Pensions Essentials - September 2024

Under the new funding and investment strategy requirement, which applies to valuations with effective dates on or after 22 September 2024, trustees must send a statement of strategy to the Regulator within 15 months of the valuation date.  The statement of strategy must be submitted in the form set out by the Regulator, which the Regulator has now confirmed means in digital form using the Regulator’s new digital service, to be launched in spring 2025.  Schemes with a valuation date on or after 22 September should not use the Regulator’s existing digital systems to submit their statement of strategy or valuation documents but should wait for the new service to be launched.  The Regulator has confirmed it will not treat schemes in that position as being in breach of the legislative requirements if there is a delay in submission because the new service is not yet live.

To help trustees understand what they need to do, the Regulator has published four illustrative statement of strategy templates, which differ depending on whether the scheme is adopting the Fast Track or the Bespoke approach, and whether the scheme’s valuation date is before, or on or after, its “relevant date” (being the date on which the scheme reaches significant maturity).  Although the appearance of the final templates may change, the information and data required in them will not.  Trustees should, therefore, familiarise themselves with their content.

The Regulator has said it will publish a full response to its consultation in the winter which will outline the responses it received from industry and its consideration of those responses. Nevertheless, we are pleased to see that many of the comments we made in our response appear to have been taken on board when preparing the final templates.  In particular:

• Part 1 of the statement of strategy has been trimmed down, to meet what is legally required under the regulations, and is broadly consistent across all four templates.
• The Regulator has removed much of the narrative explaining the legal requirements, which rendered the document unduly complicated, and was unnecessary in a statement which is being produced for the Regulator rather than for members.
• Trustees will need to complete a free text box to describe their scheme’s long term objective, instead of choosing one of a limited list of prescribed options. This should alleviate concerns from sponsors about including unqualified commitments to buy out or buy in, which could have negative implications for corporate accounting.

Overall, trustees will have more scope to tailor their submission to their scheme’s particular circumstances. Whilst the quantity of information that must be included in Part 2 of the statement of strategy remains significant, there have been some relaxations, including:

• Small schemes (defined as those with 200 members or fewer, excluding lump sum death benefit only members, DC-only members in hybrid schemes and fully insured annuitants not included in the scheme’s liabilities) and certain other low-risk schemes will not need to provide detailed covenant information. These include schemes in surplus on a low dependency funding basis after applying an immediate stress test.
• Small schemes and those adopting a Fast Track approach will no longer be required to submit cashflow information. Other schemes will only need to provide 40 years of cashflows. 
• Cashflows for future service will no longer be required, but schemes open to accrual will have to provide total pensionable salaries and future service contribution rate as at the valuation date.
• There will no longer be a requirement to submit information regarding currency hedging.
• Multi-employer schemes will be able to aggregate covenant data and to decide whether to explain this approach. Further information on this will be included in the revised covenant guidance, which the Regulator expects to publish “in the next few months”.
• Non-segregated, non-associated multi-employer schemes will not be required to submit employer cashflows in the same format as other schemes – instead they will need to submit a summary of the trustees’ assessment of supportable risk over the reliability period.

In its press release the Regulator said that whilst the general election and ongoing party conference season means the DB Funding Code will not legally be in force until the end of November, it nevertheless expects those 118 schemes who will become subject to the new requirements before the Code comes into force to comply with its requirements.

In 2021 the FCA and the Pensions Regulator issued a joint discussion paper on a framework and possible metrics to assess value for money across all DC schemes.  The intention is that requiring schemes to consistently measure and disclose performance should reduce the number of members in DC auto-enrolment schemes that are delivering poor value and drive better value for money across the industry through greater scrutiny and competition by focussing on long-term value rather than cost.

The regulators and successive governments have remained committed to these proposals and in July the King’s Speech announced that the new Pension Schemes Bill would introduce “a standardised test” for occupational DC schemes to demonstrate they deliver value and the same test would be implemented by the FCA in relation to personal pensions.

The FCA has now begun consultation on what the new value for money (VfM) framework will look like in the context of personal pension schemes and the Pension Schemes Bill should contain similar provisions for occupational pension schemes. 

The in-scope arrangements of the new VfM requirements are default funds and arrangements that look like default funds within older pre-auto-enrolment schemes that meet specified requirements.  Arrangements with under 1,000 members will be exempt unless they are a scheme’s only or largest default fund.

There are 4 key elements to the new proposals:

• Measurement and disclosure: Consistent measurement and public disclosure of investment performance, costs and service quality by firms should allow VfM to be assessed effectively.
  
  The new disclosures will require a lot of information.  Arrangements will need to disclose gross investment performance in three different ways: net only of transaction costs; net of investment charges; and net of all costs and charges.  Figures will need to be shown over periods of 1, 3 and 5 years, with 10 and 15 years also shown if reasonably practicable.  Firms should also show the figures for different cohorts with 30, 5 and 0 years to retirement.  All calculations should be made for the period ending 31 December and standard risk metrics will also be required.  Costs and charges information will have to be given over the same periods and for the same cohorts.
  
  Disclosures will also be needed in relation to quality of service.  It is more difficult to collect objective data about this but the FCA proposes looking at things such as quality of data, promptness and accuracy of core financial transactions, member complaints, members using services on retirement planning and engaging with their pensions.
  
  There are additional requirements in relation to asset allocation but these will not form part of the VfM assessment and do not apply to arrangements which have been designed for a specific employer so it is not clear how they will map across to the occupational pensions world.

• Assessment of performance against other arrangements: Comparisons will need to be with arrangements offered by at least 3 other providers and the FCA encourages the use of more.  At least two of the providers will need to have total DC workplace pension assets above £10bn.  In addition, there will need to be a comparison against at least 1 contract-based and at least 1 trust-based arrangement.
  
  Once comparators are identified there is a 4 stage assessment process to compare whether an arrangement offers value when compared to them.  It will look at value delivered from investment performance, value from services, provisional overall value and a red, amber or green rating allocated depending on the outcome.  Green will represent VfM, red not VfM with no prospect of improvement within a reasonable time and amber that the arrangement can be improved within a reasonable period of time.
• Public disclosure of assessment outcomes: There are detailed requirements on what would need to be published and when but it is proposed that there will be a reporting cycle based on the calendar year, with a reporting end date of 31 December and each metric calculated will be a snapshot as of 31 December.  Firms will be required to publish by 31 March their collated data up to 31 December of the previous year.
• Actions where arrangement does not provide VfM: Providers will need to notify contributing employers and close to new business.  Both red and amber rated arrangements will also need to submit an action plan to the FCA. 

Consultation is open until 17 October 2024 and trustees and sponsors of occupational pension schemes are also encouraged to respond as it will inform the regime that applies to them.  The Pensions Regulator has also urged engagement to help ensure that the final version works for occupational pension schemes.

The Pensions Regulator has said that: “In a landscape where automatic enrolment means more people start saving sooner, and may end up with multiple pots, it is vital they can find a complete picture of their pensions in one place” which means that schemes need to ensure that are able to comply with their dashboard duties.  It acknowledges that many schemes are working towards ensuring they have the data that will be needed but says it “cannot be right that with the connection dates approaching, there are still some schemes not measuring their data or trying hard to improve it”.  To address this, the Regulator is planning to engage with a large number of schemes over the autumn and ask what steps they are taking to ensure data is dashboard-ready.  Where a scheme has not taken enough action, the Regulator says that it may consider taking regulatory action. 

The Regulator has powers not only to pursue trustees for non-compliance but may take action against third parties such as employers and administrators where it considers that they are at fault.  Its new compliance and enforcement policy says that the Regulator will focus on the behaviours or breaches that it considers pose the greatest risk to members’ abilities to receive a complete and accurate picture of their pensions, and therefore make appropriate decisions.  It will focus on “connection compliance” which includes schemes not connecting by the connection deadline, trustees being unable to demonstrate they have had regard to DWP’s guidance on connection and a scheme failing to fully connect or remain connected to dashboards. 

Trustees and administrators will also need to ensure that they have appropriate governance standards in place around the dashboards and this includes:

• Keeping records about any decisions taken by scheme, including related advice or information received.
• Having a risk management function in place, including identifying, evaluating and recording risks, with appropriate internal controls to mitigate the key risks and monitor them.
• Having appropriate controls when selecting, appointing and managing service providers.
• Reviewing and assessing the quality of their data from multiple dimensions and putting adequate controls around them.
• Having processes in place to identify breaches of the law and if necessary, reporting them to the Regulator.

The Regulator also says that it will take “an interest where a scheme is failing to find a pension for a saver when they should” or where they “fail to provide data in line with legal requirements, and where the value provided is not sufficiently recent.”

The updated technical standards and code of connection set out how data and dashboard providers will interface with the central digital architecture of the dashboards and with each other, as well as the mandatory requirements for schemes and dashboard providers to connect and remain connected to the dashboards.

Normal minimum pension age (NMPA) is the earliest age at which most individuals can take their pension from a registered pension scheme.  It will rise from age 55 to age 57 on 6 April 2028.  That might seem like quite a long way in the future, but there are things that schemes need to think about before then.

Some members may be entitled to retain an NMPA of 55 if the scheme rules included a provision allowing payment of benefits before age 57 on 11 February 2021 and, prior to 4 November 2021, the member had an unqualified right to take a pension or lump before age 57.  An unqualified right in this context means that no employer or trustee consent is required to take the benefit. 

If a member with a protected pension age takes an individual transfer of their benefits on or after 4 November 2021, that protected pension age can also apply in the receiving scheme, although in the case of an individual transfer it will only apply to amounts derived from the sums and assets transferred.  Receiving schemes do not need to provide members with a lower pension age but may have agreed to do so when they accepted the transfer credit. 

Where members currently have a right to retire before age 55 (because their scheme rules provided for a lower retirement age before the NMPA was increased from age 50 to 55 in 2010), they will be unaffected by the change in 2028 and the conditions in relation to retaining the lower pension age also remain unchanged.

As a starting point, trustees need to ensure that they know what the minimum pension age is for different categories of member under their scheme rules, including any entitlement to protected pension ages.  They also need to consider whether any members who have transferred in have a different minimum pension age in relation to some or all of their benefits. 

The new guidance from PASA highlights a number of issues for trustees and administrators to consider in relation to transfers in and highlights the differences in the protections that apply depending on whether the transfer was a block transfer or an individual transfer. 

In addition, it sets out a checklist of things to be thinking about now, including: 

• Scheme rules: Review and consider impact of the change.
• Communications: Consider reviewing benefit statements to reflect the change and ensure that members have clear information to plan their retirements.  Trustees might also want to review other member facing communications such as the scheme booklet and consider whether further communications are needed to explain to members what is happening.  Also review whether any changes are needed to wake up packs.  If there are modelling tools used on scheme websites, these may also need to be updated.
• Transfer packs: These should contain information on the impact of transferring benefits on the minimum pension age applicable to the member. 
• Administration systems: These need to record the minimum age applicable to the member and, possibly, different tranches applicable to different ages (e.g. where the member has transferred benefits into the scheme).