Pensions Insight: 17 April to 23 April 2023

In this Insight we cover the Pensions Regulator’s 2023/24 corporate plan, the Institute of Fiscal Studies (IFS) report that is launching a review of UK pension provision and questions raised by the House of Commons Work and Pensions Committee on liability-driven investments (LDI) resilience. We also cover the Pensions Regulator’s blog on ESG and climate reporting as well as progress of the Finance (No2) Bill 2023.

Regulator blog on ESG and climate reporting

The Pensions Regulator’s blog on ESG and climate reporting explains that the Regulator’s recent compliance initiative on these areas stems from recent climate change reports that the ‘window of opportunity’ to resolve climate issues is ‘rapidly closing’. 

Financially material ESG factors can impact schemes (both in terms of investment and employer covenant), and, since 1 October 2019, relevant schemes have been under a legal duty to take into account such considerations when investing. 

As part of the Regulator’s recently launched ESG and climate change campaign, it will be checking that schemes with 100 or more members have published a statement of investment principles (a SIP) that contains the legally required policies on ESG and stewardship and an implementation statement setting out how these policies have been implemented. Only 180 of the 220 defined contribution (DC) schemes already provided web addresses for these documents. The Regulator expects compliance in this area to improve and will take enforcement action where necessary.

The blog also covers the results of the Regulator’s recently published review of schemes’ annual climate reports, summarising its findings (see our Insight) and discussing an action plan that trustees of schemes might set.

Finally, the blog notes that the forthcoming updated employer covenant guidance will consider climate impact on covenant.

Regulator publishes corporate plan for 2023 and 2024

On 21 April 2023, the Pensions Regulator (TPR) published its Corporate Plan for 2023 to 2024. It sets out how the Regulator has prepared to launch the new Defined Benefits Funding Code in April 2024 and how it will focus on tackling scammers with the Pension Scams Action group. The Regulator also noted its intention to “lay foundations for a significant increase in addressing quality outcomes in defined contribution schemes”. 

Sarah Smart, chair of the Pensions Regulator, has said that the “latest corporate plan clearly shows how TPR will continue to deliver our commitment to protect saver outcomes, by pushing hard for ever-higher standards of trusteeship and governance and by fighting to beat scammers”.

The plan also demonstrates willingness from the Regulator to embrace change through assisting schemes with preparation for connecting to pensions dashboards and assessing any collective defined contribution (CDC) applications for authorisation. This follows recent approval of the Royal Mail CDC scheme that was covered in our insight published earlier in this month.

In terms of areas which the Regulator looks to focus on in 2024 as it enters the third year of its three-year cycle as set out in its Corporate Strategy in 2021, it highlights the following points:

• assessing the possibility of new models such as defined benefit (DB) superfunds and multi-employer Collective Defined Contribution (CDC) schemes and delivering new regulatory regimes for their assessment, authorisation and supervision to ensure savers can have confidence in the pensions vehicles they use to save for retirement; 
• improving how the Regulator monitors and assesses market risks and events, including consideration of the level of information gathering that it conducts about scheme asset allocations;
• assessing whether it would be feasible to mandate that a professional trustee sits on each board or for accrediting or authorising professional trustees. This assessment would establish the basics for working with the Department for Work and Pensions (DWP) to progress the most suitable approach; and
• developing a regulatory framework that would enable ‘swift and targeted’ action where pension dashboard requirements are not being met as it looks to assist schemes with the preparation for dashboards.

The Chief Executive for the Regulator, Nausicaa Delfas, has said that the Regulator has “a full and ambitious agenda for the benefit of millions of savers”. Noting that they “will continue to focus on protecting savers’ money, enhancing the pensions system and as (they) look to the future, helping to drive innovation in savers’ interests”. Additionally, the Regulator has plans to work with the Financial Conduct Authority (FCA) and DWP to deliver a value for money framework, in order to issue a response to its work consultation later this year and publish its new General Code in the first quarter of 2024. 

IFS to review pensions retirement policy following review of UK pension system

The Institute of Fiscal Studies (IFS) has called for a ‘major review of pension provision’ in a statement following the publication of its recent report ‘The Challenges for the UK Pension System: the case for a Pensions Review’ on 20 April 2023. The report highlights several key issues facing the UK pension system including low savings rates and a lack of adequate pension plans offered by some employers. 

The IFS noted in their report several key issues regarding pension provision in the UK. Firstly, despite auto-enrolment improving the participation in workplace pension schemes, many participants are contributing low amounts to their pension. The report found that for middle earners, 60% of employees in the private sector were contributing less than 8% of their earnings. It also found that 87% are saving less than the 15% which the Pensions Commission had suggested savers should be contributing in order to save for retirement. As well as this, the report highlights a collapse in pension saving among the self-employed, with just one in five self-employed workers being part of a pension scheme, and an increasing number of those approaching retirement living in more expensive, insecure, privately rented accommodation. 

The IFS report argues that a review of the UK pension system is needed to ensure its sustainability and the ability of future retirees to maintain an adequate standard of living. The IFS will now join a steering group consisting of former Chancellor, Alistair Darling; former Secretary of State for Work and Pensions, David Guake; and the former Chief Executive of the Pension and Lifetime Savings Association, Joanne Segars, to perform a joint comprehensive review of the UK Pension system and policy in partnership with Abrdn Financial Fairness Trust. The Review was launched by Lord Turner, former leader of the Pensions Commission, at an event on 20 April 2023 and is expected to conclude in Summer of 2025. 

Committee queries powers of TPR to avert wider financial crisis

The Work and Pensions (WPC) Committee of the House of Commons has published correspondence in response to the evidence submitted by the Economic Secretary to the Treasury, Andrew Griffith MP, and the Pensions Minister, Laura Trott MP. This comes as part of its inquiry into DB schemes with liability-driven investments (LDI) following the crisis concerning LDI and the UK gilts market in September 2022. 

The WPC had raised its queries in a letter dated 3 April 2023, asking both ministers to clarify the powers and duties of the Pensions Regulator with regard to the impact of pension funds on the wider financial system. This comes soon after the Bank of England’s Financial Policy Committee (FPC) recommended that the Regulator takes immediate action to mitigate risks to the wider financial system by specifying minimum levels of resilience for the funds which trustees of DB schemes may invest in as part of their Scheme’s LDI strategy. You can read about the recommendations of the Financial Policy Committee (FPC) in our previous insight here. 

The WPC also requested clarification on the Government’s intent to legislate on the Regulator’s remit to consider financial stability and gathering data on schemes’ LDI arrangements through a notifiable events regime. The letter highlights how the Regulator had suggested this in earlier correspondence addressed to the committee on 20 January 2023 and asked Minister Trott to confirm if this would be the correct approach and if so, when the Government would legislate for this. 

You can read more about recommendations for LDI resilience in our December insight article here. 

Finance (No2) Bill 2023 reaches whole House of Commons committee stage.

On 18 and 19 April 2023, the whole House of Commons Committee stage of the Finance (No 2) Bill 2023 took place. A number of provisions were considered including opposition amendments to pension clauses on lifetime allowances but were rejected after a vote.

The opposition raised concerns about the LTA’s abolition and its benefit to all high earners rather than just NHS staff for which there was greater support. The opposition had tabled an amendment to clause 18 of the Bill seeking a review as well as further impact information. Andrew Griffith MP, the Economic Secretary to the Treasury, confirmed that the Government’s intention was to “remove the pension tax barriers to remaining in work that highly skilled and experienced individuals across the public and private sectors, including senior NHS clinicians, are facing”. This was aligned with other changes from the Spring 2023 budget which looked to encourage re-entry to the labour market.

The opposition had also tabled an amendment to clarify measures in the Bill concerning the taxation of collective money purchase arrangements in winding up that was part of clause 24 and top-up payments for low earners in net pay arrangements that had been included in clause 25. The amendments were rejected following debate and a vote. Clauses 18 to 25 were ordered to stand as part of the Bill. 

The remainder of the Bill will be considered by the Public Bill Committee from 16 May 2023 with conclusion of proceedings expected by 23 May 2023.