Pensions bulletin

Pensions Bulletin 2024/45 – Mansion House special

Pensions & benefits Policy & regulation Mansion house reforms

This edition:

Mansion House: Mansion House overview – the most significant changes to pensions in 20 years, consolidating the DC pension market, reforming LGPS investment, Pension Fund Investment and the UK economy, UK Green Taxonomy consultation, ESG rating providers to be FCA regulated, FCA advice / guidance boundary review update.

In other news: MaPS annual report reveals sharp uptick in pensions dashboard costs, Regulator sets out how it will supervise CDC schemes, pensions tax law regulations come into force.

View of seaside town over fields at sunset

This edition of the Pensions Bulletin focuses on the pensions-related announcements made by the Chancellor and others on and around 14 November 2024.

Mansion House overview – the most significant changes to pensions in 20 years?

On 14 November 2024, following the Mansion House speech by the Chancellor, Rachel Reeves MP, an interim report on the first phase of the Pensions Review was published. This phase had focussed on investment and the report followed a Call for Evidence earlier this year (see Pensions Bulletin 2024/37) which received over 200 responses.

Two new consultations were also launched containing proposals aimed at delivering a major consolidation of the UK DC pension system and the Local Government Pension Scheme and to unlock billions of pounds of new investment for the UK economy, boosting returns for savers at the same time. We cover these in the two articles that follow. 

The Chancellor’s speech emphasised the Government’s well-known priority on growing the economy by increasing private investment and set out the five priority growth opportunities for the forthcoming Financial Services Growth and Competitiveness Strategy. These are Fintech, sustainable finance, asset management and wholesale services, insurance and reinsurance, and capital markets.

The Chancellor went on to state that pension funds are one of the key areas of her plans and that she believes “for too long, pensions capital has not been used to support the development of British start-ups, scale-ups or to meet our infrastructure needs” and “that this hurts our economy”. The Chancellor intends to change this by creating Canadian and Australian style “megafunds” through significantly consolidating both the DC market and the investment operations of the Local Government Pension Scheme.

The final report of the first phase of the Pensions Review will consider domestic investment from pension funds. The second phase of the Review, not yet launched, will consider further steps to improve pension outcomes, including assessing retirement adequacy.

Comment

The Chancellor referred to her proposals as “the most significant set of changes to the pensions landscape since the Turner Review” (which published its first paper in 2004). As we explore below, the proposals do certainly have the potential to radically alter the current DC pensions landscape – and as the overwhelming majority of current pension savers are in DC vehicles, this could indeed affect millions of individuals.

There was no reference to any changes for private-sector DB schemes. It is slightly disappointing not to see anything on this yet, as there is £1.3 trillion in occupational DB schemes, which remain a vast untapped asset for members, sponsors and the wider UK economy. However, we understand that the Government is considering this separately and announcements are expected in the coming months.

Consolidating the DC pension market

As part of the package of measures announced alongside the Chancellor’s Mansion House speech, the Government launched a consultation which it says, amongst other things, is designed to accelerate and help enable scale and consolidation in the Defined Contribution (DC) market.

The key areas are as follows.

Achieving scale in workplace DC schemes

The Government is seeking views on proposals to introduce minimum size requirements for, and to limit the number of, default arrangements for multi-employer DC schemes (ie Master Trusts and Group Personal Pension (GPPs)).

The consultation goes on to suggest that the benefits of scale start to arise at £25bn - £50bn Assets Under Management (AUM) and asks what the appropriate minimum size of AUM for a default arrangement should be.

The Government accepts that these proposals are significant and cannot happen overnight. Therefore, it proposes these requirements will not apply before 2030 at the earliest and will be introduced incrementally. The consultation also goes on to say that the Government wants to explore if differential pricing, where different employers may be charged different prices for the same default pension products, is something which might need to be addressed under a future auto-enrolment model.

Overriding individual contracts to allow the bulk transfer of assets for contract-based schemes without individual savers’ consent

This issue has been a real barrier to consolidation and moving savers into potentially better arrangements for several years. To solve this, the Government is proposing to allow overrides to permit transfers without saver consent (but with appropriate protections).

The role of the employer in assessing value in their pension arrangements

This is intended to shift the emphasis away from overly focussing on solely cost considerations. The Government is asking for views on several policy approaches to achieve this:

Should there be a legal duty on employers to consider value when choosing a scheme and should this be re-assessed periodically, for example every five years?
Should responsibility for the pension arrangement sit at Board level with a nominated executive having responsibility for ensuring it delivers good value for employees? (This might work in a similar way to action in other areas such as social mobility, diversity and inclusion and Modern Slavery.)
Should there be more regulation of advisers providing pension scheme selection or investment consultancy services?

The consultation has 42 questions in total and closes on 16 January 2025.

Comment

There is clearly a lot to digest in these far-reaching proposals. If implemented, they will radically reshape the DC workplace pensions market.

If the Government does mandate a minimum size of default arrangement in the order of £25bn - £50bn then this will hugely impact current GPP and Master Trust providers since only a handful of these providers currently have assets of that size in a single default arrangement. We expect if implemented this would lead to significant consolidation of the Master Trust market and the number of default strategies offered by providers across their Master Trusts and GPPs.

GPP providers and employers with such schemes are likely to welcome the proposals to unblock transfers without consent to better value arrangements, as previously this has inhibited the transfer of savers by providers into newer or better performing arrangements, even where poor value has been identified in a saver’s current arrangement.

Employers will be affected if the proposed new employer duty to consider value in pension arrangements is brought into force. Whilst some employers already take great care and diligence in considering their pension arrangements, other employers may lack the knowledge to assess pension value and will either need to upskill themselves or seek advice in making the required assessment.

Single employer trusts appear to be largely unaffected directly by the consultation proposals (other than possibly the proposed new employer duty to consider value), but in the longer term if the workplace DC pensions market becomes dominated by a handful of “megafunds” then single employer trusts are likely to also face less choice for providers.

Reforming LGPS investment

As part of the Mansion House package, the Ministry of Housing, Communities and Local Government launched a consultation in which it set out new requirements on Local Government Pension Scheme (LGPS) administering authorities relating to asset pooling, UK and local investment and governance. The proposals are taken in turn below.

Asset pooling

The current eight LGPS asset pools are to be reformed by mandating the following minimum standards:

Administering authorities will be required to fully delegate the implementation of investment strategy to the pool, and to take their principal advice on their investment strategy from the pool.
Pools will be required to be investment management companies authorised and regulated by the FCA, with the expertise and capacity to implement investment strategies.
Administering authorities will be required to transfer legacy assets to the management of the pool.

UK and local investment

Administering authorities will be required to:

Set out their approach to local investment in their investment strategy including a target range for the allocation and having regard to local growth plans and priorities.
Work with local authorities etc to identify local investment opportunities.
Set out their local investment and its impact in their annual reports.
Pools will be required to conduct suitable due diligence on potential investments and make the final decision on whether to invest.

Governance

Administering authorities and LGPS pools will be required to strengthen their governance is the following ways:

Committee members will need to have the appropriate knowledge and skills.
Administering authorities will need to publish a governance and training strategy (including a conflicts of interest policy) and an administration strategy, appoint a senior LGPS officer, and to undertake independent biennial reviews to consider whether they are fully equipped to fulfil their responsibilities.
Pool Boards will be required to include representatives of their shareholders and to improve transparency.

The aim behind these proposals is that by applying a consistent approach to asset pooling across the LGPS, all investment potential is fully realised and for the LGPS to act as an engine of UK and local growth.

Consultation closes on 16 January 2025. It is not clear what the next steps will be, or over what timescale.

Comment

This is an ambitious proposal to further centralise the operation of the LGPS in the crucial area of investment policy, very much taking up the reins from the previous Government which had intended to accelerate and expand the pooling of LGPS assets to similar ends (see Pensions Bulletin 2023/47), but on which progress appeared to have stalled after last year’s Autumn Statement. The “mega funds” that will be so created out of the current £400bn LGPS are a key plank of the Chancellor’s agenda to consolidate and then utilise pension savings, whether in the public or private sector, to deliver economic growth.

Pension Fund Investment and the UK economy

As part of the first phase of the Pension Review the Department for Work and Pensions published an analysis of the trends of UK pension fund investment, with comparisons to selected countries, and the implications these trends have for UK economic growth.

The paper illustrates the extent to which UK pension fund investment varies by scheme type, with, for example, private sector schemes (whether DB or DC) having much lower allocations to UK listed equities now than they did in the recent past. And their current allocations are significantly lower than those in Canada, New Zealand and Australia.

The paper then goes on to suggest that pension fund investment in domestic markets has the potential to support stronger economic growth and capital market development, although it will vary according to the type of asset being invested in and factors such as the extent of investor demand in those markets. There is also the suggestion that diversified pension fund investment may improve member outcomes, with in particular, higher allocations to private markets potentially delivering improved risk-adjusted returns compared to a largely overseas equity portfolio.

There are also chapters addressing the benefits and challenges of a more consolidated pensions market.

Comment

Although this paper does not set out any conclusions, the analysis is clearly intended to be supportive of the Government’s direction of travel as set out in the first phase of its Pension Review.

UK Green Taxonomy consultation

Also mentioned in the Chancellor’s speech was the release by HM Treasury of a consultation on whether or not it is desirable to introduce a “Green Taxonomy” in the UK. A taxonomy is a classification tool which, in this context, provides users with a common framework to define which economic activities support climate, environmental or wider sustainability objectives.

The primary purpose of this consultation is to establish whether a UK Green Taxonomy would be additional and complementary to existing policies in meeting the objectives of mitigating greenwashing and channelling capital in support of the Government’s sustainability objectives. To inform this, views are invited on market and regulatory use cases which would contribute to these objectives.

Comment

This is a significant area of post Brexit divergence between the UK and the European Union. The EU has implemented a taxonomy while the UK has hesitated. The consultation gives few hints as to whether the Government will proceed. If it does it will be some years before it is in place.

ESG rating providers to be FCA regulated

As signalled in August (see Pensions Bulletin 2024/31) the Government intends to proceed with regulating the providers of ESG ratings. In its response to the consultation issued by the last Government, and published as part of this year’s Mansion House package, the Treasury now defines an ESG rating as “an assessment regarding one or more ESG factors, produced in the form of an ESG opinion, an ESG score or a combination of both, whether or not it is characterised as an ESG rating” and intends to expand the “regulatory perimeter" to capture ESG ratings which are likely to influence a decision to make a financial services regulated investment.

Secondary legislation will be required, a draft of which is included in the consultation, which closes on 14 January 2025. Once these regulations have been passed by Parliament, the Financial Conduct Authority will develop the standards and regulatory requirements that will need to be met by ESG ratings providers. The Treasury anticipates that it will take four years to design, develop and commence the new regime, starting with the passage of the regulations in early 2025.

FCA advice / guidance boundary review update

The Chancellor also said in her speech that the Financial Conduct Authority would “shortly consult on transformational changes to financial advice and guidance to ensure that people get the right support” and the following day the FCA provided an update to the work it is undertaking on the boundary between guidance and advice when it comes to assisting individuals make more informed investment and pension decisions. The review itself was launched in December 2023 (see Pensions Bulletin 2023/50) and the update contains an outline of the feedback it received and what the FCA now intends to do.

The FCA says that it plans to consult on high-level proposals for targeted support for pension savers in December 2024 followed by consulting on rules for better support for consumers in retail investments and pensions in the first half of 2025. Ahead of this it has published a statement with the Pensions Regulator and the Information Commissioner’s Office, to help firms communicate with their pensions and retail investments customers. Amongst other things, this statement contains a list of the communication topics that can be drafted in such a way that they are unlikely to be regarded as direct marketing.

Comment

Although this update is welcome, it does appear to have been forced by the Mansion House agenda. And we may well have to wait until well into 2025 before we start to see how the FCA intends to deliver on this review.

There was some other news outside the Mansion House developments and this edition of the Pensions Bulletin moves on to cover these.

MaPS annual report reveals sharp uptick in pensions dashboard costs

On 14 November 2024 the Money and Pensions Service published its annual report and accounts for the year ended 31 March 2024 revealing a substantial increase in the cost of delivering the pensions dashboard with expenditure up from £8.1m in 2022/23 to £14.1m in 2023/24. Nearly all of the increase is put down to “contracted services” which rose from £3.4m to £8.6m.

By contrast, costs in the pension freedoms operating segment fell from £34.3m in 2022/23 to £28.5m in 2023/24, whilst that in the pensions guidance operating segment fell only slightly from £9.0m to £8.8m.

This year’s report provides some detail about the reset of the dashboard project following its red rating in July 2022 (see Pensions Bulletin 2023/46), much of which is already in the public domain. And although delivery is now on an amber rating, the report recognises that “the risk to delivery remains high risk”. However, in her foreword to the report, Chair Sara Weller says that the dashboard is “on track for its industry-wide October 2026 deadline”.

In other news, the pensions guidance service delivered 263,000 sessions and 635,000 digital tool completions – both above target. This service covers a wide range of pensions-related matters, including the pension safeguarding appointments that operate where a DB transfer out request raises an amber flag.

And the pension freedom service delivered over 118,000 ‘appointments attended’ and over 78,000 ‘self-service online journeys’ – both above target. This service relates to the Pension Wise guidance provided to those who have DC pension pots and who need to understand their options so that they can make an informed decision when taking their benefits.

Comment

It is reassuring that this year’s report signals that the pensions dashboard reset has been achieved and the project is on track for its new delivery timeline, but in a sense, now is when all the hard work really starts as schemes start to connect from April 2025 through to September 2026.

Regulator sets out how it will supervise CDC schemes

Following the launch of the first Collective Defined Contribution scheme last month (see Pensions Bulletin 2024/38), on 13 November 2024 the Pensions Regulator issued its compliance and enforcement policy for CDC schemes, which sets out its regulatory approach and how it expects to supervise these schemes.

The Regulator expects to engage with trustees, employers and other relevant persons such as the scheme administrator, service providers and advisors as part of its supervision process. This engagement will include periodic scheme evaluations, monitoring specific concerns, reviewing regular and ad-hoc data submissions, interactions including visits and face-to-face meetings, and reviewing significant events and triggering event notifications. While the frequency and detail of supervision may vary according to the scheme’s level of risk, the Regulator expects to contact scheme trustees annually with a review summary.

As well as the standard regulatory and enforcement policies applicable to employers and pension schemes, the Regulator also has specific powers applicable to CDC schemes, including pause orders, risk notices, and withdrawal of authorisation.

The Regulator expects that the supervisory approach will be reviewed and revised over time as experience with CDC schemes increase.

Comment

With over 100,000 Royal Mail employees newly joining their CDC scheme, and other multi-employer schemes under development, a clear supervisory regime is necessary to give members and employers confidence in this new offering. It will be interesting to see how this regime might change as the first scheme matures and commercial multi-employer schemes come into the market.

Pensions tax law regulations come into force

On 18 November 2024 two sets of regulations that address certain errors and omissions in the legislation removing the Lifetime Allowance (see Pensions Bulletin 2024/39) came into force. They are as follows:

Both are backdated to have effect from 6 April 2024.

We understand that HMRC will shortly be updating its Pensions Tax Manual to reflect the many changes made by these regulations.

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Disclaimer

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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