Hot on the heels of the Chancellor’s Mansion House speech, the DWP has published a raft of documents, all designed to drive better outcomes for pension savers and to promote investment by UK pension schemes in alternative assets including in high growth businesses.
As part of the Government’s drive to boost economic growth, it wants to ensure pension scheme money is working as effectively as it can for members, sponsoring employers and the UK economy. As part of this, it is exploring:
- whether more can be done with the assets of maturing private sector defined benefit (DB) schemes;
- how to drive the consolidation of defined contribution (DC) schemes and force underperforming DC schemes to wind-up; and
- how to remove barriers to trustees investing in unlisted equities and other higher growth (and higher risk) assets.
In outlining and exploring potential reforms, the Government recognises the need to move cautiously and to understand the impact of any suggestions on the UK economy as a whole. In particular, as well as ensuring pensions are protected, the Government highlights the need to prioritise having a strong and diversified gilt market and for its decisions to strengthen the UK’s competitive position as a leading financial centre.
The various policy documents published by the DWP on 11 July include:
- a response to the consultation on a Value for Money framework – this confirms the intention to introduce a Value for Money framework.
- a response to the consultation on the consolidation of DB schemes – this confirms the Government’s intention to introduce a permanent legislative framework for the regulation and supervision of DB superfunds.
- a call for evidence on options for DB schemes – this has been launched to support the development of innovative policy options to offer more choices for DB schemes where buy-out is out of reach and to offer more flexibility around the use of surplus.
- a response to call for evidence in helping savers understand their pension choices – this sets out the Government’s response to the products and services element of its June 2022 call for evidence on supporting individuals use of their pension savings in decumulation.
- a call for evidence on pension trustee skills, capability and culture – this has been launched to support the development of policy options for improving the skills and capability of pension trustees and removing barriers to trustees’ ability to make effective investment decisions.
- a response to the consultation on extending opportunities for CDC schemes – this sets out the Government’s response to its consultation on proposals to broaden Collective Defined Contribution (CDC) provision to accommodate multi-employer schemes including Master Trusts and on the role of CDC in decumulation.
- a response to the call for evidence on ending the proliferation of small pension pots – this sets out the Government’s response to its call for evidence which sought views on the development of potential solutions to address the issue of small pots including a default consolidator model and pot follows member.
We consider some of these in more detail below.
DB schemes hold assets worth around £1.7 trillion and the Government is keen to see if it can find ways to make these assets work harder for members, employers and the economy. It sees consolidation as key to this. Therefore, while it recognises the essential role played by buy-out insurers, the Government has signalled its support for the development of more options for schemes and sponsors for which an insured buy-out is out of reach.
As part of this, and after four years of waiting, the Government has responded to its consultation on the creation of a legislative authorisation and supervisory regime for DB superfunds. Work will now begin to finesse the detail required to develop and progress the permanent legislative regime to support the development of this market.
The DWP has also issued a call for evidence in which it is seeking views on a range of other potential options to enable assets held within DB schemes to be used more flexibly to benefit pension scheme members and the wider economy. These options include:
- the potential to establish a public consolidator (e.g. one run by the Pension Protection Fund) to facilitate the consolidation of DB schemes that are not able to buy-out and that are unlikely to be attractive to commercial consolidators; and
- the scope to relax the rules relating to return of surplus to incentivise employers and trustees to generate surpluses and to give more flexibility over how surpluses within DB schemes may be used.
Value for Money framework
In line with the objectives outlined by the Chancellor in his Mansion House speech, the proposed new Value for Money (VfM) framework is designed to drive and require consolidation of underperforming DC schemes and to encourage schemes to broaden their investment approaches by shifting the focus in the DC sector from cost to performance.
The framework will provide greater transparency and standardisation of reporting across the DC pension market. The Government hopes this will enable trustees and providers to make more informed investment and governance decisions and enable employers to better compare the value and performance between DC schemes when choosing where to automatically enrol their staff.
The response confirms the DWP will continue to work with the FCA and the Pensions Regulator to implement the VfM framework. This will be done in phases. The VfM framework will require primary legislation and the Government intends to consult on draft regulations and FCA rules which will implement the detailed requirements, although no timetable has been given.
Pension trustee skill, capability and culture
This call for evidence, launched by the DWP and HM Treasury (HMT), covers DC, DB, and CDC schemes, as well as hybrid schemes. It focuses on three areas:
- trustee skills and capability;
- the role of advice; and
- other barriers to trustee effectiveness.
DWP and HMT are particularly interested in whether trustees have the right knowledge and skills to consider investment in the full breadth of investment opportunities.
The call for evidence contains 25 questions (with several sub-questions), including:
- Do trustees currently meet the knowledge and understanding requirements expected of them? Are some types of trustee better than others?
- Do trustees (including Master Trust trustees) have the right knowledge and understanding to invest in the full breadth of investment opportunities? If not, what can be done to improve this?
- To trustees: How does legal advice impact on your investment decisions? What is an acceptable level of tolerance for investment risk? Is there a culture of ‘risk aversion’?
- Is fiduciary duty a well-understood concept? Do current regulations and guidance support trustees to make investment decisions which seek higher returns for members? If not, what changes would be useful?
Although many of the proposals covered by the DWP’s publications are not new, the DWP is clearly keen to show that it is working to advance the Government’s and HM Treasury’s agenda to improve the performance of DC (and DB) pension schemes and to unlock more of the potential for UK pension schemes to support UK economic growth.
The consolidation of both DB and DC schemes is clearly seen as key to this. After several years of delay, it is significant the Government (and HMT) now appear to be committed to supporting the development of DB superfunds and open to exploring other options, including the creation of a public consolidator for DB schemes. The consolidation of DC schemes is also still firmly on the agenda. The new VfM framework is clearly being positioned as central to this. However, much will depend on how tough the Pensions Regulator is on cracking down on DC schemes that do not offer good value or that do not carry out the required assessments.
The fact the Government is considering relaxing the rules on return of surplus and even offering incentives for DB schemes to re-risk in order to generate surpluses, shows that it is prepared to think outside the box in order to boost the UK’s faltering economy.
If you would like to discuss any of the topics covered in this blog speak with your usual HSF adviser or contact one of our specialists.