Pensions Watch – Issue 16: What’s been happening and what’s on the horizon in the world of pensions

Pensions Watch – Issue 16: What’s been happening and what’s on the horizon in the world of pensions

In this edition of Pensions Watch, the first for 2022, we consider what’s on the horizon over the next 12 months for UK pension schemes, what these initiatives mean for schemes and why each is key to improving member outcomes.

Regulation, regulation, regulation

2021 for UK pension schemes was very much a year of grappling with numerous, ongoing big projects, multiple consultations and the sheer weight and complexity of new regulation. Much of the latter was (and continues to be) introduced courtesy of the, long-awaited, Pensions Schemes Act 2021, with schemes’ governance budgets needing to accommodate a considerable number of new The Pensions Regulator (TPR), the Department of Work and Pensions (DWP) and, in some cases, Financial Conduct Authority (FCA) regulatory disclosures (and yet more acronyms). Not that 2022 will be any different. In fact, working through a 26-page trustee bulletin outlining regulatory change, consultations in progress, guidance and what’s on the horizon for 2022, no less than 56 issues are considered.1 So what are the key items for pension schemes to address in 2022 and why do they matter?

Climate disclosures2

2021 saw the collective financial muscle of UK pension schemes very much on the government’s radar as a potentially significant catalyst in moving the UK to net zero greenhouse gas (GHG) emissions by 2050. This coincided with the very largest private sector defined benefit (DB) schemes and master trusts being required to make annual Task Force on Climate Related Disclosures (TCFD),3 not only to inform engaged members of the scheme’s carbon footprint, GHG emissions risk management and climate ambitions but also to enhance trustees’ understanding of how climate-related risk and opportunities could affect their scheme and to plan for a multiplicity of potential climate outcomes. After all, like any disruptive force, transitioning to a low carbon, and ultimately a net zero emissions, economy will invariably result in winners and losers – and what trustee (or any other fiduciary) or scheme member, recognising the systemic and financially material risk climate change potentially presents to the security of member benefits, wouldn’t want to know whether the winners far outweigh the losers and that each is being managed appropriately?
However, the problem remains that not all of the information required to make such definitive judgements is attainable, particularly for illiquid asset classes and, crucially, government bonds,4 or presented in a consistent, standardised, format, although this will undoubtedly change over time as companies and asset managers face increasingly stringent TCFD reporting requirements.
In addition to these disclosures being extended this coming 1 October to all trust-based schemes with assets of £1bn+, TCFD disclosures will, following the recent closure of the TPR’s October 2021 Paris-alignment reporting consultation, also require those trust-based schemes subject to TCFD disclosures, to detail to what extent their asset portfolios align with the +1.5°C goal of the Paris Agreement. Moreover, these disclosures may well be extended, perhaps as soon as next year, to all private sector occupational pension schemes (i.e. including those regulated by the FCA), by which time there should, hopefully, be more streamlined TCFD implementation protocols and guidance.
Although some Local Government Pension Scheme (LGPS) Funds are already complying voluntarily with TCFD disclosures, the recent consultation from The Department for Levelling Up, Housing and Communities (DLUHC) will result in a more definitive shaping of the rules on how the LGPS Funds should report on the climate-related impact of their investments.
Indeed, while for some private and public sector schemes, climate disclosures are increasingly becoming a hygiene factor, for many others, particularly the default investment strategies of DC schemes, this isn’t the case. In fact, the extent to which climate considerations are reflected in DC default strategies remains a challenge. Therefore, to enhance fiduciaries understanding of climate-related risks and opportunities and to support the achievement of best practice, TPR has recently finalised trustee guidance on TCFD reporting obligations5 and will shortly issue an update to its Trustee Toolkit.
Of course, the ultimate objective of making these disclosures is to create a UK pensions system that builds resilience to both transition and physical climate risks and which better deploys capital to an increasing array of climate-resilient, or carbon-reducing, investment opportunities. While legislation and regulation go some way to achieving this, collaborative asset manager- and asset owner-inspired initiatives will undoubtedly continue to square the climate risk management circle in 2022.6

Collective Defined Contribution (CDC) schemes

After four years of deliberations, this year will see Collective Defined Contribution (CDC) schemes in the UK,7 such as that to be offered by the Royal Mail, become a reality. Subject to Parliamentary approval, draft legislation will come into force on 1 August for single and connected employer Collective Money Purchase (CMP) schemes, as they’re referred to in the legislation: with TPR, which will authorise and regulate CDCs, looking to consult this month on a Code of Practice and operational guidance for sponsoring employers. A TPR consultation on extending CDCs to multi-employer schemes and decumulation-only solutions may also be on the horizon. In providing a half way house between the generous pension provision, collective passivity and certain outcomes of DB and the greater individual responsibility, less generous and less certain outcomes of DC, CDC will, undoubtedly, be of potential of interest to a number of DB schemes and could well become a core component of the UK pensions landscape.8

TPR Codes

TPR’s much anticipated DB Funding Code, which will set the funding framework for all DB schemes, is now likely to be introduced later in the year, following the revised timetabling of its second consultation from late-2021 to summer 2022.
Equally anticipated this year is the introduction of TPR’s new single Code of Practice. Replacing TPR’s 15 existing codes, the new single code – which will be applicable to occupational defined benefit and defined contribution schemes, personal pension schemes (to some extent) and public sector schemes – will provide one contemporary and consistent source of information on scheme governance and management.9 The new code will comprise 51 topic-based modules grouped into five themes, covering: (1) the governing body (2) funding and investment (3) administration (4) communications and disclosure and (5) reporting to TPR. Within the single code will be a requirement for schemes to develop, document and implement an Effective System of Governance (ESOG) and an Own Risk Assessment (ORA), with the code detailing the requisite processes, procedures and documents to be fully compliant with these frameworks. For instance, trust-based schemes will be required to document their processes for identifying and assessing climate-related risks and opportunities, having considered the short, medium and long-term effects of climate change on the objectives of the scheme and its operations.
While becoming familiar with both new codes will undoubtedly place considerable demands on trustees, in what is already shaping up to be yet another busy year, the streamlining (and probable simplification) of the current array of codes is to be welcomed in the quest to continually improve member outcomes through improved governance and risk management.

Pensions Dashboards10

Although the Money and Pensions Service’s (MaPS) long-awaited pensions dashboard, which will store all of one’s pension entitlements securely online in one place, won’t be launched until 2023, at the earliest, preparations for its introduction are now starting to hot up. The DWP-appointed Pensions Dashboard Programme (PDP) has already begun building the dashboard’s central digital architecture, while the DWP, having set out the legislative framework for dashboards (there will be more than one), will shortly consult on the likely regulations governing how providers and schemes will connect to the MaPS dashboard’s infrastructure and what data they should provide. This will be partly informed by recent PDP research into end-user reactions to different ways of presenting information about their pensions, with clarity and security of information being at the heart of the programme. Indeed, presenting this information in a simple and logical fashion should help drive greater member engagement, more informed decision making and spur those, thus far, disengaged into action.11 Additionally, the PDP has begun working with seven pensions organisations in refining the MaPS dashboard‘s onboarding process and initial testing of the end-to-end system. This has since been reinforced by bringing a further three commercial organisations on board, each considering launching their own dashboards.
Of course, all of this activity serves to highlight the importance to schemes and providers of ensuring their member data is dashboard ready in time for the MaPS dashboard launch.12

VFM assessments13

Securing value for money, or value for members, is central to achieving good retirement outcomes. Following the publication, last September, of the joint discussion paper by TPR and the FCA on assessing and driving Value for Money (VFM) in the DC accumulation phase, given the not unreasonable connection made between scheme size, governance and value delivered to members, we are likely to see both an acceleration of consolidation among small, single employer trust-based DC schemes and the seemingly inexorable rise of the master trust.

Why does this matter?

There is always a logical reason for the introduction of pension scheme regulation and a clear rationale for it providing a means to an end, with an unwavering focus by TPR, the DWP and the FCA on improving member outcomes and the security of member benefits. As such, it should never be treated as a tick box exercise. For instance, TCFD disclosures, while seemingly complex to the uninitiated, will increasingly help fiduciaries better understand, assess and manage climate risks as they seek to both mitigate the physical and transition risks of moving to a climate-resilient economy and capture the opportunities arising from each. Moreover, for DB schemes this risk assessment extends beyond just considering the assets, by helping to pinpoint the potential impact of climate change on sponsor covenant strength and the scheme’s liabilities.
However, a frequent plea made by pension fiduciaries to regulators is for guidance on the practical application and achievement of best practice to be issued prior to the introduction of a regulation, rather than after, while allowing more time between a regulation’s finalisation and introduction. In a year that will undoubtedly place considerable demands on fiduciaries, that plea may well become louder. After all, the above isn’t an exhaustive list of what fiduciaries will be expected to address in 2022 – far from it. Major projects like GMP equalisation will remain ongoing, alongside less governance-intensive, but nonetheless time consuming, initiatives such as implementing a stronger nudge to those members transferring or accessing their pension benefits to use Pension Wise (April),14 and annual benefit statement simplification for auto-enrolment DC schemes (October). Fiduciaries will also need to keep an eye out for the introduction of a statutory regulatory regime for pension consolidators and more stringent anti-scam measures.
While many schemes undoubtedly benefit from the introduction of new regulation and its accompanying guidance in making the necessary improvements to their governance and risk management, there are many others for whom being ahead of the curve with little, if any, formal prompting remains the obvious path to take. Those schemes that continually strive to improve member outcomes, by achieving best practice in all that they do, should be applauded for their resolve.

And finally – a post script on inflation15

Having become accustomed to low and stable inflation, UK pension funds continue to gauge whether the inflation spikes of the past year will prove transitory or not, in a multi-dimensional sense. After all, rising inflation potentially challenges both sides of DB schemes’ balance sheets, not to mention the sponsor covenant, and the ability of DC schemes to generate inflation-plus returns.
However, while most DB scheme benefits are subject to single-digit inflation caps, bolstered by increasingly comprehensive inflation hedging programmes and an amplified focus on real assets, with either implicit or explicit index linking, they also typically allocate extensively to fixed income assets with no inflation hedging.16 By contrast, most DC schemes tend to hold more inflation-busting equities than DB. However, they too are potentially quite exposed to inflation spikes in allocating to nominal fixed income assets and holding few real assets.
Crucially, while these inflation spikes have been more persistent than initially anticipated, they should be expected to moderate, as the supply chain headwinds that have underpinned them will likely become less dominant as 2022 progresses. Moreover, the countervailing forces of globalisation, demographics, de-unionisation and technology should continue to keep inflation in check over the longer term.
19 January 2022
Chris Wagstaff
Chris Wagstaff
Head of Pensions Investment & Education
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Pensions Watch – Issue 16: What’s been happening and what’s on the horizon in the world of pensions

1 See:
2 The TCFD framework was established by the Financial Stability Board with the goal of harmonising climate disclosures across the financial intermediation chain, including companies, banks, investors and pension funds.
These disclosures are detailed in Pensions Watch – edition 7 (April 2021). See: and Pensions Watch edition 1 (November 2020).
3 TCFD reporting comprises four broad themes: governance, strategy, risk management and metrics and targets – the latter comprising an absolute measure of the carbon generated by a portfolio, a relative intensity measure
and a third measure chosen from a short-list of options, which include implied temperature rise – and building different scenarios based on different assumptions of the level of global warming.
4 Additionally, for government bonds, the government’s carbon data must capture the emissions of individuals, companies and the public sector, which inevitably risks double counting.
5 This includes examples of selecting a climate target and conducting scenario analysis.
6 For more on the climate challenges faced by pension funds and the potential solutions, see: There is no Planet B: Why climate change risk management is the world’s hottest topic and how asset owners and asset managers should
be responding. Chris Wagstaff. Columbia Threadneedle Investments. June 2020. See:
7 Collective Defined Contribution (CDC) schemes set a target or “ambition” level of benefits to be paid as a pension for life with variable increases. Based on a fixed level of employer contributions, set for a fixed term of at least
five years, after which they are reviewed, a CDC scheme, unlike DB, has the scope to redefine the benefits it offers if circumstances change, without the employer being required to pay shortfall contributions. As there is no sponsor
covenant, there are no guarantees. So, whereas the amount of pension is based on salary and service years, just as it is for DB, if the fixed contribution rate and the investment returns prove to be insufficient to support this accrual,
then the pension benefit will be necessarily lower than originally intended. By pooling money into a single fund, with a desired long-term asset mix, CDC pension arrangements allow employees to pool the risks of investing and
longevity, achieve lower costs through economies of scale and permit greater and longer-term exposure to growth and illiquid assets. Crucially, CDC, through employee risk sharing, also provides intergenerational fairness by not
allowing one cohort to benefit significantly at the expense of another. CDC therefore provides a half way house between the generous pension provision, collective passivity and certain outcomes of DB and the greater individual
responsibility, less generous and less certain outcomes of DC.
8 See: CDC support grows; one fifth of businesses considering use. Holly Roach. Professional Pensions. 6 December 2021.
9 The single code will also detail how trustees deal with climate risk.
10 For more on what pension dashboards will potentially offer, please see Pensions Watch – edition 4 (December 2020). See:
11 The launch of Sweden’s pensions dashboard, in 2004, is instructive. Although 50% of the working population are now registered to use it, over 80% of the dashboard’s original functionality had to be revised shortly after launch as it
wasn’t giving end users the information they really needed. Only after working with social psychologists and user research specialists did the information provided resonate with end users, resulting in end user registrations picking up.
12 In addition to the forthcoming DWP consultation on dashboard data standards, the Pensions Administration Standards Association (PASA) has recently published a helpful guide on what scheme data needs to be provided. Please
see: For details of the PDP’s timeline and key milestones, see:
13 For more on how to assess VFM, please see Pensions Watch – edition 11 (August 2021). See:
14 For more on Pension Wise, please see Pensions Watch – edition 4 (December 2020). See:
15 For more on the risks posed by and how to manage inflation, please see Pensions Watch – edition 9 (June 2021). See:
16 Across the 5,220 DB schemes tracked by the Pension Protection Fund, the average holding in bonds was 72%, more than half of which have no index-linking. See: The Purple Book 2021. 16th edition. The Pension Protection Fund. p.4.

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