- MPs publish their findings on DB schemes’ LDI exposures
- Countdown begins for EU-originated pensions case law
- FRC adjusts guidance on money purchase projections
- Actuaries publish latest mortality projection model
- Next steps in pension tax reform may be set out soon
- Mansion House Speech could be highly significant for pension scheme investment and further consolidation
- New limitation on local government pension schemes power to invest proposed
MPs publish their findings on DB schemes’ LDI exposures
The Work and Pensions Select Committee’s report on its inquiry into the use of liability-driven investments in DB pension schemes launched last October (see Pensions Bulletin 2022/39) has been published setting out how LDI developed, what happened last autumn and the lessons to be learned.
The MPs make a number of requests, mainly of the Pensions Regulator and the DWP, first under the heading of improving DB scheme regulation and then on the need to manage systemic risk. Under the latter they also express “fundamental concerns” with the much-delayed new scheme funding regime on two counts – not sufficient to allow open schemes to thrive and resulting in greater herding of investment risks. As a result, the MPs call for its delivery to be halted until at least a full impact assessment, including the impact on financial stability and on open DB schemes has been produced.
On LDI itself, the Committee’s recommendations are as follows:
- The DWP and Pensions Regulator to produce, by the end of 2023, a detailed account of the impact on pension schemes of last autumn’s events
- The Pensions Regulator to require trustees to report certain data on their use of LDI and develop a strategy for engaging with schemes based on the results more closely
- The DWP to respond to its 2018-launched consultation on DB consolidation (see Pensions Bulletin 2018/50) by the end of October 2023, work with the Regulator as a priority to improve the regulation of trustees and standards of governance, and consider whether the use of LDI could be restricted
- Before the end of this Parliament, the Government to bring forward its plans for investment consultants to be brought within the FCA’s regulatory perimeter
- The Pensions Regulator to work with the FCA to review whether the guidance the FCA issued to LDI funds in April 2023 has been implemented effectively and is providing trustees with the simple mechanism for monitoring LDI
- The DWP and Pensions Regulator to report back to the Committee by the end of October 2023 on how they plan to monitor whether LDI resilience is being maintained – to include mechanisms to provide real-time warnings of reductions in LDI resilience
- The DWP and Pensions Regulator to consult on whether requiring schemes to make LDI disclosures through the annual report or investment statement would help improve governance standards and to consult on the data it is appropriate to collect for this purpose
- The DWP and Pensions Regulator to work with other regulators and the Bank of England to improve the management of systemic risks and to report back by the end of October 2023 on how they intend to ensure this happens
- The DWP to report back by the end of January 2024 on how it proposes to take forward the Bank of England’s recommendation that the Pensions Regulator be given a remit to take account of financial stability considerations and how it plans to ensure that the Regulator has the capacity and capability to deliver
It is now over to the Government to respond, normally within two months.
Comment
Reports by Parliamentarians, calling on Government to take action are often met with flannel and obfuscation, but this report is for the most part going with the grain of public policy and as such it could well be that the Government responds in a positive manner. Given the events of last autumn we can expect to see, in the coming period, a greater focus by the DWP and the Pensions Regulator on the risks that LDI presents. However, only so much can be done within the current legislative framework.
And as for the new scheme funding regime, conceived in a completely different economic environment, and now in tension with the Treasury’s desire for schemes to invest for the benefit of the wider UK economy, as well as the issues flagged by MPs, we would not be surprised if further thought is now necessary.
Countdown begins for EU-originated pensions case law
The Government Bill whose purpose is to bring to an end the special status of retained EU law in the UK statute book and to remove a certain amount of such law, is obtaining Royal Assent today, but only after significant amendments were made in the House of Lords, including a complete reversal of the controversial sunset clause (see Pensions Bulletin 2023/20).
The Retained EU Law (Revocation and Reform) Act 2023 provides for the expiry of certain EU-derived subordinate legislation and retained direct EU legislation – with some 600 such items that are being ‘sunsetted’ on 31 December 2023 set out in Schedule 1 of the Act. However, none of these relate to pensions legislation.
Significantly, the Act sets out a mechanism under which any EU-originated “rights, powers, liabilities, obligations, restrictions, remedies and procedures” which before 30 December 2020 were recognised and available in UK law by virtue of our EU membership, are generally revoked at the end of 2023.
This will in particular mean that a number of important pensions court decisions will lose their efficacy unless the Government uses special regulation-making powers in the Act to restate their effects in UK legislation before the year is out.
Those matters impacted by this new sunset are expected to include the effects of the Hampshire, Bauer and Hughes judgements in relation to PPF compensation, the Walker judgement in relation to contingent survivor pensions and the Allonby judgement which provides support for GMP equalisation amongst other things.
Comment
Whilst a potentially damaging sunset of a whole raft of regulations has been avoided (ie determined by whether they fall within a particular definition rather than having been explicitly identified and individually assessed), many Government departments will still have their work cut out to preserve (if they wish to) a number of effects from our EU membership that have yet to be stated explicitly in our law. Expect to see a number of ‘restating’ regulations from across Government before the year is out.
FRC adjusts guidance on money purchase projections
The Financial Reporting Council has made some changes to the October 2022 dated guidance that accompanied the release of its new version 5.0 of Actuarial Standard Technical Memorandum 1 last year (see Pensions Bulletin 2022/37), releasing in its place a June 2023 edition. AS TM1 itself is not changing.
Some adjustments have been made where the guidance covers circumstances where fund volatility cannot be reliably determined, most usefully to make clear that the three examples it gives in paragraph 2.1 are not intended to be an exhaustive list.
There is also a completely new section headed guaranteed annuity terms which between paragraphs 5.1 and 5.7 addresses disclosure requirements when guaranteed annuity terms are applied and where the forms of guaranteed annuity differ from those described in AS TM1.
Comment
The publication of this updated guidance serves as a useful reminder that only a few months remain before the radically different standard must be used for money purchase projections. Trustees of schemes containing any form of DC provision (including AVCs delivered by another provider) should be checking that projects to deliver these new projections are on track.
Actuaries publish latest mortality projection model
The Continuous Mortality Investigation (CMI) of the Institute and Faculty of Actuaries has published the latest version of its mortality projection model, which is called CMI_2022, together with its working paper. The launch is accompanied by a publicly available frequently asked questions page which provides a brief overview of mortality improvements and CMI_2022.
CMI_2022 is calibrated to England & Wales population mortality data up to 31 December 2022. Prior to the pandemic, all of a year’s data would be taken into account, but since then the core model has taken no account of the 2020 or 2021 data. This reflected the view that the pandemic adversely distorted the likely trends in mortality and so it was not reasonable to continue with a business-as-usual form of updating by fully calibrating the model to the abnormally high mortality rates seen in 2020 and 2021.
However, this time round, and following consultation, the 2022 data is being given a 25% weighting (see Pensions Bulletin 2023/14). The 25% weight speaks to the fact that although 2022 mortality remains significantly higher than that experienced before the pandemic, mortality is becoming less volatile and maybe indicative of future mortality to some extent.
Comment
Core projections generated by CMI_2022 produce lower cohort life expectancies than those produced by CMI_2021 (with other parameters held constant) for most ages. This is primarily because the 2021 version made little allowance for the higher mortality rates over the pandemic years and seen since. As a result, adoption of the 2022 core model is likely to result in a lower value being placed on pension scheme liabilities, as LCP partner Chris Tavener described when the CMI_2022 proposals were put out for consultation earlier this year.
Next steps in pension tax reform may be set out soon
The Government has announced that draft clauses for the next Finance Bill will be published on 18 July 2023 (so called “L Day”) for technical consultation before the legislation is laid before Parliament (typically in late autumn).
This is a potentially significant date for pensions tax law, because the 2023 Finance Bill currently making its way through Parliament, whilst lifting the Lifetime Allowance charge does not remove the Lifetime Allowance itself from the statute book – the policy target announced in the March 2023 Budget (see Pensions Bulletin 2023/11). A future Finance Bill is to do this and we may see on 18 July how the Government intends to deliver this and address the consequences that then follow.
Comment
Removing the Lifetime Allowance charge was a relatively easy thing to do legislatively speaking and impacts relatively few people (although its speedy introduction in the 2023 Bill from 6 April 2023 presented some difficulties).
Removing the Lifetime Allowance – a key lynchpin of the current regime – will be more fundamental technically. For example, if most of the concepts of “benefit crystallisation events” disappear, there will need to be a new form of control over the tax-free pension commencement lump sum, which will also complete the bedding-in of the new overall hard cap of £268,275 announced at the March 2023 Budget.
It seems that there will be much to be done and very little time to do it if – as HMRC’s newsletters imply – the new regime is to be up and running from 6 April 2024 (and there may be a political imperative to get this reform in the 2024 Finance Bill and onto the statute book by next summer and before an announcement of the next General Election).
The draft clauses on 18 July could be an important first indicator for employers, schemes, members and advisers planning for implementation, retirement or other decisions from 6 April 2024, just seven months later – and perhaps immediate decisions too.
Mansion House Speech could be highly significant for pension scheme investment and further consolidation
The Chancellor Jeremy Hunt is due to give the annual Mansion House speech in July and it is being reported that he will use it to outline wide-ranging plans to encourage UK pension funds, whether DB or DC, and whether in the private or public sector, to invest in riskier, but potentially high-growth British assets, and to drive further consolidation of schemes. However, the Chancellor is not expected to propose mandating where pension schemes should invest.
The speech could be shortly followed by a number of consultations, with the final shape of his plans set out in the Autumn Statement.
Comment
We reported at the beginning of the month on a possible extension to the role of the Pension Protection Fund (see Pensions Bulletin 2023/22), but it seems that a number of other options are on the table, including proposals that would enable surplus in DB schemes to be more easily accessed.
New limitation on local government pension schemes power to invest proposed
The Conservative Party’s 2019 General Election manifesto contained a commitment to ”ban public bodies from imposing their own direct or indirect boycotts, disinvestment or sanctions campaigns against foreign countries”.
The Economic Activity of Public Bodies (Overseas Matters) Bill, introduced to Parliament on 19 June 2023, is intended to implement this commitment. It does this by prohibiting a “decision-maker” in a public body from having regard to a consideration that relates specifically or mainly to a particular foreign territory “in a way that would cause a reasonable observer of the decision-making process to conclude that the decision was influenced by political or moral disapproval of foreign state conduct”.
The relevance of this to pensions policy is that one decision-maker in scope is a governing body of a local government pension scheme where guidance already prohibits investment decisions that conflict with the UK’s foreign and defence policy following litigation concerning a boycott of Israel (see Pensions Bulletin 2022/08). The Bill provides that a “fund investment decision” made by such a decision-maker is subject to the same prohibition as described above. It also gives the Pensions Regulator the power to enforce the ban, using existing enforcement powers in pensions legislation.
Comment
The Government is increasingly interested in how pension schemes invest. This is one example. Any legislation emanating from the Mansion House speech (see above) could be another, and it is likely that a new government would be active in this area.
