Pensions: what's new this week - 3 July 2023
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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: Work and Pensions Committee report on LDI; FCA countdown to the Consumer Duty; More pension schemes allowed to invest in Long Term Asset Funds.
Work and Pensions Committee report on LDI
The Work and Pensions Committee (WPC) has published a report on the use of liability driven investments (LDI) by defined benefit (DB) pension schemes. LDI funds aim to invest in assets with returns broadly matching a scheme’s liabilities (not simply seeking the highest return). Market volatility in autumn 2022 centred on the use of these funds has brought LDI under scrutiny.
The report discusses the role of trustee governance in the appropriate use of LDI, in particular in relation to smaller schemes. The WPC supports the Pensions Regulator’s (TPR) view that consolidation will help to improve trustee governance but notes that legislation is needed in relation to DB consolidation. The DWP consulted on a proposed framework for DB consolidation or ‘superfunds’ in 2018 (read more); the WPC recommends that there should be a response to this consultation by the end of October 2023. It also recommends that the DWP should work with TPR ‘as a priority to improve the regulation of trustees and standards of governance’. In the meantime, it suggests that the DWP should consider whether the use of LDI could be restricted, for example based on a test related to a trustee board’s ability to understand and manage the risks involved.
Other recommendations included: halting the proposed new DB funding regime, at least until there has been a full impact assessment for the proposals (due to concerns that it will lead to greater ‘herding’ in investment decisions); TPR specifying minimum levels of resilience for the LDI arrangements in which pension schemes may invest and considering how this will be monitored; TPR putting in place mechanisms to provide real-time warning of reductions in LDI resilience; a consultation on whether introducing disclosure requirements relating to the use of LDI in the annual report or statement of investment principles would help improve standards of governance; and bringing investment consultants under regulation by the Financial Conduct Authority (FCA).
FCA countdown to the Consumer Duty
The FCA has produced materials for firms in preparation for the coming into force of the new Consumer Duty on 31 July 2023. The duty applies to firms regulated by the FCA, meaning that occupational pension schemes will not be directly affected (though FCA-regulated personal pension arrangements will be). In certain circumstances, FCA-regulated firms providing services to occupational pension schemes are subject to the duty, so trustees may see changes in approach by some providers in line with this.
More pension schemes allowed to invest in Long Term Asset Funds
The Financial Conduct Authority (FCA) has published new rules broadening the scope of investors who can use Long Term Asset Funds (LTAFs) to include more pension scheme arrangements. LTAFs are a new category of authorised open-ended fund specifically designed to invest efficiently in long-term, illiquid assets such as venture capital, private equity, private debt, real estate and infrastructure. The FCA believes that while these investments can have a higher risk of loss than diversified portfolios of listed equities or bonds, they can also potentially deliver higher long-term returns in exchange for less liquidity.
Previously, pension scheme investment in LTAFs was restricted to DB schemes and the default arrangement within qualifying defined contribution (DC) schemes. The new rules expand this to permit investment by self-select DC pension arrangements and self-invested personal pensions (SIPPs). Additional protections will need to be put in place to protect those considering these investments, such as risk warnings and summaries.