UK Pensions - Mansion House reforms: Implications for pension schemes

The Chancellor of the Exchequer, Jeremy Hunt, has delivered his Mansion House speech, setting out a package of reforms known as the “Mansion House reforms”. The overall aim of the reforms is to support growth across the economy by unlocking capital for high-growth companies and increasing returns for savers. Reforms to the UK pensions market feature prominently and have the potential to impact significantly on trustees and sponsoring employers. However, many are not entirely new ideas, with the publication of several responses to earlier consultations marking an evolution rather than a revolution in pensions policy. It is also notable that many of the proposals will require legislation to implement and will therefore take some time to come to fruition.

Key points to note include the following:

  • DB superfunds: The Government has published the long-awaited response to its 2018 consultation on a legislative framework for the regulation of defined benefit (DB) “superfund” consolidation schemes. Since the publication of the original consultation, the Pensions Regulator has established an interim process for assessing DB superfunds but, to date, only one DB superfund (Clara-Pensions) has been assessed by the Regulator as meeting its expectations. The Government wants to see this market develop further so that sponsoring employers and trustees have an alternative to buy-out as a way of managing DB liabilities, and so that superfunds can use their scale to invest in assets that support the UK economy. Primary legislation will be required to put in place the new framework, which is described in detail in the consultation response. This means that it is likely to be some time before the legislation is in place to kickstart the DB superfund market.
  • Options for DB schemes: The Government has published a new call for evidence to support the development of innovative policy options, which it says have the potential to offer more choices for DB scheme sponsoring employers and trustees, increase protection for DB members and support wider economic initiatives. In particular, the Government is looking at the current rules around surplus refunds (a hot topic in the industry at the moment); potential consolidation options (including the possibility of a public sector consolidator, potentially run by the Pension Protection Fund); and the role of DB schemes in “productive finance” (i.e. investment that provides equity capital and finance for businesses in the UK, including start-ups, infrastructure and private equity, as well as longer-term investments, typically in illiquid assets). The responses to the call for evidence will be used to develop future policy in this area. Importantly, the call for evidence emphasises that it will continue to be for schemes themselves to make decisions on asset allocation.
  • Value for money: The Government has published a response to its consultation on a new value for money (VFM) assessment framework for defined contribution (DC) schemes. One of the aims of this framework is to shift the focus from costs to value by requiring consideration of factors critical to longer term saver outcomes, including investment performance. The VFM framework also seeks to accelerate consolidation in the DC market by giving the Regulator powers to enforce wind up and consolidation where schemes are not delivering VFM. The new framework will require primary legislation and the Government says it will be implemented in phases. Trustees should be aware of this new regulatory burden coming down the road, as well as the step change in the Regulator’s enforcement powers.
  • Small pots: The Government has published a response to its call for evidence on addressing the challenge of small pots, together with a consultation on its proposed automated consolidation solution. The Government is proposing to introduce a multiple default consolidator model. Under this model, deferred small pots which meet the eligibility criteria for automatic consolidation will transfer automatically to one of a number of consolidators, with members being given an opportunity to opt-out as well as the option to choose their consolidator. The Government is also proposing an enhanced authorisation regime for schemes to act as a default consolidator. The proposals open the door to greater consolidation and a solution to the problem of small pots, but they will also require schemes to put in place new processes and systems. 
  • DC decumulation: The Government has published a response to the products and services element of its call for evidence on helping savers understand their pension choices, together with a consultation on a decumulation framework to support individuals at the point when they access their pension savings. It is proposed that trustees of DC schemes will have a new duty to offer decumulation services which are suitable for their members, with members having the option to either choose this default service offered by the scheme or access the products and services available under pension freedoms. Trustees would either need to offer these services in-house, or partner with another supplier who could provide these services. As with the proposals on VFM and small pots, these proposals have the potential to impose a significant new burden on trustees.
  • CDC schemes: The Government has published a response to its consultation on extending collective defined contribution (CDC) provision beyond single or connected employer schemes to accommodate unconnected multi-employer schemes and has confirmed it intends to consult on draft regulations to extend CDC provision in this way in the autumn. The Government also says it is committed to creating provision for CDC decumulation products and will continue to work with the industry on this. The Government wants to encourage the establishment of new CDC schemes, which it believes can invest more effectively by pooling assets, but it remains to be seen whether these developments will encourage more employers to explore this option.
  • Trustee skills, capability and culture: The Government has published a new call for evidence to support the development of policy options for improving the skills and capability of pension scheme trustees and removing barriers to trustees’ ability to make effective investment decisions. The Government says it is particularly interested in whether trustees have the right knowledge and skills to consider investment in the full breadth of investment opportunities. This call for evidence applies to DB, DC and CDC scheme trustees.

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