Mini-budget: Government to move ahead with removing "well-designed" performance fees from the charge cap
As part of its Growth Plan 2022, the Government has confirmed that it will legislate remove "well-designed" performance fees from the occupational defined contribution (DC) pension charge cap. Broadly, the charge cap operates to restrict the costs and charges which can be levied within the default funds of automatic enrolment arrangements. The Government believes that this will "ensure that savers benefit from higher potential investment returns while providing clarity for institutional investors to help unlock investment into of the UK’s most innovative businesses and productive assets".
The announcement that the Government will drive forward this aspect of its productive finance agenda follows a mixed reaction to its November 2021 consultation. The language in the Government's response earlier in the year had suggested that it would proceed somewhat tentatively in implementing this change within the occupational DC scheme framework, and so the confirmation last week that it will be moving ahead suggests that this has been re-prioritised as part of the Government's broader economic planning.
Trustees of DC automatic enrolment schemes will, in due course, need to consider whether they wish to make use of the additional flexibility which the legislation will introduce. In order to do so they will need to get to grips with the new concept of what constitutes a "well-designed" performance fee. The Government has not provided much detail so far on how this would be defined, but it has previously indicated that it would consult on principle-based guidance alongside any new legislation. In addition, trustees will need to weigh up the potential for better investment returns against the greater risks for the (potentially very significant) numbers of members in the relevant funds.
DWP call for evidence on how to help savers, improve member communications, guidance and decumulation in occupational pension schemes
The Department for Work and Pensions (DWP) has published a call for evidence with the aim of exploring what support members of occupational pension schemes need to help them make informed decisions about how to use their pension savings. This continues to be a key focus for the Government in the wake of the 2015 pensions freedoms and the increase in pension savers as a result of automatic enrolment. The Government also wants to understand what support and decumulation products are currently on offer to members of occupational schemes, and what may be offered to them in the future.
No specific regulatory or legislative changes are being proposed at this stage, but the Government has said that it will take into account the response to the call for evidence, together with feedback from other engagement activities which the DWP is undertaking, in order to decide whether further regulatory change is required.
- Exploring whether FCA changes are applicable to occupational schemes: the DWP has said that it wants to explore whether changes which the FCA recently implemented for contract-based arrangements and which were aimed in addressing some of the emerging issues arising from the pensions freedoms (such as increased complexity for members), should be applied to occupational arrangements. These include changes to retirement wake-up packs (providers of contract-based schemes are now required to send these at an earlier stage and in a simplified format) and the introduction of default investment pathways for members entering income drawdown who have not received regulated financial advice.
It is understandable that the DWP is wanting to consider whether changes to FCA regime may be applicable to occupational schemes in the future. The goals which underpinned the FCA's rule changes, such as supporting members to make informed choices, reducing complexity and improving member outcomes are shared by the DWP and are equally relevant for members of occupational schemes. From members' perspectives too, consistency across different regulatory regimes is generally welcome. The DWP has, however, acknowledged that there are key differences between the two regimes and, in our view, there are some aspects of the FCA's recent rule changes which may not be immediately transferable to occupational schemes. For example, in our experience, most occupational pension arrangements (with the exception of some master trusts) do not offer the facility to take income drawdown within the scheme itself and so the concept of default investment pathways for drawdown may not be so immediately relevant for occupational pension schemes. It is worth noting that the overall scope of the call for evidence is extremely wide, and whilst the DWP is looking at the FCA rule changes as part of the call for evidence, it is possible that future policy developments for occupational pension schemes won't be limited to a specific approach which has been adopted by the FCA.
- Understanding barriers to schemes providing support with retirement planning: in addition to exploring whether recent FCA changes could be applicable to occupational pensions, the DWP has also said that it wants, more generally, to understand more about the support on offer when members are looking to access their occupational pension savings. The DWP has said that this will help it assess areas in which members may need further support to achieve the pension outcomes that they want and understand if there are barriers which limit what occupational pension scheme trustees can do to support members here and if so, how they can be addressed. The call for evidence refers to the risk of guidance and support constituting regulated financial advice as a potential barrier to trustees putting in place additional help for members suggesting, perhaps, that this is an area the DWP may explore further in the future, although the call for evidence does not put forward any particular proposals (this was also an issue highlighted by the Work and Pensions Select Committee in in January 2022 report on the progress of the pensions freedoms). In our experience, this remains a key issue for trustees.
- Exploring possible use of CDC to improve member outcomes in decumulation phase: the call for evidence is also seeking views on whether collective defined contribution (CDC) arrangements could be used to deliver good outcomes for members during decumulation, including seeking views on whether the use of decumulation-only CDC models could be made use of. Again, it remains to be seen how much impact this will in practice. Legislation allowing CDC arrangements has only recently come into force: it is not yet clear how many CDC schemes will be established based on a more "typical" model comprising both accumulation and decumulation phases (and so far there has not been a huge appetite by employers to establish these), much less CDC schemes with a decumulation-only model mooted in the call for evidence.
The call for evidence can be viewed here.
Developments on the Regulator and the FCA's value for money framework - watch out for a consultation later in the year
The Regulator and the FCA have published a joint feedback statement setting out the responses which they received on their September 2021 discussion paper on developing a value for money framework. The feedback statement, which is not a formal policy response, also sets out the next steps for progressing the framework.
The framework, which it is intended will apply across both contract and occupational DC pension arrangements, would be separate from (and in addition to), the legal requirement for trustees of smaller DC schemes (broadly, those with assets of under £100 million) to undertake detailed value for member assessments and the (wider) disclosure requirements relating to whether DC costs and charges represent value for money. It is not clear at this stage whether the value for money framework would be underpinned by legislation, although the feedback statement notes that the DWP has "expressed its willingness to legislate to introduce the VFM framework for the schemes regulated by TPR" and so it is possible that compliance with the framework could become a legal requirement in due course.
The objective with developing the value for money framework is to allow members to be able to compare arrangements more easily and see which offers better value for money. It supports the wider policy objective of helping savers achieve good outcomes. The Regulator and the FCA consider that giving members the means to compare value meaningfully across arrangements will, in addition, support members making decisions about whether to consolidate their pensions (another of the DWP's policy aims).
Although cost remains an element of assessing value for money, the development of the framework reflects the growing concern amongst policy makers and regulators that cost is not the only factor in determining long term value for members, with the Regulator commenting that "an excessive focus on cost may result in the other key elements of value not being given appropriate consideration, which is why we want to encourage a shift in focus to long-term value for pension savers." Accordingly, investment performance and customer service are two elements which, in addition to costs, form the basis of the framework. The feedback statement confirms that there is a broad consensus with this more holistic approach and that these three elements (investment performance, customer service and costs) were the correct ones. There was, however, less consensus on how to measure each of these elements and there was a mixed reaction to whether benchmarking these elements separately would be helpful.
The feedback statement confirms that the value for money framework will be focussed on accumulation phase initially (and, in particular default arrangements), but the Regulator and the FCA have said that they will consider how best to extend the framework to self-select options in workplace schemes and to non-workplace pensions, as well as to pensions in decumulation, in due course.
No clear timing has been given for when the framework will be introduced, but it is unlikely to be before 2023. The Regulator and the FCA have said that they are aiming to consult on detailed proposals towards the end of 2022.
The feedback statement can be viewed here.
ERI restrictions to be removed for large DC Master Trusts from 1 October 2022
In March the Government consulted on a proposal to amend legislation in order to relax the employer related investment (ERI) requirements for large DC master trusts (those with 500+ employers). The Government's objective for the proposal is to allow master trusts to access a wider range of investments, including illiquid or private credit markets, which the Government is keen to facilitate access to as part of its productive finance agenda. The proposal also takes into account that the current ERI restrictions were put in place before the development of commercial DC Master Trusts and that the risks which the restrictions were intended to address - schemes making inappropriate loans to or investments in their sponsoring employers - is less of an issue in many of the DC Master Trusts, where the participating employers do not tend to be connected in the same way and where the scheme and employers typically operate entirely at arms' length.
The Government has recently responded to the consultation, confirming that this proposal will be implemented. Regulations making changes to The Occupational Pension Schemes (Investment) Regulations 2005 have been laid before Parliament and are expected to come into force from 1 October 2022.
For more detail on DC developments prior to May 2022, see our alert here.
