PENSIONS: An Introduction

As well as paving the way for proposals relating to defined contribution (DC) schemes to come to fruition, the Chancellor’s Mansion House speech in July 2023 resulted in papers looking at possible future options for defined benefit (DB) schemes, as well as trustees’ skills, capability and culture. Radical pensions tax changes were also announced as part of the 2023 Budget.

Key changes are now set for release in 2024 and beyond. Whilst some are new to the pensions playlist, others are more akin to reworked cover versions.

Rolling in the DC 

Value for money (VFM) 

Over the last couple of years, the Department for Work and Pensions (DWP), the Pensions Regulator (TPR) and the Financial Conduct Authority (FCA) have been collaborating on a common framework for assessing VFM across the DC market. With the ultimate aim of providing better retirement outcomes, the new framework will provide a transparent, standardised process for schemes to “holistically assess and evidence” VFM and “the actions they are taking to improve the value they provide to savers”.

Underperforming schemes will be required to take immediate action to improve or to wind up and consolidate, providing this is in savers’ best interests. With further details to come, TPR “will be given the necessary powers to intervene” so as to remove “persistently poor performing schemes from the DC pensions market”.

Deferred small DC pots 

Ever since automatic enrolment began being phased in back in 2012, there has been concern that pensions savers, particularly those changing jobs frequently, may amass numerous small DC pots over their working lifetime. Small pots may be disproportionately affected by the costs involved in maintaining them over time, or even forgotten about by the individual altogether. Having considered several options, the DWP is pressing ahead with proposals to enable multiple default consolidators.

Under the proposals, a small number of schemes would be authorised to act as automated consolidators for deferred small DC pots, with a “clearing house” acting as a central point to store and manage data and inform schemes where to transfer. To further reduce potential risk, pensions savers will have a choice over the final destination or can even opt out if they wish. Pots of up to GBP1,000 would become eligible for automatic consolidation 12 months after the last contribution, with this size limit set to be reviewed at regular intervals.

Something like DC? 

The idea of a benefit design offering a middle ground between the traditional DB and DC pensions models has been on successive governments’ radars for well over a decade. In a collective DC (CDC) scheme, member and employer contributions are invested in a single fund, as opposed to individual pots, with members offered a target benefit rather than a guarantee. Unless a member chooses otherwise, a pension is provided from the scheme at retirement based on available assets.

With CDC schemes for single or connected employers a possibility since last year, the DWP is now moving forward with extending the legislative framework to allow unconnected multi-employer CDC schemes, including master trusts. Eventually, CDC decumulation-only products might also materialise.

Hello from the other DB side 

Having been in deficit for many years, some DB schemes have witnessed the resurgence of surpluses over the last 12 months or so.

As part of its “drive to promote economic growth”, the DWP launched a call for evidence to support the development of “innovative policy options”. This looks at how DB schemes could use their assets more flexibly, without undermining trustees’ obligations and whilst maintaining appropriate security for members’ benefits. Unsurprisingly, questions posed by the call for evidence explore both access to, and the potential use of, DB surpluses.

A superfund is an occupational pension scheme set up for the purposes of consolidating DB schemes’ liabilities. The link to the sponsoring employer is severed or “substantially altered” following a transfer to the superfund, with the “covenant” replaced by a capital buffer provided through external investment.

Pending the introduction of a legislative framework, TPR set up an interim regulatory regime for DB superfunds. The government’s aim is for superfunds to be a viable option for schemes which are not in a position to secure promised benefits with an insurer, but which are “suitably funded” to avoid burdening the superfund itself with too much risk.

With some of the finer detail still to be worked through, the key principles which will underpin the proposed legal framework include that:

1. superfunds will be authorised and supervised by TPR;

2. there will be triggers for when it can intervene; eg, if profit is being taken or the superfund is being wound-up; and

3. there will be requirements around financial sustainability and capital adequacy.

Take it Easy on Trustees 

Against the backdrop of an “evolving and more complex regulatory environment”, a recent call for evidence focused on trustee skills and capability, the role of advice, and potential barriers to trustee effectiveness.

Unsurprisingly, the adequacy of the existing knowledge and understanding obligations applicable to occupational pension scheme trustees fell under the spotlight, as well as available training. In tune with the government’s wider objective of unlocking capital to support growth businesses, views were also sought on whether the way in which trustee duties are interpreted or exercised could be holding schemes back from exploring a broader range of investments, including in less liquid assets.

Setting Fire to the Current Pensions Tax Regime 

Various pensions tax changes emerged from the 2023 Budget, with some already in force and others on the 2024 turntable.

Key changes from 6 April 2023 include:

1. an increase in the standard Annual Allowance (AA), which limits the total tax-relieved pension savings an individual can make each tax year across all registered pension schemes, from GBP40,000 to GBP60,000;

2. the money purchase AA, which applies to any subsequent DC savings by individuals who flexibly access their DC benefits, being raised from GBP4,000 to GBP10,000; and

3. the parameters for the so-called “tapered AA” being shifted upwards, so that those earning between GBP260,000 and GBP360,000 have an AA somewhere between GBP60,000 (at the lower end) and GBP10,000 (at the upper end). Where the tapered AA bites in full, an individual’s AA is just GBP10,000.

The lifetime allowance (LTA) limits the total amount of tax-relieved pension savings that an individual can build up over their lifetime across all their registered pension schemes without incurring an additional tax charge. Previously, any excess above the LTA was taxed at 55% (if taken as a lump sum) or 25% (if taken as pension).

As part of the 2023 changes, the LTA charge was replaced by an income tax charge, although this is merely a prelude to the LTA being abolished altogether from 6 April 2024.

Rumour has it… 

New requirements to disclose information about certain corporate activity to TPR and trustees, as well as a new general code of practice from TPR designed to ramp up scheme governance, were still pending at the time of writing. With a new Pensions Act also on the cards, and the requirement for DB schemes to have a funding and investment strategy coming into force, all in all, 2024 looks set to be another hit year for pensions.