31 January 2024
Pensions bulletins – 8 of 7 Insights
In this January edition of our Taylor Wessing Pensions Bulletin we are looking forward to some of the key developments we are expecting for the coming year.
Please get in touch with your usual Taylor Wessing pensions contact if you would like to discuss anything you have seen in the Bulletin.
With the Government making a slew of announcements in the last half of 2023 about forthcoming pensions changes and a number of cases in the pipeline, 2024 looks set to be a very busy year for anyone involved in the pensions world. For our first Bulletin of 2024, we have identified some of the more interesting developments which we will be monitoring closely.
2024 looks set to produce a bumper crop of judgments, with a number of cases being heard which deal with how historic amendments to scheme rules were made. The outcome of these cases will likely affect how other similar schemes are run, and the Virgin Media case in particular could have far-reaching impacts, depending on the outcome. The cases we are expecting include:
Automatic enrolment is to be extended to workers from the age of 18 (down from 22) and the lower earnings limited applicable in calculating "qualifying earnings" is to be abolished so that contributions are calculated by reference to the first pound earned. The Government is to consult on regulations effecting these changes during 2024 (with the timing of implementation still uncertain). Employers should be aware that these changes are in the pipeline and will affect both how they assess the workforce for auto-enrolment and the cost of providing pension benefits, as well as allowing them an opportunity to engage with an additional cohort of workers on pensions.
The Government has just published revised DB scheme funding regulations to be in force from April and to have effect for valuations from September 2024. The Pensions Regulator (TPR) has reportedly said that it expects its Code of Practice on scheme funding to be finalised in time to be in force in the autumn. The suggested timescales means trustees (and their advisers) whose schemes have September 2024 valuation dates will have a relatively small window in which to prepare and to work with their advisers to achieve compliance.
A significant proportion of defined benefit schemes are now in surplus on a "buyout" basis, leaving trustees and employers with a decision about how to deal with their schemes. One option is to secure scheme benefits in full with an insurer with a view to buying the scheme out and winding it up. The buyout market has been extremely busy in recent years, with insurer resources stretched and trustees needing to ensure their scheme is well-prepared before going to market (for example by resolving any historic benefit issues). Employers may alternatively choose to run their scheme on, perhaps with some element of downside protection to ensure the strong funding position is not lost, an option which is being explored increasingly. One legal change to note is that the tax rate on scheme surpluses paid to employers is set to drop from 35% to 25% (matching the main rate of corporation tax) this April.
Following a consultation in 2021 on an expansion to the notifiable events regime, the DWP is expected to issue its response and some draft regulations.
The changes we anticipate are:
Employers operating defined benefit schemes should keep a sharp eye out for these changes. While they have been long in the pipeline, they will introduce a new layer of complexity when thinking about notifiable events and corporate transactions, given the level of fines that TPR can now impose for non-compliance, it is important that steps are taken and advice sought to avoid an inadvertent breach.
For some time now the general direction of travel has been towards greater consolidation of pension schemes, but we expect to see more consolidation as we move into 2024.
For DC schemes, 2024 will likely see more transfers into master trusts, given an increasing focus on value for money and an increasing governance burden including proposals that, if brought into effect, will mean trustees of DC schemes are required to provide decumulation options for members.
For DB schemes, 2023 brought us the first transaction whereby a scheme was taken on by a consolidator (Clara), which took place under TPR's interim regulatory regime. The Government has said that legislation formalising the legal framework will be passed as soon as possible.
Having announced the abolition of the lifetime allowance in the 2023 Spring Budget the Government introduced the Finance Bill 2024 into Parliament towards the end of 2023 to make the necessary changes. This should simplify some aspects of scheme administration but with the introduction of certain new tax allowances (for lump sums) and some transitional arrangements this again is an area in which schemes will need to get up to speed in a very short timescale. The Labour party had said it intended to reverse the change if it came into power, but has more recently said it is 'undecided' on the issue perhaps because any such reversal would be far from straightforward to achieve.
The General Code was finally laid before Parliament in January 2024, and is expected to come into effect on 27 March. The new Code brings together ten of TPR's existing Codes in a single document and incorporates aspects of the formal responses received by TPR during the consultation process.
Regulations requiring trustees to establish and operate an "effective system of governance" were made in 2019. The Code now clarifies that the ESOG can incorporate existing procedures and policies but additionally requires schemes with 100 or more members to carry out and document an "own risk assessment" setting out an evaluation of how well the ESOG is working and how potential risks are managed. Schemes will be required to produce their first ORA within 12 months of the end of the first scheme year after the Code comes into force, and to produce a new ORA every three years (or whenever there is a material change in the scheme's ESOG (or related processes) or risks affecting the scheme).
Many of the requirements of the Code will be familiar to trustees already, but we would flag in particular the sections on cyber-risk as being worthy of further consideration. Do contact us for further details of what trustees can do to ensure compliance.