The Pensions Regulator has confirmed it will press on with reforming the asset class information it collects via the scheme return, in a consultation response published on Thursday.
The consultation was launched in April by TPR and the Pension Protection Fund and proposed a number of changes to asset class information collected by the two bodies, which were separated into two categories: bonds, and equities and other assets.
It also proposed dividing schemes into three tiers, with smaller schemes (in tier one) retaining a simple reporting approach, larger schemes (in tier two) providing more “granular information” on asset allocations, and the largest schemes (in tier three) “providing information on the sensitivity of portfolios to investment stresses”.
The consultation was in part designed to capture more information on bonds, accounting for the fact that they now make up more than two-thirds of assets held by defined benefit pension plans; while it also proposed the introduction of three new categories: absolute return funds, diversified growth funds, and private debt.
Protecting savers is our core priority and this additional data will give us a more detailed picture of how trustees are managing their members’ investments. It will give us an improved overview of DB funding, while also flagging any potential concerns about a particular scheme’s approach to risk management
David Fairs, TPR
As Pensions Expert reported at the time, changes to information about bonds include the introduction of a specific UK government fixed interest bond class to replace the more general government bond category that currently exists for all tiers.
Similarly, a new UK government inflation-linked bond category will replace the general inflation-linked category, while additional segments will be introduced for bond investments to “identify differences in maturity, credit quality and currency” for schemes in tiers two and three.
Schemes in tiers two and three will likewise see added a new private debt bond category, while schemes in all tiers will have to supply information pertaining to a new sub-investment grade bond segment.
Under ‘equities and other assets’, schemes in tiers two and three will have to further break down their overseas equities into developed and emerging markets categories, though hedge funds will be removed as a category across all tiers.
A new diversified growth fund category takes its place, and schemes in tiers two and three will additionally have to account for a new absolute return fund segment.
It was suggested that the boundary between tiers one and two should be set at £20m, based on section 179 liabilities at the scheme’s most recent valuation, while the boundary between tiers two and three would be set at £1.5bn.
Pressing ahead
In its response to the consultation, TPR confirmed it would be introducing the new asset class categories in 2023, and introduce the new tiered system.
The boundary between tiers one and two will initially be set at £30m. TPR said its intention is “to keep it under review and reduce the threshold to £20m (or less) in the future”.
“We have reservations about the strength of the arguments for a higher threshold — relatively few respondents addressed the key issue of the trade-off between the potential for some cost and the improvement in understanding of investment risk,” the regulator said.
“However, based on feedback and to give time for industry to build the necessary reporting requirements, TPR and the PPF are minded to set a higher initial boundary point.”
The boundary between tiers two and three will remain at £1.5bn, as initially proposed.
TPR is now “developing the necessary changes to their scheme portal to enable implementation of the new scheme return. This will, in due course, include the collection of the new asset data. The intention is to implement the collection of the new asset information in 2023”, the consultation response stated.
The changes, which have a bearing on the PPF, “will facilitate a more accurate assessment of schemes’ investment risk, which will support TPR’s ability to use its resources appropriately”, it continued.
“The PPF will consult on the rule changes necessary to facilitate the use of the new asset information in the levy. We expect this to form part of the 2023-24 levy consultation process.”
David Fairs, TPR’s executive director of regulatory policy, analysis and advice, said: “Protecting savers is our core priority and this additional data will give us a more detailed picture of how trustees are managing their members’ investments. It will give us an improved overview of DB funding, while also flagging any potential concerns about a particular scheme’s approach to risk management.
“Recognising the burden on schemes as we emerge from the impact of the Covid-19 pandemic, we have decided not to ask trustees for this additional information until we issue our scheme returns in 2023.”
PPF proposals unchanged despite ‘small majority’ in favour
Separately, the consultation explained that, despite the introduction of new asset class information, it should not necessitate a change to the indices currently used by the PPF to “roll forward” asset information and ensure consistency between schemes when it calculates risk-based levies.
Just 13 of the 22 responses on this point favoured the proposal as stated, but only three respondents favoured the tabled alternative, which would involve separate indices sourced for each of the asset sub-classes in tiers two and three.
The consultation response confirmed that the PPF will move ahead with the planned approach, though it noted the small majority in favour, and pledged to “review the approach after implementation, and consider if any sub-classes have sufficient overall allocations to warrant the use of more granular indices in the context of likely impact on levies”.
The consultation response noted that a number of respondents had called for infrastructure to be made a separate category, on the grounds of its growing appeal as an asset class.
TPR, PPF propose tiered approach in asset information reform
The Pensions Regulator and the Pension Protection Fund have issued a joint consultation into proposals to change the asset class information TPR collects via the scheme return.
TPR acknowledged this growth, but countered that the allocation to infrastructure investments “is likely to be small for most schemes”.
“We are treating infrastructure assets no differently to non-infrastructure assets. Where infrastructure investments are through bond vehicles that have a credit rating, they should either be placed in investment grade or sub-investment grade bonds depending on the credit rating. Where the investment is through private debt, or a private equity route, then this should be the basis for reporting,” it explained.
A number of respondents also suggested that liability-driven investment be included as a separate category, and on this TPR said it had “noted the need for clearer guidance on how to allocate LDI assets and will take this forward when revising the guidance”.
