The Autumn Statement from Chancellor Jeremy Hunt included well-trailed measures that show the government has listened to the industry’s responses to the Mansion House reforms. There are a number of details that must be worked through, in particular for the reduction in small defined contribution (DC) pots.
Following its call for evidence on consolidating small pension pots earlier this year, the Department for Work and Pensions (DWP) is launching a further consultation on proposals to introduce a lifetime provider model. Under this model, employers would be required to check whether new employees have existing pension savings and, if so, to pay its contributions into that existing arrangement.
This appears to be an attractive proposition in principle, but a number of obstacles are already clear. Legislation is likely to be complex, and interaction with the existing automatic-enrolment regime will need to be navigated carefully. The additional burden on employers and payroll providers would be significant, with errors in contributions and general administration inevitably increasing. Monitoring and enforcement by HMRC and the Pensions Regulator would also become more complex. The consultation on this and other measures closes on 24 January 2024.
The DWP will consult on how the Pension Protection Fund (PPF) can act as a consolidator for defined benefit (DB) schemes unattractive to commercial providers. It is expected that proposals will focus on whether and how the PPF can act as a superfund for smaller schemes that are underfunded on a buy-out basis.
Using the surplus to improve benefits for existing members is unattractive, as in many cases it would give PPF members a higher level of pension than they would have received from the original scheme. Using some of the surplus to enable small schemes sponsored by small-to-medium-sized employers to join the PPF and receive 100% of benefits promised under the scheme’s rules may be a solution. It is a solution that would have the added benefit of releasing struggling sponsors from the burden of maintaining their DB schemes, freeing them up to grow their business and further the government’s economic growth strategy.
It is unlikely to be popular with insurers and commercial consolidators, which will see the PPF as a state-sponsored competitor. However, it is difficult to see where the real competition would be. If, as is anticipated, the proposals will relate to schemes that are underfunded on a buy-out basis, they will not be attractive to insurers in any case. Given that even fully funded schemes are struggling to make it to the front of the queue for buy-in quotes, it is unlikely that using the PPF as a consolidator will harm the bottom line of insurers, at least.
The reduction of the authorised surplus payments charge from 35% to 25% from 6 April 2024 will be welcomed by employers of well-funded schemes.
The DWP will also consult over the winter on whether and how to change rules around the use of DB scheme surpluses and when surplus assets can be paid back to sponsoring employers. It is anticipated that changes could incentivise well-funded schemes to invest in higher-return assets, meeting the dual aim of increasing investment in UK equity and increasing the assets available to sponsoring employers to fuel their own growth.
The consultation is likely to focus on how surplus assets in large, ongoing schemes can be accessed by sponsoring employers while also ensuring that trustees can continue to meet their duty to protect member benefits.
Richard Knight is a partner and Amy Davies is senior associate at Burges Salmon