Hotly anticipated by the Pensions industry, yesterday’s Autumn Statement from Chancellor Jeremy Hunt included well-trailed measures representing the next steps of the Mansion House reforms. It’ll take some time to digest the details set out in the raft of papers published in the wake of the Statement, but the principal headlines are:

1. Increasing the consolidation of DC pots using a “lifetime provider” model

Following its call for evidence on consolidating small pension pots earlier this year, the Department for Work and Pensions 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. In his Statement, the Chancellor referred to a similar Australian model, introduced in 2021, by which employees are “stapled” to a fund which must be used by all future employers. 

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 is published here and closes on 24 January 2024.

 2. Using the PPF as a consolidator for small, underfunded schemes.

The DWP will consult “this winter” on “how the Pension Protection Fund 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. It will be interesting to see the details when they emerge: at present, the PPF (originally established to act as a “lifeboat” for underfunded schemes cut adrift following the insolvency of their employer) is now significantly overfunded with its surplus assets effectively trapped and no statutory mechanism currently in place for it to freeze further levy payments from ongoing schemes. 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’s 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's unlikely to be popular with insurers and commercial consolidators, who will see the PPF as a state-sponsored competitor. However, it’s 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’s unlikely that using the PPF as a consolidator will harm the bottom line of insurers, at least.

3. Use of surplus assets in ongoing schemes

Among the announcements made today, 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’s 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. 

It's an idea that’s been floated by many across the industry, including Burges Salmon in its joint paper with XPS Pensions Group and Premier Milton Investors, which you can read about here. The consultation is likely to focus on how surplus assets in large, ongoing schemes can be accessed by sponsoring employers whilst also ensuring that trustees can continue to meet their duty to protect member benefits. 

Commenting on the package of reforms, Richard Knight, Head of Pensions at Burges Salmon said: “We are encouraged by the announcements made today, which show that the Government has listened to the industry’s responses to the Mansion House reforms. There are clearly a number of details that must be worked through, in particular for the reduction in small DC pots, but the level of engagement and overall direction of travel is positive. We look forward to seeing the outcome of the consultations, and hope that changes can be made that will benefit employers and pension savers alike.”