What’s on the new Labour Government’s pensions to-do list

22 July 2024

1. What next for the Defined Benefit (DB) funding code?

New legislative requirements apply to scheme valuations with dates on or after 22 September.

But there’s a problem.

Before Rishi Sunak called the general election, The Pensions Regulator (TPR) was due to provide clarity on how to comply with these new regulations via an update to its code of practice on funding.

With the general election campaign came purdah, meaning tight restrictions on government and civil service activity. This prevented TPR from distributing information – such as clarification on the funding code – that could be perceived as political.

Even now the election is over, TPR needs the approval of government before laying the revised code before parliament for the required 40 working days (the summer recess doesn’t count).

One important missing detail concerns significant maturity – the point at which a DB scheme is mature enough for the funding level and investment strategy to require only low dependency on the employer for further support, according to TPR. To date, there has been no definition of significant maturity. The regulations specifically require TPR to define significant maturity in its revised funding code.

The new Government will need to step in quickly to propose any further changes or simply to enable schemes to comply with the new funding code with effect from September.

As the situation stands, schemes with valuation dates after 22 September (to which the new regulations apply) may have to start their valuation work without the necessary clarification. We all need guidance as soon as possible.

2. How to share surplus

For at least two decades, we all lived in a largely surplus-free DB universe as we battled to manage scheme deficits.

In the new era of scheme abundance, the previous government started discussing how to free up surpluses and put them to good use. They were keen to redirect the surplus funding into the UK economy to promote productive growth.

The possibility of surplus sharing appeared in the 2024 Options for DB schemes consultation, opened by the Department for Work and Pensions (DWP).

First Actuarial responded that it might be fairer to also give something back to pensioner members, rather than hand over the entire surplus to the employer for reinvestment in the economy. We pointed out that the measures for sharing scheme surplus seemed focused on closed schemes. Another use of surplus is to help keep schemes open for active members (or even re-open schemes to new members).

We also expected the proposed measures to have limited impact on the amount of assets released for productive finance. Investment power rests with trustees, not with employers. Trustees of a well-funded closed scheme are much more likely to invest in assets that match the buy-out position. The likelihood is that only the surplus as measured on a buy-out basis would be directed into more rewarding investments.

As for employers, many may prefer to get rid of their closed scheme if it’s 100% funded on a buy-out basis, rather than run-on the scheme and wait for a surplus to emerge.

Overall, many schemes simply don’t know what to do with their surplus, and the employer can’t get it back. The surplus can become trapped.

This is partly down to behavioural obstacles. Trustees have no experience of extracting surplus because it’s been so long since it was an option. They’re also duty bound to protect their members. If they’re suddenly returning scheme funds to the employer, they may feel that they’re failing to protect their members’ interests.

Trustees need clear political and regulatory guidance on this. As Vicky Greenwood stated at First Actuarial’s annual conference a few weeks ago, we would welcome the views of TPR on how they see surplus extraction working.

3. Buy-out or run-on?

2023 was a record year for bulk annuity transactions. For smaller schemes though, buy-out is far from straightforward, even if they’re in a relatively strong financial position. Few insurers are interested. With resourcing constraints, it’s more cost-efficient for them to handle larger schemes and they can only take on so much business per year. Those small schemes that can afford buy-out tend to get a less competitive deal.

With run-on, on the other hand, schemes can focus on retaining economic value within their scheme, rather than handing it over to insurers. If done well, it could be a real game-changer for schemes of all sizes.

This is the central point that First Actuarial’s Vicky Greenwood recently made in her article on scheme run-on. However, she also stresses that political support is needed to make run-on a mainstream approach.

4. Do we need a public consolidator?

In its Options for DB schemes consultation, the DWP introduced the idea of a government-backed public consolidator, which would be open to all schemes that meet its entry terms. The previous government wanted to provide more options for those small schemes currently struggling to access the buy-out market.

However, the previous government did stress how important it was to minimise the impact on the superfund and insurance buy-out markets. To achieve this aim, they planned to target the public consolidator at those schemes struggling to access the current market.

As they saw it, schemes that could already access the market would continue down this route.

However, this may be difficult to achieve in practice. Some of the proposals put forward in the consultation – such as the public consolidator having a government guarantee which is stronger than those available from commercial providers – would make the public consolidator attractive to all schemes, even those that can already access the market. Being able to accept schemes with a current buy-out deficit would also give the public consolidator a competitive advantage over the private market.

If the new Government is to minimise disruption to the current market, they’ll need to apply strict eligibility criteria, for example a limit on the overall size of the scheme, except in circumstances where there’s clear evidence that a deal with a commercial provider isn’t possible.

Another question is whether the public consolidator would increase productive investment in the UK economy, something the Labour Party sets great store on. If the consolidator targets small, closed, maturing schemes, there will be less scope for more productive investment. These schemes will still have the same maturity profile whether they run-on as closed schemes or enter the consolidator.

If the new Government is willing to provide a robust guarantee, then the consolidator can take more investment risk. This will help meet political aims. However, this is akin to taking the assets to the Treasury and paying benefits on a pay-as-you-go basis. It would raise political issues and increase the risk of disrupting the market.

5. Decisions on the Lifetime Allowance

The previous government abolished the Lifetime Allowance (LTA), which is a limit on the pension savings that an individual can build up in a registered scheme while benefitting from tax relief.

At one time, the Labour Party promised to bring back the LTA, arguing that it only benefited the wealthiest. They then dropped this idea, partly in response to lobbying from senior NHS staff and unions and partly because it would be too complicated to reinstate the LTA.

However, there are a number of issues around the abolished LTA that still need to be addressed. We’re waiting for clarification on several areas, including the lump sum and death benefit allowance, and members with protected allowances. In the absence of this guidance, the HMRC has even suggested in some cases that members should delay retirement, stating that “members may need to wait until the regulations are in place before taking or transferring certain benefits”.

So irrespective of whether the new Government brings back the LTA, they will need to provide clarification, most importantly to avoid delays for those awaiting retirement.

6. The Mineworkers’ Pension Scheme

The Labour Party made a manifesto pledge to review existing arrangements in place for the use of surplus in the Mineworkers’ Pension Scheme.

When British Coal was privatised in 1994, half of the Mineworkers’ Pension Scheme surplus was used to enhance member benefits, and the other half was placed into a government investment reserve. In return, the Scheme got a government-backed benefit guarantee. Scheme members and government then received equal shares of any further surplus.

As the investment reserve grew significantly over time, many argued that government’s share of the surplus was disproportionate to the risk it underwrote.

Pressing pension issues for the new Government

The new Labour Government faced a bulging to-do list from day one, with huge challenges almost everywhere it looked.

There are some big pension issues to consider and a surprise Pensions Bill was announced in the King’s Speech. But among the big pension issues we’ve looked at here, there are some pressing details that the Government will need to address sooner rather than later.