As the end of the year approaches, attention starts to turn to what lies ahead. After a year of economic and political turmoil, one hopes we are entering calmer waters. But what can we expect for UK pensions in 2023?
In short, it will be the year of funding, finding and finessing workplace pensions.
It is likely we will finally see the introduction of the new statutory funding requirements for defined benefit (DB) occupational pension schemes, first mooted in 2018. These new requirements will mark the most significant change to the UK's current statutory funding regime since its introduction in December 2005 and they will be accompanied by a revised DB funding Code.
According to the latest timetable, these new requirements will apply from September next year and they will require trustees of DB schemes to put in place a long-term funding and investment strategy for their scheme which, in most cases, will need to be agreed with their scheme's sponsor. The aim of this strategy must be to reach a position where the scheme is no longer dependant on employer contributions, all other things being equal, by the time the scheme is "significantly mature". Once they have set their long-term strategy, a scheme's trustees will be required to rachet up their scheme's technical provisions at each valuation to ensure they are on track to hit their long-term funding target.
The impact of these new requirements is likely to be less significant than many may have expected when the measures were first proposed, given the significant funding improvements the majority of DB schemes have experienced over the past 12 months. However, the new requirements are still likely to mean some employers will be forced to pay more money into their scheme more quickly than they had been anticipating, to ensure their scheme's long-term funding target is met. In addition, for those schemes that are already at, or nearing, significant maturity the so-called "long-term objective" may not be that long-term after all. The draft regulations do not currently cater for schemes in this position; neither do they set out how the regime will apply to schemes for which achieving low dependency is only a pipe dream. It is to be hoped the final regulations will address scenarios such as these.
Funding concerns are not limited to DB schemes. The general consensus is that members of defined contribution (DC) schemes are not saving enough for their retirement. While the Government prevaricates over setting out a timetable for increasing minimum auto-enrolment contributions, the Living Wage Foundation is preparing to launch an important voluntary initiative to encourage employers and individuals to contribute more towards workplace pensions. From next Spring, employers will be able to apply for a new Living Pension accreditation, where they provide a pension to their employees that meets the Living Pension standards, which will include enhanced minimum employer and total default contribution rates.
2023 will also see the first schemes connect to the new pensions dashboards. Although dashboards will not be available to the public immediately, this will be a significant step on the journey towards people being able to find and view their pension savings online and in one place.
The Pensions Regulator has recognised the challenge to industry posed by the launch of pensions dashboards and is proposing a twin track approach to enforcing compliance: education and support for those who are trying and a stick for those that do not.
Data quality will be a key factor in determining schemes' preparedness for dashboards and the success of the venture as a whole. Trustees of schemes with good quality dashboard data will be able to set robust matching criteria, confident in their ability to identify their members while avoiding false positives. Where data quality is compromised, trustees may find it more difficult, when setting their matching criteria, to strike the right balance between returning a sufficient number of positive matches (where appropriate) while avoiding the risk of providing data to the wrong user.
The design of the dashboards will also be critical to their success and to ensuring users understand the information presented to them. It is also essential suitable safeguards are put in place to ensure that, once found, an individual's pension data does not fall into the wrong hands.
As well as ensuring pensions are fully funded and can be found by their 'owners', regulators are also planning to take steps to finesse the regulatory framework that exists to protect pension savers and scheme members.
From 31 July 2023, FCA regulated pension providers will be required to ensure they act to deliver good outcomes for pension savers in relation to new and existing products that are open for "sale". This new overarching "Consumer duty" will be extended to cover closed products from the following year.
To meet this duty, providers will need to demonstrate they are acting in good faith towards savers, taking adequate steps to avoid foreseeable harm and enabling and supporting savers to pursue their financial objectives. In assessing compliance the FCA will focus, in particular, on:
- the suitability of the products and services a firm provides
- the extent to which the 'price' paid by savers represents fair value
- the extent to which savers can be expected to understand a firms' communications and its products, including the associated features and risks, and
- the adequacy of the support provided to savers at each stage of their savings journey.
This focus on ensuring good outcomes has been picked up by the Pensions Regulator and is likely to feature in the new single Code of Practice, which is due to come into force next year, and which will introduce new and enhanced expectations for the effective governance, operation and management of DB and DC occupational pension schemes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.