Edinburgh reforms - What do they mean for pensions?

On 9 December, the Chancellor announced over 30 regulatory reforms which, together with the Financial Services and Markets Bill, the government hopes will drive growth and competitiveness in the UK financial services sector.

The proposed reforms are designed to:

• maintain and build a competitive marketplace and promote the effective use of capital;
• secure the UK’s leadership role in sustainable finance;
• ensure the regulatory framework supports technology and innovation; and
• deliver for consumers and businesses.

These reforms will impact a wide range of businesses and consumers across the financial services landscape. The key reforms from a pensions perspective are summarised below. If you would like to find out more about the full package of proposed reforms check out the blog published by our financial services regulatory colleagues.

Key reforms

Some of the reforms included in the Chancellor's statement which will impact the pensions industry are already underway. For example:

• The Chancellor confirmed the Government's intention to lay regulations which will remove well-designed performance fees from the pensions regulatory charge cap in early 2023 – This is part of the Government's attempts to encourage DC pension schemes to invest more of their assets in illiquid investments, such as UK infrastructure. One of the barriers to this that has been identified is the fact that performance fees typically form part of the costs and charges associated with such investments. To address this, the Government is planning to add performance-related fees to the list of charges that fall outside the scope of the 0.75% regulatory charge cap that applies to the default investment funds under occupational pension schemes used for automatic enrolment. The Government has already consulted on draft amending regulations. Those regulations also include measures which would require relevant DC schemes to disclose and explain their policies on illiquid investments.
• The Chancellor also confirmed the Government's plans to introduce a ‘Smarter regulatory framework’ by repealing retained EU law on financial services and replacing it with a comprehensive model of financial services regulation tailored to the UK - The planned reform of Solvency II forms part of this new UK-specific regulatory framework. The government set outs its final policy position on a new UK-Solvency regime alongside the Chancellor's Autumn Statement. It's anticipated these reforms will reduce overall capital requirements for insurers, as well as broadening the assets they can invest in. This creates the potential for insurers to invest more in productive finance, such as UK infrastructure and green energy supply, in the coming years. Trustees and sponsors of DB schemes will also be hoping it leads to further improvements in bulk annuity pricing.

Alongside these pre-existing reforms, the Chancellor also announced that the government would:

• work with the FCA to examine the boundary between regulated financial advice and financial guidance – this is important, particularly in the context of the new Consumer Duty, which emphasises the need for pension providers and other regulated firms to provide support to retail customers to help them achieve their financial objectives;
• he also confirmed plans to increase the pace of consolidation in DC pension schemes – to achieve this the DWP will consult in the new year on a new Value for Money framework, alongside the FCA and the Pensions Regulator, which will set required metrics and standards in key areas such as investment performance, costs and charges and quality of service that all schemes will be required to meet; and
• the Chancellor also said that the Government plans to consult on new guidance on Local Government Pension Scheme asset pooling and on requiring LGPS funds to ensure they are considering investment opportunities in illiquid assets such as venture and growth capital, as part of a diversified investment strategy.

FCA regulation

More broadly, regulated firms in the pensions industry will also be interested to note that:

• the Government is legislating through the Financial Services and Markets Bill to introduce new secondary objectives for the FCA and PRA to provide for a greater focus on growth and international competitiveness while maintaining their existing primary objectives; and
• also that the government and regulators plan to review the SMCR regime in the first quarter of 2023. As part of this, the government intends to launch a Call for Evidence which will seek views on the regime’s effectiveness, scope and proportionality, and on potential improvements and reforms.

ESG

And finally, with pension schemes and providers paying increasing attention to the management of ESG risks, they will be interested to note that the Government:

• intends to publish an updated Green Finance Strategy early next year; and
• it will also consult in the Spring on plans to bring ESG ratings providers into the FCA's regulatory perimeter, recognising that these services are increasingly a component of investment decisions, and therefore the government wants to ensure improved transparency and good market conduct in this area.

Comment

From a pensions perspective, a primary driver behind several of these reforms is the Government's long-stated ambition of increasing investment in productive assets by DC pension schemes and insurers. Time will tell whether these measures will be sufficient to achieve this objective.