Annual funding statement for DB schemes issued
On 24 April 2024 the Pensions Regulator issued this year’s annual funding statement designed to assist DB schemes carrying out valuations at the current time, as well as schemes that have experienced significant changes that require a review of their funding and investment strategies.
This is expected to be the last such statement under the current funding regime, with the new regime due to apply to valuation dates from 22 September 2024. Please see our News Alert for our analysis of this statement.
Comment
In this much reduced statement, the Regulator has evolved its messaging from last year, in the context of the further improvements in funding that many schemes have experienced. There is more emphasis on the benefits of considering the full range of end-game options, including running on, and the broader systemic risks that may adversely impact funding are also highlighted.
Whilst much more compact than in previous years (though there are references back to previous statements), this document is, as ever, a valuable read for trustees undertaking valuations now.
Options for DB schemes – consultation closes
Consultation closed last Friday 19 April on the separate public sector consolidator and surplus extraction proposals put forward by the DWP in February (see Pensions Bulletin 2024/08). As expected, they attracted a great deal of interest, and with divergent views being put forward, are not going to make it straightforward for the DWP to decide how to take matters on from here.
The public sector consolidator
The consultation around the public sector consolidator for DB schemes was centred on how such a consolidator should be constructed, not whether to introduce it. However, this did not prevent some respondents from expressing their opposition to the concept as well as to some key aspects of the proposal.
LCP’s own response supports the establishment of a public sector consolidator, saying that it could act as a helpful market stabiliser given the potential for pension scheme demand to outpace the supply of commercial insurance and consolidation solutions in future, particularly at the smaller end of the market. However, we stress the need for appropriate eligibility criteria and pricing to ensure there is not a disproportionate impact on the existing commercial market.
Separately, the PPF has also published a revised proposition for how the consolidator could be designed (see Pensions Bulletin 2024/09 for its initial proposals). This revision contains numerous changes at the detailed technical level, with more thinking incorporated on benefit standardisation and the onboarding process.
The PPF says that the consolidator should be open to all schemes who, without it, may struggle to get timely or attractively priced access to market solutions. To achieve this, the PPF continues to propose not setting any ‘harder’ eligibility criteria meaning that it would be open to all.
Revisiting how DB surplus is extracted
Responses to this part of the consultation were also wide-ranging with most being supportive of the desire for greater flexibility to allow easier distribution of surplus to members and sponsors, but with varying views on the appropriate safeguards that should be put into place to facilitate this.
LCP’s understanding is that the Government wishes to encourage more DB schemes to run on for longer, and encourage meaningful investment in productive finance, in a way that would in turn lead to greater surplus sharing with sponsors and members. In our response we explain why we think that introducing a statutory override in respect of surplus extraction, whilst helpful to put all schemes on the same footing, would in isolation have a limited impact on these objectives.
We set out our view that greater member protection is needed to achieve these objectives and that we believe this could be most effectively achieved by an appropriately costed option to participate in a 100% PPF underpin. You can find out more about our proposals for the 100% PPF underpin here.
Comment
Further design work will now be carried out on the public sector consolidator with the benefit of the consultation responses, and it seems likely that a further update will be given by the Chancellor at this year’s Mansion House speech, presumably in July.
Although the consolidator will need an Act of Parliament, this initiative seems to be very much on the DWP’s agenda for delivery by 2026 (and early indications are that it would also be supported by a Labour government) and so needs to be appropriately considered now by DB scheme trustees when end-game planning.
With regard to the extraction of surplus, it seems that the DWP will need to make a choice between making some relatively minor adjustments to the current regime or delivering more fundamental changes that would offer the prospect for well-funded and efficiently managed schemes to take on board the Government’s growth agenda, invest for surplus and have a clear mechanism to access such surplus.
Either approach is likely to need an Act of Parliament and it is not clear at this point what changes will be made, if any, and over what timeframe.
Actuaries update their mortality projection model
The latest mortality projection model, CMI_2023, has been released by the Continuous Mortality Investigation (CMI) of the Institute and Faculty of Actuaries. The core model, once again, shows a modest fall in life expectancies compared to last year’s version of around one month or 0.4% at age 65 for males and two weeks or 0.2% at age 65 for females.
As before, in the core version of the model, no weight is being placed on mortality experience during the ‘pandemic’ years of 2020 and 2021, but for 2022 and 2023 there is a 15% weight allowance. There was a significant amount of debate within the CMI on the choice of the weight to give a reasonable projection of life expectancy. 15% was broadly in the middle of the range of views expressed by respondents to the CMI’s consultation on the model but does not necessarily represent the majority view or point of consensus.
Looking forwards to next year, and the next version, ‘CMI_2024’, the CMI is reviewing the model and intends to consider a range of options, which may include structural changes, with the aim of ensuring the model will respond in a robust and more predictable way across a reasonable range of future mortality scenarios. The CMI will prioritise this work during 2024 and consult on it later in the year.
Comment
Applying this latest core model to the valuation of pension liabilities will result in a modest reduction in the value of these liabilities compared to the 2022 model. However, as the drivers of mortality may vary from one pension scheme to another, it remains important to think carefully about choosing the parameters of the model to reflect views of future longevity trends in a particular scheme.
Finance Bill enables rethink of delivery of minor part of Collective Money Purchase law
The Finance (No. 2) Bill that followed the 6 March 2024 Budget remains in the House of Commons, having completed its Second Reading on 17 April 2024. This short Finance Bill contains one clause directly relevant to pensions and it concerns collective money purchase (CMP) schemes.
Clause 24 rewrites regulation making powers under the Finance Act 2004 that were introduced only in 2023 (see Pensions Bulletin 2023/13). Instead of limiting these powers to a “CMP-derived drawdown pension” (which uses funds transferred from the CMP scheme in the process of winding up), the new clause enables regulations to be made that cover the transferred funds themselves and any pensions or benefits provided by these funds. This should enable HMRC to cover a wider range of scenarios.
As a consequence, the clause also removes all references to “CMP-derived drawdown pension” in the Act, including removing such a lump sum from the definitions of pension commencement lump sum and the new pension commencement excess lump sum.
Comment
HMRC is not making it clear why this change has been necessary, but presumably it is a remaining loose end from the handful of recent changes made to this law at the request of single-employer schemes.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
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