In his Mansion House speech on Monday 10 July, Chancellor Jeremy Hunt announced a package of pension reform.

His proposals are, he stated, guided by ‘three golden rules’:

  • securing the best possible outcome for savers;
  • prioritising a strong and diversified gilt market; and
  • strengthening the UK’s position as a leading financial centre to create wealth and fund public services.

So how does the government intend to go about this, and what might it mean for you?

Evolution - or revolution? The Mansion House proposals

Many of the proposals are DC-related:

Investment

  • An industry-led agreement commits several of the UK’s largest DC pension providers to an objective of allocating at least 5% of their default funds to unlisted equities by 2030. Other DC funds are encouraged to follow suit.
  • The government will explore the demand for it to play a greater role in establishing investment vehicles, working with the British Business Bank. This will sit alongside the previously-announced Long-Term Investment for Technology and Science (LIFTS) initiative.

Value for Money (VfM)

  • A new joint VfM framework (TPR and FCA) will be phased in. This aims to prioritise long-term returns over the costs of running a scheme. DC trustees and independent governance committees (IGCs) will be required to disclose set key metrics, standards and data (including on investment performance, costs and charges, and quality of services) to a central regulatory database, and compare the value they provide for their members against peer schemes. VfM reports will have to be published by the end of October each year.
  • Poorly-performing schemes will have a defined period in which to improve – or be ‘wound up into better-performing, larger schemes,’ with TPR given appropriate powers to do so.
  • SSASs are excluded from the requirements. Workplace SIPPs are within scope, however the FCA has indicated that individual SIPPs, selected by an individual who has taken advice, are likely to be excluded because ‘there is less need for IGC/GAA oversight’. The FCA will be considering this further and consulting on proposed changes to FCA rules.
  • Primary legislation will be needed; the government intends to consult on draft regulations (and equivalent FCA rules) covering the detailed requirements ‘when parliamentary time allows.’ Until then, it ‘expects DC schemes to continue to meet their regulatory obligations’.
  • In due course, existing VfM obligations will be phased out. The DWP, TPR and FCA will also consider over time how current Chair’s statement requirements may be reduced or removed, to avoid duplication of work.
  • The government hopes that focus on long-term VfM across the industry will ‘encourage schemes to invest in more productive assets, with the potential for higher returns for savers and boosting economic growth.’

Consolidation

  • Collective DC: The government will facilitate a programme of DC consolidation, to ‘ensure that funds are able to maintain a diverse portfolio of bonds, equity and unlisted assets and deliver the best possible returns for savers.’ Collective DC schemes (CDC) in particular are seen as ‘aptly placed to deliver effective investment through their pooled set up.’

    • A consultation on draft legislation will therefore be released in the autumn, looking to extend CDC provision to unconnected multi-employer schemes including master trusts (and to clarify some existing CDC legislation). The proposed regime will require high standards for authorisation and communications. Further guidance from TPR is also expected.
  • Small pots: a consultation was also published on proposals to resolve the small pots issue by creating ‘a multiple default consolidator approach’. It proposes a maximum pot size for automatic consolidation, authorisation of consolidators, and a central clearing house to support the delivery of this solution. Primary legislation to implement a statutory framework is expected in due course, with further detail covered in secondary legislation which will be subject to consultation.

Retirement choices

  • Work will be progressed on the use of CDC in decumulation. A consultation seeks views on placing new duties on trustees in providing decumulation services (or partner with other providers to do so), to include ‘the offer of a CDC first arrangement’. Again, the government will legislate ‘when parliamentary time allows.’ Guidance for trustees on offering decumulation products will follow from DWP and TPR in due course.
  • The DWP is also working closely with the FCA to understand if there is appetite and scope for CDC in the contract-based arena.

  • Superfunds: The government finally published the response to its 2019 consultation on DB scheme consolidation. This commits to help the UK's 5,000 ‘too fragmented’ DB schemes through the creation of a ‘permanent superfund regulatory regime’, aiming to help sponsors and trustees better manage liabilities (alongside ‘existing buy-out schemes, which will continue to be an essential part’ of improving security for members). The government hopes that this may be an affordable option for sponsors where buyout is out of reach, as well as offering governance and investment benefits of scale. Superfunds will be authorised and supervised by TPR. Again, legislation will follow when time permits.
  • ‘Innovative investment’: It also issued a call for evidence on Options for Defined Benefit schemes – seeking views on how DB schemes, and the PPF (as a potential public consolidator), could contribute to productive finance ‘whilst securing members' interests and protecting the sound functioning and effectiveness of the gilt market’. Questions cover the use of surpluses, a current hot topic.

A consultation was launched on using the LGPS to boost investment. The proposals include an ambition to double existing investment in private equity to 10% of assets, giving the potential to ‘unlock’ £25bn by 2030. It seeks views on accelerating the deadline for transferring all LGPS assets to pools to March 2025, and ‘setting a direction’ that pools exceed £50bn of assets. It also looks at ‘ensuring greater transparency’ on investments, the definition of investments, and investment consultancy services.

A publication Analysing the impact of private pension measures on member outcomes gives high-level impact estimates of the package of pensions announcements generally, and the planned Automatic Enrolment 2017 Review measures. It confirms that legislation currently progressing through Parliament will enable savers to save from age 18 (down from 22) and to receive contributions from the first pound they earn (rather than from £6,240). The Bill’s second reading in the Lords is due on 14 July 2023. A date for commencement is awaited.

Finally, there is a call for evidence on trustee skills, capability and culture. It looks ‘to deepen the evidence base around trustee capability and other barriers to trustees doing their job in a way which is effective and results in the best outcomes for savers.’ It considers the role of advice, and the possible need for accreditation and registration (without, however, mandating the use of professional trustees).

Of particular note is its focus on whether trustees ‘have the right knowledge and skills to consider investment in the full breadth of investment opportunities.’ Looking ‘to improve understanding of trustees’ fiduciary duties across both DB and DC schemes,’ it asks whether the way in which trustees are exercising or interpreting their duties, and a ‘risk averse culture’ could be holding schemes back ‘from exploring a broader range of investments’.


Comment and action points

  • TPR has welcomed the proposals, stating that the ‘reforms support our ambition for pension savers to be in large, well-run schemes that deliver good outcomes at every stage of their retirement journey.’
  • The level of reform proposed is ambitious, and the timetable no less so, with ‘all final decisions’ to be made ‘ahead of the Autumn Statement later this year.’ The new consultations and calls for evidence (with the exception of the LGPS call) close on 5 September 2023.
  • Many of these proposed changes are however some way off, with primary and secondary legislation to be required post-consultation, plus guidance. We will keep you up to date with developments as they arise.
  • Schemes should of course have an eye to what is on the horizon, and consider the extent to which the reforms may affect or be useful to them. In particular, DC schemes falling under the VfM framework should familiarise themselves with the proposals.
  • The industry will be watching closely to monitor any movement towards government directives on asset allocation, and any reinterpretation of fiduciary duties…

For more information on any of these developments and the impact on your scheme, please speak to your usual TLT Pensions team contact.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2023. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Written by

Sasha Butterworth

Sasha Butterworth

Date published

12 July 2023

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