Pensions Insight: 19 to 26 February 2024

In this week’s insight we provide our usual TPR round-up together with details of the Finance Bill 2023-24 having received Royal Assent, the DWP’s DB options consultation on easing access to surplus and the PPF acting as a public consolidator, the second hearing in the Avon Cosmetics severance case and technical changes to the funding and investment regulations.

TPR round-up

Blog on ESG

The Pensions Regulator’s (TPR) latest blog discusses ‘wider’ environmental, social and governance (ESG) matters.

Schemes with climate-related reporting obligations: The first topic covered is how TPR believes that larger schemes subject to statutory climate-related reporting and disclosure requirements should be moving from the preliminary stages of compliance to ‘business as usual’. Schemes should utilise the disclosures in a positive way to “encourage genuine change in how schemes operate” rather than having disclosure “for disclosure’s sake”. Reporting should now be evolving to encompass nature and social factors – although expansion may seem ‘daunting’ it can be done in a gradual manner.

Improvement for all schemes: The blog then moves onto TPR’s expectations for all schemes that they work on improving understanding of broader significant ESG matters – this includes getting acquainted with the recommendations of the UK Transition Plan Taskforce, Taskforce for Nature-related Financial Disclosures (TNFD) and the Taskforce for Social Factors.

TPR’s expectations:

• Advisers: Trustees need to make sure that their advisers have the right skills and knowledge on ESG matters – this will help them make effective decisions and plan accordingly.
• Act first: TPR wants schemes to be ‘early adopters’ whether that be through TNFD reporting or including nature-related risks and opportunities in the statement of investment principles.
• Develop experience: Schemes in scope should use what they have learnt from reporting and develop this, for example, ask about assessing the employer covenant from a nature and social factor angle and set objectives for investment consultants on these factors.
• Work with others and disseminate knowledge: This is essential for development.

Comments: Although the emphasis in the blog is on larger schemes that have statutory climate-related reporting and disclosure obligations, its subject matter has relevance to all schemes which can consider how they are assessing ESG risks and opportunities when investing scheme assets and the ways in which this can be developed. The blog forms part of a wider drive from TPR to get schemes to focus on ESG and stewardship – the general code of practice includes a module on each area and schemes will need to check that they are meeting relevant expectations.

Strategic changes at TPR

TPR is making strategic organisational changes in response to the changing pensions environment and the anticipated consolidation of the market. From April 2024, it will be setting up three new regulatory functions: (1) regulatory compliance; (2) market oversight; and (3) strategy, policy and analysis.

TPR revised DB funding code of practice, covenant guidance and statement of strategy consultation timings

Speaking at the PLSA Investment Conference 2024, TPR has confirmed that it expects the revised defined benefit (DB) funding code of practice and a consultation on employer covenant guidance to be published this summer with a consultation on the statement of strategy expected in the next few weeks.

Finance Bill 2023-24 receives Royal Assent

The Finance Act 2024 which, amongst other things, will remove the lifetime allowance on and from 6 April 2024 received Royal Assent on 23 February 2024. You can read about the changes which are being made here.

DWP consultation on DB options: Making it easier to access surplus and the PPF acting as a public consolidator

On 23 February 2024, the Department for Work and Pensions published its Options for DB schemes consultation which follows on from its July 2023 DB options call for evidence. The consultation forms part of the Government’s Mansion House reforms and productive finance agenda under which it wishes to see the “£1.4 trillion held by [DB] pension schemes…work harder for savers and wider economy”.

The consultation requests views from the pensions industry on changing the rules on surplus to make it easier for employers and members to access the £200bn aggregate surplus it estimates schemes currently have and to consolidate the DB scheme sector through the Pension Protection Fund (the PPF) acting from 2026 as a public consolidator for the transfer of schemes that are unattractive to commercial consolidators. The Government sees both as allowing for increased investment in productive finance. The surplus extraction part of the consultation also discusses whether schemes should be able to pay a ‘super’ PPF levy to provide 100% PPF compensation levels should an employer go insolvent.

Just a few days later on 1 March 2024, the PPF published its initial views on the structure of the public consolidator – this tracks in part the consultation with more detail on certain points and an insight into the PPF’s views on particular elements.

We provide further details in our insights, which can be accessed here.

Avon cosmetics case part 2: compromise approved

In a follow-on High Court hearing held on 19 February 2024, HHJ Judge Davis-White KC has approved a compromise between the parties in the Avon Cosmetics Limited case regarding the effect of an amendment power proviso that prevented alterations being made that would ‘prejudicially’ affect accrued benefits.

The judgment provides an interesting account of the compromise process and commentary on amendment power proviso cases that protect a link to final salary including Re Courage and the recently decided Newell Rubbermaid where the judge ruled that an amendment power proviso protected the accrued final salary link through the imposition of an actuarially calculated underpin that applied at the date of the amendment when certain members’ benefits were converted from DB to money purchase.

You can read more about the Avon compromise case in our insight here.

Revised version of the finding and investment regulations 2024

A revised replacement draft of the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024 has been published – the principal change is to confirm that relevant amendments that will be made to the Occupational Pension Schemes (Scheme Funding) Regulations 2005 will only be applicable in relation to valuations on or after 22 September 2024. You can read more about the changes that are being made by the regulations here.