By David Fairs, Partner at LCP
It is tempting to think that all the policy items currently in train will be swept away and that a new Government will start with a clean sheet of paper. But the temptation to use pension assets to help boost the UK economy in some form is likely to persist whoever forms the next Government. That also means that the building blocks to facilitate investment in productive finance will also be on the next Government’s agenda.
So, we are likely to see a focus on consolidation, the adaptation of the Pension Protection Fund to establish a public sector consolidator and a full authorisation regime for superfunds and even potentially the facilitation of the extraction of surplus in order to incentivise pension schemes and their sponsors to think of wider investment strategies.
The development of multi-employer CDC and at-retirement CDC plans is also likely to be on the next Government’s agenda. They have garnered cross-party support, and as well as improving potential outcomes for members, will also potentially support investment in assets that will support economic growth.
CDC is not the only area that seems to have cross-party support; pension dashboards, value for money requirements, and implementation of the 2017 Automatic Enrolment reforms are also likely to be adopted by a new Government. Although timing of introduction of the Automatic Enrolment reforms might be influenced by other spending plans.
It seems likely that a future Government will have to think carefully about where its financial priorities lie. Unfortunately, tight Government finances might well mean an early review of pension taxation could be on the agenda. Changing an already complex system will take time to think through and implement and is not something likely to be considered close to an election given the inevitable winners and losers that it is likely to create, so it might well be something kicked off early in the new Government’s term of office.
Perhaps the most interesting pension policy issue impacted by the timing of the election is The Pensions Regulator (TPR)’s new Funding Code. The Regulations bringing the new regime into force on the 22nd of September have already been laid. TPR’s plan was to lay the new Code during June in order to give the necessary 40 days for the Code to come into effect for the September implementation date.
But even if TPR could magically lay the Code before the end of the week, there will not be enough time for the Code to be effective for the September date. So, we are likely to have a slightly uncomfortable position for those schemes with valuation dates shortly after the 22nd of September, to have to comply with new Regulations without having the benefit of the guidance from the Code on how TPR expects schemes to interpret them.
It is perhaps not widely appreciated that Schemes legally have to comply with the Regulations but don’t have to comply with the Code. TPR will take the view that if a Scheme has followed the Code, then it will also have met the requirements of the Regulations. But it is feasible that a Scheme could meet the requirements of the regulations without being compliant with the Code. The price to be paid is greater regulatory scrutiny. However, if there is no Code, schemes may find it a challenge to minimise the risk of greater regulatory scrutiny.
TPR is not likely to be open to accepting valuations under the new regime until sometime in 2025, given that it will need to settle the information that it wishes to collect and develop the necessary IT systems. During that time, it might well be that a new Government will facilitate the laying of the Funding Code. So, whilst it might not be in place for the 22nd of September, it might well be in place by the time Trustees are ready to finalise their valuation and Funding and Investment strategy. That is assuming that the next Government will want to follow a similar approach to Defined Benefit Funding and Investment. If the next Government wants to pursue a different approach, there could be a significant delay before the new Code is laid. In those circumstances, the Trustees might have to rely on the draft Code that was consulted on at the end of 2022, also taking account of changes from the draft to the final Regulations.
Pensions policy has been a fascinating and busy area in recent times, and it looks like it will continue to be fascinating in the foreseeable future.
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