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Pensions: what’s new this week - 6 February 2023

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: DC illiquid assets: disclose/explain requirements and performance-based fees; New value for money framework; Call for evidence on small pots; Consultation on extending CDC schemes to multi-employers; TPR scheme return updates: asset breakdowns; and HMRC Pension Schemes Newsletter and update to transfers guidance.

DC illiquid assets: disclose/explain requirements and performance-based fees

The government has published updated draft regulations and statutory guidance (alongside a response to its consultation on these) introducing requirements aimed at encouraging DC schemes to invest in illiquid assets. Subject to Parliamentary approval, they will come into force from April 2023.

While some clarifications and tweaks have been made following industry feedback, the key proposals remain materially the same:

  • Relevant DC schemes will be required to disclose and explain their policies on illiquid investment in their default fund statement of investment principles (or main SIP for collective money purchase (CMP) schemes). This will apply on the first occasion when the SIP is updated after 1 October 2023, and by 1 October 2024 at the latest. Guidance on the new SIP requirements will be published in due course.
  • Relevant DC schemes will be required to disclose in their Chair’s Statement the proportions of default fund assets allocated to different asset classes. The guidance recommends that allocations be given as at various member ages (an age-specific approach is not expected of CMP schemes). Disclosure will be required in the Chair’s Statement for the first scheme year that ends after 1 October 2023.
  • Trustees will be able to exclude specified performance-based fees from the default fund charge cap from 6 April 2023, where they feel this is in members’ interests. Any exempted fees would need to be disclosed in the Chair’s Statement as a percentage of the average default fund assets during the scheme year, and assessed for value to members. Current regulations permitting five-year smoothing of the effects of performance fees would be repealed.

Read the draft regulations, statutory guidance and consultation response.

New value for money framework

The government is consulting on a framework which would require workplace schemes to disclose, assess and compare the value for money (VFM) they offer for DC benefits. The consultation closes on 27 March 2023.

The framework would apply to default arrangements (following the same test as currently used for the default fund charge cap but excluding certain smaller schemes). It may be extended in a second phase to cover self-select options, non-workplace pensions and DC pensions in decumulation.

Relevant schemes will be required to gather data on three key elements of VFM: investment performance, costs and charges, and quality of services.

Investment performance

Schemes would need to disclose backward-looking investment performance, net of all costs. Performance should be reported for members at different ages (to take account of asset mix changes at different ages) and over different time periods. Risk-adjusted metrics would be applied to indicate the level of risk borne by pension savers in achieving the reported return, and a forward-looking metric for targeting future performance would be given. The consultation seeks input on what metrics should be used for each of these.

Returns net of investment charges and transaction costs, potentially at different ages, would also be disclosed. The government intends to provide additional guidance to clarify how it defines investment charges and transaction costs. It also proposes requiring schemes to report on the percentage of assets allocated to set asset classes, similar to the requirements in relation to illiquid assets referred to above.

The consultation proposes allowing multi-employer schemes to report on groups of employers, based on assets under management and/or number of pension savers.

Costs and charges

The consultation suggests requiring schemes to disclose: (a) total charges rather than 'member-borne' charges; and (b) the total amount of administration costs. It seeks input on applying these to more complex charging structures and multi-employer schemes (where it again suggests reporting on grouped employers).

Quality of services

The consultation stresses that VFM is not just about investment performance and cost – wider factors influencing saver outcomes should be considered. It therefore proposes metrics intended to measure the effectiveness of member communications and scheme administration.

VFM assessment

Schemes would need to use the information outlined above to complete a VFM assessment. The consultation sets out two different possible approaches: using regulator-defined benchmarks; or requiring schemes to compare themselves against three other schemes using their publicly available VFM data (subject to a mandatory step-by-step process intended to introduce more objectivity and consistency).

The assessment would lead to each scheme being categorised as 'VFM', 'not currently VFM but with identified actions to improve in certain areas that would deliver VFM', or 'not VFM'. This categorisation would lead to certain actions, including potential winding up for schemes that are not VFM.


Schemes would report on the above three factors using a prescribed template, to be consulted on. The government is considering publication using a 'decentralised approach' – on a publicly accessible website (which could be the scheme’s own website); or a 'centralised approach' – developing a central repository, to which schemes would be required to submit their data directly via a web portal.

The proposal is that all framework data will need to be published by the end of the first quarter of the calendar year, based on an end-point for data of 30 June the previous year. Schemes will then be able to use the published data from other schemes for their VFM assessments. Occupational trust-based schemes would need to publish the VFM assessment by the end of October, separate to the Chair’s Statement.

Changes to current Chair’s Statement requirements

The consultation also covers potential changes to the current Chair’s Statement requirements. The DWP is considering splitting the Chair’s Statement requirements into two separate documents: one that is member facing and another that is purely a governance document. It is also reviewing, more broadly, the continued feasibility of the Chair’s Statement as a means to publish governance and member information.

Read the consultation.

Call for evidence on small pots

The government is looking again at the long-standing issue of the increased number of small deferred pots. It has published a call for evidence on the issue, with responses to be sent by 27 March 2023.

The government is seeking views on two large-scale automated consolidation solutions: a default consolidator model and 'pot follows member'. Under the default consolidator model, deferred small pots that meet the chosen eligibility criteria would transfer automatically to a small pot consolidator, with members being given an opportunity to opt-out. The pot follows member model would mean that an employee’s deferred pot would automatically move with them when they move jobs, to their new employer’s scheme (again, if it met the eligibility criteria and with an opportunity to opt out).

The consultation also discusses 'member exchange' (where pension providers use a trusted third party pseudonymised data service to identify whether another provider has the same member) and 'pot for life' (combining the benefits of members who return to the same scheme into a single pot, to prevent them from accumulating multiple pots in the same scheme) as additional routes to improve consolidation, although these are not seen as full solutions.

Input is also sought on: the maximum level of benefits that should be considered 'small' and therefore appropriate for automatic consolidation; whether there should be a minimum size of pot that is eligible for consolidation (the government does not favour this approach); and at what point a pot should be considered 'deferred' and therefore consolidated (for example, should the trigger be no contributions being made for a certain period of time, a new pot being active or a saver leaving employment?). It also comments on ensuring transfers made for consolidation purposes do not inadvertently affect members with protected pension ages (in certain circumstances, a transfer of benefits can cause a person to lose this protection).  

Read the call for evidence.

Consultation on extending CDC schemes to multi-employers

The government has also published a consultation on extending Collective Defined Contribution (CDC) provision to accommodate multi-employer schemes for non-associated employers (including Master Trusts). It is also seeking views on the role of CDC in decumulation. This consultation also runs until 27 March 2023.

The consultation sets out proposed key principles that would apply to non-associated multi-employer CDC schemes and which aspects of the current CDC authorisation regime may need to be adapted. It also discusses other policy considerations; for example, how statutory transfers will be effected, how the charge cap will apply and how these new schemes would meet auto-enrolment requirements.

The consultation also seeks views on decumulation-only CDC arrangements, noting that decumulation products have historically been regulated by the FCA, so this is fresh ground for trust-based schemes.

Read the consultation.

TPR scheme return updates: asset breakdowns

The Pensions Regulator (TPR) has updated its scheme return for DB and hybrid schemes, with new information required on asset breakdowns. Scheme returns must be submitted by 31 March 2023.

Different requirements apply depending on which tier a scheme falls into, based on total liabilities (as recorded in the scheme’s last s.179 valuation):

  • tier 1: total liabilities of less than GBP30 million.
  • tier 2: total liabilities of between GBP30 million and GBP1.5 billion.
  • tier 3: total liabilities of GBP1.5 billion or more.

Tier 1 schemes have to provide a simplified set of information. Tier 2 and 3 schemes need to provide more detailed information about the bonds and equities they hold. Tier 3 schemes also need to provide information on risk factor stresses. Schemes have the option to 'trade up' to a higher tier and provide more information.

TPR will also be conducting an exercise this year to check whether schemes carry out their duties to publish their statement of investment principles (SIP) and implementation statements.

Read more.

HMRC Pension Schemes Newsletter and update to transfers guidance

HMRC has published Pension Schemes Newsletter 146. It includes a section on updates made to HMRC’s pension scheme transfers guidance, reflecting that HMRC will now confirm the registration status of a receiving scheme by email, rather than by post, but schemes must confirm they have read HMRC’s guidance on corresponding by email. The Newsletter also covers residency status reports and migration to the Managing Pension Scheme Service (including information on submitting event reports, pension scheme returns and Accounting for Tax returns).

Read the Newsletter.