Pensions Bulletin 2024/31

FCA launches consultation on value for money framework

On 8 August 2024 the Financial Conduct Authority (FCA) launched its consultation about implementing a value for money (VFM) framework for DC pension arrangements. This is the consultation promised by the previous Government in its Autumn 2023 statement but delayed because of the General Election.

Although the FCA’s consultation is notionally covering contract-based arrangements, it is clear that the FCA has worked with the Department for Work and Pensions and the Pensions Regulator on this and that the joint intention is that equivalent requirements for trust-based DC schemes will be included in the forthcoming Pension Schemes Bill – see the Regulator’s press release and the background notes to the King’s Speech in July (see Pensions Bulletin 2024/27). So, this consultation is of interest to anyone involved in running a DC workplace pension scheme, whether contract or trust based.

The core consultation is 129 pages long with a further 90 pages of appendices. It covers several areas including:

• The proposed scope of the requirements – the FCA intends that the VFM framework will apply to “in-scope arrangements” which are a scheme’s default arrangements or “Quasi-default” arrangements for pre-auto-enrolment “legacy” schemes.
• How the core metrics on cost, performance and quality of service are to be calculated and published.
• The process to be adopted by Independent Governance Committees (IGCs) in assessing arrangements, including how comparisons are to be made against other arrangements.
• The range of actions to be taken by providers in the event an arrangement is poor value for money.
• The annual publication cycle and the details of how metrics are to be published.

The VFM framework introduces four elements, with the FCA saying that it:

• Requires the consistent measurement and public disclosure of investment performance, costs, and service quality by providers for all such arrangements – against metrics we believe allow VFM to be assessed effectively.
• Enables those overseeing and challenging an arrangement’s value – IGCs and Governance Advisory Arrangements (GAAs) for contract-based schemes – to assess performance against other arrangements and requires them to do so on a consistent and objective basis.
• Requires public disclosure of assessment outcomes including a Red, Amber or Green (RAG) VFM rating for each arrangement. Amber indicates an arrangement that is offering poor VFM but can be improved over a reasonable period of time so that it offers VFM and a red rating indicates that the arrangement cannot be improved within a reasonable period of time.
• Requires firms to take specified actions where an arrangement has been assessed as not VFM (ie Red or Amber).

The VFM framework will require detailed and complex disclosures, the FCA proposing that for each default arrangement, several investment and charges metrics are disclosed over reporting periods of 1, 3 and 5 years, and also for 10 and 15 years if practical.  Such tabulations are needed for three cohorts – those with 30, 5 and 0 years until retirement – reflecting the growth, de-risking and at retirement stages of a typical pensions saving journey.

Regarding service quality, the FCA sets out five indicators and detailed commentary on how a scheme can be assessed on these. They are that savers (1) can be confident that transactions are secure, prompt, and accurate; (2) are satisfied with the service they receive; (3) are supported to make plans and decisions for their retirement; (4) can amend their pension with ease; and (5) are supported to engage with their pension.

IGCs (or third parties duly appointed) will carry out the actual assessment of VFM for in-scope arrangements. The FCA expects comparison to be made against at least three arrangements offered by other providers in order to assess the RAG rating, and several conditions about the choice of comparators are also set out.

Where an arrangement is rated Red or Amber, the provider will be required to communicate that rating each year to any employer currently paying contributions and will not be able to accept business from new employers into that arrangement.

For an Amber-rated arrangement, providers will need to quickly submit an action plan to the FCA indicating how the poor value will be rectified, whilst for Red-rated arrangements, the action plan must consider transferring savers to an alternative arrangement that does offer VFM.  However, this seems to be far from straightforward and the Government may have to legislate to enable providers to transfer pension savers without their consent.

To enable these comparisons to take place, there will be extensive disclosure requirements for providers to publish data for each of their in-scope arrangements, as well as the IGC’s annual reports.  The intention is that data will be collected on a calendar year basis, published the following 31 March, with the IGC producing its annual report by 31 October.

Consultation closes on 17 October 2024. In due course the FCA will publish a final policy statement including Handbook rules and guidance setting out the VFM framework to be implemented. The forthcoming Pension Schemes Bill will contain measures to apply the framework to trust-based schemes.

HMRC announces pensions tax law tidy up is on its way

HMRC’s latest pension schemes newsletter is notable for two things – some news on the necessary legislation to address technical inaccuracies identified with the Finance Act 2024 that abolished the lifetime allowance, and a big increase in transfers to QROPS.

On LTA abolition the newsletter announces that HMRC held a short technical consultation on draft regulations which closed on 14 August and these regulations will be introduced after the summer recess “as soon as the parliamentary timetable permits”.  We have seen these draft regulations which are lengthy and complex, albeit that many of the provisions are simply consequential adjustments to other parts of the pension tax law, in addition to error and omission-fixing the Finance Act 2024 provisions.

Turning to transfers overseas, in 2023/24 7,100 individuals undertook a transfer to a QROPS (more than double the 3,300 in 2022/23), and these added up to £1,140m (up from £680m in 2022/23). This is the largest transfer by number and amount since 2016/17. Although no reason is given, it seems likely that the abolition of the LTA charge from 6 April 2023 was a contributing factor as for 2023/24 only it was possible for very large sums to be transferred to a QROPS without attracting any tax charge (assuming that the separate overseas transfer charge was not in point). Fear of the re-introduction of the LTA may have also played a part.

The newsletter also carries a reminder to those administrators whose schemes operate the relief at source mechanism for delivering tax relief on member contributions of the correct naming convention to use when submitting annual returns, some pension flexibility data, and the usual requests to those who have yet to migrate their scheme to the Managing Pension Schemes service. 

PPF issues its fourth climate change report

The Pension Protection Fund has published its latest annual Climate Change report, disclosing how the PPF has responded to climate-related risks and opportunities and highlighting its key achievements in 2023/24.

While the PPF is not obliged to follow the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations for reporting on climate-related risks and opportunities it has again used these to produce a detailed and comprehensive report on progress over the year.

The PPF highlights the following achievements:

• 60% of portfolio companies in private markets are now covered by carbon data – which the report says is up from 37% in 2022/23;
• 90% of companies on the PPF’s Climate Watchlist reported their environmental impact data to the Carbon Disclosure Project in 2023 – up from 84% in 2022/23;
• 67% of the Fund is categorised as ‘Net Zero, Aligned, Aligning or Committed to Align’ with the Paris Agreement – up from 59% since the PPF’s December 2020 baseline; and
• A reduction of 53% in the PPF’s offices’ Scope 2 location-based emissions since the 2019/20 baseline year and continuing to procure 100% renewable electricity (100% renewable electricity also secured for data centres).

Chancellor calls on UK pension schemes to invest more in the UK economy and deliver better returns for savers

Rachel Reeves has used her recent meeting with Canadian retirement funds to issue a press release calling on UK pension funds to “learn lessons from the Canadian model and fire up the UK economy”. This press release references consolidation of pension schemes into larger funds helping to drive investment in productive assets such as infrastructure and high-growth businesses and through this generating greater returns for schemes.

The press release also states that her first Mansion House speech (the date for which has yet to be announced) will set out how she will work in partnership with industry and regulators to deliver growth.

Whilst in Canada it has been reported that Rachel Reeves said that she will bring forward legislation in 2025 to regulate agencies that evaluate the environmental, social and governance (ESG) performance of companies. The aim is to increase the transparency of the sustainable ratings industry and to bring UK legislation covering ESG rating agencies into line with other leading economies, including the EU. The FCA is to set the rules of the new regime.

PASA issues NMPA increase guidance

The Pensions Administration Standards Association has published guidance for trustees and administrators on preparing for the change to the earliest age at which individuals can normally first access their retirement benefits. This normal minimum pension age (NMPA) will increase from the current age 55 to age 57 on 6 April 2028.

The guidance is intended to support both parties in: 

• identifying those scheme members with a right to take benefits before NMPA at a “pension protected age” (PPA);
• dealing with those who have transferred such a PPA from another arrangement; and
• understanding how the 2028 changes differ to those in 2010 when the NMPA increased from 50 to 55.

The guidance also provides a checklist of practical steps which should be taken now to prepare for the 2028 change. It also reminds readers that HMRC needs to lay regulations to address minor (transitional) inconsistencies created by the increased NMPA, which PASA expects to see before April 2025.