Hello, and welcome to the Month In Pensions for January 2021, brought to you by the pensions team at Gowling WLG.
I'm Ian Chapman-Curry and I'll be looking at one of the themes that has excited the pensions industry in January before taking you through the key points of this month's main legal and policy pensions developments.
We'll then take a look at what is coming down the tracks for the industry in February 2021.
Before we start, just a quick reminder that you can find out more about the pensions team at Gowling WLG and get all of our pensions Insights.
Theme for January 2021 – Time for the Pension Schemes Act 2021
The Pension Schemes Bill 2019 - 21 has cleared all stages in its journey through Parliament. Once it receives Royal Assent, the legislation will become an Act of Parliament - the Pension Schemes Act 2021. Although at the time of recording this episode, the legislation had not yet received Royal Assent, I'll refer to it as the Pension Schemes Act for consistency. The Pension Schemes Act will provide the foundation for the development of pensions policy in a broad range of areas over the coming months and years.
The Pension Schemes Act will provide for increased powers for The Pensions Regulator , require notification of certain types of corporate transactions, lay the foundations for a new approach to scheme funding, provide the legal framework for pension dashboards and collective defined contribution and set out new requirements on climate risk reporting and statutory requests for transfers out of defined benefit (DB) pension schemes to flexible access pension schemes.
In a moment, I'll go through some key headlines from each part of the Pension Schemes Act. For more detail, we have put together two one-side overviews setting out the key issues and actions for:
What are the key themes in the Pension Schemes Act 2021?
Increased powers for The Pensions Regulator
One of the most headline grabbing aspects of the Pension Schemes Act 2021 are the increased powers for The Pensions Regulator. Under the Pension Schemes Act, The Pension Regulator will be given a range of new and extended powers, including:
- new criminal and civil penalties (including three new criminal offences);
- enhanced information gathering powers, including the right to require attendance at interviews;
- new notifiable events applicable with certain corporate transactions; and
- two new tests allowing TPR to impose contribution notices.
Scheme funding
Another key change is that trustees of DB schemes will need to:
- determine a funding and investment strategy for the scheme (described in the White Paper as the long term objective (LTO));
- have a written statement setting out their strategy; and
- submit a version of the statement signed by the chair of trustees to TPR.
This year we'll see the second half of The Pension Regulator's consultation on changing its code of practice on scheme funding. Once the new code of practice is in place, the new funding regime will be able to start
As a result it is likely that the full implementation of the new scheme funding regime will only impact on valuations from 2022 at the earliest.
Pensions dashboards
The Pension Schemes Act sets out the legal framework for pensions dashboards (i.e. the online services that will allow people to see all of their pension savings in one place).
Specific duties will follow in regulations, but trustees will have to comply within two to four years. The Pensions Dashboards Programme is already busy working on the data standards and the digital architecture that will underpin pension dashboards. This year will see the Pensions Dashboards Programme fill in more gaps on what will be required of schemes.
Climate change
One of the later additions to the Pension Schemes Act is on climate risk reporting. Trustees will be required to make, report (and, subject to regulations, publish) disclosures on climate change risk in line with international standards.
Regulations may also require trustees to take into account climate change risks and to take mitigating steps.
Collective Defined Contribution
The Pension Schemes Act sets out the legal framework for collective defined contribution schemes (also known as CDC and referred to in the Act as collective money purchase schemes).
At this stage, CDC looks set to be used by a major UK employer as a solution to a long-running pensions issue.
There is the potential for CDC to have a wider role. This will be especially the case if the government allows unassociated multi-employer mastertrusts to set up their own CDC schemes.
Scheme transfers
Finally, the Pension Schemes Act also puts in place new restrictions on the statutory transfer of defined benefits to flexible access pension schemes. New requirements will apply to the advice requirements which are designed to lower the risk of scams and bad decision making.
This month's other main developments
DWP publishes response to default fund charge cap consultation
On 13 January 2021, the DWP published its response to the Review of the Default Fund Charge Cap and Standardised Cost Disclosure. The key points from the response are
- the current charge cap of 0.75% will not be reduced "at the present time", after evidence found the average charge across schemes is 0.48%;
- the scope of the charge cap will not be extended to include transaction costs;
- the government is to introduce a de minimis pot size below which flat fees cannot be charged in default funds. This will initially be set at £100 but will be kept under review. If an individual has multiple pots within the same scheme, the de minimis will apply across all the pots being charged; and
- the government intends to monitor the voluntary adoption of standardised cost disclosure templates. If there is not a satisfactory voluntary take up in adopting these templates, the government will look to introduce legislation to require compliance.
The DWP's consultation response 'Review of the Default Fund Charge Cap and Standardised Cost Disclosure'.
Government announces expansion of Dormant Assets Scheme to certain pension assets
The Dormant Assets Scheme currently applies to funds held in UK banks and building societies that have not been touched for more than 15 years. To date, £745 million has been distributed. Any money that has been wrongly moved into the Dormant Assets Scheme can be claimed back. The government has now responded on a consultation to expand the scope of the Dormant Assets Scheme to include assets from the insurance and pensions, investment and wealth management, and securities sectors. Doing so is expected to release £575 million for social and environmental initiatives from the pensions and insurance sector alone. The government has confirmed that legislation will include certain pension products that crystallise (e.g. cash annuities with a guaranteed payment period, whole-of-life assurances, income drawdown policies and deferred annuities.
The press release issued by HM Treasury and the Department for Digital, Culture, Media & Sport.
TPR issues interim response to its funding code consultation
TPR has published an interim response to its first DB funding code consultation. In summary, TPR has said that there was "general support" for the principles and regulatory approach proposed, although there were some concerns as to how the principles would be applied in practice through the proposed so-called twin-track regime (Fast Track and Bespoke).
TPR intends to publish a full response to its first DB funding code consultation as part of its second consultation document which it expects to publish in the second half of this year. The second consultation will also contain the draft funding code.
TPR's DB funding code of practice consultation interim response.
PPF issues response to its levy consultation
The PPF has issued a note on the outcome of its 2021/2022 levy consultation. In this note, the PPF confirms a number of key decisions ahead of it formally publishing its 2021/22 levy rules and policy statement. They key points include:
- the levy estimate of £520 million for the 2021/2022 levy year is confirmed;
- the levy scaling factor of 0.48 will be retained;
- the small scheme adjustment will be implemented;
- the reduction in the risk-based levy cap to 0.25% of liabilities (from 0.5%) is also confirmed;
- the PPF will continue to measure insolvency risk on the basis that has been in use since April, using credit ratings and the PPF specific insolvency risk model operated by Dun & Bradstreet.
Although the PPF has been later than usual in issuing its final rules and policy statement, the usual deadlines of 31 March 2021 will continue to apply for submission of scheme returns and contingent asset and asset backed contribution certificates.
The PPF's 'Outcome of the 2021/22 levy consultation'.
PPF publishes update to the PPF 7800 index
The PPF has published its January 2021 update to the PPF 7800 Index. Highlights include that the aggregate deficit of the 5,318 pension schemes in the PPF 7800 Index is estimated to have increased to £86.4 billion at the end of December 2020 from a deficit of £78.8 billion as at the end of November 2020.
Small Pots Working Group issues report
The Small Pots Working Group has issued a report that concludes that 'scheme led' consolidation solutions are required to tackle the challenges small pots bring and to drive large scale consolidation. While some 'member-led' consolidation will occur (e.g. pensions dashboards help develop member awareness and engagement with pension savings) this alone will not stem the growth of small pots.
Modernised administrative processes are seen as key to enabling low-cost mass transfers and large scale consolidation, so the Working Group wants industry focussed groups to review what can be achieved in this area and also recommends that the 'default consolidator' and the 'automatic pot follows member' models should be prioritised for further investigation.
The Small Pots Working Group Report.
February 2021 in pensions
Now it is time to look forward to what the coming month will bring in pensions.
- 1 February 2021 - FCA Conduct of Business Sourcebook Instrument 2019 rules on platform switching and investment pathways come into effect following a delay resulting from a COVID-19 easement.
- 12 February 2021 - last date for submissions to the European Data Protection Board's consultation on draft guidelines on restrictions on data subjects' rights under Article 23 of the General Data Protection Regulation (GDPR).
Subscribing to The Month In Pensions
And that is nearly all from The Month In Pensions for January 2021. We always finish off with a non-pensions recommendation - something a little lighter than reading the full text of the Pension Schemes Act and its accompanying explanatory note.
Before we get to that, just a reminder that you can get in touch if there are any items you'd like to see covered in future episodes of The Month In Pensions - just contact me, Ian Chapman-Curry and you can get more from the pensions team here.
If you liked this podcast, please rate or review it and, if you hit the subscribe button, The Month In Pensions will appear in your podcast feed each month. Finally, please feel free to share the podcast with colleagues or anyone who might be interested in staying on top of developments in the pensions world.