UK pensions news summary Q2 2024

Primarily aimed at defined benefit (DB) schemes with triennial valuation dates between 22 September 2023 and 21 September 2024, The Pension Regulator’s (TPR’s) latest annual funding statement encourages those with improved funding positions, likely the majority, to use this “step change in position… to reassess their long-term targets and consider run-on, consolidator or insurance options”. Although TPR notes that it “would be good practice for trustees to consider the steps they can take now to align with the [revised] Funding Code when it is published”, so as to avoid having to make significant changes at the next valuation, the timing of the general election (and dissolution of Parliament) means the Code’s finalisation, which was expected to apply to valuations from 22 September 2024 onwards, is now unlikely to be in place by that date. Indeed, the Pensions and Lifetime Savings Association (PLSA), in its May PolicyWatch, suggests that, “TPR should take the opportunity to consider the implementation timetable for the Code; ideally moving the start point for application to the end of the year or Spring 2025 to provide schemes and employers with more time to prepare.”At the other end of the spectrum is, of course, the sizeable minority of schemes still in deficit on a technical provisions basis, whose focus will continue to be on achieving a recovery plan that aligns with employer affordability. See: https://www.thepensionsregulator.gov.uk/en/document-library/statements/annual-funding-statement-2024

Trustees are now required to produce a Funding and Investment Strategy document, setting out how they plan to reach low dependency funding by the time the scheme is “sufficiently mature”. The first of these will be due 15 months after the effective date of a scheme’s first actuarial valuation on or after 22 September 2024, though this may change owing to the timing of the general election. See: https://www.legislation.gov.uk/ukdsi/2024/9780348256901/contents

The Department for Work and Pensions (DWP) has set out a staged timetable, for occupational pension schemes and personal and stakeholder pension providers (with at least 100 members at the scheme year end between 1 April 2023 and 31 March 2024) to be connected to the pensions dashboards ecosystem and be in a position to process member ‘Find’ and ‘View’ requests. Schemes meeting the staged timetable thresholds but which came into existence on or after 1 April 2024 should connect by the later of six months after the end of their first scheme year or in accordance with the staged timetable.

Starting in April 2025, with master trusts with 20K+ members and FCA-registered providers with 5K+ members connecting, and culminating on 30 September 2026 with relevant occupational schemes with between 100 and 124 members connecting, the final connection deadline is 31 October 2026. Occupational pension schemes with fewer than 100 members can voluntarily connect to the pensions dashboards ecosystem. See: https://www.gov.uk/government/publications/pensions-dashboards-guidance-on-connection-the-staged-timetable/pensions-dashboards-guidance-on-connection-the-staged-timetable and FAQs: guidance on connection: the staged timetable (mailchi.mp)

Although the Money and Pensions Service (MaPS) has been tasked with developing and operating the public, non-commercial, Pensions Dashboard Service (PDS), private sector entities can also offer a PDS, contingent on Financial Conduct Authority (FCA) authorisation. Following the recent closure of its, 101-page, consultation, on regulatory guidance for commercial pension dashboard operators, the FCA must now implement guidance to ensure “the consumer [is put] in control of the steps they take in and beyond their dashboard journey” and “reduce the risk of a consumer being biased towards a particular action by a [dashboard] firms’ design and operation”. See: https://www.fca.org.uk/publication/consultation/cp24-4.pdf

Separately, the Pensions Dashboards Programme (PDP), that part of MaPS which is responsible for delivering the central digital architecture that will enable pensions dashboards to function, will also, subject to DWP approval, soon finalise the pensions dashboards data formatting standards for all PDSs connecting to the dashboard ecosystem. See: Connection deadline | Pensions Dashboards Programme

Finally, the, operationally independent, National Audit Office (NAO) has attributed the PDP’s delays to dashboard implementation to “a lack of digital skills and ineffective programme governance”. Additionally, the NAO noted that the costs of the PDP, principally funded through two industry levies, had increased from £235m in 2020 to £289m in 2023. See: https://www.nao.org.uk/reports/investigation-into-the-pensions-dashboards-programme/

Considerable industry debate continued to surround the DWP’s proposal for the Pension Protection Fund (PPF) to act as a public sector consolidator of DB schemes and how this could be designed and operated, not least following the PPF’s consolidation consultation response. While most respondents reiterated the need for a level playing field for end game solutions – one that doesn’t distort competition or compromise the position of commercial consolidators (superfunds) or the buyout market – which the PPF acknowledges, some supported the proposal as a means by which those, commercially unattractive, smaller, less-well funded schemes lacking strong employer support, could access the consolidation market. This, in turn, could greatly improve governance, access to more beneficial investment strategies and ultimately enhance member security and outcomes. That said, the suggestion of the PPF adopting standard benefit structures for an unsectionalised fund, could mean members of some schemes might receive less than they would outside of the PPF consolidator. Additionally, with competition and moral hazard issues front of mind, others have suggested a maximum scheme asset size limit being set. Meanwhile, the PPF, in its consolidation response, remains firmly of the view that a new public sector consolidator could help “up to 2,300 schemes, serving 960k members, and with total assets of £130bn… maintain a strong UK gilt market and increase investment in assets which support UK businesses and the economy”. See: pdf and PPF-run consolidator needed to bolster DB endgame options; New fund could unlock c.£10 billion in UK investment | Pension Protection Fund

The triple-locked new state pension for 2024/25 increased by 8.5%, in line with the increase of average weekly earnings, for men born on or after 6 April 1951 and women born on or after 6 April 1953. With a qualifying 35 years of national insurance contributions, the full amount is worth £221.20 a week or £11,502.40 a year. For those older pensioners eligible for the triple-locked basic state pension, this increased by the same percentage with the full amount rising to £169.50 a week or £8,814 a year. For some, this is supplemented by the additional state pension [previously known as either State Earnings Related Pension Scheme (SERPS) or state second pension (S2P)], which increased by 6.7%, in line with the Consumer Price Index (CPI). See: Benefit and pension rates 2024 to 2025 – GOV.UK (www.gov.uk)

Encompassing over 10,000 organisations across the public sector and with a collective liability of over £2.6tn in 2021/22, net public sector pension liabilities are estimated by the Treasury to have declined by a whopping £1tn in 2022/23 and £200bn in 2023/24. The reason? A series of higher discount rates, broadly commensurate with higher bond yields, being applied to these vast liabilities. That said, for 2023/24, the Office for Budgetary Responsibility (OBR) expects unfunded public sector pensions spending to total £7.9bn.  

The four largest public sector unfunded pension schemes, comprising the National Health Service (NHS) Pension Scheme (£1.005tn), the Teachers’ Pension Scheme (England & Wales) (£608bn), the Cabinet Office Civil Superannuation (£377.1bn), and the Armed Forces Pension Scheme (£279.1bn), account for 86% of public sector pension liabilities, with only the NHS scheme being cashflow positive. See: Public sector pensions liabilities could reduce by £1.2tn – mallowstreet – A Better Retirement for Everyone

According to consultants, Isio, Local Government Pension Scheme (LGPS) assets now exceed £400bn with an aggregate funding level at 31 March of 106%, albeit ranging from 68% to 159% between the 87 funds. The aggregate funding level of the UK’s largest DB scheme is 39% higher than that recorded at the last LGPS valuation in March 2022. See: https://www.isio.com/lgps-ew-low-risk-funding-index/

The Continuous Mortality Investigation (CMI) noted the “significant improvement” in mortality rates at end-Q124 for older people but “significantly higher” mortality rates for those of working age, collectively resulting in a mortality rate 2.9% lower than at the same point in 2023. On the back of this and other CMI research, consultants Hymans Robertson suggested that updating longevity assumptions at forthcoming triennial DB valuations could reduce scheme liabilities by 3%. See: Mortality monitor | Institute and Faculty of Actuaries and https://www.hymans.co.uk/media/uploads/240326_DB_Valuations.pdf

The recently released Financial Conduct Authority (FCA) Retirement Income Market Data, which principally analysed the period April 2022 to March 2023, pointed to a number of themes and trends around how savers are accessing their DC pots. Firstly, between 250K and 370K pots have been accessed for the first time each quarter since Q215, with more than £200bn having been accessed for the first time since Q218. Secondly, after an initial “dash for cash” in 2015/16, the data has since followed a now familiar pattern. The number of partial and full encashments, mainly of smaller DC pots, have regularly far exceeded the number of drawdown contracts purchased which, in turn, have far exceeded the number of annuities purchased. However, in cash terms, the amount invested in drawdown trumps all else, typically representing more than double the amount invested in annuities. Additionally, around 85% of annuity purchases have typically been for a level, rather than an escalating or index-linked, income.

Another visible trend has been the number of those, aged 50+, tapping into, free-to-access, Pension Wise guidance and/or seeking regulated advice before making a decumulation decision. For drawdown purchase, whereas before freedom and choice about 90% of purchases were made with advice, since 2015 only around 60% have sought regulated advice, with just under 10% taking advantage of a Pension Wise call. For annuity purchase, the percentages for both seeking advice and engaging with Pension Wise have regularly been around 30% and for full encashments and UFPLS around 25% and 10%, respectively. 

A number of other points stand out from the data:

In Q123:

• 52% of new drawdown contracts were for amounts of £50K+ (21%, 18% and 13% of drawdown purchases were for amounts of £50K-£100K, £100K-£250K and £250K+, respectively), with 70% of drawdown contacts being invested for those aged 55 to 64. 44% of this latter group made an initial drawdown of 8%+ of capital – a rate of withdrawal unlikely to be sustained for too long;
• 33% of new annuity contracts were taken out by those aged 55 to 64, while 47% of annuities were bought from the existing pension provider;
• 69% of encashments were made by those aged 55 to 64, with 10% of encashments – c.21K withdrawals – being for amounts of £50K+. Of these, over 1,500 were for amounts of £100K to £250K and 221 for £250K+. Prima facie, excepting those encashments taken as tax-free cash, a lot of income tax would have, probably unwittingly, been paid on these withdrawals by the latter two cohorts;

In addition, between April 2022 and March 2023, 8%+ withdrawals from drawdown were highly prevalent for pot sizes up to £100K, prevalent for pots sizes of £100K to £250K but less so for pots of £250K+, for which advice was typically sought. This suggests that many, far from planning a sustainable lifetime income stream, were instead adopting a myopic approach to satisfying their living standards, without giving too much thought to the long term. See: Retirement income market data 2022/23 | FCA.

Separately, The Association of British Insurers (ABI) announced a strong uptick in annuity sales during 2023, with the number and amount invested increasing significantly on 2022. Although the 72,200 contracts purchased at an average size of c.£72K, during what was a much higher yield environment than had prevailed previously, represents the highest number of annuities purchased since 2016, it is still only 15% of the 466K peak achieved in 2009 and less than 40% of the number purchased in 2014, albeit with a slightly higher total value than that invested in annuities in 2014. See: 2023 sets new post-pension freedoms record for annuity sales | ABI.

A TPT Retirement Solutions survey of 2,500 DC members, found that only 35% were confident in making retirement decisions, while 68% wanted to target a steady income from a default drawdown solution. See: https://www.tpt.org.uk/news-insights/only-a-third-of-pension-savers-are-confident-enough-to-make-retirement-decisions

In their latest paper, consultants LCP pointed out that the success of auto enrolment has culminated in “over two million new pension pots being left behind every year”. Additionally, “more than 16m deferred small pots worth under £2,500 [are] currently in the system.” Railing against the proposed “pot for life” and automatic micro pots consolidator models proposed in last year’s Autumn Statement (the DWP’s response to the comments received on its call for evidence on the Lifetime Provider Model has been delayed by the general election), LCP instead suggest a, more cost-effective, “magnetic pensions”, or pot-follows-member, model. So, as the saver moves between employers, their cumulative pot is added to their latest workplace pension until the saver “accrues a single decent pension pot”, at which point this automatic transfer process stops. Savers would be free to opt out at any stage. LCP adds that the proposal would be facilitated by the forthcoming pensions dashboards’ ecosystem. See: ‘Magnetic Pensions’ – a better solution to small pension pots – LCP | Lane Clark & Peacock LLP

The latest annual edition of LCP’s Master Trusts Unpacked Default Investment Strategies, surveying the largest 19 master trusts, once again revealed the lack of herding in asset allocation both at the growth and “at retirement” stage and the timeframe adopted for the derisking glidepath. See: https://www.lcp.com/pensions-benefits/publications/master-trusts-unpacked-2024-default-investment-strategies

The Defined Contribution Investment Forum (DCIF) took a temperature check on the direction of travel of private markets investment in the DC world. Investing in private markets: the barriers are coming down surveyed 11 master trusts and 10 single employer DC trusts and found that many master trusts have already made an allocation to private markets, or plan to imminently, principally on the basis of improving risk-adjusted returns and diversification. Although venture capital and private equity top the list for most master trusts, with LTAFs gaining traction, nothing in the private market universe appears to be off limits, though high prices and the lack of products are noted as the most significant barriers to access. By contrast, single DC trusts are deterred from investing in private markets by their perceived complexity, with lack of scale, high cost, liquidity constraints and lack of internal resources also cited as barriers. Simpler solutions are key. See: Investing-in-private-markets-part-one-FINAL.pdf (dcif.co.uk)

Covering 30 Task Force on Climate-related Financial Disclosures (TCFD) reports for scheme years ending between 1 October 2022 and 30 September 2023, The Pensions Regulator (TPR) published its latest review of TCFD reports. Effectively acting as an aide memoir to those schemes subject to TCFD reporting, a number of helpful points should be noted. Summarising key scheme information at the start of the report in readily accessible language – including specific scheme policies, the focus of risk management and notable developments – is crucial, as is providing context throughout the report. Equally, as brevity trumps verbosity, schemes should think about how best to engage the more technical reader as well as the less well informed but interested reader at appropriate points in the report. Schemes should also consider using elements of previous years’ reports for consistency and efficiency with outstanding actions, an associated action plan noted and followed up with a progress update in future reports. See: Review of climate-related disclosures by occupational pension schemes: Year 2 | The Pensions Regulator

In encouraging trustees to create an equality, diversity and inclusion (EDI) strategy or action plan for their scheme, TPR set out three top tips: engage with TPR’s EDI guidance, think about diversity more widely than just through more visible characteristics in recognising the “value everyone plays in driving this agenda” and look to the wider pensions industry, including that of the scheme sponsor, to take advantage of good practice. See: Equality, diversity and inclusion: how transparency can help to build trust | The Pensions Regulator Blog

As a counter balance, the Financial Times reported on research conducted by investment bank Morgan Stanley on the relative long and short-term share price performance of those firms with strong gender equality credentials – gender being but one of the many dimensions of EDI. Drawing on their proprietary Holistic Equal and Representation Score (HERS) model and noting that the corporate world is becoming more equitable in gender balance terms, Morgan Stanley found that gender diverse companies significantly and universally underperformed in 2023, given “growing negative sentiment” around EDI policies, though outperformed, albeit to a lesser degree on an annualised basis, over the period 2011 to 2023. See: 2023 was a bad year for women (ft.com)

The Transition Plan Taskforce (TPT) unveiled the final edition of its disclosure framework, updating that published in October, alongside a suite of other resources, decarbonisation levers, metrics and targets and “key” sources of guidance to help pension schemes manage their transition to net-zero. See: Build your transition plan | The Transition Plan Taskforce (transitiontaskforce.net)

Following on from February’s Financial Markets Law Committee (FMLC) report on supporting pension scheme trustees’ decision making in relation to climate change, LCP’s latest annual survey of scheme trustees found that 25% of those surveyed believe fiduciary duty should be reinterpreted to enable them to better consider systemic risks, such as climate. LCP suggests a widening of what constitutes fiduciary duty to not only consider the real-world impact of investment decisions but also the best financial interests of scheme members over the remainder of their lifetime. The survey also found an increased number of schemes, big and small, instituting a net zero target. See: A quarter of trustees think fiduciary duty shift will help tackle climate risks – LCP | Lane Clark & Peacock LLP

Through a Freedom of Information (FoI) request, The Pensions Management Institute (PMI) revealed that more than £2.6bn had been collectively scammed from over 95,000 UK investors between January 2020 and December 2023. Pension liberation fraud alone accounted for £19m with 1,451 victims.

Both the Conservatives and Labour have pensions policy firmly in their sights. Both, in seeking to raise the UK’s trend economic growth rate, want to see pension schemes move into those UK assets that will support this goal. However, given the complexity and increased governance that typically surrounds such asset classes, scheme and small pots consolidation will likely be key. Scheme consolidation will likely be driven, in part, by the demands of a more challenging value-for-money framework. Indeed, Labour’s manifesto specifically mentions giving TPR “new powers to intervene where schemes fail to offer sufficient value for their members” and committing to undertake a full review of the pensions landscape so as to improve pension outcomes and retirement security. In addition, citing climate change as “the greatest long-term challenge of our age”, Labour (and the Lib Dems) will require pension schemes to implement credible transition plans to align with the 1.5⁰C requirement of the 2015 Paris Agreement. 

Regardless of who takes the keys to number 10, the state pension triple lock will remain cast in stone, with the Conservatives pledging to protect the new state pension from income tax, though further down the line the continuation of higher rate pensions tax relief and quite possibly the abolition of the Lifetime Allowance (LTA) may well be on shaky ground. As regards the latter, see: Should the pensions lifetime allowance be reintroduced and, if so, how? | Institute for Fiscal Studies