Here are our key takeaway points following our “What do I need to know for 2023?” webinar held on 16 January.
The year ahead will be a big year for buy-ins and buy-outs, with improved funding meaning that more DB pension schemes are likely to be in a position to consider a buy-in or buy-out at a time when insurers have a good deal of capacity. The recent market volatility has emphasised to trustees and sponsors the risks which continue to exist with DB schemes and, consequently, the additional security which can be provided through the transfer of scheme liabilities to an insurer. However, it is likely that a scheme which is in a position to buy-in or buy-out will find that they will be doing so in a very competitive market, making it essential that the scheme is made as attractive as possible to an insurer in order that they will want to transact. In practice, useful steps will therefore include ensuring that scheme data is in a good state and that benefit specifications are agreed and ready to be shared with insurers.
Following the draft Funding and Investment Strategy (FIS) Regulations last July, the draft DB Funding Code was issued for consultation last December, along with a “Fast Track” parameters document. The Regulator expects the new DB Funding Code to apply to valuations from 1 October 2023. The draft DB Funding Code contains much of the detail to flesh out the key principles outlined in the first consultation that we expected but, importantly, also includes new concepts for employer covenant assessment. This is a shift in approach so that “Bespoke” will not be benchmarked against Fast Track valuations, and includes some flexibility for open schemes to take account of future accrual and new entrants. However, as both the FIS Regulations and DB Funding Code are still in draft, trustees and employers need to keep an eye on any changes or delays to the final FIS Regulations. They also need to start working with their advisers to consider the specific circumstances of the pension scheme and if potential changes are needed to funding and investments. Other key considerations include whether Fast Track or Bespoke is most appropriate for the scheme, and what will be the scheme’s FIS, journey plan, low dependency funding basis and investment allocation.
GMP equalisation projects continue to feature on trustees’ meeting agendas, with more progress being made by schemes both in terms of either implementing a dual records or GMP conversion approach, and also addressing unequalised historic transfer payments. HMRC guidance has helped address unanswered questions on transfer top-ups, but we are still waiting to see if more helpful HMRC guidance arrives in 2023 to deal with the thorny tax issues that potentially arise on the conversion of deferred members’ GMPs. Also in 2023 we’re expecting the consultation on the draft regulations that will flesh out the changes made by last year’s Pension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022, not least in the area of clarifying the benefits due after conversion to survivors. Trustees do not necessarily need to wait for these statutory changes in order to progress GMP conversion as the Government has indicated that they won’t affect GMP conversion exercises that have completed or are underway. We are seeing more GMP conversion projects taking place in respect of deferred members, albeit with careful communications with members who may need to opt-out of GMP conversion and have their benefits equalised via dual records instead to avoid tax issues arising. Also expect some updated PASA guidance!
We are expecting the final version of the Regulator’s Single Code of Practice to be released any day now. The Code will need to be laid in parliament for 40 days before coming into effect, which suggests we are targeting a spring or early summer commencement date for the new obligations on trustees. We are aware that key focus areas of the Regulator’s review following the March 2021 consultation have been around the Own Risk Assessment (notably the initial date by which smaller schemes will need to have this prepared, and the requirement for schemes to review this annually) and the obligation to publish remuneration policies. The Regulator has previously said it is not expecting full compliance from Day 1 and that it will take a proportionate approach to compliance while trustees get to grips with their new governance obligations, but we would anticipate that most (particularly larger) schemes should be acting promptly to take action in the first half of this year. Many trustees have already been in discussions with their sponsoring employers and advisers to carry out a ‘gap analysis’ to determine what new or amended policies they may need to put in place as a result of the Code’s requirements. Once we have the final version of the Code, trustees will need to ensure they have time on the agenda, and the resources available, to the finalise the outcome of this exercise and start adopting any new or revised policies as required.
2022 was a busy year for pensions dashboards and we expect 2023 to be just as eventful. Towards the end of last year the final Pensions Dashboards Regulations 2022 came into force, which set out the obligations of trustees of occupational pension schemes when it comes to pensions dashboards. This year we will see the largest master trusts and DC schemes used for automatic enrolment having to connect to pensions dashboards from August. In relation to all schemes, we are expecting trustees and administrators to be kept busy with the preparation needed to ensure compliance with the new obligations, including connecting to dashboards and getting scheme data dashboard ready. Specifically, trustees should be considering their route to connection, including whether a third party Integrated Service Provider (ISP) will be required, and working with administrators to review data and agree an appropriate data matching policy. Trustees should also consider the potential additional costs of the work needed to comply with the new requirements and ensure that this is factored into any annual budget.
It is now just over one year since the new statutory transfer regime came into force and, as the Regulations have bedded in, there have been various potentially tricky issues identified, specifically the issues arising from the broad definitions of overseas investments and incentives in the Red and Amber Flags. Many in the pensions industry hope that the Regulations will be changed to better reflect the initial policy intention behind the Regulations of only capturing true pension scams. It will be interesting to see if the Pensions Ombudsman issues any determinations arising from complaints under the new transfer regime, which could provide a helpful guide to trustees as to how they handle cases, for example whether to bypass the statutory transfer regime and pay discretionary transfers in certain situations. We can see the benefits of the new regime, but also the need for tweaks to enable statutory transfers to proceed in a low risk context without raising either Red or Amber Flags. There is clearly room for improvement and time will tell if the Government listens to the industry and revises the regulations accordingly.
Here are some key developments to watch out for from a DC perspective:
- New “Disclose and Explain” requirements for investments in illiquid assets – Statements of Investment Principles will, after 1 October 2023, require occupational schemes providing DC benefits to disclose and explain their policies on illiquid investments. In addition, the Chair’s Statement will need to disclose and explain the percentage of assets in their default funds allocated to different asset classes.
- New Value for Money Framework proposals will be coming in 2023 from the DWP, the Regulator and the FCA. The Framework aims to develop a set of common measurements for assessing value for money across different types of pension scheme - occupational, workplace and personal pension schemes - to allow easy comparison between them. The Framework will focus on "long-term value", including investment performance, customer service, scheme oversight, and costs and charges. This may lead to further disclosure requirements for schemes - the consultation is expected to begin soon.
- DC Decumulation – This is an area of focus for the Government, schemes, employers and members. Many members will be seeking to transfer when approaching retirement, and trustees are keen to help support members on the often complex choices available. However, trustees need to be careful not to cross the line between guidance and financial advice. While there is some support available for trustees on how to communicate with members from the PLSA, the Regulator and the FCA, the Government may act this year to address barriers to trustees providing support to members. Trustees should consider the types of support they are now providing to members, and keep an eye out for further developments.
2023 also looks like it will be an interesting year for pensions cases. We are expecting decisions on:
- An appeal following the CMG High Court judgment on the specific issue of whether the Pensions Ombudsman is a “competent court” for the purposes of the legislation which stipulates that a dispute raised by a member as to the recovery of overpayments via a deduction from future pension instalments can only continue with the order of a competent court. The High Court has ruled on two occasions that the Pensions Ombudsman was not a competent court for this purpose.
- Rectification of pension scheme increase rules (Airea).
- The appeal of the USS beneficiaries in their high profile challenge to a number of decisions of the USS corporate trustee directors on matters including scheme benefit changes and climate change policies.
- Some interesting decisions about scheme benefit changes, including whether a scheme amendment power might restrict changes to future service benefits (BBC) and whether the absence of a statutory “section 37” confirmation in respect of a formerly contracted out scheme might render amendments void (Virgin Media).