Date laid: 30 January 2023
Parliamentary procedure: affirmative
The main thrust of the Regulations is to create a more level playing field so that all pension schemes with more than 100 members have to disclose the scheme’s investments by class in relevant documents, and, from 6 April 2023, separately identify illiquid assets in that information. These Regulations also seek to remove a barrier to pension schemes investing in illiquid assets by excluding “specified performance-based fees” from the list of charges that fall within the 0.75% regulatory charge cap. “Illiquid assets” covers a wide range of investments (for example art, buildings, intellectual property), some with significant risks. We are concerned that without limits on the proportion of such assets within a pension scheme, the scheme may not be able to deliver the returns members anticipate, many of whom may be auto-enrolled by their employer and therefore have no involvement in the choice of their pension scheme investments. As the fee changes made by these Regulations aim to encourage pension schemes to increase their investment in illiquid assets, the House may wish to ask the Minister how schemes’ subsequent exposure to an increased risk of lower, as well as higher, returns is to be monitored and how trustees are to be properly guided on assessing the risks to the portfolio.
These Regulations are drawn to the special attention of the House on the ground that they are politically or legally important and give rise to issues of public policy likely to be of interest to the House.
5.The main thrust of the Regulations is to create a more level playing field so that all pension schemes with more than 100 members have to disclose the scheme’s investments by class in relevant documents, and, from 6 April 2023, that information will include illiquid assets separately identified. Illiquid assets are ones which cannot easily be sold or exchanged for cash (for example art, buildings, intellectual property). Illiquid assets encompass a wide range of investments and a varying range of risk and returns.
6.Paragraph 7.2 of the Explanatory Memorandum (EM) states that the Government wishes to encourage pension schemes to invest in illiquid assets like renewable energy projects, other infrastructure and UK start-up businesses as this will help contribute to economic growth, in particular in sectors that can help with the transition to net zero.
(a)Specifically, this instrument:
7.Certain pension schemes used by employers to meet their automatic enrolment duties are subject to a cap on the charges which may be borne by scheme members of 0.75% of the funds under management within the default arrangement. The cap applies to all scheme and investment administration charges, excluding transaction costs and a small number of other specified costs and charges.
8.Paragraph 7.1 of the EM states that it is the Government’s priority to explore ways to help facilitate greater investment by UK institutional investors in illiquid assets, because of their potential to deliver higher long-term returns to investors as part of a diversified investment portfolio. The Department for Work and Pensions (DWP) adds that the Pension Charges Survey 2020 showed two-thirds of defined contribution occupational pension schemes had no direct investment in illiquid assets in their default funds and that meeting the cap on charges was a significant barrier to such investment.
9.These Regulations address that barrier by excluding “specified performance-based fees” from the list of charges that fall within the regulatory charge cap. Regulation 2 states:
““specified performance-based fees” means fees, profit-sharing arrangements, or any part of fees or profit-sharing arrangements, which are—[ … ]
(b) calculated only by reference to investment performance, whether in terms of the capital appreciation of the managed investments, the income produced by the managed investments or otherwise;
(c) only payable when—
(i) investment performance exceeds a pre-agreed rate, which may be fixed or variable; or
(ii) the value of the managed investments exceeds a pre-agreed amount;
(d) calculated over a pre-agreed period of time [ … ].”
10.In supplementary information DWP said that the Regulations do not prescribe what that pre-agreed rate or amount has to be. Since producing the EM, DWP has now published the statutory guidance,3 which states that the rate or amount is for the trustees or managers of the scheme, with support from their advisors, and the fund manager to agree based on the nature of the investment proposed. DWP also stated that:
“when investing without the full security of the charge cap, trustees and managers are also advised to seek professional advice on, for example, what is an appropriate hurdle rate for the investment proposed and should also consider the application of mechanisms such as a high-water mark4 or a fee cap to ensure fund managers are not taking excessive risk or being paid repeatedly for the same level of performance.”
11.“Illiquid assets” covers a wide range of assets that tend to have a niche market, and some of them may be harder to sell profitably at short notice—this can imply greater risk. So we asked DWP what happens if the illiquid asset makes a significant loss. Although there will be no charges to the fund members, there will also be less return to the fund—so presumably a risk of lower pension payments to the members.
12.DWP responded:
“Illiquid assets are considered a good fit for pension schemes as generally longer term investments they can offer the potential of positive returns as their value grows in time and reduces the impact of inflation. Ultimately, whether these are suitable investments for pension schemes is a matter for trustees in line with their fiduciary duty to manage “risk and reward” in their members’ best interest. This includes whether an investment in their assessment is expected to lead to additional value that outweighs the expected costs to members.”
13.Because certain illiquid assets are higher risk, we asked whether there is any mechanism within this instrument to prevent a pension scheme being wholly or totally funded by illiquid assets.
14.DWP responded that:
“Regulation 4 of the Occupational Pension Schemes (Investment) Regulations 2005 (SI 2005/3378) sets out the rules that pension scheme trustees (in line with their fiduciary duty) must comply with when exercising their powers of investment. While they do not categorically state where proportions of investments should go they do require trustees to invest in the best interests of members, see regulation 4(2), and in a manner calculated to ensure appropriate liquidity (cash or an asset that you can quickly convert into cash at a reasonable price), see regulation 4(3), and adequate diversification of the investment portfolio–see regulation 4(7).”
15.One objective of this instrument is to provide clear information on the proportion of the portfolio dedicated to different classes of assets. Another is to encourage pension schemes to make greater use of illiquid assets; however, that covers a wide range of investments, some with significant risks, some with significant returns. We are concerned that without limits on the proportion of such assets within a scheme, it may not be able to deliver the returns scheme members anticipate, many of whom may be auto-enrolled by their employer and therefore have no involvement in the choice of their pension scheme’s investments. As the fee changes made by these Regulations aim to encourage pension schemes to increase their investment in illiquid assets, the House may wish to ask the Minister how pension schemes’ subsequent exposure to an increased risk of lower, as well as higher, returns is to be monitored and how trustees are to be properly guided about assessing the risks to the portfolio.
16.We also draw attention to the current concerns about liability-driven investing, which triggered emergency calls for collateral from pension funds last autumn. The need to raise cash quickly meant funds had to sell other assets like property, often at a significant discount, which is where an over-reliance on illiquid assets can cause problems. The House of Common’s Work and Pensions Committee is currently conducting an enquiry into the matter.5 Lord Hollick, Chair of the House of Lords’ Industry and Regulators Committee, also wrote to HM Treasury on 7 February 2023 calling for greater liquidity buffers in pension schemes.6
17.We note the statutory requirements for trustees to invest in scheme members’ best interests but if that legislation were sufficient there would not be so many insolvent pension schemes now reliant on the Pension Protection Fund. We have also commented previously on the complexity of the legislation that trustees are now required to deal with and this legislation adds yet another layer. 7
Date laid: 26 January 2023
Parliamentary procedure: negative
Amongst other measures, these Regulations increase the maximum amount of student loans to cover living costs by 2.8% in 2023–24, following similar increases in the previous two years. Though in line with inflation forecasts at the time, the earlier upratings have proved to be significantly below actual inflation, leading to real-term reductions in income for students. The Department itself has said this will have a “negative impact”, although fully mitigating the shortfall would have significant implications for the public purse. The House may wish to enquire further about the extent and implications of this negative impact. We also raise questions about aspects of the uprating methodology and encourage the Department to consider whether any improvements could be made. Finally, we regret that important information to assist with scrutiny of the Regulations was only made available after the instrument had been laid. The House may wish to enquire further about the extent and implications of this negative impact. We also raise questions about aspects of the uprating methodology and encourage the Department to consider whether any improvements could be made. Finally, we regret that important information to assist with scrutiny of the Regulations was only made available after the instrument had been laid.
These Regulations are drawn to the special attention of the House on the grounds that they are politically or legally important or give rise to issues of public policy likely to be of interest to the House.
18.These Regulations introduce a range of changes to financing for students in higher and further education. Amongst these changes are the annual increases in the maximum amount of further education maintenance loans, intended to cover living costs. Students can also apply for loans to cover tuition fees, but these are not the subject of this instrument.
19.The Department for Education (DfE) has said that the rationale for the Government providing loans and grants to students is that without Government intervention a lack of access to finance would represent a barrier to participation in higher and further education.8 DfE concluded that without state assistance, only those students who could fund the costs of their studies through private means would be able to participate in higher education.
20.The Regulations provide that maximum maintenance loans will increase by 2.8% in 2023–24 compared with 2022–23. DfE states that this is based on the Office for Budget Responsibility’s (OBR) forecast for the rate of inflation for the first quarter (Q1) 2024, being roughly mid-way through the 2023–24 academic year, and that the inflation index used was the Retail Prices Index Excluding Mortgage Interest Costs (RPIX).
21.The OBR’s latest forecast for RPIX in Q1 2024 is indeed 2.8%.9 We note that this uprating follows increases of 3.1% for 2021–22 and 2.3% for 2022–2310 based on inflation forecasts at the times the upratings were announced. In fact, however, the annual inflation rate measured by RPIX has been over 5% since October 2021 and well over 10% since May 2022.11 Inflation on the more usually cited measure, the Consumer Price Index (CPI), has been slightly lower but has still been above 10% in recent months.12 We note, therefore, that loans designed to cover living costs have failed to reflect the rapid rises in the cost of living since late 2021.
22.In its Equality Impact Assessment (EIA), published shortly after the instrument was laid, DfE recognised this issue, stating that “increases in maximum loans and grants for 2021–22 and 2022–23 have not maintained their value in real terms”.13 This is despite the EIA describing the rationale for an annual uprating as being “to ensure that students do not suffer a real reduction in their income”. As a result, DfE concluded that “these proposed changes will overall have a negative impact for students”.
23.The EIA reported several estimates of the extent to which students’ purchasing power has reduced since 2020–21:
24.We asked the Department why the uprating is considered adequate, given the erosion in the real-terms value of loans. DfE replied:
“The 2.8% increase in loans and grants for living and other costs for 2023–24 was announced alongside other measures to ease cost of living pressures for students. The Government has announced that it will provide an additional £15 million in hardship funding this financial year so that universities can provide extra support to students that need it most. This builds on the £261 million funding that the government has already provided to the Office for Students for the 2022–23 academic year which universities can draw upon to boost their own hardship funds. In addition, students will benefit in 2023–24 from fees being frozen for a sixth consecutive year.”
25.The hardship funding for 2022–23 benefits from a “one-off reallocation” of £15 million15 but is otherwise unchanged in nominal terms from 2021–22.16 The £276 million of hardship support compares with total student maintenance loans of around £8 billion per year.17 We conclude that the mitigating actions outlined by Department will not compensate for the loss in the real value of maintenance loans.
26.Higher levels of maximum student loans lead to higher costs for taxpayers because not all of the loans are paid back. DfE provided us with estimates of the implications for the public finances of alternative possible approaches to the 2023–24 uprating. The estimates (the so-called Resource Accounting and Budgeting (RAB) charge) are in present value terms (in other words, discounting future streams of income and costs to a single figure):
27.By choosing not to mitigate the “negative impact” on students that it has acknowledged, the Department is avoiding large additional costs for the taxpayer. We note that this instrument follows another, which reformed the system by which student loans are paid back, which we drew to the special attention of the House in January 2023.18 In that report we noted that the reforms generated savings to the taxpayer by increasing the amount that most borrowers pay back.
28.Returning to the 2023–24 uprating, the EIA stated that the 2.8% increase “will likely lead to a further erosion of students’ purchasing power”. The Department said this was against a background in which half of all students are already reporting “financial difficulties”, with some taking out extra credit because their student loan was not enough to support their living costs. The EIA found that groups including women, mature students, those on low incomes and ethnic minority students would be particularly adversely affected by the real-terms decrease in the value of loans.
29.Our earlier report on the student loan payback system expressed concern that the changes made the system less progressive and may not be consistent with Government policy elsewhere, for example in the Levelling Up agenda. The Department’s EIA suggests that the fall in the real terms value of maintenance loans may have similar effects.
30.DfE told us that the RPIX index has been used to uprate maintenance loans consistently since 2017–18. We have, however, noticed differences in the timing of upratings relative to updated forecasts. For example, the 2023–24 uprating was first announced in a Ministerial Statement on 11 January 2023.19 It referred to the OBR’s most recent forecast of inflation, from November 2022. This instrument was then laid approximately two weeks later, on 26 January 2023.
31.The 2022–23 uprating of 2.3% was, however, announced by Ministerial Statement on 21 October 2021,20 despite not being laid until 2 December 2021:21 a six-week gap. The uprating utilised a forecast from November 2020, which was nearly a year out of date. Just six days after the statement, on 27 October 2021, the OBR published updated forecasts that would have generated a higher increase in the maximum loan, of 3.7%. We encourage DfE to ensure that future announcements are timed, as far as possible, to ensure that up-to-date inflation forecasts are available.
32.We have previously commented on DfE’s use of RPIX in many parts of the student loan system,22 despite the UK Statistics Authority describing RPI measures as “flawed” and stating that it would be wrong for the Government to continue to use them.23
33.DfE told us that legislation24 requires the Secretary of State to have regard to RPIX when considering annual increases to maximum loans to tuition fees. However, this is of questionable relevance because the Secretary of State is not obliged to use RPIX for tuition fee loans and the Department has not referred to any similar legislation in relation to maintenance loans. DfE also argued that RPIX upratings promote consistency as the index is also used in other parts of the student loan system but, as we said in our earlier Report, it would be open to the Department to change the reference index more widely. Again, the House may wish to enquire further on the rationale for not moving away from a measure that the Government themselves describe as flawed.
34.The Regulations also provide that students undertaking the new Higher Technical Qualifications, introduced as part of recent reforms to higher technical education, will be eligible for student loans for both course fees and the cost of living. Other measures include widening the eligibility for loans to those who arrived in the UK under the Afghan or Ukrainian schemes; for example, so that migrants can access loan support and ‘home fee’ status even if they arrive part-way through an academic year.
35.Finally, we note that the EIA for the Regulations, which contained important information enabling readers to understand the effect of the changes, was only published some days after the instrument itself. This meant that it would have been easy to overlook the EIA and could have hindered effective scrutiny. We reiterate that all supporting material should be made available to Parliament and the public at the time the instrument is laid.
36.These Regulations appear to implement a routine adjustment to maximum maintenance loans for students based on forecast inflation. Discrepancies between past forecasts and actual inflation have, however, been large, leading to a substantial fall in the purchasing power of student loans. Remedying the discrepancy could have a significant impact on the public purse and DfE has chosen not to do so, even though the Department itself has stated that the policy will have a “negative impact” on students. The House may wish to enquire further on the extent and implications of this negative impact. We also raise questions about aspects of the uprating methodology and encourage the Department to consider whether any improvements could be made.
1 The Occupational Pension Schemes (Investment) Regulations 2005 (SI 2005/3378).
2 The Occupational Pension Schemes (Scheme Administration) Regulations 1996 (SI 1996/1715).
3 Department for Work and Pensions (DWP), ‘Statutory guidance’ (January 2023): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1131782/Statutory-guidance-final.pdf [accessed 22 February 2023].
4 High water mark—ensures that the fund manager only receives performance-based fees for generating additional levels of performance. This avoids an investor paying performance-based fees repeatedly on the same level of performance during periods of volatility.
5 House of Commons Work and Pensions Committee, ‘Call for evidence: Defined benefit pensions with Liability Driven Investments’: https://committees.parliament.uk/call-for-evidence/3042/ [accessed 21 February 2023], open until 3 March 2023.
6 Letter from Lord Hollick, Chair of the Industry and Regulators Committee to Andrew Griffith MP, Economic Secretary to the Treasury and Laura Trott MP, Parliamentary Under Secretary of State (Minster for Pensions) on the use of Liability Driven Investment strategies by pension funds, 7 February 2023 https://committees.parliament.uk/publications/33855/documents/185115/default/
7 See for example Draft Occupational Pension Schemes (Governance and Registration) (Amendment) Regulations 2022 in SLSC, 6th Report (Session 2022–23, HL Paper 31), p 5, and Occupational Pension Schemes (Climate Change Governance and Reporting) (Amendment, Modification and Transitional Provision) Regulations 2022 (SI 2022/733) in SLSC, 10th Report (Session 2022–23, HL Paper 56), p 12.
8 Department for Education, ‘Higher education student finance for the 2023 to 2024 academic year: Equality Impact Assessment’: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1133802/Equality_Analysis_HE_Student_Finance_Regulations_2023–2024_.pdf [accessed 8 February 2023].
9 Office for Budget Responsibility (OBR), ‘Economic and Fiscal Outlook: November 2022’: https://obr.uk/efo/economic-and-fiscal-outlook-november-2022/ [accessed 7 February 2023], Supplementary Economy Tables 1.7.
10 Implemented by the Education (Student Fees, Awards and Support etc.) (Amendment) (No. 3) Regulations 2020 (SI 2020/1203) and the Education (Student Fees, Awards and Support) (Amendment) (No. 3) Regulations 2021 (SI 2021/1348).
11 Office for National Statistics, ‘RPI All Items Excl Mortgage Interest (RPIX): Percentage change over 12 months’: https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/cdkq/mm23 [accessed 8 February 2023].
12 Office for National Statistics, ‘CPI annual rate 00: All items 2015=100’: https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23 [accessed 31 January 2023].
13 Department for Education, ‘Higher education student finance for the 2023 to 2024 academic year: Equality Impact Assessment’: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1133802/Equality_Analysis_HE_Student_Finance_Regulations_2023–2024_.pdf [accessed 8 February 2023].
14 Institute for Fiscal Studies, ‘Cost-of-living crisis to hit students harder than expected’: https://ifs.org.uk/news/cost-living-crisis-hit-students-harder-expected [accessed 8 February 2023].
16 Office for Students, ‘Funding for academic year 2022–23’: https://www.officeforstudents.org.uk/media/eea64c40-100d-4249-af07-cb3645f51d9b/funding_for_2022–23-_ofsdecisions.pdf [accessed 21 February 2023], p 8.
17 Student Loans Company, ‘Student support for higher education in England 2022’: https://www.gov.uk/government/statistics/student-support-for-higher-education-in-england-2022/student-support-for-higher-education-in-england-2022 [accessed 21 February 2023].
18 SLSC, 25th Report (Session 2022–23, HL Paper 131).
21 Education (Student Fees, Awards and Support) (Amendment) (No. 3) Regulations 2021 (SI 2021/1348).
22 SLSC, 25th Report (Session 2022–23, HL Paper 131), p 18.
23 Office for National Statistics, ‘UK Statistics Authority Statement on the future of the RPI’: www.ons.gov.uk/news/statementsandletters/ukstatisticsauthoritystatementonthefutureoftherpi [accessed 9 February 2023].
24 Student Fees (Inflation Index) Regulations 2006 (SI 2006/507).