Trustee skills, capability and culture

In its response to a ‘call for evidence’ on whether trustees work effectively and are supported to make decisions in the best interests of savers, the Government concluded in their Autumn Statement that trustees and others would benefit from more support, guidance and training.

The Government wishes to ensure that better outcomes for pension savers is at the forefront of decision-making, including a holistic consideration of value. It believes an over focus on cost and minimising risks is a key barrier to achieving this. Once implemented, the value for money framework will help to shift this focus. In the meantime, measures will be taken forward in the following areas:

• supporting TPR to put in place a trustee register;
• accreditation of professional trustees;
• updates to TPR’s investment guidance and trustee understanding of alternative investments; and
• engaging with employers on selecting a pension scheme.

Guidance on private market investments

On 24 January 2024, TPR published new guidance aimed at trustees who are considering investing in private markets. This initiative is part of the broader Mansion House reforms announced by the Chancellor in 2023, which seek to invigorate the UK's financial services sector by unlocking capital for promising industries and enhancing returns for savers, thereby fostering growth across the economy.

The guidance underscores the potential benefits of private market investments as part of a diversified portfolio, emphasising their role in delivering improved outcomes and value for money for scheme members. TPR highlights that, with appropriate advice and effective governance, private market assets can significantly contribute to the protection and enhancement of saver benefits.

Action: TPR's guidance is a call to action for trustees to ensure they possess the necessary knowledge and understanding to work with their advisers effectively. This is to fully consider how accessing private market assets may meet their scheme's needs, thereby acting in the best interests of savers. This includes, but is not limited to, fee implications and ensuring appropriate governance processes are in place should there be problems with liquidity. TPR has also used this guidance as a prompt for trustees that do not have the capability to consider this matter, to think about consolidation into arrangements that do have the governance processes to invest (or at least consider investing) in private markets.

General code of practice

On 10 January 2024, TPR published its general code of practice (“General Code”), consolidating and updating 10 existing codes of practice on its expectations of trustees on scheme governance and administration.

The General Code looks different, set out in short, focused modules. TPR believes the new format will make it easier for trustees to find and consider whether, and how, they are meeting its expectations.

Action: Trustees must establish and operate an effective system of governance including internal controls. The system of governance must be proportionate to the size, nature and complexity of the activities of the scheme. The General Code sets out in detail what TPR expects, bringing together many key aspects of running a scheme. TPR will expect trustees to be able to demonstrate that they have appropriate procedures and policies in place. The own risk assessment, required for schemes with 100 or more members, is a periodic review of the effectiveness of the system of governance and will help the trustees focus on key areas in need of improvement.

Report on trustees’ fiduciary duties, sustainability and climate change

On 6 February 2024, the Financial Markets Law Committee released a comprehensive report addressing the intersection of trustees' fiduciary duties with sustainability and climate change considerations. This document is pivotal for trustees navigating the complex landscape of integrating ESG factors into their investment decision-making processes. 

The report aims to clarify the legal obligations and strategic approaches trustees can adopt to align their duties with the growing emphasis on sustainability and the urgent need to address climate change within their investment portfolios. This guidance is particularly timely, given the increasing regulatory and societal pressures on pension schemes to contribute to a sustainable future.

Spring Budget 2024

On 6 March 2024, the Chancellor delivered his Spring Budget, including the following pensions-related announcements:

• Some basic further details - prior to consultation expected in the spring - on how the Government intends to progress a common Value for Money (VFM) framework for DC schemes of all types.
• The Government remains committed to exploring a lifetime provider model and will undertake continued analysis and engagement to ensure this would improve outcomes for pension savers.
• Providers of ESG ratings to UK users will be regulated by the Financial Conduct Authority (FCA).

Whilst not directly pensions related, changes from 6 April 2024 to employee National Insurance contributions and to the income band over which child benefit is tapered may be of interest to savers using pension salary exchange.

Absent from the announcements was any timeline on automatic enrolment extension, i.e. reducing the lower age limit from 22 to 18 and removing the lower threshold for ‘qualifying earnings’. Consultation on implementing these measures is still awaited.

Removal of the Lifetime Allowance - Autumn Statement update

Following the April 2023 interim measure of setting the Lifetime Allowance (LTA) tax charge to nil, legislation will remove the LTA from 6 April 2024. 

Tax-free lump sums in life will be tested against a new allowance, the Lump Sum Allowance (LSA), frozen at £268,275 (25% of the outgoing LTA). Lump sums in excess of the LSA will be taxed at an individual’s marginal rate of income tax. Some lump sums will not use up the LSA - for example trivial commutation lump sums, small lump sums and winding-up lump sums - but there must be LSA capacity. 

The total of tax-free lump sums in life and on death before age 75 will be tested against a further new allowance, the Lump Sum and Death Benefit Allowance (LSDBA), frozen at £1,073,100 (the outgoing LTA). Lump sums in excess of the LSDBA will be taxed at the recipient’s marginal rate of income tax. Some lump sums will not use up the LSDBA, for example those listed above for the LSA, and also death benefits arising from pension savings taken before 6 April 2024.

Individuals with lump sum protections and LTA protections will retain their rights to higher entitlements. The deadline for applying for fixed protection 2016 and individual protection 2016 will be 6 April 2025.

A further new allowance will be introduced for transfers to Qualifying Recognised Overseas Pension Schemes, also set at £1,073,100 (the outgoing LTA) with the introduction of an Overseas Transfer Charge on any excess.

To account for benefits taken before 6 April 2024, transitional arrangements will reduce the LSA and LSDBA. Individuals can apply for a transitional tax-free amount certificate if they took a lower tax-free lump sum than that suggested by the standard transitional calculations. Where an individual has previously used up all of their LTA, they will also have exhausted the new allowances.

Action: Employers may wish to review any special arrangements for Directors and those with LTA protections, e.g. cash in lieu of pension contributions and ‘excepted’ group life assurance arrangements. Trustees should review their scheme rules and liaise with their administrators, and both employers and trustees should undertake a review of communications.

Ending the proliferation of deferred small pots - Autumn Statement update

The Government has concluded that a multiple default consolidator approach, underpinned and support by a ‘clearing house’ system, is most appropriate and plans to legislate for this when Parliamentary time allows. The Government will establish and work with an industry delivery group to ensure its successful implementation.

Individuals will be consolidated into a scheme where they already have a pot. If they have multiple pots with different consolidators, they will be allocated to the scheme which holds their largest pot. In cases where an individual does not have a pot with a consolidator, they will be allocated to one on a carousel approach (this will divide pots at an equal proportion, between consolidators).

The Government will develop an authorisation and supervisory regime for trust-based schemes to act as consolidators and investigate options for a similar framework for contract-based schemes, working with the FCA.

The Government intends to take forward the following criteria for automatic consolidation:

• pots that were created since the introduction of automatic enrolment;
• pots within automatic enrolment charge-capped default funds, excluding those with guarantees;
• pots must have had no contributions made for a period of at least 12 months; and
• pots must be valued at £1,000 or less.

On 7 February 2024, the Department for Work and Pensions (DWP) launched the Small Pots Delivery Group, which will provide recommendations on how best to implement the proposed multiple default consolidator approach. The Group is chaired by the DWP and has representation from regulators and industry organisations.

Regulatory approach to master trusts - Autumn Statement update

The Government published a review of the master trusts authorisation and supervisory regime, exploring areas where this may need to evolve to equip it for the future.

Master trusts are set to play a leading role in the reforms, for example:

• The projected scale of master trusts means they will be able to access a broader range of investment opportunities, including those that contribute to UK growth.
• Master trusts are likely to be among the default consolidators of deferred small pots.
• Master trusts will likely be the pension provision of choice for consolidating occupational schemes.
• Master trusts will need to offer decumulation services and develop default decumulation solutions.
• The Government expects that master trusts will play a role in establishing a market for collective defined contribution (CDC) schemes.

The Government and regulators have an aligned focus on ensuring the pensions market works in the best interests of savers, e.g. striving for market competition to protect members and championing good practice and encouraging innovation to drive better member outcomes. They envisage a more interventionist, influential, involved approach from TPR in relation to master trusts in order to see these objectives achieved.

Closing the advice gap

On 8 December 2023, the Government and the FCA launched a consultation on proposals to close the regulatory boundary between financial advice and other forms of guidance and support, known as the ‘advice gap’. This is part of the advice guidance boundary review, aiming to ensure individuals can get the help they need, at an affordable cost, when they need it, while recognising the complexity that financial decisions can bring.

The proposals include:

• further clarifying the advice guidance boundary, so that FCA-authorised firms have greater certainty on what support can be provided to consumers without constituting regulated advice;
• a new ‘targeted support’ regulatory framework that would allow FCA-authorised firms to suggest products or actions based on a target group the consumer has been identified as belonging to from limited personal information; and
• a new form of simplified advice suitable for the mass market, enabling FCA-authorised firms to provide more affordable support to consumers with simpler needs and with smaller sums to invest.

The consultation also seeks to clarify how trustees feel constrained in the support they can provide to members, including around decumulation, without crossing into regulated advice.

Value for money framework

TPR and the FCA released statements (TPR statement and FCA statement) on the proposed VFM framework. The regulators and the DWP share an objective to develop a holistic framework that can be applied consistently across the UK DC pensions market.

The FCA plans to consult on draft rules for contract-based schemes in spring 2024 and will share feedback received with the DWP and TPR. Meanwhile, TPR will work with the FCA to help it develop its rules in anticipation of legislation for trust-based schemes, and to devise joint policy solutions. 

Action: TPR encourages trustees to engage with the FCA consultation so that there are no barriers to implementing the VFM framework in the trust-based environment.

Cyber security

On 11 December 2023, TPR updated its cyber security guidance to reflect best practice approaches to managing cyber risk and to report cyber incidents. 

Following this, TPR issued a press release introducing a report on a cyber security incident suffered by pension administrator Capita in March 2023. The report documents how TPR worked closely with Capita to assess the risk to schemes and their members, contacted trustees and set expectations on the actions they should take, including communicating with members.

TPR’s report reflects on learnings from the incident, particularly the challenges encountered when communicating with trustees and affected members, and provides a list of key steps that trustees should take in the event of such an incident occurring.

Action: TPR asks that trustees, their advisers and providers report significant cyber security incidents on a voluntary basis, in an open and cooperative way, as soon as is reasonably practicable. TPR aims to use this information to improve its understanding of cyber-related issues.

Helping savers to access their pension savings

On 15 November 2023, TPR published a blog on helping savers to access their DC pensions savings. This considers what ‘good’ looks like, and some of the challenges to get to ‘good’, such as how value for money should be assessed in relation to decumulation.

The long-term expectation is that all schemes should offer retirement products either directly or through partnerships. If schemes will not or cannot make that offer, they will come under pressure to consolidate.

TPR will engage through a series of virtual roundtables, and these will inform interim guidance which it intends to publish in 2024 to provide clarity on key issues and encourage the sector to develop their offer early.

Pensions dashboards

On 2 November 2023, the Pensions Dashboards Programme (PDP) published its eighth progress update report. With a reset deadline of 31 October 2026 for all schemes in scope to connect to a dashboards ecosystem, the update report confirms the intention to provide guidance at least 12 months ahead of the first connection date, which will include details of revised connection staging timelines (indicating when schemes, by size and type, are scheduled to connect). The PDP is continuing to work collaboratively with the industry on dashboards delivery and standards, and will be launching a user testing and planning group in 2024.

Other news on pensions dashboards include:

• a TPR blog on preparing for pensions dashboards, including a link to its dashboard preparation checklist;
• Pension Administration Standard Association (PASA) guidance on becoming ‘connection-ready’, alongside a call to action that lays out 5 key actions schemes can take now; and
• the National Audit Office is undertaking an investigation into the PDP. The investigation is due to conclude in Spring 2024 and will set out the purpose of the PDP and how it was set up, what progress has been made against delivery plans, what has caused delays, what progress has been made in resetting the programme and what changes have resulted from the reset.

DWP Taskforce on Social Factors

On 19 October 2023, the DWP Taskforce on Social Factors (TSF) consulted on a comprehensive guide for industry, aiming to enhance the integration of social factors into investment decisions within the UK pensions sector. This initiative presents over 30 recommendations designed to assist pension schemes in addressing risks and capitalising on opportunities related to the "social" component of ESG investing.

The TSF, comprising representatives from pension schemes, asset managers, data providers, and civil society, among others, focuses on a broad spectrum of social factors. These include workforce conditions, supply chains, community engagement, consumer protection, and modern slavery. The guide provides trustees with practical tools for incorporating social considerations into their investment and stewardship decision-making processes. It emphasises the importance of social factors from an investment perspective, aligning with trustees' fiduciary duties, and outlines a materiality assessment framework to prioritise action areas.

Furthermore, the guide proposes a structured approach for pension schemes to address social factors, offering indicators for baseline, good, and leading practices. A significant portion of the guide is dedicated to modern slavery, providing insights on why it is crucial for trustees to consider this issue and suggesting methods for addressing it within pension investments.

The TSF's recommendations extend beyond trustees to include regulators and the Government. It suggests that the DWP formally outlines expectations for pension funds regarding social factors, to be overseen by TPR. Additionally, it calls on the FCA to establish social factor reporting expectations for asset managers and encourages UK regulators to promote learning materials developed by the Impact Investing Institute. On the Government's part, the TSF recommends continuing to foster a policy environment supportive of action on social issues and ensuring the effective enforcement of relevant regulations.

PLSA Retirement Living Standards

On 7 February, the PLSA published updated Retirement Living Standards. The Standards are designed to help people better understand the annual costs of their preferred retirement lifestyle, based on minimum, moderate and comfortable lifestyles. Standards are published for single people and couples, living either in or outside London.

The latest update reflects rises in prices, in particular for food and energy, as well as “increasing importance people place on spending time with family and friends out of the home, as people’s priorities have changed following the pandemic”. 

The PLSA are keen to reiterate that the Standards are a tool to assist with retirement planning and that savers will have their own expectations and requirements when it comes to their own desired retirement lifestyle.

Survey on awareness of death benefits

On 9 November 2023, the Money and Pensions Service published the results of a survey on the awareness of what happens to pensions on death. These showed:

• Only two in five people (41%) know their pensions would go to their nominated beneficiary
• Others incorrectly believed their pensions would go to their employer, the Government or automatically to their next of kin
• Just over one in five (23%) don’t know who they have chosen to receive any of their pensions

The survey results highlight the importance of helping pension savers to understand how pension death benefits work and how they can best ensure these would be payable in line with their wishes.