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14 Dec 2023

The Autumn Statement 2023 - The tip of the iceberg for pensions

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What should trustees be doing?

Background

A lot was thrown at the pensions industry on 22 November 2023. There were a few headline points set out in the Chancellor's statement. It was, however, the materials published alongside the Autumn Statement where the details can be found reflecting the government's intention for a change in the focus of pension schemes.

Following on from the Mansion House Reforms, the materials provided alongside the Autumn Statement make it clear that there is focus on unlocking the vast investment potential of pension schemes to promote the UK economy. This is reflected in proposals for promoting 'run-off' of defined benefit pension schemes, rather than de-risking solutions, as well as the Pension Regulator's (Regulator's) shift in focus from compliance to the supervision of investment strategy and performance.

The continued promotion of pension scheme consolidation and improved governance is also, unsurprisingly, a further key focus in these materials.

Trustees of both defined benefit (DB) and defined contribution (DC) pension schemes should be aware of these proposals. There may be some short to medium term steps they should be taking in respect of their schemes. It is also important to have a general understanding of the changing nature of the pensions landscape.

Key developments

Topic

Detail

Impact for trustees

DB Schemes

Surplus

  • The government considers that having schemes 'run off' rather than buyout may have benefits for employers as well as the wider economy. A consultation will take place this winter on making it easier for employers to access surplus in order to promote running on.
  • The viability of a 100% PPF underpin will also be considered with the hope it would promote greater investment in productive finance by providing full benefit security in return for a higher PPF levy.
  • There will be a reduction in the tax charged on surplus refunds from 35% to 25% from 6 April 2024.

 

For employers set on buy-out, these proposals are likely to have limited impact. Trustees should, however, be aware employers may wish to postpone any scheme wind-up until 6 April 2024 in order to benefit from the reduced tax charge for surplus payments.

Trustees of larger schemes with a strong employer covenant may find that, in the medium term, employers are more keen to run off their scheme rather than buyout.

 

Consolidation

  • A public sector consolidator for schemes unattractive to commercial providers will be established by 2026.
  • Consolidation will be voluntary on the part of trustees and will not be mandated.
  • The PPF is being considered for this role.

There is no immediate impact on trustees.

DC Schemes

Small pot default consolidation

  • The government is looking to introduce a small number of authorised schemes to act as consolidators for eligible DC pension pots under £1000.
  • This will apply to schemes that have not received any contributions for at least 12 months.
  • A clearing house will be established to support schemes and members through the consolidation process and will allocate a member to a consolidator scheme in cases where a member does not make an active choice.
  • Authorisation would be needed for consolidator schemes. An authorisation regime for consolidators will therefore need to be established. This will be established for trust-based schemes and the DWP will work with the FCA to consider a similar framework for contract-based schemes wishing to be consolidators.

Whilst the exact details of default consolidation are still to be established, schemes should ensure they have accurate scheme data and can identify pots of less than £1000 which have not had contributions paid into them in the past 12 months.

Larger schemes may also want to consider if they are interested in becoming consolidators. If so, thought should be given to any changes that will be needed to satisfy a new authorisation regime.

'One pot for life'

As part of its medium to long-term strategy for pensions, the government has issued a call for evidence to look into a lifetime provider model for DC schemes, allowing individuals to have one pension pot for life. Early industry responses have generally been negative to this proposals, in particular of the removal of the link between a pension scheme and an employer.

There is no immediate impact on trustees.

Additional duties on DC occupational trustees

  • The DWP will, "at the earliest opportunity", introduce legislation to place duties on all trustees of occupational pension schemes to offer a range of decumulation products and services to members at the point of access. Before legislation is introduced, the DWP will work with the Regulator to publish interim guidance to show how the objectives can be met in the interim.
  • There will be an 'opt-out' approach taken; members will be placed into a default decumulation solution by the trustees unless they make an active choice.
  • Schemes will be allowed to partner with external providers.
  • Trustees will need to develop appropriate communications and guidance as part of the decumulation service to be offered.

 

Whilst the DWP intends to introduce legislation to mandate these new requirements, in the meantime the Regulator will be issuing guidance and the DWP will be encouraging schemes to voluntarily develop a decumulation offering or enhance their current service.

Trustees should therefore review any decumulation service currently offered. Thought should be given as to what decumulation options will be provided as well as the appropriate default option for the member profile of their schemes. Trustees should also consider the approach they will take to member communication and guidance.

Master trust review

The government has published its review of the master trust authorisation and supervision framework.

The Regulator will start to shift its focus from master trust compliance to the supervision of investment governance. Master trusts are seen as playing a leading role in achieving the aims set out in the Mansion House reforms, including adopting dynamic and sophisticated investment strategies with long-term investment in UK assets. Master trusts will be required to:

  • Provide an increased flow of more timely investment information to the Regulator;
  • consider their investment strategy if they are underperforming relative to others in the market and focus on continuous improvement.

The Regulator will challenge how decisions are made by master trusts, as well as the investment expertise on trustee boards.

Legislation will be taken forward introducing a Value for Money Framework and master trusts are expected to be pro-active in ensuring compliance. The DWP will also consider further legislation to enhance the Regulator's new investment supervisory role, if required.

 

Master trust trustees should ensure that they have appropriate investment experts on the board. The Regulator's focus will increasingly be on investment strategy and trustees should therefore ensure their strategy would stand up to scrutiny. The Regulator will be looking for 'continuous improvement' by master trust investments.

Trustees should also be ready for the Value for Money framework on the horizon.

DB and DC Schemes

Trustee knowledge and understating

  • The Regulator will provide a register of trustees and the DWP will support this.
  • Professional trustees will be strongly encouraged to seek accreditation.
  • The Regulator's investment guidance is being updated to improve understanding of alternative investments. This is expected by the end of the year.

There is a clear focus on ensuring trustees have appropriate understanding of investments and alternative assets. Trustee boards should ensure they have appropriate expertise in this area.

Any professional trustees not already accredited should also consider undertaking this.

Lifetime Allowance

The government has confirmed that the lifetime allowance (LTA) will be abolished from April 2024. HMRC has published a policy paper clarifying the tax treatment of certain benefits as a result of this abolition:

  • Lump sums and lump sum death benefits
    • These will be tested against a new threshold set at the same level as the present LTA (£1,073,100). If the lump sum payment does not take the individual above this level, no tax is due. Any lump sum paid above the level will be taxed at the marginal rate of income tax of the member/beneficiary. This limit applies per person and will not take into consideration the payment of regular pension income.
    • The maximum amount payable for a tax-free pension commencement lump sum will remain at £268,275.
    • Members may take a pension commencement excess lump sum which will attract tax at the member's marginal rate.
    • The maximum tax-free elements of an UFPLS will remain at £268,275.
  • Trivial commutation lump sum, winding up lump sum and small lump sum - The tax-free elements of these sums will not be deducted from the new threshold, but the individual must have available thresholds to be able to take these lump sums.
  • Transitional provisions have also been included to account for benefits taken before 6 April 2024.

Trustees should consider reviewing their rules and considering if any amendments will be required to accommodate the changes from April 2024.

 
Comment

Whilst there are limited immediate steps that trustees need to take, it is clear that the Regulator is going to be scrutinising trustees' investment knowledge and understanding. Trustees should therefore ensure they have undertaken sufficient training and have appropriate knowledge in this area. Trustees of DC schemes should also start thinking about the decumulation offerings that they will put in place. The Stephenson Harwood pensions team are available to assist trustees with these upcoming obligations.

In terms of the medium term, it will be interesting to see if further legislative changes around refund of surplus and other changes to promote run-off of DB schemes may result in an attitude shift for some employers from viewing DB schemes as a burden, to an invest opportunity. 

This note does not constitute legal advice. Information contained in this document should not be applied to any particular set of facts without seeking legal advice. Please contact your usual Stephenson Harwood pensions law group member for more information.

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