Pensions Bulletin 2022/44
Pensions & benefits Policy & regulation Pensions dashboards
- LDI – Pensions Regulator issues new trustee guidance
- Pensions dashboards regulations approved by Parliament
- Pensions Regulator consults on its dashboards compliance and enforcement policy
- HMRC consults on McCloud remedy regulations
- Industry guidance on less liquid assets published
- FCA finalises British Steel redress scheme
- Revaluation Order delivers significant boost to deferred pensioners
- DWP issues latest benefit and pension rates
LDI – Pensions Regulator issues new trustee guidance
On 30 November 2022, and following the turbulence in the gilts market in the early Autumn, the relevant industry regulators released the following coordinated communications to their regulated communities:
- The Pensions Regulator issued a guidance statement – “Maintaining liability-driven investment resilience”
- As many LDI funds are located in Ireland and Luxembourg their regulators, the Central Bank of Ireland and the Commission de Surveillance du Secteur Financier (the National Competent Authorities (NCAs)), both issued letters (substantially the same) to the LDI managers they regulate
The UK Financial Conduct Authority also provided a short statement welcoming all of the above.
The Regulator guidance is directed at DB pension scheme trustees and advisers. It sets out recommended actions which aim to maintain an appropriate level of resilience in leveraged arrangements to better withstand a fast and significant rise in bond yields and separately to improve their scheme’s operational governance.
Maintaining resilience
The Regulator welcomes the NCA letters, which amongst other things state that Sterling LDI funds currently have an average “yield buffer” in the region of 300-400 basis points. The Regulator also acknowledges the expectation of a specific level of “liquidity buffer” along with reduced risk profile. The Regulator goes on to state that:
“Where statements from the NCAs refer to pooled funds, we believe the same level of resilience should be maintained for segregated leveraged LDI mandates and single-client funds, as they face the same market risks and operational challenges. If a scheme is not able to hold sufficient liquidity, or is unwilling to commit to that level of liquidity, they should consider their level of hedging with their advisers to ensure they have the right balance of funding, hedging and liquidity. For schemes that decide to adopt an investment strategy with a reduced hedge, this should be done in a predetermined manner by the trustee, having taken appropriate advice.” [Our emphasis]
The Regulator then sets out its requirements for trustees that depart from the NCA buffers. They should:
- Work with their advisers to demonstrate the buffer the scheme has in place
- Complete a risk assessment of how the scheme will respond to stressed market events so that the scheme remains resilient during these events, including how it will raise liquidity
- Detail a step-by-step plan for bringing the scheme to higher levels of resilience in the event of volatility returning to the market
- Document these arrangements and review regularly
Improving governance
The Regulator recommends that trustees review their governance processes and consider the challenges that arose for their pension scheme during the volatility in September and October 2022, and then consider what practical steps in terms of their arrangements (or other governance considerations) they can implement as a result of lessons learned. Specific recommendations are as follows:
- Confirm authorised signatories are up to date and ensure that governance is sufficiently robust, and that decisions can be made at speed in stressed market conditions
- Stress the non-leveraged LDI asset allocation (eg equities, corporate bonds) using a yield shock as set out by the NCAs
- Stress the leveraged LDI pooled fund / segregated mandate using the same yield movement
- Calculate the required collateral amounts, and the type of assets (for example, gilts, cash)
- Specify the dates when these collateral / margin calls need to be made
- Specify what assets would be sold, when the sell instructions would need to be given, and when the cash is settled taking into account settlement periods / dealing dates and liaison with the fund managers
- Confirm who the instructions need to go by and the method of signature (electronic or wet ink)
- Confirm that necessary collateral / cash margins can be paid on the dates specified
- Confirm the asset allocation post collateral / margin call
- Document these arrangements and review them regularly
The Regulator also recommends that trustees continue to have detailed conversations with LDI managers on liquidity for pooled and segregated arrangements, including:
- What the triggers for replenishment are
- Confirming the process for meeting collateral / margin calls
- Providing visibility of liquidity to LDI managers as appropriate
The Regulator also states that any credit lines arranged should be documented and reviewed regularly and in any case must only be utilised on a short-term basis and for liquidity purposes (and notes that legal review will be necessary to avoid the risk of an abrupt end to the facility when it is needed).
The Regulator plans to issue a further update to their Annual Funding Statement in April 2023 and in further statements and investment guidance as necessary.
Comment
We think an overall regulatory “line in the sand” is probably helpful to avoid a situation where competition between managers creates a creep up in leverage levels offered. We also note that simply focusing on a (presumably target level of) basis points to exhaustion is not a complete picture as what also matters is the level at which additional collateral is called for and the operational process for executing the collateral transfer (for individual clients we think this is just as important to be aware of). The Regulator’s guidance seems to recognise this.
For some schemes, that still require relatively high investment returns, having LDI funds maintain a lower level of leverage may create challenging consequences – either those schemes accepting lower liability hedging (and hence more risk), trying to use leverage elsewhere in portfolios (and hence different risks) or accepting lower investment returns (and hence potentially increasing cash cost of pension schemes to employers, which may not prove affordable in some cases and/or has knock-on covenant implications).
All this comes during the Work and Pensions Committee inquiry into LDI and there remains the possibility that lawmakers may consider this guidance insufficient and push for further regulation or legislation.
Pensions dashboards regulations approved by Parliament
The Department for Work and Pensions’ dashboards regulations, that were laid before Parliament in draft form in October (see Pensions Bulletin 2022/38), have been approved by both Houses. As a result, The Pensions Dashboards Regulations 2022 (SI 2022/1220) have now been issued in final form. They come into force on 12 December 2022.
Comment
The bringing into law of these regulations is a significant moment in the delivery of the pensions dashboards policy. It also starts the 12-month clock for those schemes that want to request that their staging date is put back and believe that they meet the very narrow eligibility conditions for such deferral.
Pensions Regulator consults on its dashboards compliance and enforcement policy
Now that the dashboards regulations have been issued in their final form, the Pensions Regulator has, as promised, launched a consultation on its expectations as to how occupational pension schemes should comply with the regulations and the Regulator’s approach to regulating schemes in this regard.
Policy principles
The Regulator’s proposed approach is driven by eight principles that include the following:
- It will be risk-based and proportionate taking a pragmatic approach to compliance and will work with schemes to reach the best outcome for the saver. However, where it sees wilful or reckless non-compliance, it will take a robust enforcement approach
- It will focus on the quality of the data held by schemes, along with scheme governance
- It acknowledges that schemes will be highly dependent on third parties in order to comply with their duties – as a result, the Regulator will consider using its powers against these third parties where necessary to do so
The Regulator also says that it believes that the pensions industry is best placed to devise common solutions and will support them in doing so, working with the industry to resolve issues as they arise.
Key risk areas the Regulator will focus on
The Regulator will focus strongly on connection compliance. It will also be interested where a scheme is failing to find a pension for a saver when they should and where schemes fail to provide data in line with legal requirements, in particular where the value provided is not sufficiently recent.
Schemes are expected to operate adequate internal controls in line with the Regulator’s forthcoming single code guidance, keep clear audit trails of the steps they take to comply with their dashboard duties, keep records of steps taken to resolve any issues that arise, and keep records of their matching policy and the steps taken to improve their data.
The document goes on to explain the Regulator’s intended approach to non-compliance and then sets out the various options available to it – ie compliance notices and fines. It then concludes with eight illustrative scenarios setting out for each the action that the Regulator takes when presented with different forms of non-compliance.
Consultation closes on 24 February 2023 and the Regulator intends to publish the final policy in spring 2023.
Comment
The draft policy is as one might expect and trustees and Integrated Service Providers can expect to receive compliance notices pretty much automatically if it comes to the Regulator’s attention that there has been non-compliance on a key matter. By contrast, the Regulator promises to be much more nuanced when it comes to issuing penalty notices.
The draft policy is, of course, predicated on schemes being able to comply with all the demands that the dashboard will place on them. It is not clear how the Regulator will react should there be a systemic issue.
HMRC consults on McCloud remedy regulations
HMRC has issued a consultation on draft regulations that set out changes to how the pensions tax rules will apply to pension scheme administrators and members of public service pension schemes as a consequence of the “deferred choice underpin” remedy that is being delivered via the Public Service Pensions and Judicial Offices Act 2022 to address the issues exposed by the McCloud and Sargeant cases. These regulations follow the taking of regulation-making powers in the Finance Act 2022 (see Pensions Bulletin 2022/11).
The draft regulations make changes to how pensions tax legislation operates in a number of circumstances, including changes to how schemes will need to report and pay extra tax charges or reclaim overpaid tax. The draft regulations are also intended to ensure that schemes can pay adjusted pension benefits as authorised payments.
The draft regulations are accompanied by draft guidance whose purpose is to explain what the regulations do and provide scheme administrators of public service schemes with the information they need to deal with the tax changes arising from the remedy. Both the regulations and the guidance have also been signalled by an HMRC newsletter.
Consultation closes on 6 January 2023. The regulations are intended to take effect from 6 April 2023, but some provisions will have a retrospective effect.
Comment
The draft regulations are exceptionally complex and wide-ranging, reflecting many of the potentially adverse tax consequences that can arise when a retrospective adjustment to benefits is necessary. However, they don’t cover all the issues that have been identified and it seems that further regulations will be needed.
Importantly, the regulations seem to be limited in their application to public sector schemes.
Industry guidance on less liquid assets published
The Pensions and Lifetime Savings Association has published a series of guides intended to help DC schemes understand the key considerations and risks around investment in less liquid assets, such as venture capital, private equity, private credit, real estate, and infrastructure. The intention is that these guides will encourage DC schemes to consider whether to invest in less liquid assets within a default arrangement and in so doing potentially improve member outcomes.
Investing in less liquid assets – key considerations brings together six guides covering the following issues:
- Value for money: this outlines a process for assessing value for members from investing in less liquid assets and provides case studies on how that could work in practice for different types of DC schemes
- Performance fees: this sets out key principles and maps them to specific features of performance fees to highlight their implications for DC schemes
- Liquidity management: this outlines how DC schemes can meet the liquidity needs of their members, while investing in less liquid assets, by managing liquidity at two levels – the DC scheme and underlying fund levels
- Fund structures for less liquid assets: this overviews the key features and considerations around the fund structures potentially available to UK DC schemes
- Legal guide to the Long Term Asset Fund (LTAF): this highlights the key features of the LTAF, including its legal structure and a summary of the key terms
- Due diligence: this highlights the key considerations around due diligence on the investment managers and products
The document concludes with a statement from a number of investment and employee-benefit consultants, including LCP, that they will shift their focus from cost to long-term value for members when advising DC decision makers, some key principles for consultants on how to integrate successfully less liquid assets into DC schemes, and a call to action for DC investment platforms to evolve their processes and systems.
The guides have been produced by the Productive Finance Working Group, which was convened by the Bank of England, the Financial Conduct Authority and HM Treasury and follows recommendations from the Group for removing barriers to DC schemes investing in illiquid assets, published in September 2021 (see Pensions Bulletin 2021/40).
Comment
For too long DC trustees have faced significant barriers, including those of an operational nature, when it comes to investing in less liquid assets – something not faced by their DB scheme counterparts. In addition to Government initiatives, we now have these most welcome guides that should help to frame investment conversations with trustees of DC schemes of all sizes; not just the largest. This is all to the good.
FCA finalises British Steel redress scheme
The Financial Conduct Authority has published the final rules for the redress scheme for former members of the British Steel Pension Scheme (BSPS) who received unsuitable advice to transfer out between 26 May 2016 and 29 March 2018. This follows a consultation launched in April 2022 on the redress scheme itself and a further consultation in August 2022 (see Pensions Bulletin 2022/30) in which some changes were proposed to the FCA’s generic redress scheme for non-compliant DB pension transfer advice. The updated rules for this scheme have also been settled.
In relation to former members of the BSPS:
- The FCA is providing a tool that advisers will have to use to calculate redress payments
- Advisers will have to provide details of all cases rated as 'suitable' to the FCA so it can check if former BSPS members would like the Financial Ombudsman Service to independently review their advice
- Advisers should contact former BSPS members between 28 February 2023 and 28 March 2023, to explain whether they are within scope of the scheme, and if so that their transfer advice will be reviewed unless they opt out, with advice being reviewed by the end of September 2023
- Advisers should provide the redress calculation by the end of December 2023 if former members opt to receive it as a lump sum, and by February 2024 if they opt to receive a payment into their pension scheme. Those whose advisers have gone out of business should make a claim with the Financial Services Compensation Scheme
The FCA is also proposing to extend its temporary BSPS asset retention rules so that the rules apply until firms have resolved all relevant cases. Consultation on this closes on 23 December 2022 and should this extension go ahead the FCA intends to publish a policy statement in January 2023, before the temporary asset retention rules expire on 31 January 2023.
Comment
The FCA’s BSPS redress scheme has taken a long time to come to fruition, but at least once it had been formally proposed earlier this year, it has been expedited by the FCA. Nevertheless, those who have been misadvised may have had to wait up to 8 years before receiving redress payments through this scheme. And for those who need to make a claim with the FSCS there are two issues – first the onus is on the individual to make that claim and second, the amount of compensation the FSCS can provide is capped at a level that could be well below the loss incurred.
Revaluation Order delivers significant boost to deferred pensioners
An Order has been laid before Parliament setting out, for early leavers from mainly DB occupational pension schemes who reach their scheme’s normal pension age in 2023, the minimum revaluation required on that part of their deferred pension in excess of any GMP. As in previous years the Order sets out the revaluation percentages for each of the revaluation periods since 1 January 1986; this year ending on 31 December 2022.
The Occupational Pensions (Revaluation) Order 2022 (SI 2022/1229) comes into force on 1 January 2023, and this year reflects the September 2022 CPI which returned an increase over the year of 10.1%.
Comment
Although this 10.1% increase is capped at 5% for accruals before 6 April 2009 and at 2.5% for accruals from this date, because revaluation and the caps are applied over the revaluation period as a whole, rather on a year-by-year basis, many deferred pensioners will see a one-year increase in their deferred pension that is much more than these caps. This is because price inflation has been very modest for much of the last 35 years and so adding just one year at 10.1% doesn’t in many cases get limited by the operation of the cumulative cap.
DWP issues latest benefit and pension rates
Following the Autumn Statement, the Department for Work and Pensions has issued a list of the benefit and pension rates that will operate from 2023 to 2024. These include the following:
- The new State Pension – which increases from £185.15 pw to £203.85 pw
- The old Basic State Pension – which increases from £141.85 pw to £156.20 pw
- The standard minimum guarantee of the Pension Credit – which increases from £182.60 pw to £201.05 pw for single people and from £278.70 pw to £306.85 pw for couples
Comment
As announced at the Autumn Statement, many of the social security benefits and state pensions increase in line with the rise in the CPI of 10.1% for the year to September 2022.
