In the consultation response document, TPR states that it will publish further guidance on the fitness and propriety criteria and on how authorisation fees for additional sections are to be calculated. TPR also states that “it is too early to speculate what might happen in future iterations of legislation”; refusing to comment on how the Code might be adapted to multi-employer (master trust) CDC schemes, though stating “we hope that much of the existing code will be applicable in the future.”
TPR has also made some modest, but welcome, relaxations including in relation to financial sustainability measures and clarifying that they do not expect “schemes to actively seek member feedback [on communications] quarterly” as some had feared. While the requirements of the Code are onerous, TPR believes this is justified noting that it believes the level of detail is necessary to help trustees and employers understand what is needed to run such a scheme and useful to it by demonstrating that the Trustees have grasped it.
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The Pensions Regulator has published “Pensions dashboards: initial guidance” that sets out its expectations regarding how trustees meet their pensions dashboards responsibilities as the staging dates for the biggest schemes loom nearer their starting date of June 2023. The guidance will be updated once the final regulations have been published and the industry standards developed.
As well as the timetable, the guidance contains details on connecting to the dashboards, how to choose a digital interface, what steps are required prior to connection and ongoing requirements. It then covers how people will be matched to their pensions, with names (first and last), date of birth, current address, national insurance number and old contact details being provided by the Pension Finder Service. It is then for trustees to determine which data they use to identify if a match or possible match is found. The guidance also sets out the information that will be provided to members via the dashboards, penalties for non-compliance and how to stay abreast of changes.
The guidance also contains a helpful checklist and TPR is asking trustees, scheme managers and administrators to attend a pensions dashboards webinar on 28 July at 2.30pm.
TPR says its research shows that a majority of trustees have yet to get their preparation sufficiently underway. This underpins its launch of a “Deadline” campaign that urges trustees to check when their connection deadline is, to consider how they will connect (in-house/integrated service provider etc) and to take stock of their data and digitise it. TPR recognises the huge challenge this presents schemes and will look to work with industry as issues arise. It warns, however, that it will use its powers to impose financial penalties where it sees “intentional or reckless non-compliance”.
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TPR has published its Corporate Plan 2022 to 2024 and associated press release “TPR outlines its priorities for next two years to protect savers”. It updates the 2021 to 2024 Corporate Plan, which aligned with TPR’s five strategic priorities: security, value for money, scrutiny of decision-making, embracing innovation, and bold and effective regulation. The initial sections cover the wider pensions landscape including the impacts of COVID-19, global conflict, economic challenges and climate change. The plan then sets out TPR’s priorities for the coming year and looking ahead to 2023 to 2024 for each of the strategic priorities. There are a number of proposals. Those that caught our eye include:
Finally, in the section headed ‘Year 3 (2023 to 2024)’, supervision and enforcement, TPR hints that the additional notifiable events legislation is scheduled to come into effect in 2022 to 2023. Interestingly, TPR also suggests that the 2017 AE Review measures may be implemented.
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David Fairs’ blog “Reporting on climate: a challenge but an opportunity” acknowledges the genuine challenges that trustees have faced in drafting Taskforce on Climate-related Financial Disclosures (TCFD) reports and states that TPR does not expect to issue penalty notices to trustees in the first wave, provided such schemes publish a TCFD report containing such details as they have managed to obtain and have made a genuine effort to obtain the rest.
The blog notes that TPR understand some trustees have concerns – in light of their experiences with the DC Annual Governance (Chair’s) Statement – about how the published reports will be used and reviewed. The blog summarises the purposes of the disclosures. TPR then outlines how it expects to use the disclosures. This includes providing “high-level observations and feedback to in-scope schemes where we have an existing supervisory relationship”, refining the approach to those in the second wave of TCFD reporting and informing DWP’s review of the regulations in late 2023.
TPR also concedes that first-year costs may be high but anticipates that the cost and resource requirements should reduce over time.
Finally, TPR warns that there may be additional requirements in future to cover “Sustainability Disclosure Requirements” and that these are expected to follow the recommendations made by the International Sustainability Standards Board (ISSB).
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The pensions consumer journey feedback statement summarises responses received and TPR/FCA’s next steps following their 2021 call for input. Unsurprisingly, everyone agreed that communication is key. The statement includes links to some useful material including “The Mid-Life MOT: helping employees navigate mid-life” and Government guidance headlined “Planning for your retirement puts you in control of your future”. The statement encourages larger schemes to support employers in providing midlife MOTs to their workforce.
The statement also recognises the concern that all parts of the industry have in not straying from guidance into advice and the potential conflict between regulatory expectations on good member communication and the Information Commissioners Office’s (ICO’s) draft direct marketing code of practice. The statement confirms that communications to new members about “products” outside that into which a member has been automatically enrolled could be classed as marketing.
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The DWP has published a response to its 2019 consultation on draft regulations to integrate the Competition and Markets Authority (CMA) Order into pensions legislation, requiring trustees to carry out a tender process for fiduciary management services and set objectives for their investment consultant (subject to limited exemptions). The draft regulations (which have been laid before Parliament for approval) largely replicate the CMA Order and provide for the Pensions Regulator (TPR) to oversee compliance, rather than the CMA. Trustees will therefore be required to report compliance to TPR via their scheme return.
The DWP has made some minor changes to its original proposals, including the definitions of “investment consultancy services” and “fiduciary management services”, and the “in scope” assets for the purposes of identifying when the requirements apply.
The final regulations are expected to come into force on 1 October 2022. TPR will amend its current guidance before this date and provide further guidance on the penalties that apply for non-compliance.
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