Eleventh Report Contents

Appendix 2: Additional information from the Department for Work and Pensions

Occupational Pension Schemes (Investment) (Employer-Related Investments by Master Trusts) (Amendment) Regulations 2022 (SI 2022/827)

Q1: These Regulations simplify the position for investing in shares etc so that the Master Trust managers are no longer forbidden from investing in any participating company–only in their own companies. This removes a burden and an overhead cost by removing the need for each investment to be researched for prohibited links, but does it not also remove a protection–by allowing the Master Trust managers to invest deliberately in participating companies? Is there not a risk of them using the huge sums available to them to (artificially) boost those companies’ share prices/manipulate the market?

A1: The power to make regulations to prescribe restrictions on employer related investments was originally introduced by the Pensions Act 1995 to strengthen member protection. The legislation was designed to restrict the way trustees of single employer Defined Benefit occupational pension schemes (‘DB schemes’) could make employer-related investments. It was introduced following several high-profile cases where employers had misappropriated the scheme assets through loans and investments from the scheme’s funds to the employers sponsoring the scheme or to companies with connections to the employers such as in the Maxwell scandal with the Mirror Group pension scheme.

The pensions landscape has changed significantly since then and DB schemes, prevalent at that time, are now predominantly closed to new accrual. Following the success and full roll out of automatic enrolment in 2018, Defined Contribution occupational pension schemes (‘DC schemes’) are now the dominant form of pension saving in the UK. It’s important therefore that regulations evolve and adapt to reflect and meet the needs of the current pension system. When considering these changes, we looked very closely at the impact this could have on member protection and what checks and balances could help mitigate the risks you also identified.

In reaching our decision to proceed with the regulations we concluded, after careful consideration of the feedback we received at consultation, that it was highly unlikely that the risks you have identified would arise in a large Master Trust that has completed a rigorous authorisation process overseen by The Pensions Regulator. We also think existing safeguards in the pension system help mitigate these risks, for example, the fit and proper person tests which Trustees in Master Trusts must pass, their fiduciary duties and the overarching regulatory oversight The Pensions Regulator provides.

Q2: After these Regulations take effect, could the Master Trust managers now make a large loan to one of the participating employers as long as they are not on the list in para 6.2 of the EM with potential for the same consequences as in the Maxwell scandal?

Q3: Do these Regulations also remove the 5% and 20% caps on loans to those companies?

A2 & 3: Employer-related loans in relation to large, authorised Master Trusts will still be prohibited, but only loans to the scheme funder, scheme strategist, or a person connected or associated with the scheme funder and scheme strategist will constitute employer-related loans. Loans to other participating employers will no longer be prohibited.

Removing the prohibition on loans to most participating employers means there will no longer be a continuous need for the scheme to check whether any of the entities in which it has loan investments has become a participating employer, has acquired a participating employer or has been acquired by a participating employer. This removes a considerable burden on a large multi-employer scheme and frees up investment opportunities.

The 5% cap on employer-related investments in any single participating employer, and overall 20% cap on employer-related investments, apply to multi-employer schemes under regulation 16(5)(a) of the current regulations. The caps apply to investments, rather than loans. Employer-related loans are a type of employer-related investment, so if a scheme did have an employer-related loan, it would count towards the caps. But employer-related loans are generally prohibited. In the amending regulations, the overall 20% cap is removed for large, authorised Master Trusts. But they are still subject to a 5% cap on investments in any particular employer (although this will only relate to the scheme funder, scheme strategist or persons connected or associated with them).”

Q4: Also the consultation document and IA both refer to the government’s wider objective of opening up all asset classes to DC schemes, most notably illiquids or private markets. The IA goes on to say “these new regulations should make it easier for Master Trusts to access private credit markets.” Could you please explain what you mean by “private credit markets”, whether these Regulations do have that effect, and, if so, what the benefits of that change are likely to be for the pension scheme member.

A4: By private credit markets we mean asset classes that are not traded on the public markets. Private credit can be a useful source of finance for Small and Medium Enterprises and can often be the key to unlocking their potential. Investment by pension scheme trustees in private credit markets has the potential to deliver good long term returns for pension schemes and their members (who take a long-term view) as part of a diversified investment portfolio.

The previous legislation required Master Trusts to monitor each investment they made to ensure they do not breach the employer-related investment restrictions by investing in any of the participating employers using their scheme. Feedback from Master Trusts to our consultation was that due to the number of participating employers (which can range from hundreds to tens of thousands), the regulations restricting employer-related investments were becoming a real barrier to investing in these asset classes. They expected this issue to increase as the DC market and the number of participating employers continues to grow. The amending regulations have only recently been made, and we will keep the operation of them under review to see what impact they are having.

26 August 2022

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