As expected, the Chancellor, Jeremy Hunt MP, has announced in yesterday's Autumn Statement on pension reform a raft of measures that build on his July Mansion House proposals – having recently announced “a £320 million plan to usher innovation and deliver Mansion House Reforms”. Part of the rationale of these is to increase pension scheme investment in productive finance, but other ‘wins’ include an expectation of improved governance and, where appropriate, accelerated scheme consolidation. In itself, consolidation is expected also to result in improved governance and make it easier to invest in productive finance.
Below we set out various elements from the Government’s responses to July’s consultations together with a note of a fresh call for evidence.
From April 2024, refunds of surplus to sponsors from DB schemes will be subject to tax at 25% rather than 35%. A consultation will be launched in the winter on making surplus extraction easier and the appropriate safeguards for members, such as the levels at which surplus can be refunded, covenant strength, and giving consideration to the potential benefits of a 100% underpin from the Pension Protection Fund (PPF). In its response to the call for evidence, the Government notes an intention to clarify in the revised funding and investment regulations that there is headroom for more productive investment and make changes to the DB funding code to support a less risk-averse approach.
The Government intends to establish a public sector consolidator by 2026, which is aimed at schemes that are unattractive to commercial providers and will consult on the design and eligibility “this winter”. This is likely to be focused on the smaller end of the DB landscape and appears to be a much more targeted measure aimed at addressing gaps in the market rather than the radical consolidation proposals put forward by the Tony Blair Institute for Global Change.
The Government has taken a two-stage approach in its response to the proliferation of small, deferred DC pots. The first considers the proposal for a multiple default consolidator framework. The Government is pressing ahead with most of July’s proposals, having concluded that a central clearing house is its preferred approach and rejecting calls for relying on the pensions dashboards infrastructure. The latter being member-initiated is “significantly different to what would be required from a clearing house – where action is taken without requiring member involvement”. It also implies that the clearing house might support the second (longer-term) part of its small pots strategy – a ‘pot for life’ regime; more of which below.
Where a member has an existing chosen consolidator, this will be the default for any future consolidation. In the case of multiple pots with multiple consolidators, funds will be moved into that with the largest pot. The Government will develop an authorisation and supervisory regime for trust-based schemes and examine options for the contract-based market. The document cites some of the requirements including being able to demonstrate good levels of value for money (VFM) and protection against flat-fee charges. As proposed, in scope pots will be those valued £1,000 or less where there have been no active contributions in the last 12 months.
The small pots industry group – to be launched in early 2024 – will consider the interaction between dashboards and consolidators and will publish its first interim report in Spring/Summer 2024 with a view to making firm proposals in late 2024.
Longer term, the Government is attracted to the idea of individuals being able to choose a pension for life, contrasting this with the historical premise that they would have a job for life. This part of the document is therefore couched as a call for evidence “Looking to the future: Greater member security and rebalancing risk” from which the Government can then distil further proposals. It expects the setting up of the small pots clearing house will help in developing the necessary architecture to support such a model. Moreover, the paper cites that “95% of savers in [the] trust-based market are within around 30 Master Trusts”, so it might be reasonable to infer that the Government sees members choosing from a yet smaller number of Master Trust providers, rather than more widely from existing retail options.
The document recognises the risk of a recurrence of the ‘opt-out’ scandal, by implying that there would be an exemption where the employer provides a better offering than the lifetime provider – including DB or Collective Defined Contribution (CDC) schemes, higher than automatic enrolment (AE) minimum employer contributions and where members benefit from certain protections.
Bringing multiple strands together into a single panacea, the Government wants to understand “whether there is merit in considering a potential CDC lifetime provider model” resulting in a small number of “authorised providers that aggregate small pots, process AE contributions, and deliver decumulation choices”.
The call for evidence deadline is 24 January 2024.
The Government continues to believe that “trust-based CDCs have the potential to be a promising future model for pensions”. It therefore sets out its expectation that the first CDC scheme is likely to go live in early 2024, regulations for multi-employer schemes will follow later in 2024 and that it will continue to work with the pensions industry to establish a CDC decumulation model that works in the UK (see also entries on small pots and helping savers understand their pension choices, where the Government considers CDC has a role to play).
The Government has concluded in its response to the call for evidence that most trustees are well-supported, knowledgeable and hard-working. It does however believe that trustees and others would benefit from more support, guidance and training, and it plans to immediately take forward the following areas:
There were some other points of interest too. The Government is not currently seeking to mandate a professional trustee “quota” for boards – although they are explicit that their long-term vision is for a more consolidated market with at least one professional trustee per board. Many of the responses highlighted, and the Government acknowledged, that effective scheme governance requires a diverse board with a range of skills, experience, and expertise, rather than being reliant on individual knowledge. There is an acknowledgement that the time commitment for trustees can be significant, and not having sufficient time was particularly noted by lay trustees; however, no additional requirements on employers are currently proposed in relation to this. And finally, trustee indemnity insurance was noted as ‘expensive’, and a suggestion was made that TPR engage with the insurance industry on the nature and level of risks to which trustees are exposed.
In its response to the call for evidence, the Government has announced that legislation will be introduced ‘when parliamentary time allows’ to require trustees of all trust-based schemes to offer a range of decumulation products and services to members at the point of access that are suitable for their members and consistent with pension freedoms. In doing so, it is relying on trustees’ fiduciary duty to act in the members’ best interests, but hints at greater intervention if necessary. Schemes will have to provide the service in-house or by partnering with a third-party provider – with no scheme-size restrictions. Schemes will be required to have a default position in place as a backstop for those that do not engage. The Government considered two options – an ‘opt-in’ approach whereby the member has to actively opt in (or out) of a range of decumulation options on offer or an ‘opt-out’ approach whereby a scheme-specific generic solution is implemented unless the member makes an active choice about what to do with their assets. It has chosen to proceed with the 'opt-out' approach.
As mentioned above, CDC in decumulation will be considered further to add an additional tool to support good member outcomes.
The Government acknowledges that communication and guidance will remain a key element in supporting individuals in making the right decision. As previously announced, TPR will be hosting a series of virtual roundtables in 2024 to help inform the content of interim guidance on decumulation later that year.
The Financial Conduct Authority has announced that it will consult in the spring on draft value for money (VFM) rules for contract-based schemes. While The Pensions Regulator welcomed this announcement, it did not indicate when to expect further development of the VFM framework for trust-based schemes. Instead, it stated that “trust-based schemes should engage with the FCA consultation so that there are no barriers to implementing the value for money framework in the trust-based environment.” To complement the framework, the Government proposes to work with TPR to produce supporting material for employers on “what factors should be assessed when they are selecting a pension scheme”, with the focus on value as well as cost.
The DWP and TPR, with input from the FCA, have carried out a review of the Master Trust (MT) market and its authorisation and supervisory regime – “Evolving the regulatory approach to Master Trusts”.
Overall, it considers the regime to be “fit for purpose at this stage”. However, it makes some recommendations for each of the DWP and TPR in the medium term. The main area of TPR’s focus is on investment governance, including more timely and enhanced reporting on asset management and information. This is intended to allow TPR to challenge schemes’ decision-making at key moments.
In addition, TPR will “define and identify schemes reaching systemically important size and consider what additional oversight these schemes may require”. The document also covers a wide range of other elements pertinent to the Mansion House reforms, particularly with regards to MTs’ role in consolidation; both in terms of the number of MTs and the DC market as a whole.
The Government has provided no further steer for the new superfund legislative timetable (beyond the previously stated: “as soon as parliamentary time allows”).
