PENSIONS: An Introduction to London (Firms)

2025 – The Culmination of Years of UK Pensions Innovation or the Start of Something New?

July 2024 saw the election of a new UK government. At first sight, it may appear to be a case of “plus ça change” for pensions policy.

The promised Pension Schemes Bill will implement previous government policy. Speculation that a Labour government would reintroduce the lifetime allowance was unfounded.

The extent to which the funding and investment strategy legislation and the attempt by The Pensions Regulator (TPR) to shape behaviour through its defined benefit (DB) funding code will impact trustees and sponsors remains to be seen. TPR has promised guidance on assessing employer covenants, which may lead to interesting conversations between some sponsoring employers and trustees.

Dig a little deeper, however, and there seems to be a subtle change in focus, fuelled by the drive to use pension scheme assets to “boost growth”. The Pensions Review announced by the Chancellor on 20 July 2024 will, in its first phase, look at how the GBP360 billion of assets in the Local Government Pension Scheme, and the GBP800 billion of assets anticipated to be invested in defined contribution (DC) schemes by 2030, could be invested in UK businesses. Assets held by UK DB schemes still vastly exceed those held in DC schemes, with the PPF7800 Index reporting the figure as GBP1.455 trillion by 31 July 2024. However, DC contributions are now greater than those of DB, which may explain why the government has made DC its initial area of focus. Asa significant number of DB schemes currently have a surplus that could be used for UK investment or to make payments to members and sponsoring employers, failure to focus on DB schemes and progress proposals to make extracting surplus easier in ongoing schemes may be a missed opportunity.

The drive to use pension schemes to help achieve economic growth means that a number of existing innovations look likely to become a reality. It is an exciting time for pension schemes, and some of the key areas for employers and trustees to look out for over the next year are detailed in the following.

The Pension Schemes Bill announced in the King’s Speech is designed to “increase the amount available for pensions savers”. Building on the success of auto-enrolment and consolidation in the DC market, the government is encouraging large DC master trusts to focus on improving financial outcomes for members by focusing on returns as well as charges. It aims to do this by encouraging such schemes to invest in UK productive finance to help grow the economy, emulating the experience of the Australian superannuation funds. It will also contain proposals to:

• consolidate small, deferred DC pots created within the auto-enrolment regime;
• introduce a “standardised test” for occupational DC schemes to demonstrate they deliver value, which will also be implemented by the Financial Conduct Authority (FCA) in relation to personal pensions; and
• require trustees of occupational DC schemes to offer a service to members accessing benefits that provides decumulation options of an appropriate quality and price, including a default decumulation solution.

However, the greatest impact on member savings is likely to flow from increasing automatic enrolment contributions, but there remains a reluctance to do so in the current economic climate. Currently, employers have a duty to auto-enrol workers who are aged 22 or over and have earnings of more than GBP10,000, and to pay contributions on their behalf. Minimum contributions and benefits are calculated by reference to “qualifying earnings”, which are currently between GBP6,240 and GBP50,270. An Act has been passed that allows for regulations to relax this condition, but draft regulations have yet to emerge.

Having achieved significant success in consolidating occupational DC schemes, the previous government had shifted its attention towards DB consolidation and endgame planning. The current government continues this focus, and the Pension Schemes Bill will include the long-awaited legislation to regulate superfunds. Pending the introduction of a statutory regime, TPR has issued updated guidance for trustees and employers looking to transfer to superfunds to allow more flexibility as to when investors will be able to withdraw capital. This should pave the way for further entrants to the superfund market and add to the two transactions completed by Clara last year. Volumes of buy-ins and buy-outs in HY24 have perhaps been lower than the anticipated GBP50 billion+ volumes predicted by LCP and other consultancies at the start of this year. However, insurers are reporting a strong pipeline for the second half of 2024, with Standard Life recently anticipating over GBP40 billion of bulk-purchase annuities to transact by the end of the year.

We await confirmation as to whether the government will continue with its predecessor’s consultation on setting up a public sector consolidator to be run by the Pension Protection Fund (PPF) by the end of 2026. It was previously proposed that the consolidator would be available to schemes that cannot access buy-out or a commercial consolidator, and would provide a small number of standardised benefit structures. With recent improvements in DB funding levels, the options for sponsors of DB schemes are growing. In anticipation of legislative change to facilitate greater access to surplus, sponsors of DB schemes are also contemplating whether to run on their scheme to generate a surplus as opposed to paying a premium to a commercial buy-out insurer.

The innovation does not end with DB and DC. With the final pieces of legislation being put in place, October looks set to see the launch of the UK’s first single- or connected-employer collective defined contribution (CDC) scheme, for Royal Mail. Expanding the law to allow commercial multi-employer CDC schemes and decumulation-only CDC would result in real growth of this third option for providing employee pension benefits.

As lawyers, we must inevitably temper all this excitement with some old themes. Increased volumes of de-risking work in recent years, as well as preparations for the launch of the Pensions Dashboards programme, have resulted in the discovery of historic benefit and data errors in many DB schemes. Decisions of the UK courts in relation to guaranteed minimum pension (GMP) equalisation and the requirement for actuarial confirmation when amending contracted-out DB rights between 6 April 1997 and 5 April 2013 have also resulted in increased scheme liabilities. The significant time and cost required to investigate and correct matters has resulted in further capacity constraints within the already-stretched administrator market, with many schemes yet to start work.

With a new government and a “painful” Autumn Budget promised, we cannot sign off without mentioning potential changes to pensions tax. Whilst the recent abolition of the lifetime allowance seems too complicated to reverse, the government’s commitments not to increase income tax, VAT or National Insurance indicate that changes to pensions tax relief could be coming, and hints have been given that there might be new restrictions on tax-free lump sums. Innovation or plus ça change?