United Kingdom: Proposals for pension plans to help boost U.K. growth

Employer Action Code: Monitor

The government recently published several documents as part of its program to develop legislation aiming to encourage defined benefit (DB) plans to invest in high-growth assets, promote and regulate “superfund” consolidators of DB plans, tackle the proliferation of “small pots” for members of occupational defined contribution (DC) retirement plans and improve “value for money” (VFM) for members of DC retirement plans. For further information, please refer to WTW’s Hot Topics: Chancellor’s Mansion House speech heralds wave of consultations and Mansion House reforms: next steps for UK pension schemes.

Key details

DB plan funding and refunds of surplus

Starting in April 2024, refunds of surplus to DB plan sponsors will be subject to a tax rate of 25% rather than 35%. A consultation will be launched in the coming months on making surplus extraction easier and on the appropriate safeguards for members, such as the levels at which surplus can be refunded, covenant strength and consideration of the potential benefits of a 100% underpin from the Pension Protection Fund (PPF).^[1] (See WTW’s white paper: Six changes to seize the DB pension surplus opportunity.) In its response to the call for evidence, the government notes its intention to clarify, in the revised funding and investment regulations, that there is headroom for more productive investment and to make changes to TPR’s DB funding code (expected to take effect in April 2024) to support a less risk-averse approach.

DB plan consolidation and investments

The government has reiterated its support for superfunds and announced its goal of introducing a permanent superfund regulatory regime to chart a middle course between plan buy-in/buy-out and takeover by the PPF. The proposed regime is intended to allow companies to concentrate on running their business while building consolidated plans at a scale that would enable them to invest further in growth assets. Primary legislation will be developed “as soon as parliamentary time allows.”

DC plan VFM and consolidation of ‘small pots’

The government intends to proceed with its proposals to introduce consistent metrics for plan fiduciaries to assess VFM across all DC workplace pension plans — albeit initially limited to the default arrangements used by plans to meet automatic enrolment obligations. The framework will entail the public disclosure of metrics covering such items as investment performance, costs and charges, and quality of services. The government says it “will not hesitate to take action” against plans that do not provide VFM and “will require [such plans] to discontinue or consolidate to a better run, better performing, value for money scheme.” It will give the Pensions Regulator (TPR) powers to wind up plans where VFM assessments show that the plans are consistently not providing value.
The government has responded to the growth of small, deferred DC pension pots (i.e., those valued at 1,000 British pounds or less with no active contributions in the past 12 months) with a two-stage approach. The first considers a proposal built around the default consolidator model, with what the government expects will be a small number of authorized plans that act as automated consolidators for such small pots. The government’s preferred approach is a central clearing house (where action is taken without requiring member involvement) rather than relying on the pensions dashboards infrastructure (where action is member-initiated) or a central registry (that would require more plan involvement). It also implies that the clearing house might support the government’s second (longer-term) part of its small-pots strategy — a “pot for life” regime where individuals would have a single pension account for the duration of their careers rather than separate accounts related to their service periods with separate employers (similar regimes already exist in Australia, Chile, Mexico and New Zealand). The government has published a call for evidence, “Looking to the future: Greater member security and rebalancing risk” with a January 24, 2024 deadline for responses.

Helping savers understand their pension choices

Similarly, legislation will be introduced “when parliamentary time allows” to require DC occupational pension plan trustees to offer a decumulation solution(s) to plan members at the point of access that are suitable for their members and consistent with pension freedoms.^[2] In doing so, the government is relying on trustees’ fiduciary duty to act in the members’ best interests but hints at greater intervention if necessary. Plans will have to provide the service in-house or by partnering with a third-party provider — with no plan-size restrictions. Members will be placed into a default decumulation solution unless they actively choose what to do with their assets. Plans will have flexibility to design their default solution, and effective member communication will be key.

Employer implications

Primary pensions legislation is needed to further most of these proposals; however, no such legislation is expected in this final parliamentary session before the general election (the next election is scheduled to be held by January 28, 2025). The Financial Conduct Authority is expected to consult in spring 2024 on draft VFM rules for contract-based DC pension plans. TPR encourages occupational pension plans to engage with this consultation. The government is also expected to work with TPR to develop information for employers to help them select a good plan when looking to fulfill their automatic enrollment obligations. This will focus on “best value and long-term outcomes” rather than the single metric of costs and charges. TPR is also expected to publish new guidance on investing in private markets before the end of 2023 as well as to update its existing DB and DC investment guidance “in due course.” A small pots industry group will be launched in early 2024 to 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. TPR is also expected to host a series of virtual roundtables in 2024 to inform interim guidance it plans to issue to support trustees in developing their decumulation solution(s). Employers should watch for further developments to consider how this might affect existing plans or proposals for future pension provision in the U.K.

Footnotes

The PPF provides compensation to members of eligible DB pension plans, when there is a qualifying insolvency event in relation to the employer, and where there are insufficient assets in the pension plan to cover the PPF level of compensation. It is funded by a levy on DB pension plans. Return to article
Pension freedoms were introduced in 2015 and apply to anyone who has a DC workplace pension. The freedoms allow savers to flexibly access the funds saved in their DC pension plan. The normal minimum pension age from which pensions can first be taken without tax penalties is currently age 55 but will increase to age 57 from April 2028. Return to article

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Mark Dowsey