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Pensions: what's new this week - 19 December 2022

Welcome to your weekly update from the Allen & Overy Pensions team, covering all the latest legal and regulatory developments in the world of workplace pensions.

This week we cover topics including: TPR: DB Funding Code published; Financial sector reforms: pensions-related changes; TPR blog post: member outcomes; Dashboards: finalised guidance on deferred connection; PPF final levy rules for 2023/24; FCA consumer duty – application to pension schemes; Next edition of WNTW: 9 January 2023.

TPR: DB Funding Code published

The Pensions Regulator (TPR) has launched its long-awaited consultation on its revised DB Funding Code, publishing the new draft Code, a consultation document, a response to the previous consultation, and a separate document explaining TPR’s Fast Track approach. There is a lot of material to get to grips with during the 14-week consultation period ending on 24 March 2023; key points are set out below. TPR notes that any changes to the DWP’s draft regulations will need to be reflected in the final Code. The aim is for the package to come into force on 1 October 2023 (applying to valuations with a subsequent effective date). 

The draft Code

The draft Code is split into three parts:

  • an overview of the funding regime, including TPR’s views on how the new funding and investment strategy, the statement of strategy and scheme valuations interact;
  • long-term planning, including low dependency asset allocation from the point when a scheme reaches significant maturity and what it means for assets to be ‘broadly matched’ with the payment of scheme benefits; how to assess resilience to short-term adverse changes in market conditions via stress testing; the low dependency funding basis; how the point of significant maturity is set (the DWP may decide to take an alternative measure of maturity instead of duration of liabilities, so this may be subject to change); assessing the employer covenant; journey planning; and the statement of strategy; and
  • application, covering technical provisions; recovery plans (including reasonable affordability); and investment and risk management considerations. This includes a chapter on systemic risk considerations, with particular reference to liability-driven investment (LDI) funds – see further below.

Fast Track – a changed approach

TPR is changing its approach to Fast Track – previously this was seen as a benchmark that schemes could meet to receive lower regulatory interaction. Instead, TPR now sees it as a filter for assessment of all submitted actuarial valuations: if a valuation submission meets the Fast Track parameters, TPR is unlikely to scrutinise it further, or would limit its engagement to individual unmet parameters. The Bespoke route may be more appropriate for schemes following a more complex funding and investment path or those unable to meet the Fast Track criteria. Neither route equates automatically to compliance, but Fast Track provides greater clarity on the level of risk that TPR will tolerate. The Fast Track parameters are separate from the Code and cover the low dependency funding and investment strategy, technical provisions, investment risk and recovery plan length.

Other developments

Further guidance is to follow next year on the information to be provided in a scheme’s statement of strategy, and on covenant assessment.

Separately, correspondence has been published between TPR and the Parliamentary Work and Pensions Committee (WPC). TPR has resisted calls from the WPC to delay the draft Code until after their findings on LDI have been published, noting that this would in effect delay the Code for another year. TPR’s letter to the WPC notes that a new section around systemic risk has been included in the draft Code, taking into account the disruption witnessed by the financial markets in September and October.

Read the consultation documents and online survey for responses.

Read TPR’s correspondence with the WPC.

Financial sector reforms: pensions-related changes

The Chancellor of the Exchequer has published a collection of proposed reforms to the financial sector, known as the ‘Edinburgh reforms’, intended to promote an ‘open, sustainable, and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens’. Some of the reforms are relevant to occupational pension schemes, including:

  • in the new year, the DWP, FCA and TPR will consult on a new Value for Money framework, which will set required metrics and standards in key areas such as investment performance, costs and charges and quality of service. The government intends this to help accelerate the consolidation of smaller schemes;
  • regulations, consulted on in October 2022, will be laid early in the new year removing ‘well-designed performance fees’ from the pensions charge cap; and
  • a consultation has been launched on the VAT treatment of fund management. The proposals will set out criteria for funds that benefit from a VAT exemption. They are intended to clarify the current position by codifying existing policy, which is currently set out in a mixture of UK law, retained EU law, general principles, guidance and a body of case law. No policy changes are intended.

Read details of the reforms.

Read the consultation on VAT treatment of fund management.

TPR blog post: member outcomes

TPR has published a blog post focusing on improving member outcomes in DC schemes. This highlights disadvantages with smaller DC schemes, continuing TPR’s long-standing message that many smaller schemes should consider whether better member outcomes could be achieved by transferring members’ benefits to another scheme and winding up. If they decide not to wind up and transfer members’ benefits, they should make any improvements necessary to ensure the scheme does offer value, and to upskill themselves.

TPR highlights the current, more difficult, risk environment and notes that trustees need to consider whether their governance structure is best placed to deal with emerging systemic risks, including climate change and wider sustainability issues. It also refers to improving opportunities to invest in illiquid and climate change-related investments and sets out steps trustees should take when considering investment in illiquid assets.

Read the blog post.

Dashboards: finalised guidance on deferred connection

The DWP has finalised its guidance for occupational pension schemes looking to defer their dashboards staging deadline (the date by which they must connect to the dashboards ‘ecosystem’). There are no significant changes to the draft guidance published in October.

Schemes can apply to defer their staging deadline by up to 12 months if, before the coming into force of the dashboards regulations (which occurred on 12 December 2022):

  • they had embarked on a programme to transfer the data held by the pension scheme to a new administrator; and/or
  • they had entered into a contract containing an obligation to retender the administration of the scheme and the timetable for this is reasonable and conflicts with the staging deadline for the scheme; and
  • complying with the staging deadline (a) would be disproportionately burdensome, for example the monetary cost of compliance would be significantly higher, the additional cost is not considered to be in the best interests of scheme members, and reasonable alternatives have been considered; or (b) would put the personal data of members at risk. Changing administrator is not, of itself, sufficient.

Deferral can only be granted once. It will not be granted where it is suspected that a scheme is deliberately seeking to avoid its dashboard obligations. Applications must be supported by sufficient evidence and be made by 11 December 2023 and at least two months before a scheme’s staging deadline, though the DWP recommends submitting them as early as possible, as applications will be prioritised for consideration based both on staging date and the date of the application.

Read the guidance.

PPF final levy rules for 2023/24

The Pension Protection Fund (PPF) has set out its final levy rules for 2023/24. They are in line with the proposals consulted on in September. The levy estimate has been confirmed as GBP200 million – a reduction of GBP190m compared with 2022/23, due to the PPF’s improved funding position. This means that 98% of schemes are expected to see a reduction in their levy and the majority of schemes that pay a risk-based levy can expect it to fall by more than half. The PPF consultation response reassures schemes that a future increase to the levy is unlikely to happen.

The PPF will also simplify the way the levy is calculated:

  • to reduce the sensitivity to insolvency risk, the levy rates for levy bands 2 to 10 will be changed, halving the band-to-band increase. This means that a move from one band to the next, in isolation, would have a more limited impact on schemes’ levy bills;
  • the Levy Scaling Factor will be set at 0.37 (0.48 in 2022/23), reducing risk-based levies by 23%, other things being equal;
  • the Scheme-Based Levy Multiplier will be reduced to 0.000019 (0.000021 in 2022/23), reducing scheme-based levies by 10%, other things being equal;
  • the risk-based levy cap will remain at 0.25% of scheme liabilities; and
  • the 2022/23 limit on increases in levies (the ‘2022/23 adjustment’) will not be continued.

The PPF is also updating its asset and liability stress factors, to integrate information from the updated asset categorisation that will be included in DB scheme returns from 2023.

In relation to asset-backed contributions (ABCs) the PPF has made a small change to the Rules and ABC guidance to enable the Board to take account of payments made to a scheme in exchange for the scheme trustee’s interest in an ABC arrangement ceasing (e.g. by sale or other arrangement). This will allow such payments to be included in the calculation of ABC payments where it is appropriate to do so.

Read the levy rules.

FCA consumer duty – application to pension schemes

The FCA has published a consultation on amendments to its Handbook, relating to how the new Consumer Duty for FCA-authorised firms will apply where they are providing services to occupational pension schemes.

The consumer duty broadly applies extra requirements from July 2023 on the standard of conduct expected of firms when dealing with consumers. It will apply to all UK FCA-authorised firms that offer products and services to retail customers, including where they do not interact directly but the firm indirectly ‘materially influences retail customer outcomes’. There has been some debate over how this applies where FCA-authorised firms provide services to occupational schemes. The recent consultation proposes amendments to clarify that the duty applies where a firm can determine or materially influence outcomes for beneficiaries of occupational schemes.

The suggested amendments also clarify that (i) where new members cannot join a scheme, it would be classed as closed, meaning firms have until July 2024 to implement the duty in respect of those schemes; and (ii) an exclusion for instruments designed for wholesale investors does not apply where firms are designing and distributing funds for retail customers, for example an asset manager working with a pension provider or an investment platform to design and manage funds.

In practice, the FCA does not expect there to be many instances where FCA-authorised firms can determine or have a material influence on retail customer outcomes in relation to DB occupational pension schemes. It is possible, however: for example, a firm might provide services to DB trustees that have a material influence on consumer understanding or consumer support.

Read the consultation.

Read our quick reference guide to the new consumer duty.

Next edition of WNTW: 9 January 2023

This is our last edition for 2022. We hope you have a peaceful and restful break; What’s New This Week will return on 9 January 2023.