- Treasury considering expanding scope of the Pension Protection Fund
- Next step taken for schemes wishing to participate in LIFTS initiative
- FRC proposes changes to its Corporate Governance Code
- Pensions Equity Group launched
Treasury considering expanding scope of the Pension Protection Fund
It has been reported that the Treasury is currently considering proposals to extend the role of the Pension Protection Fund (PPF) which currently provides a safety net for underfunded defined benefit (DB) schemes when sponsoring employers fail. In future, the PPF’s remit could encompass taking over smaller poorly performing DB schemes should they so request it. This approach is also discussed in some detail in “Investing in the future: boosting savings and prosperity for the UK” a report published by the Tony Blair Institute for Global Change on 29 May 2023.
This development appears to build on one of the recommendations coming out of the PPF departmental review published last December (see Pensions Bulletin 2023/01), which also acknowledges that the PPF has built up significant reserves and anticipates questions being asked as to how this will be used. Separately, the Pensions Regulator has long promoted the consolidation of smaller DB schemes.
In addition to allowing such struggling DB schemes to benefit from economies of scale and potentially better governance, it is reported that this proposal would also be likely to result in “tens of billions “of funds being transferred to the PPF. Although currently the PPF makes its own investment decisions, it would be possible to change the legislation to allow the Treasury to have some influence over how those assets are invested and potentially unlock “tens of billions” of pounds for investment in the UK economy and helping with the transition to a green economy.
The PPF has acknowledged this development and welcomes the chance to work with the Government and the wider industry to explore the various options, but wishes to reassure its current members, and levy payers, that delivering the best outcomes for them remains its priority.
Comment
We are delighted that others are now talking about how DB scheme assets could also be made to work harder for the UK economy and agree that the PPF is a successful model that can be built upon to deliver better outcomes.
However, a number of questions spring to mind regarding how this specific proposal would work, ranging from what level of assets would be required to opt in to the PPF to whether this proposal would create significant “moral hazard” risks of schemes adopting very risky strategies, viewing the “opt in” PPF as a failsafe.
In our view, there are other approaches to building on the PPF to encourage DB schemes to invest for growth that address these issues and share the benefits of investing for growth in a fairer manner; our proposed approach is introduced here.
As any expansion of the PPF’s role would require an Act of Parliament it is not clear whether there will be time to deliver it in this Parliament – and if it is not, we call for it to be actively explored by the next government.
Next step taken for schemes wishing to participate in LIFTS initiative
The Chancellor has announced an “ambitious life sciences package to support economic growth”, including the promise of up to £250m to incentivise pension schemes to invest in science and technology firms through the Government’s Long-Term Investment for Technology and Science (LIFTS) initiative.
This announcement was accompanied by a call for proposals from the British Business Bank on the LIFTS initiative whose objectives are to unlock UK institutional investment, catalyse private investment into UK science and technology and stimulate the UK venture capital eco-system.
The Bank wishes to hear particularly from DC pension schemes (or consortia) and from authorised asset managers which have at least one UK DC pension scheme willing to support the proposal and are demonstrably able to meet these objectives. Open DB schemes are also mentioned as possible investing institutions. The deadline for submissions is 28 July 2023, with the announcement of successful proposals expected in November.
The Government has also now published a summary of the responses to the five questions around the LIFTS initiative that it consulted on in April (see Pensions Bulletin 2023/11).
Comment
If this initiative delivers on its objectives, the proposals could deliver both an increase in domestic sources of capital from DC pension schemes for productive investment in the UK’s science and technology businesses and potentially higher returns to members of those pension schemes. We look forward to seeing what innovative new funds or investment structures might emerge.
FRC proposes changes to its Corporate Governance Code
The Financial Reporting Council has launched a consultation on some changes to its Corporate Governance Code. The limited revision of the Code is as a consequence of the Government’s 31 May 2022 response to its White Paper “Restoring Trust in Audit and Corporate Governance” in which it invited the FRC to strengthen the Code in the areas of internal controls, assurance and resilience.
The Code applies to companies with a premium listing of equity shares on the UK Stock Exchange, with the Listing Rules requiring companies to make a statement of how they have applied the principles set out in the Code, in a manner that would enable shareholders to evaluate how the principles have been applied.
The consultation document describes the proposed changes and their rationale in great detail, but for a quick examination of the changes the reader can go straight to Appendix A where one can see what is new (in green) what is being struck out (in red) and what has been moved (in blue). Noteworthy additions include the following:
- How environmental and social matters are taken into account in the delivery of the Board’s strategy, including its climate ambitions and transition planning
- A number of mentions of diversity and inclusion in relation to the composition, succession and evaluation of the performance of the Board
- Inclusion of sustainability matters in relation to audit, risk and internal control
There are no changes to the Code’s expectations for directors’ pensions. As currently, only basic salary should be pensionable and the pension contribution rates for executive directors, or payments in lieu, should be aligned with those available to the workforce.
There is also a warning that the pension consequences and associated costs of basic salary increases and any other changes in pensionable remuneration, or contribution rates, particularly for directors close to retirement, should be carefully considered when compared with workforce arrangements.
What is new under the directors’ remuneration heading is the inclusion, in the annual report on remuneration, of a description of any malus and clawback provisions that operate to withhold or recover remuneration from directors for misconduct, misstatements, and other serious failings.
Consultation closes on 13 September 2022. The intention is that the revised Code will apply to accounting years commencing on or after 1 January 2025.
Comment
In introducing the report, the FRC says that when the new Code is issued “it will be part of a wider framework of measures that will improve accountability, build trust and support investment and stewardship decisions in the UK”. However, the Government remains silent on the timing of the Audit Reform Bill that is necessary to achieve this.
Pensions Equity Group launched
A new coalition of over 20 leading pension companies and organisations, working together to tackle pension inequalities in the UK, has been launched. The Pensions Equity Group (PEG) has been established in recognition that many in our society are not saving enough for retirement and aims to:
- Develop a way of consistently measuring pension inequalities, beginning with the gender pensions gap
- Work with Government and policymakers to achieve positive change
- Share best practice approaches to help employers address inequalities
- Find practical tools to empower individuals, such as planning tools and guidance; and
- Highlight potential industry product developments that will help drive greater equity for individual savers
Comment
Although welcomed by the Government, this does not appear to be a government-instigated initiative. We welcome the industry coming together with a view to tackling inequity in pension savings and the systemic hurdles that some savers face and look forward to seeing the results of the Group’s work in due course.
