The turbulent market reaction to last week’s ‘mini-Budget’ has led to government bond yields increasing by 1.2% pa in the space of four days, which has shaken pension funds’ LDI portfolios that are intended to protect schemes against interest rate and inflation risk. The value of LDI portfolios (which reduce as gilt yields rise) may have plummeted by 50% or more for some pension funds by the end of 27 September. LDI uses leverage to efficiently provide schemes with high levels of interest rate and inflation protection – for example using £50m of LDI assets to protect a scheme against changes to £100m of liabilities.
The LDI portion of many pension funds’ portfolios needed to be rapidly topped-up from other liquid assets the pension schemes owned (such as equities and diversified growth funds) to ensure the agreed level of protection was maintained. If this was not done, then funds would have lost their entire liability hedge. The Bank of England intervention on 28 September 2022, which led to a stabilisation in financial markets reduced gilt yields by more than 1% pa in a single day, reducing the need for the rapid recapitalisation of LDI portfolios and the potential for significant forced selling of gilts.
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Hot on the heels of Friday’s ‘fiscal event’, and perhaps prompted by the turbulent market reaction, the Government have announced that they plan to set out further details on the government’s fiscal rules, including ensuring that debt falls as a share of GDP in the medium term, and an Office for Budget Responsibility (OBR) forecast on 23 November. The ‘Update on Growth Plan implementation’ will be followed by a Budget in the Spring of 2023, accompanied by a further OBR forecast.
The statement reiterates that the government intends to provide detail on further supply side growth measures during October and early November, including changes to the planning system, business regulations, childcare, immigration, agricultural productivity, and digital infrastructure. As part of that programme, the Chancellor plans to outline regulatory reforms to ensure the UK’s financial services sector remains globally competitive.
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On 27 September, the Pensions Regulator (TPR) published its “Equality Diversity and Inclusion (ED&I) action plan”. It sets out steps that TPR, in partnership with the Diversity and Inclusion Industry Working Group (IWG), intends to take to support trustees in creating a culture of inclusion and recruiting diverse candidates.
This follows research that indicates that too few trustee boards are treating diversity of their composition as a priority. It also reflects one of TPR’s strategic aims, as set out in its own “Equality, Diversity and Inclusion (ED&I) Strategy” – namely to “promote high standards of equality, diversity and inclusion among [its] regulated community”. TPR considers that it is “important for good governance and decision making and can be beneficial to good saver outcomes” and cites its own research that indicates “a lack of understanding of why the ED&I on boards is considered important”.
Rather than defining what it considers to be meant by diversity, TPR is adopting the definition used by the Pensions and Lifetime Savings Association – this encompasses the protected characteristics under the Equality Act 2010, but also extends to other individual differences such as socio-economic background.
TPR’s action plan, in part following responses to last year’s consultation on its single modular code and the 2020 consultation on the future of trusteeship, outlines how it will set trustees “clear expectations on diversity along with providing practical tools and information on recruiting diverse candidates and create a culture of inclusion”.
To assist TPR, the IWG has set up four workstreams:
TPR will continue to work with the last three of these workstreams to publish guidance – “a package of good practice guides, case studies and tools for employers, trustees and advisers” – by the end of the 2022-23 financial year.
The data, research and innovation workstream will support TPR “in developing a baseline from where [it] can gauge how diverse and inclusive boards are and monitor changes over time”. TPR will use this to “develop a mechanism to collect and use diversity data in the longer term to measure success” – citing that it intends to measure progress “by the end of 2023-24”. Measures under consideration include adding questions to the scheme return and running regular (possibly triennial) “all-trustee” surveys.
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The Pensions Regulator (TPR) has published its half-yearly automatic enrolment ‘Compliance and enforcement bulletin’ highlighting the findings of in-depth compliance inspections at over 20 large employers in the UK. While the number of times TPR has used its compliance powers has remained broadly the same, the inspections uncovered a number of common errors in respect of calculating pensions contributions and communications to staff.
In its press release on the common types of errors that can leave employers at risk of unintentional non-compliance, TPR highlighted the use of incorrect earnings thresholds as one that can leave employers at risk of having to make backdated payments for staff on behalf of whom incorrect contributions have been made as well as financial penalties. TPR also advised employers to check the government guidance on maternity pay, as miscalculating this can cause consequential errors in pensions contributions. When approaching re-enrolment, TPR recommends that employers take the opportunity to check that their systems and processes are up to date and running smoothly.
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On 22 September the Department for Health and Social Care (DHSC), published “Our plan for patients”. The DHSC intends to “change elements of the NHS pension scheme to help retain doctors, nurses and other senior NHS staff, to increase capacity:
Kwasi Kwarteng’s first big speech as Chancellor delivered some well-trailed tax cuts combined with a couple of surprises, all contained in ‘The Growth Plan 2022’. The reversal of the recent increase in National Insurance contributions (NICs) and the bringing forward of the reduction in the basic rate of income tax to 19% were both widely leaked, but the abolition of the Additional (45%) Rate of income tax for those with earnings over £150,000 could be classed as a rabbit from a hat.
The core message in the speech was that the Government wants to drive growth. That may have hastened the commitment to bringing forward draft regulations that will remove ‘well-designed’ performance fees from the charge cap for defined contribution default funds.
The Government’s response to the consultation on policy proposals to deliver this objective was published in March 2022. The Chancellor’s Growth Plan indicates that the Government are pressing ahead with this and that draft regulations can be expected – though no date was given and previous attempts to introduce this flexibility have met with a mixed response – including a commitment to consult on draft guidance alongside any draft regulations.
NICs continued their rollercoaster year. They had been increased by 1.25% in April 2022, so that Class 1 NICs were increased from 12% to 13.25% on earnings between the primary threshold and the upper earnings limit and from 2% to 3.25% thereafter and then the primary threshold at which individuals start to pay NICs rose from £9,880 to £12,570 on 6 July.
From 6 November 2022, that rate of NICs will drop back to 12% and 2% respectively. The April 2022 NICs rise was due to have been changed to a Health and Social Care Levy from April 2023, but that will no longer take effect and to reverse it the Health and Social Care Levy (Repeal) Bill was introduced yesterday.
The Chancellor also announced changes to Income Tax. His predecessor Rishi Sunak’s proposed cut to the basic rate (from 20% to 19%) which had been scheduled for April 2024 is brought forward to April 2023. This will correspondingly cut pensions tax relief for members who pay tax at the basic rate under the net pay system. However, it appears that members who pay contributions to relief at source schemes (where the scheme reclaims tax at 20%) will have that rate protected for 2023-24.
At the same time, the 45% Additional Rate of Income Tax (introduced in April 2010 and cut from 50% to 45% in 2013) will be abolished from 6 April 2023 – reducing the amount of pensions tax relief available to the 660,000 individuals that paid it. Individuals who wish to maximise the available tax relief, including any from ‘carry forward’ of unused annual allowance from previous years, might wish to increase their contributions in this tax year.
The Chancellor announced he would “bring forward an ambitious deregulatory package to unleash the potential of the UK financial services sector” including “scrapping EU rules from Solvency II”. Potentially, this could reduce the cost of securing pensions with insurers.
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In November 2020, the UK Statistics Authority decided, with effect from February 2030 onwards, to align increases in the RPI with those under the Consumer Prices Index including owner occupiers’ housing costs (CPIH). Three large pension schemes challenged that decision and the process by which it was made. They also challenged the lack of compensation for those who would be expected to suffer financial loss including pension schemes holding index-linked gilts and pensioners with RPI-linked pensions. The Court has ruled against the legal challenge on all counts. It is not yet known whether the judgment will be appealed. However, it now appears very likely that the change to RPI will proceed as planned and that no compensation will be paid. [Update: 29 September 2022: The judgment will not be appealed and so it is now final.]
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