Pensions Insight: 20 March to 27 March 2023

In this insight we report on the Finance (No. 2) Bill which will enact all but one of the Budget’s pensions measures, provide our usual round-up of the latest Pensions Regulator news and report on a potential delay to a Government announcement on bringing forward the increase of state pension age (SPA) to 68.

Spring Budget 2023: Finance (No.2) Bill

The Finance (No. 2) Bill that will give legal effect to the Budget pension changes with the exception of the abolition of the lifetime allowance (see our Insight) received its first reading in the House of Commons on 21 March 2023. The second reading was on 29 March.

In addition to the pensions tax allowance changes, the Bill also covers three other pension-related matters as previously consulted upon: 

• providing pensions relief for net pay low earners,
• clarifying the authorised tax status of periodic income payments and transfers from winding up collective defined contribution schemes, and
• confirming that ‘pension’ payments from a Dormant Assets Scheme will be treated for tax purposes like a pension asset (see our Insight for further details).

The removal of the lifetime allowance (LTA) will be made through a future finance bill – the provisions required to remove LTA references will be more complicated than the other changes because the LTA as a concept is used in many ways in existing legislation.

Pensions Regulator round-up

Review of climate-related disclosure reports

On 23 March 2023, the Pensions Regulator published its review of a selection of pension schemes’ annual climate reports noting that these demonstrated some ‘emerging good practice’ but also other areas where improvement is needed.

Schemes with relevant assets of £1bn or more must ensure that there is effective governance with respect to climate change. They must identify, assess and manage climate-related risks and opportunities and publish an annual climate change report based on the recommendations of the Taskforce on Climate-related Financial Disclosures.

The Regulator’s findings from its review of a sample of the reports include that:

• net zero target: 43 of the 71 reports analysed have set a formal net zero target (representing approximately £450bn of assets under management and in excess of 18m scheme memberships);
• good practice: include (1) planning training, (2) developing a trustee policy on investment beliefs around climate change, (3) publishing member friendly summaries, (4) liaising with investment managers to collect improved data, (5) allotting more funds to sustainable investment, (6) managing climate-related risk through stewardship, and (7) moving to climate-tilted pooled funds; and
• areas for improvement: include (1) failing to comply with Department for Work and Pensions (DWP) statutory guidance, (2) not providing enough background information on the scheme causing difficulties in understanding disclosures, and (3) accessibility problems such as overly complex web addresses.

The Regulator must fine trustees at least £2,500 where a report is not published and may issue a penalty (up to £5,000 for individuals and up to £50,000 for other breaches). To date, it has decided to issue penalties only where a report has not been published or there has been no genuine effort to comply. However, going forward the Regulator will consider issuing fines for failure to meet the legislative requirements.

Action for schemes within scope: The Regulator recognises that this area is new to schemes and there is much to learn but will expect that those areas it has identified as requiring improvement are addressed going forward (whilst noting that there are certain limitations in respect of current availability of certain data but that these difficulties should reduce over time). Trustees “need to understand what their climate change assessments tell them and incorporate them into the scheme’s overall decision-making process.”

Action for other schemes: Because climate change affects all schemes, even those schemes not within scope may wish to use the Regulator’s report to improve how they address climate change.

Blog: new VFM initiative, data drive and the General Code

VFM

In what may be Charles Counsell’s last blog in his role as Chief Executive of The Pensions Regulator (see Insight), we hear once again (see Insight) about the importance of members receiving value for money (VFM) and also about a new regulatory initiative later this year which will investigate those schemes that either do not make the required improvements following a VFM assessment or do not carry one out. Schemes that do not provide VFM will need to consolidate.

Data

The blog also covers the importance of data to the Regulator when overseeing compliance. This has led to the setting up of a new Digital, Data and Technology directorate within the Regulator which will support the Regulator’s data and digital functions.

General Code

Of final note, is the reference to timing of the General Code of Practice (the new single code of practice which is amalgamating and updating 10 of the 15 existing codes of practice). As we reported in our earlier Insight, and as now confirmed in the blog, this is expected to be launched this spring.

Regulatory intervention report: ERI breaches

The Regulator has issued its regulatory intervention report on its prosecution of two former trustees for two counts of prohibited employer-related investments (ERI) (illegal loans of around £240,000 from the Eastman Machine Company Limited Superannuation Scheme to the scheme employer) and two counts of providing false or misleading information.

Each of the former trustees were sentenced to 16 months’ imprisonment, suspended for two years, and will have to do 250 hours of community work each. Both have also been suspended from acting as trustees.

The Regulator was first alerted to the ERI breaches by the scheme auditor who had noticed the prohibited loans when auditing the scheme accounts. Following initial intervention in 2013 no action was taken on the basis that the loan had been ‘inadvertent’. A later 2018 alert led to further inquiries and the recent criminal and trustee suspension proceedings. Full restitution (£270,000) has since been made to the scheme which was used as mitigation during sentencing.

Reported delay of Government announcement on whether increase in SPA to 68 will be brought forward

It has been reported in the national press that, amongst a backdrop of falling/ stagnant life expectancy and the inevitable unpopularity amongst middle-aged voters regarding should the state pension age be increased sooner, that Ministers plan to delay deciding on whether to bring forward the increase of SPA to 68 from 2044 to between 2037 and 2039. It was expected that there would be an announcement this May following publication of the statutory five-year Government review into SPA (see our Insight), the deadline for which is 7 May 2023. However, based on these press reports it could be that the decision itself will be delayed until perhaps 2024.