Pensions Legal Outlook 2023
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As part of the Legal Outlook series, our UK Pensions team has contributed a Pensions Legal Outlook 2023 publication. In this report, we predict the key issues for occupational pension scheme trustees and sponsoring employers in 2023.
Topics which have climbed up the agenda in 2022, such as liability driven investment, the cost of living crisis, ESG and pensions dashboards, will continue to be key themes in 2023. We are also expecting developments in important areas such as scheme funding, notifiable events and the single code of practice.
Following a consultation on draft regulations earlier this year, a new scheme funding regime is expected to come into force in 2023. In a nutshell, schemes will be required to target full funding on a low dependency funding basis and aim to be invested in a low dependency investment allocation by the time they are significantly mature. Trustees will have to set out their strategy for achieving this in a “funding and investment strategy” and report this to the Pensions Regulator (together with lots of detailed information) in a “statement of strategy”. Many schemes already have a long-term objective, so this is not entirely new ground. But making this a formal legal requirement will propel trustees and employers further (and more quickly) along the road towards fully funding their schemes on a buy-out or self-sufficiency basis.
Pensions hit the headlines in late September and early October, following unprecedented volatility in gilt yields and an emergency intervention by the Bank of England. In the aftermath, we have seen statements from the Pensions Regulator and the FCA, as well as inquiries by the Work and Pensions Committee and the Industry and Regulators Committee. It is possible that we will see changes to the legal and regulatory landscape as a result with the Regulator already promising a further update in its Annual Funding Statement in April 2023 and in further statements and investment guidance as necessary. Trustees and employers should ensure they keep up to date with developments in this area in 2023.
ESG, and climate change in particular, remains high on the agenda. The requirement for schemes to align their governance processes and disclosures with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations was extended to schemes with £1bn or more in assets from 1 October 2022. Many of these schemes will be producing their first TCFD reports in 2023. For schemes with £5bn or more in assets, 2023 should be a time for reflecting on what they have learnt from preparing their first TCFD reports, what can be done better next time (including if better quality data is available) and how to deal with the new Paris alignment metric. Looking ahead, the Government is expected to consider in 2023 whether the requirements should be extended to schemes with less than £1bn in assets.
We will also see the publication in September 2023 of the Task Force on Nature-related Financial Disclosures framework, creating a risk management and disclosure framework for organisations to use in reporting on nature-related risks. Pension schemes will not be required to comply with this and there is no current suggestion this will become mandatory but schemes should be aware of its publication.
The Pension Schemes Act 2021 set the scene for significant changes relating to employers’ reporting obligations, the intention being to alert the Pensions Regulator and trustees at an earlier stage to financial decisions which could impact on the pension scheme. In practice, the vast majority of employers already inform trustees about significant business transactions and discuss with them the impact (if any) on the scheme, but employers will need to adapt their approach to ensure compliance with the detail and timing of the new requirements. The Government consulted on draft regulations setting out the detail of these changes in 2021 and they were initially expected to come into force in April 2022. However, we are still awaiting a response to the consultation. Will we finally see the new notifiable events regime coming into force in 2023?
The Pensions Regulator consulted in 2021 on its work to combine the content of 10 of its current codes of practice into a single, shorter code consisting of 51 topic-based modules. It was initially expected that the new code would become effective in summer 2022, but this timetable has been delayed and we are now expecting the code to come into force in 2023. Two key changes included in the code relate to the requirement for trustees to establish and operate an effective system of governance (known as an ESOG) and for trustees of schemes with 100 or more members to carry out and document an “own-risk assessment” (ORA) of their ESOG. The draft code also includes several other new and amended expectations. Trustees will need to carry out a gap analysis to ensure all the requirements are being met.
2023 will be a big year for pensions dashboards, the online platforms which will allow users to view information from multiple pensions in one place. From August 2023, schemes will be required to connect to the dashboards ecosystem, with the first wave of schemes (those with 1,000 or more relevant members) being required to connect by dates between August 2023 and September 2024 (depending on scheme type and size), although the public is unlikely to have access to dashboards until the middle of 2024. Schemes should already be well on the way to becoming “dashboard ready”, including checking their connection deadline, taking steps to ensure the quality and completeness of their scheme data, and liaising with the scheme administrator to understand their plans and readiness to connect to pensions dashboards.
With inflation at a 40-year high, many trustees will be faced in the coming year with decisions about whether to increase pensions in payment by more than that required by the scheme rules. Most scheme rules include a discretionary power for trustees to award a greater increase, often subject to the consent of the employer. In deciding whether to grant a discretionary increase, trustees should consider all relevant factors, ignore irrelevant factors and reach a decision which is reasonable and not perverse. Relevant factors are likely to include the funding position of the scheme and whether additional contributions would be required, the strength of the employer covenant and the views of the sponsoring employer.
As scheme funding levels improve, it is expected that there will be an increase in de-risking activity in 2023. Schemes targeting buy-out in the near future are likely to undertake benefit specification exercises in readiness for future buy-out and other exercises such as cleaning up data. These exercises can reveal administration issues and data gaps and their early identification means that planned and cost-effective steps can be taken before approaching the buy-out market.
A new regime for pension scheme transfers came into force on 30 November 2021. Under the new regime, trustees must not comply with a transfer request unless one of the conditions set out in the legislation is met. A key feature of the new regime is the system of red and amber flags: in order to proceed with a transfer, trustees must decide that none of the red flags are present and, if the trustees decide that any of the amber flags are present, the member must take pension transfer scams guidance from the Money and Pensions Service. In practice, problems have arisen as a result of one of the red flags (which applies where the member has been offered an incentive to make the transfer) and one of the amber flags (which applies where there are overseas investments included in the receiving scheme). The Government committed to a review of the regulations within 18 months of them coming into force, so we hope to see these issues addressed in 2023.
The Pension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022 received Royal Assent in 2022. The Act amends the provisions of the Pension Schemes Act 1993 relating to GMP conversion by: clarifying that the legislation applies to survivors as well as earners; providing for a power to set out in regulations the conditions that must be met in relation to survivors' benefits; confirming that defined contribution (DC) benefits are not included in the actuarial calculation to convert GMP benefits into other benefits; providing for a power to set out in regulations detail about who must consent to the conversion; and removing the requirement to notify HMRC. We hope that regulations setting out the details will be published in 2023, paving the way for more schemes to finalise GMP conversion exercises.
The Government’s 2017 review of auto-enrolment promised changes to auto-enrolment in the mid-2020s. With the mid-2020s rapidly approaching, 2023 might be the year auto-enrolment reaches the top of the Government’s pensions to-do list. What changes might we expect to see? The key changes put forward by the Government in 2017 included reducing the lower age limit from 22 to 18 and removing the lower earnings limit (£6,240 in 2022/23) so that contributions are calculated from the first pound earned. The Government also promised to review minimum contribution levels, test targeted interventions to identify the most effective options to increase pension saving among self-employed people, and examine whether current legislation requires clarification around the eligibility of workers in atypical or non-standard forms of employment to be auto-enrolled.
A number of developments in the DC space are expected in 2023. These include the exclusion of specified performance-based fees from the charge cap, a new requirement to include an explanation of the scheme’s policy on investing in illiquid assets in their default statement of investment principles, and a new requirement to report on specified performance-based fees incurred by the scheme and on the different classes of assets in which they invest in the scheme’s annual chair's statement. The Government published a call for evidence earlier this year which sought to explore what support members of occupational pension schemes need to help them make informed decisions about how to use their savings. We may see new regulation on decumulation following this. Finally, we are expecting a joint Pensions Regulator and FCA consultation on a common framework for measuring value for money in DC schemes.