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Pensions: what’s new this week 25 October 2021

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26 October 2021

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

This week we cover topics including: the implementation of simpler annual statements; new developments on sustainable investment and stewardship; and changes to reporting of annual asset class information by DB schemes.

 

Simpler annual statements to be implemented from October 2022

New requirements for simpler annual statements will be implemented from 1 October 2022.

The requirements will apply to statements provided to members by DC automatic enrolment schemes (where the member is not in receipt of benefits). Trustees must provide the benefit information in a statement that does not exceed one double-sided sheet of A4-sized paper (when printed), and must have regard to statutory guidance on content and layout. Trustees may provide the information in a non-compliant layout in response to member requests, where the trustees are reasonably satisfied that this is necessary to comply with the Equality Act 2010.

The government ‘strongly encourages’ trustees of schemes that are not required to comply with the new requirements ‘to use the discretion that they already have when designing their statements to apply the same principles of brevity and simplicity set out in the statutory guidance which includes the illustrative statement template’. Over the longer term, the government is aiming to improve consistency across all categories of schemes through short, simple statements and it will consider lessons learnt from these changes – a review of the new requirements is due to be published before October 2027.

Read the regulations.

Read the statutory guidance and illustrative template.

Read the consultation response.

Sustainable investment and stewardship: government announces plans for new sustainability-related requirements; consults on Paris alignment reporting and new guidance

Ahead of COP26, there have been several government announcements relating to pension schemes this week.

Roadmap to sustainable investing: future sustainability-related disclosure requirements

First, the government announced plans for new sustainability-related disclosure requirements (‘UK SDR’), including for pension schemes. The proposals are contained in the government’s policy paper ‘Greening Finance: A Roadmap to Sustainable Investing’, which is a combination of updates on existing workstreams and some new proposals.

For occupational pension schemes, the headline measure is that certain UK pension schemes will be required to disclose sustainability-related risks, opportunities and impacts. This information is likely to be combined with the existing reporting requirements on climate-related risks and opportunities (the TCFD report). The scope and timing of requirements for pension schemes, and the reporting detail, will be determined following consultation. The policy paper indicates that the new requirements will apply to £5bn+ and £1bn+ schemes, as with the TCFD reporting requirements.

The paper also sets out some government expectations for the UK pensions and investment sectors:

  • Progressing work on stewardship; applying to become a signatory of the UK Stewardship Code 2020; and encouraging or requiring service providers to sign up to the Code.
  • Taking into account the information generated by UK SDR when allocating capital.
  • Engaging in active investment stewardship (actively monitoring, encouraging, and challenging companies to promote long-term, sustainable value generation).
  • Being transparent about their own and their service providers’ engagement and voting (including through high-quality and accessible reporting).
  • Providing leadership, for example by joining a net zero initiative and publishing a high-quality transition plan.
  • The government plans to assess progress on the above points at the end of 2023.

You can read more about the proposals, including a UK green taxonomy and new sustainable investment labelling, on our Countdown to COP26 and Beyond blog: read the blog post.

Read the policy paper.

Consultation on: Paris alignment reporting and related amendments to statutory guidance; new guidance on reporting on stewardship and other matters in the statement of investment principles (SIP) and the implementation statement

From 1 October 2021, the government introduced new climate change-related duties for trustees of certain pension schemes – the first wave of the rollout applies to schemes with £5bn or more in assets (specific valuation rules apply), master trusts and collective DC schemes. To read more about the new requirements, visit our information hub: Sustainability and UK pension schemes: Preparing for the new TCFD requirements.

The government has now published a consultation on proposals to amend this framework to include ‘Paris alignment’ reporting. The relevant regulations would be updated to require trustees to, as far as they are able, calculate a portfolio alignment metric and use this metric to identify and assess the relevant climate-related risks and opportunities. A portfolio alignment metric is defined as a metric which gives the alignment of the scheme’s assets with the climate change goal of limiting the increase in the global average temperature to 1.5 degrees Celsius above pre-industrial levels. The government is seeking feedback on draft regulations and related updates to statutory guidance for trustees.

The government is proposing that all trustees who are in-scope for the existing regulations must comply with the new requirements from 1 October 2022, with no staged rollout. This would mean that trustees falling into both waves of the initial rollout (ie including £1bn+ schemes in the second wave) must comply from that date. The draft regulations state that the requirement to include information about a portfolio alignment metric in the TCFD report would not apply in respect of a scheme year ending before 1 October 2022 – this easement is to cover reports produced or published on or after this date but relating to a scheme year ending before 1 October.

In addition, the consultation covers proposed new guidance on statements of investment principles and the implementation statement. The government has produced this following stakeholder feedback that a lack of clarity about expectations has made it difficult to avoid the implementation statement becoming a tick-box exercise. The guidance is aimed at providing clarity on stewardship, including voting and engagement, and reducing reporting burdens.

The guidance on the SIP and implementation statement covers matters including stewardship and engagement with asset managers, financially material considerations and non-financial matters and other required reporting on investment policies. The government intends for the parts of the guidance relating to the SIP to be ‘best practice’ guidance (not statutory guidance), but for guidance in relation to the implementation statement to be statutory guidance to which trustees must have regard. Following publication of the final guidance, the government plans to review its effectiveness, including whether a regulatory intervention might be necessary, in the second half of 2023.

The consultation closes on 6 January 2022.

Read the consultation.

Changes to reporting of annual asset class information by DB schemes

TPR and the Pension Protection Fund (PPF) have announced changes to the asset class information provided annually by DB schemes, following a consultation earlier this year. The new requirements are expected to be introduced in scheme returns from 2023.

TPR will gather additional information via scheme returns, using a tiered approach based on scheme size (by liabilities on a section 179 basis). A simplified approach (Tier 1) will apply to smaller schemes with liabilities of less than £30m (the consultation response indicates that the boundary between Tier 1 and Tier 2 schemes may be lowered to £20m or less in future). Larger schemes (Tiers 2 and 3) will be asked for more granular information, with Tier 3 schemes (£1.5bn or more in liabilities) also having to provide additional information on risk factor stresses.

TPR expects that the new information will facilitate a more accurate assessment of schemes’ investment risk (and support the appropriate allocation of regulatory resources). The PPF plans to consult on related rule changes in the 2023/24 levy consultation process.

Trustees should discuss this development with their investment consultant, to ensure that appropriate information-gathering processes are in place for their scheme ahead of the first reporting deadline.

Read the consultation response.

GMPs: HMRC delays eRoom closure process

HMRC has delayed the start of the closure of Scheme Cessation and Scheme Reconciliation eRooms to the end of November 2021, following feedback from scheme administrators. It had previously advised that it would begin closing these rooms from 1 September 2021. Administrators have been advised to check the data held in these eRooms and to make copies of any information required before closure.

HMRC has also provided a contact email address for any GMP queries that fall within the ongoing service provided by HMRC, but which are not appropriate for the GMP Checker service.

Read the update.

Fraud Compensation Fund update

Previously we reported that the government had introduced a Bill to Parliament that would permit a government loan to the PPF to increase the funds available to the Fraud Compensation Fund, in order to cover expected compensation payments related to pension scams. The loan would be repaid over time using funds from the fraud compensation levy. The Bill has now passed through Parliament and Royal Assent has been granted: read the Act.

The PPF’s latest annual report indicates that it has already received claim applications in respect of such schemes amounting to over £40 million (and it expects to receive more claims in the future): read the report. The government is expected to consult this autumn on the levy ceiling for the fraud compensation levy.