Employment and pensions

UK Public Service Pensions Update | July 2023

Published on 25th Jul 2023

Welcome to the latest edition of the UK Public Service Pensions Update

People in a meeting and close up of a gavel

This month we look at developments in areas ranging from the chancellor's Mansion House speech, to the McCloud remedy, to abolition of the Lifetime Allowance.

If you would like to discuss any of the items in this newsletter, please contact one of the experts listed at the end.


LGPS | Mansion House speech - new consultation on asset pooling

The chancellor of the exchequer delivered his first Mansion House speech on 10 July.

The chancellor set out the current government's plans to "boost returns and improve outcomes for pension fund holders whilst increasing funding liquidity for high-growth companies. … to incentivise companies to start and grow in the UK by strengthening our position as a listings destination. And finally … reform and simplify our financial services rulebook to ensure we have the most growth-friendly regulation possible without compromising our commitment to stability."

A number of consultation papers and responses were released the day after the speech. These included a consultation on "accelerating the consolidation of Local Government Pension Scheme" (LGPS) "assets, with a deadline of March 2025 for all LGPS funds to transfer their assets into local government pension pools and ensure greater transparency on investments."

The themes of the pensions-related announcements were unlocking investment into the UK economy (including into unlisted high growth companies, infrastructure and other productive assets), and the consolidation or scaling up of schemes in order to make it easier for them to allocate part of their portfolio to unlisted assets.

The consultation papers and responses released on 11 July relevant to private sector pension schemes related to topics such as defined benefit superfunds (commercial consolidator funds) and a new value for money framework for all defined contribution schemes (trying to widen the focus of "value" beyond costs and to further encourage consolidation into another scheme where a scheme cannot provide value for money). Also, extension of the new collective defined contribution model to make this form of large-scale scheme more readily available.

The consultation on the consolidation of LGPS assets seeks views on proposals in five areas and will be open until 2 October 2023:

  • "[P]roposals to accelerate and expand pooling, with administering authorities confirming how they are investing their funds and why. While pooling has delivered substantial benefits so far, we believe that the pace of transition should accelerate to deliver further benefits which include improved net returns, more effective governance, increased savings and access to more asset classes. We propose a deadline for asset transition by March 2025, noting we will consider action if progress is not seen, including making use of existing powers to direct funds. Going forward, we want to see a transition towards fewer pools to maximise benefits of scale."
  • Proposals "to require funds to have a plan to invest up to 5% of assets to support levelling up in the UK, as announced in the Levelling Up White Paper…. This consultation sets out in more detail how the Government proposes to implement this requirement and seeks views on its plans." 
  • An "ambition to increase investment into high growth companies via unlisted equity, including venture capital and growth equity. The government believes there are real opportunities in this area for institutional investors with a long-term outlook, such as the LGPS." For example, that funds "should have an ambition to invest 10% of their funds into private equity as part of a diversified but ambitious investment portfolio" to unlock a "further £25 billion by 2030" and "should be supported to collaborate with the British Business Bank and to capitalise on the Bank’s expertise."

  • Proposals to amend The LGPS (Management and Investment of Funds) Regulations 2016 and associated guidance "to implement requirements on pension funds that use investment consultants … to implement the requirements of an order made by the Competition and Markets Authority (CMA) in respect of the LGPS." Here the suggestion is that: 

  1. "[w]here the administering authority uses investment consultancy services [as defined] in relation to its Investment Strategy Statement or for other matters, it must set strategic objectives for the investment consultancy provider, unless the provider is exempt (such as the LGPS pools);
  2. [a]dministering authorities must not enter investment consultancy services contracts or continue to receive such services from any provider unless the authority has set strategic objectives for that provider;
  3. [a]dministering authorities must review strategic objectives at least every 3 years or every time the ISS changes substantially;
  4. [s]trategic objectives must have regard to guidance on setting objectives for providers of investment consultancy services issued by the Pension Regulator in November 2019."
  • A proposal to amend the LGPS (Management and Investment of Funds) Regulations 2016 to make it clear that LGPS administering authorities may make contribute to a limited partnership in an unquoted securities investment partnership. This is a technical change to ensure that the regulations reflect the original policy intent.

The LGPS scheme advisory board has confirmed that it intends to respond to the consultation.

You can read about the financial services initiatives announced in the chancellor's speech in our Insight.


LGPS | Extension of LGPS academy guarantee

On 28 June 2023, the minister for schools announced that the Department for Education has extended the LGPS academy guarantee to include academy trust outsourced contracts.

The extension will "help academy trusts by reducing the costs of their outsourced contracts—for example, by lowering set-up costs, simplifying administrative processes and removing the requirement for a bond."

Detailed guidance has been published.


McCloud remedy | LGPS

The Local Government Association and the Local Government Pensions Committee (LGA and LGPC) have published their response to the Department for Levelling Up, Housing and Communities' (DLUHC) consultation on supplementary issues relating to the implementation of the McCloud remedy in the LGPS and on draft regulations to implement the remedy.

We discussed the consultation in our June 2023 newsletter. Among other things the joint response expresses concern that the regulations "will be laid so close to the effective date of 1 October 2023. In our last response we suggested a lead in time of 12 months would be needed to implement remedy, but we will instead have a period of three weeks. This means pension software will not be updated in time for 1 October 2023 and there will be very little time to get to grips with the detail. Administering authorities may need to manually calculate pension benefits for leavers from 1 October 2023 to avoid knowingly paying incorrect benefits. It is imperative that the statutory guidance needed to implement the remedy is provided as near to 1 October 2023 as possible. The LGPC questions whether DLUHC has committed sufficient resource to the implementation of the McCloud remedy to date. It urges the Department to ensure adequate resource is in place to deliver the necessary statutory guidance in a timely manner."


McCloud remedy | NIC exemption

Regulations have already been made to exempt compensation payments made under the Public Service Pensions and Judicial Offices Act 2022 from income tax. A second set of regulations has now been made to exempt those payments from National Insurance Contributions.


McCloud remedy | Police and Firefighters' Pension Schemes

In our March 2023 newsletter, we reported that a number of departments were consulting on draft regulations (or policies to inform amendments) to be made under the Public Service Pensions and Judicial Offices Act 2022 in order to implement the retrospective part of the McCloud remedy: the deferred choice underpin under which members will be able to choose between legacy scheme and reformed scheme benefits for remediable service between 1 April 2015 and 31 March 2022.

The Home Office has now published consultation responses in relation to the Police Pension Scheme and Firefighters' Pension Scheme. The related regulations have been made (Police and Firefighters pension schemes) and will come into force on 1 October 2023.


McCloud remedy | Judicial Pension Schemes

In our May 2023 newsletter, we reported that the Ministry of Justice had published the government's response to its consultation on draft regulations to deliver the McCloud remedy for judges (a formal options exercise offering judges a choice between legacy scheme or 2015 scheme membership for the period 1 April 2015 to 31 March 2022). The draft regulations would also make a couple of changes not directly related to the McCloud remedy.

The regulations have now been made and come into force. Commencement regulations have also been made to bring Chapter 2 and related provisions of the Public Service Pensions and Judicial Offices Act 2022 (remediable service and options exercise for judicial pensions) into force.


All funds | Other developments

Funds should also be aware of developments relating to pensions tax (draft legislation to remove the Lifetime Allowance), pensions dashboards, the Retained EU Law (Revocation and Reform) Act 2023 and ESG (environmental, social and governance) ratings providers.

Pensions tax (Lifetime Allowance)

The Finance (No 2) Act 2023 has received Royal Assent. This Act contains the changes to pensions tax legislation which were announced at the Spring Budget 2023. For example: removal of the lifetime allowance charge; certain lump sums to be taxed at marginal rate; increase of the annual allowance and money purchase annual allowance; changes to the annual allowance tapering; and some changes to lifetime allowance transitional protections. It also includes a new provision on stand-alone lump sums (for more on this and on lump sum reporting, see HMRC pension scheme newsletter 151).

HMRC has also published in draft, for technical consultation, provisions which may form part of the Finance Bill 2023-24. These include draft provisions relating to the abolition of the Lifetime Allowance and in relation to relief at source. You can read more in pension scheme newsletter 152.

Pensions dashboards

Funds are waiting for guidance on updated timings for connecting to the pensions dashboard infrastructure. There has been some discussion as to whether the timings in the guidance will be mandatory, but the Pensions Regulator has updated its guidance to make it clear that schemes "must have regard to the guidance on staging timelines, and not doing so will also be a breach". The impression given by this and the other changes made is that, once the guidance has been published, schemes will need a good reason to depart from the date it suggests for them.

Retained EU Law (Revocation and Reform) Act 2023

The Retained EU Law (Revocation and Reform) Act 2023 has been enacted, bringing significant changes to the status of "retained EU law" (REUL) and broadly empowering ministers to restate, revoke or replace REUL with only limited Parliamentary scrutiny. Although the government switched its approach, from abolishing much of REUL to sunsetting a far more limited schedule of approximately 600 pieces of REUL, the Act still makes important alterations to the status, content and operation of REUL and contains broad ministerial powers that could be used to achieve post-Brexit deregulation.

You can read more in our Insight. Schedule 1 to the Act does not contain any pensions provisions, but it will be important to understand which directly effective rights the government intends to preserve and what changes (if any) it intends to make to the law applying to pension schemes.

Draft code of conduct for ESG ratings and data product providers

The ESG Data and Ratings Code of Conduct Working Group, supported by the International Regulatory Strategy Group and the International Capital Market Association, has published a consultation on a draft voluntary code of conduct for ESG ratings and data product providers. The draft code aims to enhance consistency, transparency and accountability in the financial services industry to ensure the market can have confidence in the integrity of ESG ratings and data products through enhanced systems, processes and controls. In a press release, the Financial Conduct Authority welcomed the consultation and confirmed that it will run until 5 October 2023 and that the Code will be updated and finalised by the end of 2023.


House of Commons Library briefing papers | New and updated

The House of Commons library has published or updated the following briefing papers, which might be of interest to public service pension schemes and employers:

Pensions dashboards;

Economic Activity of Public Bodies (Overseas Matters) Bill 2022-23;

Financial provision when a relationship ends (including pensions).

This newsletter covers developments relating to public service pensions in England and Wales, with a focus on the Local Government Pension Scheme.

Share

* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

Interested in hearing more from Osborne Clarke?

3 Upcoming Events