1. Resolution of the Section 37 certification issue
In my wish list for 2024, I highlighted the industry’s concerns surrounding the ongoing Section 37 certification issue. Over the year, the original June 2023 judgment was appealed but ultimately upheld, so these concerns remain. Indeed, while many schemes continue to take a ‘wait and see’ approach, the consequences of the judgment are already being felt by some schemes.
Specifically, many schemes that are preparing to secure benefits with an insurance company will have decided to bite the bullet and investigate past deeds. A not insignificant proportion of these schemes will face a considerable headache upon failing to find all the necessary certificates: should they rectify benefits (often at significant cost) or should they put any planned transaction on pause? A real lose-lose.
It's important to once again stress the 'windfall' nature of the vast majority of potential benefit uplifts. In nearly all instances, it will be the case that a certificate could have reasonably been given at the time. Moreover, in many cases, a certificate will have been given – the issue may simply be that the necessary records cannot be located following the passage of several decades.
The Department for Work and Pensions (DWP) has the power to retrospectively amend the regulations under Section 37. Therefore, I once against re-iterate my wish for the DWP to step in and use this power to enforce the spirit of the regulations. While we wait, I also hope to see some innovation in the insurance industry that helps schemes to transact in these scenarios.
2. Reform of PPF levy legislation
In its initial September consultation, the Pension Protection Fund (PPF) once again outlined its proposal to levy a further £100 million in 2025. This is despite the PPF estimating earlier this year that it was 166% funded and acknowledging that it does not need the additional money.
To make matters worse, the pool of schemes that are paying a levy is reducing. As a result, some schemes will actually see a substantial increase in the amount they are being asked to pay, if only because there are fewer schemes to share the load.
So, what is behind this quite frankly farcical situation? The issue is that legislation currently restricts the PPF to increasing the annual levy by no more than 25% in a single year. This means that if the levy drops to a very low level, it would be challenging to increase it in future years, even if this is needed.
It was therefore heartening to see the PPF announce earlier this month that it is postponing its final levy determination until January, while it continues to work with the DWP. Therefore, my wish is that 2025 is forever remembered as the first of many years where no levy was collected.
3. Laying the foundations for improving defined contribution value
Last year I said that “we urgently need a clear plan for how and when Automatic Enrolment contributions increase”. A year on and it feels like, if anything, we have taken one step back, with the recent announcement of the postponement of the planned adequacy phase of the Government’s pension review. This is a disappointing development. While immediate increases were not expected, especially following the recent hike in employer's National Insurance contributions, the development of a plan is crucial.
For 2025, if consideration of increasing contributions is off the table, the focus should be on maximising the value of existing pots and contributions. Current consultations and initiatives, such as the pension investment review, new models for small pots, the exploration of Collective Defined Contribution (CDC) decumulation vehicles and Pensions Dashboards, aim to improve member outcomes. Let's hope 2025 lays the foundations for these improvements, allowing us to revisit the adequacy issue in the future.
4. Support for DB schemes exploring running-on
At the beginning of 2024, the previous Government consulted on how to incentivise schemes to run-on and continue to invest for growth, including making it easier for employers to access scheme surpluses.
While securing benefits with an insurer when the opportunity presents itself will likely remain the right answer for many schemes, especially smaller schemes that are unable to benefit from economies of scale, there are potentially huge benefits to be had from larger schemes deciding to delay any such transaction and continue to run-on.
This is because there is a significant gap between the cost of ongoing funding and full buyout. Running-on therefore allows some of this capital to be used for the benefit of sponsors and members, rather than insurers, as well as potentially providing wider benefits for the economy.
Given this, the recent Mansion House speech was an enormous missed opportunity. And so, my hope for 2025 is that the Government revisits the crucially important issue before it is too late.
5. Big changes ahead in 2025 for LGPS
The Government gifted the Local Government Pension Scheme (LGPS) community with the 'Fit for the future' consultation, for consideration over Christmas. The consultation proposes significant changes to LGPS investment/pooling arrangements in England and Wales and takes forward some of the long-awaited Good Governance recommendations.
Many of the proposals will be contentious, with funds likely to be concerned about central Government trying to dictate how funds invest their not inconsiderable assets and whether this is a first step towards reducing the number of funds. My wish list would include Government listening to the responses from funds and their advisers to ensure that whatever the final changes are, the opportunity is not lost to reform and modernise the LGPS to help deliver a quality service for members and employers for a long time to come. This must include appropriate oversight of the pools and the advice they provide to the funds.
In addition, 2025 is a valuation year for LGPS funds in England and Wales. Over recent times funding levels have diverged as asset strategies have diverged but different actuarial methodology also plays its part, with some funds reporting materially improved funding levels due to higher gilt yields.
With the devolution white paper suggesting further changes to county councils in particular, and the ever-increasing pressure on local authority budgets (not helped by the increase in employer NI contributions), I hope decision-makers can maintain their focus on the long game and consider the stability of employer contributions rather than just short-term contribution reductions.
6. An updated approach to mortality modelling
The Continuous Mortality Investigation (CMI) has long been a global leader when it comes to analysing mortality. This was underlined during the pandemic when the CMI made key contributions that were in the wider public interest and was one of the first organisations to incorporate pandemic data into their models.
However, recent mortality trends, influenced by Covid-19 and NHS pressures, have been a challenge to the CMI’s projection model, given that the model was built on the assumption that recent experience is a good guide to the future. The CMI has so far done its best to adapt its approach to this new data, but it is becoming clear that a more sustainable and robust solution is needed.
I am therefore hoping that the CMI’s upcoming consultation, which the CMI has said will consider a fundamental reworking of how the model copes with pandemic data, will help address the current challenges.
7. Recognition of bandwidth concerns
2024 was a very busy year for many DB schemes and 2025 is shaping up to be similarly busy, if not busier still.
Many schemes will already be managing several large projects, whether that is preparing for or undertaking an insurance transaction, progressing GMP projects or getting ready for the launch of pension dashboards. On top of this, 2024 saw a raft of new regulatory guidance, including the new General Code, the new Funding Code and updated employer covenant guidance, which will only start to be felt in earnest over the next year. And that’s all before considering the rising expectations in areas such as ESG and DEI.
While my experience is that trustees and advisers are rising to the challenge, there still needs to be some recognition that pensions schemes have limited bandwidth – and limited budgets. So, with some notable exceptions outlined above, my general wish for 2025 is for legislators and regulators to hit the pause button – a period of stability and consolidation is needed.
Mark Tinsley, Principal and Senior Consulting Actuary at Barnett Waddingham (BW): "As we move into 2025, these wishes reflect the need for stability, clarity, and forward-thinking solutions. By addressing these key areas, we can ensure a better future for UK occupational pensions schemes."
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