Pensions Insight: 20 November to 4 December 2023

In our latest insight we summarise the LTA removal provisions contained in the Finance Bill 2023-24. We also report on other key pensions developments including the Government’s response to the WPC’s LDI report and an update from TPR on timings of the revised DB funding regime.

Abolition of the LTA – Finance Bill 2023-24 Published

The Finance Bill 2023-24 which contains the removal of the lifetime allowance (LTA) and other pensions tax measures was published on 29 November 2023, along with explanatory notes. The Bill received its first reading in the House of Commons on 27 November 2023 – we understand that it received its second reading the following day.

Many parts of the Bill reflect the draft legislation and associated materials that were published back in July (see our insight). However, there are some notable inclusions as regards the post-LTA abolition regime:

• clarification as to what will happen with pension commencement lump sums (there will be “continued operation of permitted maximum and applicable amounts which limit the pension commencement lump sum”);
• there will be a new form of authorised lump sum, a pension commencement excess lump sum (see discussion here);
• confirmation that the present tax treatment of uncrystallised defined contribution funds payable upon the death of a member before age 75 will be maintained (see discussion here); and
• new provisions, including in respect the taxation of small lump sums, the treatment of overseas benefits, provision of information and transitional provisions.

Government Response to WPC’S DB with LDI Report

On 20 November 2023, the Government issued its response to the Work and Pensions Committee’s (WPC) report on DB pensions with liability driven investments (LDI). You can read more about the report here.

The report was commissioned following the LDI crisis which ensued following the 23 September 2022 ‘Mini-Budget’. It formed part of a WPC inquiry into the impact of the events on DB schemes, the Pensions Regulator’s (TPR) approach to LDI, DB scheme governance and whether change was required. The report contained several recommendations to which the Government has now responded – particular points to note include the following.

• TPR is analysing funding over 2022 and expects to be able to produce a report by the end of this year on the impact that the LDI ‘episode’ had on pension schemes.
• Also, by the end of 2023, TPR’s data collection framework on LDI will be in place. This framework involves working with the Financial Conduct Authority (FCA) and the Bank of England (BoE) to oversee leverage.
• Part of how TPR will collect data on LDI will be through the scheme return.
• TPR will also question investment consultants and schemes to confirm that governance and operations accord with TPR guidance on LDI.
• DWP will consider if disclosure requirements need amending after TPR’s data collection results are available.
• TPR will outline its ‘vision’ on data capability in a data and digital strategy by the end of the financial year.
• The Government is still considering next steps as regards bringing investment consultants within the FCA’s regulatory perimeter.
• The Government accepts the Financial Policy Committee’s recommendation that TPR’s statutory remit include financial stability considerations. TPR is planning to establish protocols with the BoE to make sure that they are ‘working cohesively with the wider financial regulatory system’. This collaboration has already started. TPR is also reviewing how it deals with external risks and, with the DWP, looking at what it requires to include financial stability within its remit.

TPR Round-up

TPR gives evidence to WPC on DB inquiry – includes update on revised DB funding regime

In its 29.11.23 oral evidence to the WPC’s inquiry into DB pension schemes, TPR confirmed a number of things including that the new funding and investment regulations will be ‘introduced in the new year’, be in force by April 2024 and apply to schemes with valuations ‘from autumn 2024’ – TPR’s revised DB funding code of practice will tie in with these dates.

Blog on alternative arrangements market

On 27 November 2023, TPR published a blog on capital backed journey plans (CBJPs), a type of alternative DB funding arrangement that typically involves a third-party funder injecting additional capital so that scheme assets can be invested in higher expected return assets.

TPR notes the emergence of CBJPs being considered in cases of sponsoring employer distress including imminent insolvency cases. Such CBJPs can be supported by TPR (as TPR believes in supporting innovation which provides flexibility and security of member benefits). However, TPR needs to be happy that the CBJP is appropriately established and operated. In addition, certain parts of the Regulator’s DB superfund guidance will apply – the applicable parts will vary depending on case-specifics. At present, no such CBJPs have completed assessment but discussions with various schemes and providers are currently taking place.

TPR will publish guidance on alternative arrangements in the new year – in the meantime, the blog sets out some issues that trustees should consider if looking at a CBJP including early engagement with relevant parties, a balancing of investment risk against the additional capital, and making sure that the trustees have sufficient knowledge and understanding.

FCA Policy Statement on Sustainability Disclosure Requirements (SDR) and Investment Labels

On 28 November 2023, the FCA issued a policy statement on the final rules and guidance on the SDR and investment labels regime which aims to protect consumers, improve competition and trust by ensuring that financial products which are marketed as sustainable are what they claim in this regard and that the claims can be supported with evidence. The statement follows an October 2022 consultation on the regime. The changes are being introduced following FCA concerns that certain firms make “misleading or exaggerated sustainability-related claims about their investment products”. The measures include:

Applicable to all authorised firms

• an anti-greenwashing rule proposed to come into force on 31 May 2024 for all authorised firms to make sure that claims concerning sustainability are fair, clear and not misleading – the FCA’s 28 November 2023 consultation on the proposed guidance on anti-greenwashing can be accessed here;

Applicable to UK asset managers

• four investment labels that can be used as from 31 July 2024 to assist investors understand how their funds are being used linked to sustainability goals and criteria;
• naming and marketing provisions effective from 2 December 2024 to ensure that products are not labelled as being sustainability-positive when they are not.