UK Pensions Briefing: Changes in pensions law effective from October 1, 2022 – a round-up of new legislation

Introduction

This month, we provide a round-up of a number of changes in pensions law which came into force on October 1, 2022. Where applicable, we have suggested some steps for employers and trustees to consider taking.

The final section of this briefing details further significant legislative changes which we are expecting in the near future.

Pensions Regulator assumes oversight of investment consultants and fiduciary managers

The Governance and Registration (Amendment) Regulations 2022 essentially integrate the relevant provisions of a previous Order made by the Competition and Markets Authority to require trustees of most occupational pension schemes to carry out a tender process for fiduciary management services and to set strategic objectives for their investment consultants.

The Regulations require trustees to report compliance to the Regulator as part of the scheme return process (rather than separately to the CMA, as had been the case since 2019). They also introduce powers for the Regulator to enforce compliance by way of third-party and penalty notices where necessary. 

One point of difference between the Regulations and the CMA Order is that the previous exemption for master trusts is no longer included. Where the scheme is a DC master trust, and its scheme strategist or scheme funder (or a group company of its scheme strategist or scheme funder) is a firm that offers both investment consultancy services and fiduciary management services to the trustees, the Regulations apply. This means that the objectives and monitoring requirements will also apply to those performing investment consultant functions for master trusts.

Where a scheme had set an investment consultant’s objectives before October 1, 2022, under the CMA Order, the first review must be completed within three years from that date. Given that the CMA Order came into force on December 10, 2019, some schemes’ reviews could be due as early as December 10, 2022.

In acknowledgement of the new Regulations, the Regulator has updated both its guidance on tendering for fiduciary management services and its guidance on setting objectives for investment managers.

Actions for trustees: As the Regulations are intended broadly to replicate the former CMA requirements, most trustees will have no immediate action to take but should check the dates when objectives were last set under the CMA regime. DC master trusts, however, will now need to set investment consultant objectives. All trustees should familiarise themselves with the Regulator’s updated guidance, and should check the date for completion of their first review. In addition, where in the past schemes appointed a fiduciary manager without a competitive tender, this will also need to be considered for future appointments.

Climate change reporting requirements and new DWP guidance

New climate change reporting requirements began to be phased in from October 1, 2021, applying first to larger schemes with £5bn or more of relevant assets, CDC schemes and master trusts. The Climate Change Governance and Reporting Regulations 2022 bring schemes with £1bn or more in relevant assets within scope of the same requirements during the first scheme year which ends after October 1, 2022. The requirements cease to apply from any subsequent scheme year end-date on which the scheme has relevant assets of less than £500m.

The Regulations require trustees of affected schemes to establish and maintain processes so that they are satisfied that third parties undertaking scheme governance activities (including those advising or assisting the trustees, but excluding legal advisers) take adequate steps to identify, assess and manage relevant climate-related risks and opportunities. Trustees are expected to identify climate-related risks and opportunities which they consider will have an effect on the scheme's investment strategy and, for DB schemes, its funding strategy.

Within seven months of the end of the relevant scheme year, the trustees must publish a report which is to be available free of charge on a publicly available website. The Regulator will monitor compliance and has the power to issue a penalty of £2,500 breach of this requirement.

Schemes now falling within the ambit of the Regulations will also have to calculate and disclose a metric describing the extent to which their investment portfolio is aligned with the Paris Agreement goal of limiting global warming to below 2 degrees. 

New statutory and non-statutory guidance has been published by the DWP, and trustees must take into account the statutory elements when considering how to comply with the requirements relating to SIPs and implementation statements.

Paragraphs in the guidance which are statutory are marked “SG”. The other, non-statutory, parts of the guidance are intended to encourage good practice but following them is not mandatory. The guidance explains that “must” refers to a legislative requirement and failure to comply may lead to enforcement action by the Pensions Regulator. Where “should” is used in relation to the preparation of the IS, trustees are expected to follow the approach set out. If they choose not to, they should be able to explain why not in the IS. A table following paragraph 11 sets out which parts of the guidance are statutory and which non-statutory.

Actions for trustees: schemes now in scope should already have established systems and processes in place to take account of climate related risks and opportunities. Where schemes have year ends between December 31, 2022, and March 31, 2023, time is now short for those responsible to select the climate-related metrics and analyse data against the chosen targets. The report must be prepared and published within seven months of the end of the scheme year. Data will need to be collated on an ongoing basis, with a view to updating the report annually. Trustees should familiarise themselves with the DWP’s guidance and ensure the statutory guidance is followed.

Simpler annual benefit statements for members

From October 1, 2022, where a DC scheme is used for auto-enrolment, a “simpler annual benefit statement” to all members (except pensioners) will be required.

The statement must be provided within 12 months of the end of the scheme year, must not exceed one double-sided sheet of A4 when printed, and can be provided in hard or electronic copy. However, trustees must take into account the needs of disabled people when deciding on the format to use.

Statutory guidance has been published alongside the amending regulations, including an illustrative template of the two-page statement. Trustees may use their own branding, but this should not “obscure the flow of information” or increase the length of the statement beyond the permitted two pages.

The Secretary of State will assess the effectiveness of the new requirements and publish a report within five years of October 1, 2022, and five-yearly after that.

Actions for trustees: trustees of all DC schemes used for auto-enrolment should note the changes and ensure their future annual benefits statements comply with the new requirements.

Easements for master trusts on employer-related investments

Limits apply on investments connected with sponsoring employers of multi-employer pension schemes, known as “employer-related investments” (ERI). These limits include a maximum of five per cent of a scheme’s investments in a participating employer or associated employers and a cap of 20 per cent of the scheme’s total assets invested in ERI. 

With effect from October 1, 2022, these restrictions were eased for master trusts with 500 or more active employers. The new provisions mean that ERI restrictions only apply to investments relating to the scheme funder, the scheme strategist and persons connected to or associated with them. 

The proposals for change were made as master trusts with a large number of unconnected participating employers previously had to undertake costly and onerous compliance checks before certain investments are possible.

Further changes still awaited

As ever, the pensions legislative agenda has been fairly busy, and will continue to be so over the next few months. There are several more legislative changes which are anticipated before the end of 2022. Please contact your usual Norton Rose Fulbright adviser if you need further information on any of the following:

• The Regulator’s Single Code which will consolidate ten of the existing 16 codes, has been expected since “Autumn”. We have published three detailed briefings on the information available so far:

  In July 2022, “Turning up the heat on compliance: the Pensions Regulator’s “super” Code”, explained how the Regulator will expect trustees and sponsoring employers to be much more disciplined in their future approach to scheme management. We focused on the new requirement for trustees to develop an “effective system of governance” (or ESOG). 

  In August 2022, “Own risk assessments: the Pensions Regulator’s “super” Code part 2”, we turned to the requirement for all schemes with 100 or more members to prepare an “own risk assessment” (or ORA) within 12 months of the new Code coming into force. We looked at the essential elements of the ORA and gave some practical pointers on how trustees could tackle its production.

  In October 2022, “Scheme policies and what to put in them: the Pensions Regulator’s “super” Code part 3” we looked at some of new concepts that trustees will need to get to grips with; what could be recycled from the policies they already have, and what needs looking at afresh. 

• DB scheme funding regulations - the final version of the regulations outlining the requirement for a new funding and investment strategy is awaited from the DWP, following closure of the consultation on October 17, 2022. The Regulator will also produce a new DB funding code of practice. See our September 2022 briefing “Funding defined benefit pension schemes – proposed funding and investment changes” for more detail.
• Changes to the notifiable events regime – this has been outstanding for a few months now, and response to the consultation had originally been expected in early 2022. See our September 2021 briefing for more detail.