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CATALYST
DC pensions technical update | Q3 2024
Providing the latest updates to spark new ideas and accelerate your progress within DC pensions.
Mark Futcher
Partner and Head of DC
Note from our editors
This edition of Catalyst explores significant shifts in the UK pensions landscape following the recent election of a new Government, which has set the tone for transformative changes. Key legislative updates aim to improve retirement outcomes through consolidation, a Value for Money (VFM) framework, and mandatory retirement income solutions. Trustees' roles continue to evolve, with increased focus on environmental, social, and governance (ESG) compliance and the upcoming change to the normal minimum pension age. Our wider updates section also highlights the Government's push for pension funds to invest in productive assets, which should drive economic growth, as well as updates on the removal of the Lifetime Allowance. These developments underpin a period of change, yet also opportunity in DC pensions.
Sonia Kataora
Partner and Head of DC Investment
Phil Duly
Principal and Head of DC Research
& Technical
The Autumn Budget 2024
Absent from the Budget were speculated changes to the National Insurance (NI) exemption status for employer pension contributions, pension tax relief reform, and restrictions on tax-free cash lump sums.
It was also announced that employer NI will increase from 13.8% to 15% in April 2025 and the earning threshold for employer NI will drop from £9,100 pa to £5,000 pa, adding to employment costs alongside a minimum wage hike. However, higher employer NI will increase saving from pension salary sacrifice.
On 30 October, Chancellor Rachel Reeves presented the Autumn Budget 2024. The most significant change for DC pensions was the announcement that unused pension savings will be included in estates for Inheritance Tax from April 2027. The Government has launched a consultation on the implementation, with further consultation of draft regulations expected in 2025.
Wider updates
GOVERNMENT & REGULATION UPDATES
TRUSTEE updates
In short
The King's Speech introduced a Pension Schemes Bill aimed at consolidating small deferred DC pots, establishing a VFM framework, and mandating trustees to offer retirement income solutions.
Learn More
The Government launched a review focused on boosting productive investment and improving retirement outcomes, with consolidation of schemes and broader investment strategies.
Learn More
The Pensions Regulator (TPR) is evolving its supervision of master trusts, focusing on investment quality, data standards, and innovation at retirement, with an emphasis on delivery long-term value for savers.
Learn More
Regulations to address technical deficiencies with the abolition of the Lifetime Allowance will come into force on 18 November 2024, and will have effect from 6 April 2024.
Learn More
A pensions review
Pension Schemes Bill
Master trust supervision
Lifetime Allowance
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CATALYST | DC pensions
Government & regulation updates
King's Speech & Pension Schemes Bill
The UK elected a Labour government with a large majority appointing Sir Keir Starmer as the new Prime Minister. Following this appointment, we now have a new Secretary of State for Work and Pensions, Liz Kendall, and a new Pensions Minister, Emma Reynolds.
The King's Speech, delivered on 17 July 2024, outlined the legislative agenda the Government intends to follow over the course of the current Parliamentary session. This includes a Pension Schemes Bill, with measures to:
Implement automatic consolidation of small deferred DC pots.
Establish the new VFM framework for trust-based DC schemes, expected to align with new rules from the Financial Conduct Authority (FCA) for contract-based schemes.
Place duties on trustees of trust-based schemes to offer a retirement income solution, including default investment options, to their members.
The Government intends that the measures in this Bill "will enable consolidation and more productive investment of funds", leading to improved outcomes and greater security in retirement for savers.
Given general fiscal constraints, there will be interest in whether Labour will seek to change the pensions tax regime more widely. We may hear more on this in the Autumn Budget set for 30 October, with the Prime Minister already setting expectations that this Budget will be "painful".
Government launches pensions review
In line with Labour's election manifesto commitment, the Government has launched a review of the pensions landscape aimed at boosting productive investment, increasing pension pots, and addressing inefficiencies in the pensions system.
The first phase of the review focuses on enhancing productive investment and improving retirement outcomes. This will be achieved through consolidation and encouraging large-scale schemes to adopt broader investment strategies to increase returns.
The Government ran a Call for Evidence in September 2024 to invite input, data and information which would inform the first phase of the review. This invited respondents to consider issues of scale and consolidation, costs vs value and investing in the UK. The findings from this phase are expected to be reported in the coming months and may include additional measures for the Pension Schemes Bill.
The second phase of the review, anticipated late in 2024, will explore further steps to enhance pension outcomes and boost investment in UK markets. This phase will also assess retirement adequacy, so may include the extension of automatic enrolment.
Value for Money (VFM) consultation
Building on joint work with the Department for Work and Pensions (DWP) and TPR towards a new common VFM framework across DC schemes, on 8 August 2024 the FCA launched a consultation with feedback invited until 17 October 2024. This consultation sets out proposed rules and guidance for default arrangements of workplace contract-based schemes.
The framework aims to shift focus from costs to long-term value, for example enabling providers to invest in assets that could deliver greater long-term returns despite higher management costs.
Key features of the proposed framework:
Schemes must publicly publish information and metrics, including investment performance, costs and charges and service quality.
Schemes must assess their VFM using the published information and metrics and those of comparator schemes.
Schemes will use a traffic-light Red-Amber-Green (RAG) rating system for VFM.
Schemes with amber and red VFM ratings will be required to improve or consider transferring savers to green-rated schemes.
Action
A key aspect of the consultation is the development of metrics that clearly define value for money. To ensure that the VFM framework can be effectively rolled out across DC schemes, both employers and trustees are invited to respond to the consultation.
