Pensions Bulletin 2023/32
Pensions & benefits Pensions dashboards Policy & regulation
Pensions Regulator publishes revised superfund guidance
The Pensions Regulator has published updated DB Superfund guidance for prospective ceding trustees and employers alongside revised guidance for those setting up and running such superfunds. The original guidance for this interim regime was published in June 2020 (see Pensions Bulletin 2020/26) and an update to it was due around now.
Under the revised guidance to trustees and employers, in relation to the gateway tests (the criteria that determine the appropriateness of a superfund for a scheme):
- On the buyout affordability test schemes that cannot “access” buyout (eg if an insurer declines to quote on a scheme) should be allowed to transfer to a superfund as it potentially gives the opportunity to safeguard members' benefits. The 2020 guidance provided that schemes that can “afford” buyout now or in the foreseeable future should not be considered for a superfund transfer. The revision recognises the potential capacity crunch within the insurance market
- Once gateway tests are demonstrated to be met at a particular date, the Regulator will deem them to be met for nine months afterwards (as opposed to the one month set out in the 2020 guidance). This means that if there are market movements after the initial gateway tests have been met, which for example mean that buyout is now a more viable option, the process would not automatically have to stop. However, during this nine month period, schemes will still need to ensure that the transaction is in their members' best interests before it completes
The updates made to the guidance relating to those setting up superfunds include the following:
- The discount rate to be used for assessing the superfund’s funding position will now be based on government bond yields plus a margin of 0.75% pa (rather than the 0.50% pa margin in the 2020 guidance)
- Superfunds are now expected to provide evidence of the collective competence of the superfund corporate and trustee boards including their skills, knowledge and experience. This is intended to provide further comfort around the operation of the superfund to those considering the option
The Regulator also acknowledges that allowing a proportion of surplus profits to be extracted by capital providers in certain circumstances could help the market to start transacting without putting members at additional risk. Given the complexity of the issue, the Regulator plans to engage with the pensions industry to develop specific mechanisms on profit triggers and will update guidance in due course, but makes it clear that until such time surplus value in the scheme or capital buffers should not be used to support new transfers into the superfund.
To mark this update the Regulator has published a blog discussing superfunds and the changes made to the guidance. This includes the results of an engagement exercise that the Regulator ran with industry stakeholders earlier this year. The blog references the Government recently issuing its response to its 2019 consultation on DB scheme consolidation (see Pensions Bulletin 2023/28) which included confirmation that it is to go ahead with a new legislatively-backed authorisation and supervision regime for such superfunds and providing some indicators as to how it may operate.
Comment
The easements contained in this updated guidance should make the superfund option more appealing to a wider audience, but this can only be a temporary step ahead of the Regulator developing its proposals around profit extraction and the DWP developing the permanent legislative regime.
DWP updates deferred connection guidance to pensions dashboards
The DWP has updated its guidance on deferred connection to pensions dashboards so that it reflects the amendments made to the dashboard regulations (see Pensions Bulletin 2023/24) which took effect on 9 August 2023.
The guidance, originally published in draft form last October (see Pensions Bulletin 2022/38), still explains the limited circumstances in which an application for deferral can be made, but has been updated to highlight that the application, which now must relate to pre 9 August 2023 events, has to be submitted by 8 August 2024 and now can only be in respect of a request to defer connection beyond 31 October 2026. As before, any successful application cannot be granted more than 12 months deferral, so now no later than 31 October 2027. However, the guidance does now provide that where an application is not permitted this would not prevent a further application being made.
The updated guidance states that the DWP will be in touch with those who submitted an application under the old guidance. It also highlights that where a scheme is changing administrator, in some cases it might now be reasonable to connect via the existing administrator and manage the change post-connection.
Comment
The update is little more than good housekeeping on the DWP’s part. And as before, there is little guidance in this guidance as nearly all of its contents are set by the regulations.
MaPS issues report on pension scams
The Money and Pensions Service has set out findings from a review of evidence on the scale of pension scams in the UK, the impact on those affected, types of scam and tactics used by scammers, key risk factors and current trends. The review itself was undertaken by the Behavioural Insights Team and is enhanced by input from interviews with six people who have been affected by scams and ten pensions professionals.
Amongst the findings discussed are the difficulties in estimating the scale of the problem in the UK (due to it being grossly underreported and inconsistencies in data capture), their similarity to more general investment scams, the constant evolution of scams in response to changes in regulation, technology and external events, their high financial and emotional cost, and that they can happen to anyone, with a significant risk of re-targeting – either as part of a secondary scam or repeated demands by the initial scammer – once an individual has been successfully scammed.
The report also notes concerns from the pensions industry professionals interviewed that there could be a surge in pension liberation scams when the minimum age to access pensions increases from 55 to 57 in 2028 and also when the advent of the pensions dashboard reminds savers of their smaller pension pots.
The report also sets out strategies and interventions that MaPS and other stakeholders can adopt to lower the risks of scams and offer better support to those affected. These fall under the headings of prevention, encouraging those affected to seek support and lowering the risk of being affected more than once. Among the suggestions are an extra point of reflection after a Pension Safeguarding Appointment (following the raising of an amber flag on a pension transfer) and before the reference number required to make the transfer is issued, making the risks more salient (for example by using simple, direct messages to ensure that people understand that they have limited right to redress if they lose their money) and providing easier access to government-backed advice and personalised guidance.
Comment
This is a useful report, especially given the combination of academic and evidence-based research and interviews with people affected or dealing with those affected. Although a lot of its content is of little surprise, what it does do is provide a basis for future interventions under the three headings above.
PASA issues guidance on benefit accuracy for DB schemes
The Pensions Administration Standards Association has published new guidance on benefit accuracy for DB schemes which builds on earlier guidance on data quality. Intended to support schemes to ensure that benefits are accurate, the guidance focusses on five areas:
- Benefit Specification – which documents the basis for calculating all of a scheme’s benefits and should be accompanied by documentation setting out agreed house practice methods for calculating the benefits
- Data Specification – which documents the relevant data items required to construct benefits and should align with the benefit specification
- Benefit Audit – in which a regular review of the accuracy of benefits put into payment is carried out, with benefits recalculated from first principles and cross-referenced against the benefit and date specifications and scheme rules
- Automation – of benefit calculations, subject to appropriate ongoing review
- Independent Assurance – which sets out some key considerations for carrying out independent benefit and data audits
The guidance concludes by saying that the time and money associated with delivering this is well spent, not only for DB scheme members, but also in comparison with the significant costs arising when things go wrong.
DBT provides update on UK sustainability disclosure standards
The Department for Business and Trade has published an update on the Government’s framework to create UK Sustainability Disclosure Standards (UK SDS) following the International Sustainability Standards Board’s publication of two new global standards in June this year – namely IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2: Climate-related Disclosures. This update is in line with the Government's intentions set out in Greening Finance: A Roadmap for Sustainable Investing issued in October 2021 (see Pension Bulletin 2021/43).
The UK SDS will set out corporate disclosures on the sustainability-related risks and opportunities that companies face. As such they will form the basis of any future requirements in UK legislation or regulation for companies to report on risks and opportunities relating to sustainability matters, including risks and opportunities arising from climate change.
The DBT is to publish the UK SDS and they in turn will be based on the IFRS Sustainability Disclosure Standards issued by the ISSB. The Government intends to make endorsement decisions on these standards to create the UK standards by July 2024.
Comment
These corporate disclosures are the first of three strands envisaged by the Government’s Sustainability Disclosure Requirements (SDR). We wait to hear about the second strand which is to set out new sustainability disclosure requirements for asset managers, including occupational pension schemes.
FCA provides update on advice / guidance boundary review
The Financial Conduct Authority has published some further news on the review of the boundary between regulated financial advice and financial guidance that it is undertaking with HM Treasury. The FCA first mentioned this proposal in a speech in September 2022 and it was then noted in December 2022, as part of the Chancellor’s Edinburgh reforms with further details announced in a speech in March 2023 (see Pensions Bulletin 2023/29). The aim of the review is to improve access to helpful support, information and advice, while maintaining strong protections for consumers.
In its latest update the FCA says that some key themes and insights have emerged from the early phase of the work, which will guide the next phase of the work. These include the need to “design a regulatory system where commercially viable models of support can emerge”.
The FCA has also published a clarification of the existing framework of the advice / guidance boundary for FCA-authorised firms. This sets out examples where such firms can support consumers without inadvertently providing a personal recommendation (a personal recommendation, by reference to certain investments, is where the boundary between guidance and advice is currently set).
A policy paper on the advice / guidance boundary is promised in the autumn.
Comment
This is a potentially important development for pension providers who may wish to provide more guidance and support but are fearful of being seen to be giving advice. However, we will have to wait for the policy paper to see what reforms the FCA and HM Treasury have in mind, although the examples set out in the new publication should help in the interim.
APPT publishes review of its accreditation framework
The Association of Professional Pensions Trustees has published a review of its accreditation framework which it conducted in the first half of 2023. The framework itself was launched in March 2020.
The report on the review, published to inform the joint DWP / HM Treasury call for evidence on Pension Trustee Skills, Capabilities and Culture, which includes questions around the possible introduction of accreditation requirements (see Pensions Bulletin 2023/28), finds that the accreditation scheme has worked well within the current regulatory environment. Some follow up actions are set out, which include:
- Giving further consideration, in the medium term, to the merits of requiring a higher-level examination (to the PMI’s Level 3 Certificate of Pension Trusteeship) at least for those without other relevant professional qualifications or experience
- Although retaining the CPD requirement of 25 hours, restricting within that the amount of unstructured CPD to 5 hours and requiring members to document the learning outcome of all unstructured CPD
Comment
There would seem to be a continuing need for the APPT’s accreditation scheme, at least under the current regulatory framework, with future developments in it hinging on the outcome of the DWP / HM Treasury review.
