This is the time of year when commentators in the sector make predictions about what will impact everyone in the world of pensions in 2024. Our predications all stem from actions that occurred in 2023; some or more may actually come to pass! All we can be certain of, in what seems certain to be an election year, is that it’s going to be another busy year on the pensions front.
Lifetime Allowance – going, going, nearly gone?
In the Spring Budget of 6 April 2023, the government announced that the LTA would be abolished immediately. Its actual removal has been more drawn out and culminates in a two-step process during 2024.
The Finance (No 2) Act 2023 amended existing legislation, so that no LTA charge arose on or after 6 April 2023. But the LTA has not been abolished yet and will continue to exist until amending legislation, removing it, is passed on 6 April 2024.
Even though the amending legislation is less than 2 months old, there have been industry calls to delay the LTA’s removal because extracting it from the existing legislation is a fiendishly complex job, impacting on policy, practice and legislation alike.
Whilst the Finance Bill 2023-24 does contain detailed provisions, it could be that the government decides that removing the LTA entirely is too big and too complicated a job to get right in the remaining 3 months of the tax year, even more so as this year’s budget is early in March so the process may be delayed.
The Labour Party has indicated that it will reinstate the LTA if elected; the risk of that coming to fruition would surely be higher if the existing legislation hasn’t been completely removed as a result of any delay.
Mansion House Reforms: a move toward consolidation of funds and diversification of investments
The “Mansion House Reforms” were a package of reforms announced by the Government on 10 July 2023. These are aimed at improving the functioning of capital markets in the UK. The reforms, which are a response to previous consultations and calls for evidence, cover three main areas: pensions, company listings and regulation. In regards to pension, the Government’s strategy is to boost returns and improve outcomes for pension fund holders, and increase fund liquidity for high-growth companies, which will help to attract companies to start and grow in the UK. This is achieved predominantly through encouraging the consolidation of funds and the pooling of assets to create bigger and better run pension schemes. The key features of the reforms are set out below:
Value For Money (‘VFM’) framework for Defined Contribution (‘DC’) schemes
The implementation of this framework is intended to result in a standardised and transparent assessment of VFM, which will shift the focus from costs to long-term value and saver outcomes. As part of this, DC schemes will need to disclose VFM data across investment performance, costs and charges and quality of services. These schemes will then need to assess and compare their VFM to produce a rating, which is published. Based on this rating, The Pensions Regulator will have the power to force wind-up and consolidation of underperforming schemes into larger better performing schemes, thus achieving better VFM.
Investing DC assets in unlisted equities
The Government has formed the Mansion House Compact. This is a group of representatives of the UK’s largest pension schemes who have committed to the objective of allocating at least 5% of their default funds to unlisted equities by 2030. This would be an increase from the current <1% of assets in unlisted equities and could lead to £50 billion of extra investment in high growth companies.
Whether the proposed reforms survive the outcome of any election remains to be seen. Both main parties see pensions reform and pensions investments as part of wider growth agendas. That being the case, whichever party comes into power, we are almost certainly going to see some of the changes proposed being developed into full policies and legislation, all of which is focused on a more active use of pensions investments, whether for infrastructure or innovation, and incubation of new businesses.
Virgin Media v NTL Trustees – goes to Appeal
This is a matter that may have an impact for a lot of schemes. The first instance decision in 2023 – which held that rule amendments, where a section 37 confirmation was not obtained from the scheme actuary, are void – left many schemes and trustees wondering as to the consequences for their formerly contracted out schemes.
The appeal hearing will take place before the Court of Appeal on 25 - 26 June 2024 and it is unclear if this matter will be successful or not. It appears this Appeal is separate to a further hearing, to hear arguments on what other documentation might evidence the confirmation was given. It’s unclear when this hearing might happen and whether it might answer any of the outstanding points from the original hearing, such as how the positon may differ between occasions where a confirmation was given but has subsequently been lost, as opposed to one where no confirmation was ever given.
DC decumulation-only schemes
The Government has proposed that trustees of DC schemes will have a duty to offer decumulation services that are suitable to their members. These services may be provided either in-house or by a partner supplierDC decumulation schemes deliver a benefit only (i.e. the pot is drawn on but never contributed to) and provide an alternative means to access a sustained income. The intention behind this is to remove inequalities in options available to members of different schemes.
Consolidation of small DC pension pots
To overcome the issue of numerous small pension pots associated with previous stints of employment, the Government is proposing to introduce a multiple default consolidator model via a new statutory framework. This will result in automatic consolidation of small pension pots that meet certain eligibility criteria (i.e. below a threshold amount). These pots will consolidate into a number of consolidators. Members will have the choice to opt-out or to select their consolidator. The Government acknowledges that tackling the issue of the ongoing creation of new deferred small pots requires a more fundamental change to the auto-enrolment framework.
Regulatory regime surrounding defined benefit (‘DB’) superfunds
The Government will introduce a statutory regime for the compulsory authorisation and supervision by The Pensions Regulator of DB superfunds and other consolidation models. An interim process has been employed by The Pension Regulator, but to date only one DB superfund has been assessed as meeting its expectations. Superfunds provide a mechanism through which a sponsoring employer can end its liability for the DB pension scheme and represents an alternative to buy-out as a way of managing DB liabilities. This involves the transfer of a scheme’s assets and liabilities into a consolidator vehicle where the employer’s liability is replaced with a capital buffer. The capital buffer is provided by either investor capital or employer contributions. The Government hopes that through increased scheme funding, the capital buffer, economies of scale and better governance, the security of members’ benefits is enhanced and the fund’s scale can be utilised to access more diverse investment opportunities, which will bolster the UK economy.
More legal changes?
A raft of further legislative and regulatory change is expected in 2024, which may finally see several long-awaited pieces of legislation come into force. These would include:
Auto enrolment to be extended
The Pensions (Extension of Automatic Enrolment) Act 2023 amended auto enrolment legalisation, to allow the Secretary of State to make regulations to: reduce the lower age limit at which eligible workers must be automatically enrolled and re-enrolled into a pension scheme by their employers (the aim being to reduce the lower age limit from 22 to 18); and, remove the lower earnings limit from the qualifying earnings band, so that contributions are calculated from the first pound earned. If enacted, these amends would widen the numbers of workers who could be enrolled by a significant amount. The Government is aiming to consult on draft regulations early this year. Given the cross party support of this extension, we don’t expect an election to derail final implementation. Employers need to be aware of any potential changes to the regime arising from the new legislation.
The initial timetable for pensions dashboards, of August 2023, has long gone and has now been replaced with a with a single connection deadline of 31 October 2026. There is an expectation (notwithstanding the publishing of guidance on non-statutory connections) that some schemes will be asked to start connecting from autumn 2024. It is unlikely any election will impact on this initiative and schemes should continue to work to be as ready for connection as soon as possible. There may be further guidance on this matter later in the year.
Notifiable Events Regime
A piece of legislation with almost mythical standing which hasn’t progressed for over 3 years! It could see significant changes relating to employers’ reporting obligations, including obligations to alert the Pensions Regulator and trustees at an earlier stage to financial decisions which could impact on a pension scheme. Since the Government last consulted on draft regulations, in 2021, there has been no response to this this major piece of legislation. We are still awaiting a response to the consultation. Could 2024 be the year it finally comes into force? Probably our riskiest predication, but if it does occur it could have a major impact for all employers.
The current pension scheme transfers legislation came into force in 2021. Under the regulations, trustees must refuse a transfer request unless one of the conditions set out in the legislation is met. The system of red and amber flags used, to determine whether to proceed with a transfer, has in practice been causing issues for all parties.
Scheme Trustees must be satisfied that no red flags are present and, if the trustees decide that any amber flags are present, the member must take pension transfer scams guidance from the Money and Pensions Service. Last year the Government published a review which recognised that issues around overseas investment and the use of incentives, in particular, were driving a lot of problems and confirmed the system would be reformed to make it more practical and workable, albeit there is no timescale attached to this and it may or may not come to be finalised in 2024.
The Pension Ombudsman
Last year the Court of Appeal decided that The Pensions Ombudsman (TPO) was not a competent court for the purposes of enforcing a TPO determination, in relation to the recovery of overpaid pension under section 91(6) of the Pensions Act 1995; in practice that means that a county court order for enforcement is currently required.
TPO has published a factsheet explaining the effect of the Court of Appeal judgment and how TPO will assist pension trustees who need to apply to the county court for an enforcement order. This would involve the production of a certified copy of the TPO determination, setting out a repayment schedule for the overpaid pension.
The Department for Work and Pensions (DWP) has already indicated it intends to bring forward legislation fairly quickly, giving the Ombudsman the powers directly to make its determinations in this area enforceable. We expect this to arrive in early 2024.
The Pensions Regulator and Scheme Funding
The DB Funding Code and Funding Regulations
The Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations are due to come into force by April 2024, with application to schemes with valuations in November 2024. However, the November start date will be contingent on the Regulator’s revised DB funding code of practice also coming into force before November. This is a very tight timescale in an election year, when a number of changes to the last version of the guidance are expected.
One of the key points to look out for is how the low dependency investment allocation for “significantly mature” schemes, as set out in previous versions of the legislation and guidance, will sit with the Mansion house plans for pension schemes to have the flexibility to invest in growth assets.
The Pensions Regulators General Code of Practice
Also expected to be in force for April 2024, the General Code of Practice is the Regulator’s new, overarching pension governance code, which will consolidate and replace the numerous current codes into one document. Previous consultation versions were criticised for being more onerous in terms of the obligations placed on Trustees, than the underlying regulations which enabled the code.
Relaxation on surplus refunds
In the Autumn Statement, the Chancellor announced that the tax charge on repayment of scheme surplus to employers will be reduced from 35 per cent to 25 per cent from April 6, 2024. Linked to the promotion of more return seeking investment and hoping counter trapped surplus concerns, we should expect a consultation on the exact form of, and process for, surplus repayment during the course of 2024.
If you would like to discuss any of these topics in more detail, please contact our Pensions team.