Pensions Law Update October 2024
Penny Cogher and Harriet Fletcher explain recent pensions law developments:
Lifetime Allowance: HMRC has confirmed, in Newsletter 162, that some corrective regulations will be coming “as soon as Parliamentary time allows” to address some of the technical problems with the Finance Act 2024 which abolished the Lifetime Allowance. We understand that the Lifetime Allowance will not be re-introduced.
“Pot for Life”: This is likely to be dropped by the Government, with a formal decision expected after the first stage of the Pensions Review.
Auto-enrolment: The Pensions Minister, Emma Reynolds, recently praised auto-enrolment, saying “the success of auto-enrolment means that since 2023 around 88% of employees are saving for their retirement.” The pensions industry is lobbying for auto-enrolment to apply from the age of eighteen and with no lower earnings limit. There are also calls for the overall contributions to increase to 12% of earnings so people can enjoy a comfortable retirement. It also seems likely that we will hear more about pot follows member, perhaps with this applying to pension pots under £1000.
Direction of travel: The Pensions Minister set out her vision for the pensions industry in Pensions Age Magazine on 17 September: “I want to see a private pensions system that encourages the consolidation of smaller pension schemes into larger, more efficient funds in order to deliver better value for money and outcomes for members while unlocking UK investment opportunities.”
Pensions Tax: Budget Day is 30 October 2024. Both the Association of Consulting Actuaries and Pensions and Lifetime Savings Association have reminded the Government that pensions tax is complex and to be cautious over potential tax changes. Meanwhile, the Institute of Fiscal Studies (IFS) has advised against a flat rate of tax relief for pension contributions.
TPR Funding Code: In a press release, TPR reminded schemes with a valuation date on or after 22 September 2024 to refer to the new DB Funding Code. TPR also published supporting documents on the statement of strategy and the data needed for the scheme funding valuation, although we can still expect some tweaks around the edges, for example for schemes that are still open to future accrual. For these schemes, “trustees need to consider how they would provide accrued benefits for existing members over the long term if the circumstances of the scheme were to change in the future, and comply with the legislative requirement to set the scheme’s low dependency target. In practice, at each valuation, that notional date that a scheme will reach that low dependency target will keep being pushed back if the scheme remains open”. Additionally “for schemes open to accrual, we are now requesting the total pensionable salaries and future service contribution rate as at the effective date of the valuation.” Adjustments have also been made for schemes such as GMP underpin schemes and cash balance schemes.
Small Schemes – easements: There will also be a new definition of small schemes. TPR estimate that this definition will mean around 50% of schemes will be eligible for the small scheme easements regarding the information to be provided in the statement of strategy. The new definition is as follows:
“Those with 200 members or fewer, excluding members who are eligible for lump sum death benefit only, for hybrid schemes those members with defined contribution (DC) benefits only and fully insured annuitants where they are not included in the calculation of the technical provisions liabilities.”
Helpfully, small schemes that meet the Fast Track parameters will not be required to submit detailed covenant information.
Overall, a fuller response from TPR is expected in the winter:
“We expect to publish the covenant guidance in the next few months to make it available as early as possible for trustees who are starting to prepare their valuations. We have extensively engaged with industry as we have developed the guidance.”
“The final regulations make a significant change in that, when projecting scheme maturity, open schemes can make an assumption for new entrants and future accrual. The assumption must be reasonable and based on the employer covenant.”
“Therefore, we now set out our expectations that the assumption for length of allowance for future accrual and new entrants can be between the period of covenant reliability and the period of covenant longevity. It can, of course, be shorter than this.”
Scheme Administration - an unregulated industry that varies in quality: TPR notes that while regulatory frameworks aim to improve standards, curb fraud, and promote fairness within the market, the pension administrator sector remains unregulated, resulting in varying quality across the industry. (TPR Blog 12 Sept). TPR plans to engage with ten to fifteen of the largest administrators by inviting them to “voluntarily collaborate”, followed by a “light touch” approach for the remainder over the next twelve months.
New Pensions Bill 2025 and Scheme Investment Reforms
A Pensions Bill was mentioned, briefly, in the King’s Speech on 17 July 2024, with additional details in the accompanying briefing notes. Based on pages 14 – 16 of that document King's Speech 2024: background briefing notes - GOV.UK (www.gov.uk), we can expect it to cover:
• Consolidation of small pots.
• Value for Money – introducing a framework and a standardised test for DC schemes.
• A requirement for schemes to offer a range of retirement products.
• Consolidating the Defined Benefit (DB) market through commercial Superfunds.
• Reaffirming the Pensions Ombudsman (TPO) as a competent court.
• Amending the Special Rules for End of Life (for the Pension Protection Fund and the Financial Assistance Scheme).
The draft Bill has not yet been published and we are keeping a watching brief on this topic.
Scheme Investments: TPR Chief Executive Nausicaa Delfas recently delivered a speech at the British Private Equity and Venture Capital Association (BCVA) UK Pensions Summit entitled: 'Transparency in investment performance can truly deliver for savers'.
She said the forthcoming Pensions Bill and the government’s two-part pensions review presents a unique opportunity to look at how it can make the pensions system work for everyone. TPR believes sound investment in diverse assets can not only improve outcomes for savers but could also generate growth for the UK economy.
TPR plans to bring greater transparency around performance and costs as part of the forthcoming value for money reforms to help bring about meaningful, positive changes in investment strategies. To help achieve this, it has doubled its number of investment consultants and overhauled its structure to become more market-facing and outcome-focused.
TPR also expects trustees to share proper risk management controls and a genuine understanding of what the right balance of risk and reward is for their type of member, and their type of scheme. TPR wants a clearly defined objective for savers within a scheme, which trustees regularly review. They should understand the likelihood of achieving those objectives, comparing their real-world performance with their forecasted models and adjusting strategy accordingly. TPR will probe trustees where it finds over-investing in low-risk, low return assets, especially as it believes that properly considered 'productive finance' (including private and venture capital investments) have a role to play in a diversified portfolio
PPF levy – no change yet: the PPF is consulting on the levy for 2025/2026, suggesting it remains at £100million, with changes to methodology enabling broad pooling of risk to continue and making it easier for schemes to get levy credit for deficit reduction contributions. In the meantime, the PPF would welcome legislative change to give it greater flexibility on the levy.
TPO – The Pensions Ombudsman: Complaints are up by 24% against TPO’s forecast. To manage the volume of complaints, TPO’s approach will insist on IDRP being used first. TPO will also expedite complaints assessed as having a clear outcome and are “front-loaded”, with all the information provided at the application stage. A caseworker will issue a decision and, if all parties accept that decision, the case ends. Decisions in expedited complaints will not be published. Expedited complaints will go to TPO himself if the parties disagree with the caseworker’s decision.
TPO recently awarded £2,000 for distress and inconvenience due to the poor handling of a complaint involving the Local Government Pension Scheme. A further reminder of “don’t delay” and “always respond quickly to TPO caseworkers”, even if the TPO caseworker then doesn’t respond themselves for some time…
