With the new Parliament now in recess until 2 September, MPs are traditionally going back to their constituencies, although we expect the new ministers will also be spending time with their departments identifying what needs to be done to take forward the Labour government’s agenda. It seems a good moment both to comment on the most interesting parts of what we have been told the new government will do in the pensions arena for private sector occupational pension schemes and their employers, and to speculate about other possibilities.
The agenda
The Labour manifesto had set out high level intentions to act to increase investment by pension funds in UK markets and to adopt reforms to ensure that workplace pension schemes take advantage of consolidation and scale, to deliver better returns for UK savers and greater productive investment for UK PLC. Labour also promised a review of the pensions landscape to consider what further steps are needed to improve pension outcomes and (again) increase investment in UK markets.
The Kings Speech on 17 July did indeed promise a Pension Schemes Bill (see our summary of its main provisions for employment and pensions here). And on 22 July the Chancellor announced the first phase of a ‘landmark review ‘into pensions – focusing on investment – to be led by the Pensions Minister. The next phase of the review starting later this year will have a focus in improving pension outcomes and assessing retirement adequacy (as well as further work on increasing UK investment).
We note that the new Minister for Pensions, Emma Reynolds is the first ever joint Treasury and Department for Work and Pensions Minister. We hope that this will help with joined up thinking on pensions policy, and accelerate the pace at which that policy can be turned into law. Time will tell whether instead it highlights the tensions between the different objectives and remits of the Treasury and DWP.
Our thoughts on the Pension Schemes Bill
- Measures for automatic consolidation of DC individual deferred small pension pots will mainly affect the master trusts and other providers of pensions outside the workplace. Some impact will be felt for employer sponsored schemes providing DC benefits, but we anticipate this will be beneficial: enabling them to find a home for small pots and so reduce the administrative burden and associated costs.
- The proposed duty for trustees to offer a retirement income solution or range of solutions to their members will affect trust based schemes which offer DC benefits (whether free standing or as section of a scheme which also provides DB benefits), and has the potential to be quite onerous.
- We await more detail of the proposals on commercial superfunds. In particular, the last government had consulted on a proposal that a state sponsored consolidator might be put in place, potentially managed by the PPF, which was not referred to. The Pensions Regulator has also updated its guidance on its interim regime to make release of capital easier, which might encourage new market entrants. A strong superfund market could offer more options to trustees and employers for dealing with legacy DB schemes.
The policy intent behind many of the measures is to encourage consolidation, leading at least in theory to a smaller number of well governed schemes and more productive investment of funds. It is also suggested that DC schemes which have to offer a retirement solution or solutions will stay invested for longer which could also lead to more productive investment. While we reserve judgement until more detail is available, we are not convinced that the announced measures alone will have a transformative effect on pension scheme investments. We also note that several speakers in the House of Lords debate on the King’s Speech highlighted the potential tension between the duties of trustees to invest in the best interest of members and the government’s wish to see more investment in UK assets and illiquids.
What might come next?
- Surplus: The last government had consulted on proposals to make it easier for schemes to refund surplus to employers but had not responded to that consultation before the election was called. Will the new minister take these forward? And if so when?
- Amendments to the rules of contracted out schemes: the pensions industry is lobbying for regulations to help schemes which have fallen foul of the procedural aspects of the rules on amending contracted out schemes, and we support this initiative. See here for more detail on the issue.
- Changes to auto enrolment: Legislation widening the scope of automatic enrolments by allowing the age limit for automatic enrolment to be reduced from 22 and to reduce or remove the lower limit on qualifying earnings was passed by the last government but has not been brought into force. Doing so would be consistent with Labour’s general approach to extending rights for younger and lower paid workers but will increase the burden on employers. Changes to increase the minimum contribution rate from 8% to 12% might also be considered but we think will take longer. Auto enrolment is likely to be reviewed as part of the new phase of the pension landscape review promised for later in the year
- Expansion of the collective DC regime: legislation was promised by the last government and should not be politically contentious. This may also be a focus of the next phase of the review.
- Changes to pensions tax relief: the new Chancellor had said there are ‘no plans’ to change this, but also refused to rule anything out. Given her statement this week identifying a £22bn ‘black hole’ in the public finances, it is quite possible that she will look at the tax treatment of pensions as part of the solution. It still appears that there is no intention to reverse the removal of the lifetime allowance, but changes such as capping high and additional rate tax relief on contributions, amending the national insurance treatment of both contributions and benefits, or removing the favourable inheritance tax treatment for pension savings might be all be on the table.
We are monitoring developments and will bring you further updates as we can. In the meantime, if you would like to discuss in further detail any of the points raised in this blog post, please get in touch with your usual Freshfields contact.
