Pensions Bulletin 2023/17

• Pensions Regulator issues new LDI guidance
• Annual funding statement for DB schemes issued
• Pensions Regulator publishes its Corporate Plan
• Conservative Parliamentarians call for greater accountability of regulators
• IFS launches a Pensions Review
• Actuaries publish results of corporate pensions advice review

Pensions Regulator issues new LDI guidance

On 24 April 2023 the Pensions Regulator issued new guidance for DB pension scheme trustees who use leveraged liability driven investment strategies. It was necessitated following the Bank of England’s statement on 29 March 2023 (see Pensions Bulletin 2023/14) which in effect directed the Regulator to set minimum levels of resilience for LDI funds and LDI mandates used by DB trustees. The new guidance replaces that issued by the Regulator in the latter part of 2022 following turbulence in the gilt market. For further details of this important development see our News Alert.

Comment

This is a well-balanced piece of guidance that sets out a clear framework within which trustees can operate, whilst leaving much of the detail to be decided at scheme level. However, it is unlikely to be the last word from the Regulator on this topic.

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Annual funding statement for DB schemes issued

On 27 April 2023 the Pensions Regulator issued its statement designed to assist DB schemes carrying out valuations at the current time, as well as schemes undergoing significant changes that require a review of their funding and risk strategies.

This important development is covered in our News Alert.

Comment

As ever, the statement is essential reading for trustees undertaking valuations at the current time . Although many of the themes are familiar, given financial market developments over the last year, the Regulator has given this year’s statement a twist. Trustees are being encouraged to look at their position afresh across all of funding, investment and covenant and to capture good news where it has occurred – and if things have gone badly to understand why and to review their strategy accordingly.

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Pensions Regulator publishes its Corporate Plan

On 21 April 2023 the Pensions Regulator published its corporate plan for 2023/24 which sets out its direction for the next year and provides an overview of its priorities from 1 April 2024 onwards.

The accompanying press release majors on the value for money framework that is being developed with the Financial Conduct Authority and DWP for the benefit of DC savers (see Pensions Bulletin 2023/04) and on which consultation closed in March 2023. But the press release also slips in, somewhat silently, the fact that the new DB funding regime is now intended to launch in April 2024 – six months later than the Regulator had been working towards, which itself was only the latest of a series of delays in implementation. There is no news on the Regulator’s covenant guidance which is intended to supplement the new DB funding Code.

The plan itself contains a long list of activities on which the Regulator intends to make progress over the next 12 months. These include the following:

• On LDI the Regulator is considering what further data would enable greater oversight of schemes’ leveraged positions, and the best way of collecting that data. This may mean that it seeks to increase the amount of information it gathers on a range of asset allocations, including LDI
• Value for money in relation to DC savers is stated to be a core priority for the Regulator, with underperforming schemes expected to be required to take action to improve the value they provide to savers, or encouraged to consolidate where this is in savers’ best interests. A response to the consultation is due in the summer, and work will then begin on detailed policy development and implementation. The Regulator says that this is likely to require legislative change. What goes unsaid is the almost inevitable delay that will then result, especially as some of the law change may well need an Act of Parliament. And this is before a landing is reached on whether the Regulator should have the power to close down underperforming schemes
• The publication of the long-delayed General Code of Practice (see Pensions Bulletin 2023/10). This is now promised for Q1 – ie by the end of June 2023. Quite why it has been delayed so much since the proposals were consulted on over two years ago is not clear
• Publishing guidance on alternative DB consolidation models to superfunds, with the Regulator’s 2020 published superfund guidance being reviewed

There is also a look beyond 2023/24 with matters such as the following listed:

• That the future regulation of DB pensions will include “an enhanced, data-driven approach to monitoring funding risk”. No further details are given
• Working with the DWP to explore options for better protecting value at decumulation for members of DC schemes. This follows a call for evidence that closed in July 2022 (see Pensions Bulletin 2022/23)
• Assessing the feasibility of mandating that a professional trustee sits on each trustee board, or of accrediting or authorising professional trustees with the aim of driving up governance standards. The Regulator will need to then work with the DWP to decide how best to take this forward. Ahead of this, an “option analysis” is promised by the end of March 2024
• Delivering new regulatory regimes for the assessment, authorisation and supervision of new models, such as DB superfunds and multi-employer CDC schemes. But this in turn requires decisions followed by law to be made by the DWP, and on DB superfunds we have been waiting for the DWP to get to a landing in relation to a consultation it launched in December 2018
• Helping schemes prepare for dashboards. However, this presumes that the “reset” announced in March 2023 (see Pensions Bulletin 2023/09) does not turn into a lengthy delay

Comment

The corporate plan is described by the Regulator as containing a full and ambitious agenda. It certainly does – and ranging over many topics. But the Regulator is but one cog in the slow running machinery that is the UK Government and in many instances is completely dependent on its sponsoring Department to put words into action. Don’t be surprised if the actual progress made by the Regulator over the coming period is not at the speed implied in this Plan.

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Conservative Parliamentarians call for greater accountability of regulators

The Regulatory Reform Group, a new grouping of Conservative Parliamentarians with an advisory board of regulated companies, has published a report in which it argues that reform is needed to the UK’s system of regulators in order to address systemic regulatory underperformance. The report sets out four recent illustrations of what it sees as regulatory failure in the wider regulatory landscape, two of which (last autumn’s LDI crisis and the Carillion collapse) are pensions-related.

The report highlights four areas where there is significant room for systemic regulatory improvement – strained relationships between the regulator and those it regulates, incomplete lines of accountability to government, a lack of strategic direction (which could result in market developments being missed), and the need to build skills and knowledge within the regulators.

The report has the following recommendations:

• Establish a clear definition of a regulator and for the Government to publish a list of all bodies defined as regulators, their scope and remit, and the figures involved
• Create a “Joint Committee for Oversight of Regulators” made up of members from both Houses of Parliament, to scrutinise regulators in depth and measure their performance against their statutory objectives and consumer outcomes
• Set up an “Office for Oversight of Regulators” in the Cabinet Office to inter alia improve regulatory performance on a day-to-day basis
• Introduce a new ‘Accountability Framework’ to measure regulators with a standardised set of metrics to measure the performance of major economic regulators
• Ensure that there is an open, but formal, two-way, dialogue on regulatory implementation and performance between government and regulators
• Have an “outcomes-based” approach to future regulation

Future reports are promised on more specific issues across sectors that have a bearing on the wider regulatory system, including regulatory objectives, how regulators are addressing technological change, and how they are working to meet government objectives.

Comment

As the report notes “regulation” is a huge part of the activities of the state and it is hard not to argue that the sector is ripe for a review “in the round”. The report is very much a preliminary effort, and it appears to have support from the Government. It would be a shame if the group’s findings and recommendations were dismissed by other parties just because of its political complexion.

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IFS launches a Pensions Review

On 20 April 2023 the Institute for Fiscal Studies in partnership with abrdn Financial Fairness Trust launched a new multi-year Pensions Review given concerns that despite today’s generation of pensioners doing better than any before it, the prospects for future generations is far less assured because of a number of challenges they face.

These challenges include the following:

• Many employees saving very little for retirement, with fewer than one in five self-employed workers making any pensions savings
• DC, the now dominant form of pension provision in the private sector, bearing risks that are difficult for individuals to manage well (both in the accumulation and decumulation phases)
• The tendency for higher state pension ages to push up income poverty rates for those in their mid-60s

These challenges are spelt out in a report published on the same day, which also makes the case for such a review to be undertaken.

The IFS will produce a series of detailed reports over the next two years on the challenges facing future generations of pensioners, with its first main report expected in autumn 2023 and the main phase concluding in summer 2025 when it will provide specific policy recommendations and options for reform. Following this it will continue to disseminate its findings and recommendations over the subsequent two years.

Comment

For quite some while, many have been calling on the Government to conduct a new wide-ranging pensions review, hopefully along the lines of the 2002-06 Pensions Commission that was initiated by the then Labour Government and headed up by the now Lord Adair Turner. The purpose of such a review being to build a new consensus to shape future pensions policy.

The Government so far has resisted such a review. The IFS review is the next best thing. We look forward to seeing what they have to say – as will no doubt, the new Parliament that will assemble following the General Election that cannot be much more than 18 months away.

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Actuaries publish results of corporate pensions advice review

The Institute and Faculty of Actuaries has published the findings of the thematic review of certain corporate pensions actuarial advice which it launched in June 2022 (see Pensions Bulletin 2022/25). The review was based on 48 submissions of examples of advice from 15 organisations providing corporate advice on the funding of DB pension schemes.

In general, the actuarial work that was examined was found to be of good quality with sound levels of compliance with standards. However, there were examples where advice could be improved, both to enhance the work provided to the client and to demonstrate that existing actuarial standards and guidance are being met more clearly. To help actuaries develop their advice in this area, the report focuses on the key themes from its findings and sets out the best-practice examples that were observed.

Following on from this review, the IFoA is to consider whether to make changes to its standards and guidance and will explore how the issues raised can be addressed through IFoA career-long learning and professionalism resources. Finally, it will discuss with fellow regulators and other stakeholders whether any action outside the IFoA’s remit is warranted.

Following initial engagement with organisations, the scope was narrower than originally announced in December 2020 when plan design had also been included. The IFoA plans to carry out a separate thematic review in this area in 2024.

Comment

There is no specific call to action for corporate pensions actuarial advice as a result of this review, but as ever with these things there are always areas in which advice can be improved and hopefully this report contains a few salient pointers.

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