Compass - Autumn 2020
Compass provides commentary and analysis of recent legislative and regulatory developments affecting pensions and employee benefits.
Welcome to the Autumn 2020 edition of Compass
Compass provides commentary on and analysis of recent legislative and regulatory developments affecting pensions and employee benefits.
For a time over the summer, COVID-19 released its grip somewhat and there was a qualified return to normalcy in many areas.
As a result, government departments and public bodies resumed their activity.
For a start, we have the Pensions Dashboards Programme driving forward with consultations on the scope and data definitions that the planned online dashboards will use.
The Government is progressing legislation in Parliament that will compel pension schemes to link in with and supply data to the dashboards, so this is an important area to watch.
Pensions Minister Guy Opperman has warned that those who are not getting their data in order have ‘missed the boat’ and face future compliance costs as a consequence. This is a critical issue that should receive attention and we begin with that.
Our second article focuses on HM Treasury’s call for evidence on pensions tax relief administration.
At the last General Election the Conservative Party promised to conduct “a comprehensive review to look at how to fix” the issue of non-taxpayers receiving no tax relief incentive if they are in an occupational pension scheme that uses the main method of tax relief. There are no easy answers to this, though, and any reform could have important long-term implications for many schemes.
Our attention then turns to the Department for Work and Pensions’ major priority: taking action on climate risk. Proposals are being put forward to require the largest schemes and master trusts to report specifically on climate risk issues.
However, the Minister has also made it clear that “no pension scheme is too small to make a difference”.
Our fourth article focuses on the radical steps being taken by the Government to encourage consolidation in the defined contribution sector of the pensions market.
Elsewhere in Compass, we cover:
- Proposals by the Ministry of Housing, Communities and Local Government to limit exit payments
- Legislation passing through Parliament
- Two legal cases covering pensions and inheritance tax, and a challenge to state pension age equalisation
- The Pensions Regulator and Pensions Protection Fund (PPF) activities
- A round-up of other news.
Pensions Dashboards – call for input
Pensions Dashboards - call for input
Pensions dashboards are a long-awaited service – they would allow information about a person’s UK pension(s) to be consolidated and presented online in one place
In principle this would include the State pension, public sector pensions, occupational pensions (both defined benefit and money purchase) and contract-based pensions (whether personal pensions or annuity contracts).
The Pensions Dashboards Programme (PDP), a working group established to design and implement the infrastructure to make dashboards work, published a Call for Input on 6th July building on two working papers published in April 2020 (covered later in this article).
The Call emphasised that the development of pensions dashboards will be supported by a process of feedback and research. It closed on 31st August.
Get data in order
Crucial to the PDP’s work is the development of data standards as the Government intends to compel pension schemes’ trustees and pension providers to comply with those standards.
Indeed, as we explain later, the Pensions Minister has warned schemes that they need to get their data in order.
Data Scope Working Paper
The first working paper set out options for achieving comprehensive coverage of all pension sectors in order to deliver what it deems an acceptable early breadth of coverage for individuals. It listed 12 pension sectors ranging from the State Pension through occupational pension schemes and personal pension schemes to buyout policies.
It looked at the Scope options of ‘Targeted coverage’ and ‘Broad coverage’ from the perspective of the intended purpose of the Dashboards. This is described as being in three stages, but the focus is only on the first two for now:
- ‘Find & View’ only – listing pensions with basic information provided
- ‘Find & View and Understand’ – with more details on accrued entitlement
- ‘Find & View, Understand and Act’ – with further detail to allow individuals to make informed choices.
It is important to note that the Government has determined that initially dashboards will offer only a simple ‘Find & View’ function with some consistent basic information and would show, at maximum, the information already required under the Disclosure Regulations for annual statements or on request.
The PDP recognises that producing even the information for annual benefit statements may be particularly challenging for some defined benefit schemes, as many do not routinely produce annual statements for members.
The PDP asked about what proportion of existing pensions being shown would be acceptable in the early stages, and how many months delay would be acceptable before an individual subsequently found out that more of their pensions were available to view on their dashboard.
Data Definitions Working Paper
The second working paper set out the data items that will enable pensions to be found and that will then be presented to individuals on the dashboard once their ID is validated.
It set out a hierarchy of information to be provided based on the purposes that the dashboard was intended to meet. This hierarchy is as follows:
- Level 1a - Match Data The personal data to be used to match a person with their pension entitlements
- Level 1b - Administrative Data The details of each pension arrangement that confirms they have a pension entitlement for that person because they have been able to successfully match against the Level 1a data
- Level 2a - Estimated Retirement Income The key item of data returned from each pension arrangement giving an estimated retirement income, in today’s money
- Level 2b - Accrued Entitlement Data The data from each person’s pension arrangement setting out their current entitlement (that is, accrued to date)
- Level 3 - Additional Pension Information Other data items that will be of interest and use to some people.
Levels 1a to 2a are needed to ‘Find and View’ with other levels helping people to ‘Understand’ their pension and potentially even to ‘Act’. The working paper then set out the data items that could fall into each level of the hierarchy.
The PDP asked about which data items would be most challenging for pension schemes and providers to supply, which were most difficult to provide digitally and how many months it would take to make them available.
Feedback from the industry and the PDP
A number of industry bodies have made public comment. For example, the Pensions Administration Standards Association called for the PDP to prioritise breadth of coverage over depth of information, stating that limiting the former “could impact adversely on consumer take-up of the dashboard”.
Its view was that it is important that “a very large majority of pensions are findable at outset. People are not going to know if an incomplete list is everything they have earned or not”.
The Pensions and Lifetime Savings Association stated that there should be “a well-defined timeline that gives schemes adequate time to prepare their data for onboarding and spread the cost of doing so over a manageable time period”.
Some in the industry are very supportive of the dashboard and others are not and are not spending the money to get their data in order."…"I can only set a regulatory framework at which they are going to have to comply, but if they are not spending money getting it in order now, they have really already missed the boat and must be very aware we are driving this forward with or without them. If it is without them, there will be compliance issues.
Guy Opperman, Pensions Minister
The PDP’s Head of Industry Liaison published a blog confirming that it had received more than 60 detailed and comprehensive responses. He indicated three key learning headlines from the process:
Getting data standards right will be challenging – and they will undoubtedly evolve over time
Sophisticated approaches to matching will be required to enable full coverage
Estimated Retirement Incomes are key, but extremely problematic.
The PDP will publish the first version of data standards by the end of the year, for subsequent user testing. This means that pension schemes and providers can begin to act in earnest.
At the Society of Pensions Professionals Conference, the Pensions Minister was very clear that the pensions dashboard was a key medium-term priority and that was why the Pensions Schemes Bill had specific provision on it.
He was emphatic: we believe that this warning should be taken seriously and that schemes should no longer delay taking steps to get their data in order.
Please speak to your usual Capita contact for further assistance.
Tax relief methods under review
Tax relief methods under review
As promised in the 2019 Conservative Party manifesto, the Government is reviewing how tax relief is processed for member contributions to a registered pension scheme.
The driver for this review is the discrepancy that can arise in a low-earning person’s take-home pay depending on which of the two methods is used when applying tax relief.
The ‘Pensions tax relief administration: Call for Evidence’ sought views on how the current system can be adapted to address this discrepancy without having a disproportionate knock-on effect to a system that is otherwise seen as fit for purpose.
Methods of tax relief
When processing pension contributions, there are currently two principal methods used for administering pensions tax relief.
The first method is commonly referred to as the ‘net pay arrangement’ (NPA) and this is usually applied by employers using a trust-based pension scheme as the main vehicle for pension savings.
In this method, a member’s income is only taxed after pension contributions have been deducted thus ensuring that their contributions aren’t taxed.
The second is ‘relief at source’ (RAS) and this is applied by providers of personal pension schemes and a few occupational schemes. For RAS, the employer payroll doesn’t make any adjustment for contributions, so they are taxed and then the amount paid across to the pension scheme provider is calculated assuming basic rate relief will be added (that is, 80p in the £1 is deducted and paid).
The provider must then reclaim the basic rate tax relief (of 20p in the £1) direct from HMRC and those members subject to higher rates of tax must make a claim for tax relief themselves.
As already noted, the two tax relief methods provide different results for members whose total earnings are below, or close to, the tax-free personal allowance (currently £12,500).
Under RAS, these members have a payment from HMRC credited to their pension account, equivalent to the basic rate of tax for their contribution. As they don’t pay tax, this is effectively a government top-up paid into their pension.
Conversely, under NPA, members in a similar situation don’t receive that top-up. This is because they wouldn’t have paid basic-rate tax on their pension contributions if their earnings were below the personal tax allowance.
This difference in tax treatment has been criticised recently, especially following the trend for more lower-paid employees to be enrolled into pension schemes.
Potential approaches to fix the system
The call for evidence includes four potential approaches to addressing the issue of tax relief for lower earners:
1. Paying a bonus based on Real Time Information (RTI) data
This would require HMRC to pay a ‘bonus’ to lower earners whose employers use the net pay method of tax relief. The payment would make up for the difference in the amount of tax relief that a comparator in a pension scheme operating RAS would receive.
As this proposal creates additional costs and administration burdens on HMRC, the Government is not looking to adopt this proposal.
2. Standalone charge on RAS schemes
This would see HMRC applying a stand-alone charge to a low earner to recover what it refers to as a ‘top-up’ given under the RAS method of tax relief.
This is essentially the opposite of the first approach, as it’s clawing back the discrepancy in tax relief from those that have benefited from the RAS tax relief approach.
It’s no surprise that this proposal has been pretty much ruled out, not just because of the additional administration but also because it would clearly be unpalatable for the Government to be seen to be taking money from some of those on lower incomes who are saving for their retirement.
3. Employers operating multiple schemes
This requires employers to operate both tax relief methods for their employees. Which process to apply would depend on whether the employee’s earnings would be above the pro-rated personal allowance for that pay period. This method addresses the issues with tax relief for low earners and ensures that higher earners automatically receive full tax relief on contributions when using the NPA method.
The Government sees several advantages for this proposal but suggests that it is only feasible for large employers with a relatively high proportion of low-earning employees and raises issues over fluctuating earnings. It would be interesting to see if there was any take-up of the suggested voluntary adoption of this proposal given the set-up costs and the additional complexity it would bring.
The Call for Evidence provides for an interesting discussion about how to address the inherent differences between the NPA and RAS tax-relief methods, but the Government seems to have talked itself out of all but the last of the four approaches that it put forward.
The costs to business and the Government are clearly going to be the main focus, especially in the current economic climate, and, while some will anticipate that the status quo will be maintained, others may be worried about the risks of increased costs and potential tax changes to DC pension schemes.
We watch this space with interest.
4. Mandating the use of RAS for all DC schemes
If all defined contribution (DC) schemes operated RAS, this would ensure that all low-earning members were treated in the same way.
The Government understands that requiring all DC schemes to transfer to RAS would be a significant change for providers and employers who currently operate net pay.
Thought must also be given to those employers that have schemes with DC and non-DC pension arrangements in place, as they would have to run both methods.
For those with a marginal rate of tax above the basic rate, this would require them to make a claim for any additional tax relief to which they are entitled.
On 26th August 2020 the Government published a consultation on policy proposals to require trustees of the largest occupational pension schemes, and all authorised master trust schemes, to address climate change risks and opportunities through governance and risk management measures.
The measures must be in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).
The idea is that these schemes will set a benchmark of good practice and that their market power will drive improvements in the flow of data necessary for high-quality climate risk governance.
The Pensions Climate Risk Industry Group (PCRIG) is a group with representation from industry, civil society and government. It provides guidance for pension scheme trustees on integrating climate-related risk assessment and management with their decision-making and reporting.
It’s clear in its view that all schemes face climate-related risks, irrespective of the way they invest or the estimated duration of liabilities. Its view is that this applies “whether investment strategies and mandates are active or passive, pooled or segregated, growth or matching, or have long or short time horizons”.
Linked to this is the idea of measuring ‘portfolio warming’ or the ‘implied temperature rise’ (ITR) of investment portfolios. This is also sometimes referred to as ‘degree warming’, ‘temperature score’, or the ‘portfolio warming potential’.
The idea is that financial institutions can model the likely global average temperature rise above pre-industrial levels with which their holdings are consistent. The outcome of this modelling is a single metric, for example a portfolio may have an ITR of 3°C. Trustees can then compare this against current public policy measures aimed at limiting the global average temperature increase to well below 2°C.
The Government supports the PCRIG’s thinking and sees value in occupational pension scheme trustees taking steps to understand their portfolios’ ITR and making it public.
Trustees of schemes with assets of £5bn or more (along with authorised master trusts and any new collective money purchase schemes) must put effective governance, strategy, risk management and accompanying metrics and targets in place for assessing and managing climate risks and opportunities from 1st October 2021.
They will then have to report on these in line with the TCFD’s recommendations by no later than 31st December 2022. This report will be included in the relevant Trustees’ Annual Report and Accounts.
This proposal dovetails with the Government’s Green Finance Strategy, and its expectations of large asset owners in relation to the TCFD.
This obligation will be extended to schemes of £1bn or more in assets from 1st October 2022, with a report in line with the TCFD’s recommendations due no later than 31st December 2023. Once this is achieved, the DWP is clear that more than 75% of assets, and 80% of members, would be in schemes subject to the requirements.
The Government will then take stock in 2024 and consult on the extension to all other schemes. It has been clear that its view is that “no pension scheme is too small to make a difference” but it will take into account both the quality of climate risk governance and also the current and future costs of compliance.
The Government will only set out broad requirements in the regulations, with statutory guidance expected to list the steps that schemes are required to meet and the items they must report on.
Initially trustees will only be required to carry out scenario analysis, calculate metrics and report against trustee-set targets “as far as they are able”.
They will be required to obtain data from their asset managers and, in turn, from investee firms on emissions and other characteristics. There is the recognition that schemes may face difficulties in acquiring full data for their portfolio, at least in the early days.
Trustees will be required to publish their TCFD report on their own website (or the website of the scheme’s sponsor).
As these reports could be quite long and detailed, the proposal is that they don’t need to be presented in full in the Trustees Annual Report, but they will need to be referenced in it as a key financial disclosure.
Members are to be told that this information has been published and how they can find it in their annual benefit statements. Defined benefit schemes that may only produce such a statement on request will only be required to add a link to any that are issued to members.
Trustees will also be required to provide The Pensions Regulator with the address of the website that they have published their TCFD report on via the annual scheme return.
A mandatory penalty will apply for a complete failure to publish any TCFD report.
Other penalties relating to failure to produce a report that’s fully compliant will be at The Pensions Regulator’s discretion.
The consultation closed on Wednesday 7th October 2020 and the Pension Schemes Bill in Parliament contains provisions to legislate for this change in clause 124. Every indication that we have seen is that final regulations to set out the details will be drawn up early next year.
The fact that these requirements do not apply to many schemes, and are unlikely to for some years, may lead them to kick the issue into the proverbial long grass. This may be a mistake as it is clear that the Government intends to make changes, and they will already have provisions in their Statement of Investment Principles on financially material considerations that link to climate risk that they may have to report on. At the very least, therefore, it will be appropriate for trustees to review their knowledge and understanding around this issue and investments in general now.
Trustees of schemes that may be aiming to transfer their money purchase members to an authorised master trust should consider asking their candidate scheme or schemes what their plans are and what they may be planning in the future.
Please speak to your usual Capita contact if you would like assistance.
Improving outcomes for members of DC pension schemes
Improving outcomes for members of DC pension schemes
The Government is launching a drive to accelerate consolidation in the defined contribution (DC) pensions sector.
On 7th September 2020, it launched a new consultation on proposed measures to improve outcomes. At the same time, it published its response to the February 2019 consultation Investment Innovation and Future Consolidation, which considered how to encourage DC pension schemes to invest more in illiquid assets, as well as promoting consolidation of smaller DC schemes.
Draft revised statutory guidance on costs and charges and new guidance on completing the annual value for members assessment and reporting investment returns is also included, to obtain industry feedback on how clear this guidance is.
The consultation closes on 30th October 2020.
The Government has stated that it will monitor this situation and, if new requirements don’t drive consolidation quickly enough, it will develop legislation to mandate consolidation.
Proposals to improve outcomes
The main outcome of the consultation response is to require trustees of smaller DC schemes (those with assets of less than £100m) to assess their value for members against three comparator schemes, each of which either has more than £100m in assets or is a personal pension that is not a SIPP.
One of the comparator schemes must be prepared to accept a transfer of the scheme members if the trustees’ scheme were to be wound up. Where the trustees’ scheme is found to provide poor value, trustees are encouraged to consider winding up and move to a larger scheme or authorised master trust.
This new requirement would apply from 5th October 2021 (with exact timing aligned to the scheme year for trustees’ report and accounts purposes). It would apply to trustees of all DC schemes with assets of less than £100m that have been operating for more than three years.
The assessment will be based on three areas:
- Costs and charges of the scheme;
- Net investment returns; and,
- Several measures of administration and governance, including member communications, record keeping, prompt and accurate financial transactions, investment governance, managing conflicts of interest, and trustee knowledge and understanding.
When a scheme is not delivering good value for members, the Government expects the trustees to wind it up and consolidate with a larger scheme.
If the trustees are reasonably confident that improvements can be made, or there are other factors such as wind-up costs exceeding the costs of making such improvements, the scheme may seek to improve its position. If appropriate changes don’t improve value for members, the trustees will be expected to wind the scheme up and move members to one that offers better value.
The proposal is that the value for members assessment will be done annually for applicable schemes, to be reported on as part of the DC Chair’s statement.
The trustees must also report the outcome of the assessment to The Pensions Regulator via the next annual scheme return, including what action they will take or have already taken if the scheme does not provide good value for members.
The Regulator has powers to wind up or appoint trustees to properly manage the scheme if necessary.
In addition to this new assessment, trustees of all DC schemes will need to report on net investment returns for both default and self-selected funds in the annual Chair’s statement.
The Government has asked further questions on the specific proposals, wanting to know whether the proposed regulation amendments achieve the policy aims set out above.
Illiquid assets reporting
The consultation also asks a series of questions about investment charges and illiquid assets. The Government is keen for pension schemes to consider the benefits of diversifying into illiquid investments such as venture capital and green technologies. While there was general positivity toward the proposals, support was relatively soft, so the Government has decided not to move ahead with the requirement for larger DC schemes to report their policies on illiquid assets in the Statement of Investment Principles.
The Government found no evidence of a lack of understanding of these types of asset class and hopes that the development of scale will enable more schemes to take advantage of them. It will continue to explore this area with stakeholders to improve outcomes for scheme members.
Changes to the default fund charge cap
Changes have been proposed to the default charge cap to accommodate performance fees, facilitating investment in illiquid assets. These proposed changes are in line with the Government’s policy to encourage the use of illiquid assets in DC pension schemes and would come into effect on 5th October 2021.
Default funds that offer a promised level of benefits (usually older with-profits policies) are exempt from the charge cap for default funds. However, existing regulations have the unintended consequence of these funds not requiring a default Statement of Investment Principles (SIP). The consultation proposes that they produce such a SIP. Additionally, there are some schemes that do not report on charges and transaction costs in those closed funds that are no longer able to receive contribution but that hold assets. Under the proposals, schemes will be required to show this information.
The Pensions Minister has been very clear in recent statements that he is looking for serious consolidation of the DC pensions sector towards large schemes with better governance and the proposals represent a step change in that direction.
There is a year until the intended rollout of new assessments on value for members for a large number of DC schemes. All DC schemes will also need to report on the net investment returns from their fund options. Trustees of such schemes should start considering how this may affect their thinking and plans. It will be appropriate to look at what action they may need to take to include this information in the Chair’s statement, especially where a value for members comparison assessment is needed.
Please speak to your usual Capita contact if you would like to know more.
Public sector exit payments
Public sector exit payments
On 7th September 2020, the Ministry of Housing, Communities and Local Government launched a consultation on proposals to reform the ‘exit payment’ terms, including both redundancy compensation pay and early access to pensions, for local government workers. These exit payments include all forms of compensation such as redundancy payments, pension top-ups, compromise agreements and special severance payments.
The key proposals to reform redundancy payments in local government are as follows:
A maximum tariff for calculating exit payments of three weeks’ pay per year of service. However, employers could choose to apply tariff rates below these limits
A ceiling of 15 months (66 weeks) on the maximum number of months’ or weeks’ salary that can be paid as a redundancy compensation payment. However, employers will have discretion to apply lower limits, as they do at present under the 2006 Regulations
A maximum salary of £80,000 on which a redundancy compensation payment can be based, to be reviewed annually using an appropriate mechanism, such as the Consumer Prices Index.
For members of the Local Government Pension Scheme (LGPS) who are at least 55 years old when made redundant, there will no longer be a requirement for their pension to come into immediate payment. Instead, they will be given the option to:
- Defer taking their LGPS pension to a later date, or
- Take immediate payment of their LGPS pension, with full, partial or no early retirement reductions applied.
Where a member chooses to defer taking their pension to a later date, or they choose to take immediate payment of their pension with full early retirement reductions applied, they will be able to take the discretionary redundancy payment to which they would be entitled under their employer’s redundancy scheme, subject to it being consistent with the proposals outlined on the previous page.
Where the pension is to come into immediate payment and a strain cost would be payable for its early release without reductions being applied, the strain cost cannot exceed the overall cap of £95,000 contained in the Exit Payment Regulations, less:
- The value of any Statutory Redundancy Payment required to be paid (which the employee will still receive as a cash payment)
- Any voluntary payments by the employer to cover an award of additional pension
Any reduction in the strain cost due to the above limitations could be made up by the member from their own resources, otherwise they would receive an actuarially-adjusted pension benefit.
The consultation also proposes that the full council of a local authority will have the power to relax the Exit Payment Cap, subject to the approval of the appropriate minister of the sponsoring department.
It also seeks to introduce a requirement for pay policy statements, which must be published annually under the Localism Act 2011, to explain policies on rewarding chief officers who were previously employed by the authority and who, on ceasing to be employed, received a severance payment from that authority.
The consultation closes on 9th November 2020.
Pension Schemes Bill
This Bill was passed by the House of Lords on 15th July 2020 and received its Second Reading in the House of Commons on 7th October 2020.
The Bill’s provisions build on the Government’s commitment to tighten the rules to prevent abuse, strengthen the protection for pension savers and ensure that they are provided with the necessary support they need to make informed choices about their financial futures.
The Minister for Pensions and Financial Inclusion, Guy Opperman, has described the Bill as “a milestone in bringing pensions into the digital age”.
As a reminder, the Bill:
Provides the legislative framework to establish and operate Collective Defined Contribution (CDC) schemes
Seeks to strengthen The Pensions Regulator’s existing powers and sanctions regime by introducing the power to issue civil penalties of up to £1m and three new criminal offences
Provides the legislative framework to support online pensions dashboards
Introduces a requirement for prescribed pension schemes to manage and report annually on their exposure to climate-related risks and opportunities
Makes changes to the statutory transfer rules (an area that has seen amendments during the Bill’s progress through Parliament).
The Bill has already encountered several hurdles, having been delayed once due to the 2019 General Election and again due to the need to prioritise emergency health legislation dealing with COVID-19.
We produced a Spotlight following the Bill’s introduction in the last Parliament that summarises the reforms, plus several individual Spotlights that look at some of the proposals in more detail. Please speak to your usual Capita contact for more information.
Social Security (Up-rating of Benefits) Bill
This Government Bill has been passed by the House of Commons and is now in the Lords. It will enable the State Pension to increase in April 2021, even if the UK experiences negative earnings growth this year.
State Pensions are currently increased by the triple lock, which ensures that they rise each April by whichever is highest out of earnings growth, inflation or 2.5%. The Bill aims to iron out a technical detail in the legislation that dictates that, if earnings growth is negative, state pensioners receive no increase irrespective of price inflation.
Work and Pensions Secretary Thérèse Coffey said: “The Government has worked hard to protect all age groups during the pandemic, strengthening the welfare safety net, introducing furlough and income protection schemes, as well as supporting those who have lost their jobs back into work. It is only right, then, that we also ensure pensioners can see their incomes protected as we build back better. In these difficult times, I want to give pensioners peace of mind about their financial health.”
There is concern, however, that maintaining this after the effects of the Coronavirus pandemic could see the State Pension rise significantly, as increases in the following year could be higher due to unprecedented growth caused by the return of furloughed workers.
Finance Act 2020
The Act, which was originally introduced as the Finance Bill 2019 / 20 and later renamed Finance Bill 2020, received Royal Assent on 22nd July 2020.
The Act largely legislates for the announcements made in the March 2020 Budget. In relation to pensions, this includes amendments to the thresholds applicable to the tapered annual allowance, taking effect from 6th April 2021.
A new clause was added to the Act to allow workers to be re-employed to support the Coronavirus response without losing their protected pension ages and suffering adverse tax consequences.
The changes in relation to protected pension ages are effective between 1st March 2020 and 1st November 2020, although the Act includes a power for the end date to be amended to one falling before 6th April 2021. We now understand that the protected pension age easement will not be extended beyond 1st November 2020.
Divorce, Dissolution and Separation Act 2020
The Act, which makes provision in relation to marriage and civil partnership in England and Wales, received Royal Assent on 25th June 2020.
It seeks to remove the element of blame from the initial part of the divorce process by allowing a couple to apply for divorce by making a statement of irretrievable breakdown. It also modernises the language used in the process, for example decree nisi is changed to conditional order and decree absolute to final order. Any documents that refer to these terms will need to be updated.
These welcome changes will come into force late in 2021 to allow for implementation to court, online and paper processes.
Staveley case – ill-health pension transfers and inheritance tax
The UK’s Supreme Court has given the final judgment in the long-running Staveley case of HMRC v. Parry and others, a landmark ruling for ill-health pension transfers.
Mr and Mrs Staveley had previously set up a company together but, in 2000, they went through a bitter divorce. While she was a director of the company, Mrs Staveley had accumulated a large occupational pension fund and so she transferred her share to a section 32 buyout policy. In 2004, she was diagnosed with cancer, which was initially treated successfully but returned in 2006 and was then terminal.
As it stood, the pension was still invested in the section 32 policy, so any death benefit payable would have gone to her estate and would have been subject to inheritance tax (IHT).
Therefore, Mrs Staveley transferred her section 32 policy to a personal pension and her new policy commenced on 9th November 2006.
Under the personal pension, any death benefit was payable at the appointed trustees’ discretion and Mrs Staveley could nominate people for consideration. She nominated her two sons. Mrs Staveley did not take any pension benefits at all during her life and, following her death, the death benefit was paid out in accordance with her wishes (her two sons) in 2007.
HMRC determined that IHT was due on the basis that both the transfer of funds into the personal pension and Mrs Staveley’s omission to draw any benefits before her death were lifetime transfers within section 3 of the Inheritance Tax Act (IHTA) 1984.
The two sons and their solicitor, Mr Parry, appealed as executors of the estate to the First-tier Tribunal. The appeal was partially successful in that the tribunal held that the transfer was prevented from being a transfer of value because it was not intended to confer any gratuitous benefit on anyone.
However, it was held that the omission to take any benefits did give rise to IHT as it had increased the sons’ estates when Mrs Staveley could have drawn those benefits. Each side appealed to the Upper Tribunal, which ruled that no IHT was payable on either transaction. HMRC appealed to the Court of Appeal, which held that both the transfer and the omission gave rise to IHT.
The Supreme Court, by a majority, partially allowed the executor’s appeal. It clarified that ‘intention’ is crucial when a pension transfer or switch is made in terminal ill-health. It held that the omission to draw benefits did give rise to IHT but the transfer did not. Therefore, a charge to IHT arose from the part of the benefit affected by the omission.
The long-awaited judgment was arrived at only by a majority and the outcome changed at every stage of the judicial process. However, in the end it is reassuring that the transfer itself did not create an IHT liability. The Supreme Court confirmed the emphasis on ‘intention’, and this is crucial when determining whether a liability to IHT has arisen on a pension transfer or switch made in terminal ill-health.
A transfer out to a different pension scheme will not be a transfer of value when there was no intention to confer a gratuitous benefit.
Equalising pension ages did not prejudice women
In the case of Delve and Glynn v the Secretary of State for Work and Pensions, two women brought legal proceedings against the Government to challenge the increase in their State Pension age. This age was raised by a series of Pensions Acts between 1995 and 2014, which equalised the State Pension age for women with that of men, and then increased the State Pension age for men and women, depending on their date of birth, to 68.
The two appellants were born in the 1950s, and their main argument was that these changes brought direct age discrimination contrary to Article 14 of the European Convention on Human Rights. They claimed that women born in the 1950s weren’t treated equally with men during their working lives and they therefore arrive at their 60s in a poorer financial position than men of the same age.
The Divisional Court dismissed their claim in October 2019, but they were given permission to appeal.
Their appeal was rejected by the Court of Appeal on 15th September 2020.
The Court was satisfied that this was not a case where it can interfere with the decisions taken through the parliamentary process.
The evidence showed that the Government was faced with an urgent need to reform State Pensions because of the projected increase in the number of pensioners combined with a decrease in the number of people of working age contributing to the National Insurance fund.
The Court stated that “…it cannot say that those decisions were manifestly without reasonable foundation”, which is the relevant test.
The Pensions Regulator activities
The Pensions Regulator activities
Single Combined Code of Practice
On 1st September 2020, The Pensions Regulator reaffirmed that it aims to make changes to its existing Codes of Practice.
The Regulator intends to combine the content of its 15 current Codes of Practice into a single, integrated and shorter Code. In doing so, it intends to make the important regulatory material quicker to find, use and update; enabling trustees and managers of all types of pension schemes to be more responsive to changes in regulation.
The early focus will be on internal controls, the Defined Contribution Code, public service schemes and master trusts, as this will set out the features of effective governance that will apply to all types of pension schemes.
The Regulator said that trustees will need to demonstrate that they have an effective system of governance within 12 months of publication of the updated code.
We have produced a Spotlight on the implementation of the governance reforms for occupational pension schemes.
Please speak to your usual Capita contact for a copy.
Regulator expectations and COVID-19
The Regulator has updated its COVID-19 guidance, setting out what it expects of pension scheme providers.
At the start of the pandemic in March 2020, The Regulator extended the maximum period defined contribution (DC) pension schemes and trustees had to report late contribution payments from 90 to 150 days, to help with the financial uncertainty.
The updated guidance requires DC schemes and providers to resume reporting late contribution payments no later than 90 days after the due date from 1st January 2021.
This period has been set to give schemes time to adjust their systems and processes and for those employers that have been affected by the pandemic to work with their provider to bring any outstanding contributions up to date.
Other types of enforcement will start to return to normal from 1st October 2020. This includes the requirement for schemes to submit audited accounts and investment statement reviews.
The Regulator will also return to reviewing Chairs’ statements submitted on and after that date as usual. These requirements had been temporarily eased to allow trustees to concentrate on the immediate risks that the pandemic posed for their schemes.
The Regulator has confirmed that it will continue to take a risk-based, proportionate approach to enforcement decisions.
Regulator’s enforcement activity drops by half during COVID-19
The Regulator’s quarterly compliance and enforcement bulletin shows how the temporary flexibilities led to a 55% fall in the use of its powers between April and June this year compared to the previous quarter.
Despite the challenges that COVID-19 introduced, The Regulator said it has not seen a significant or unusual spike in missed pension contributions and the majority of employers continued to meet their auto-enrolment duties.As COVID-19 easements begin to be lifted, The Regulator launched an advertising campaign to remind employers that, while their workplace has changed due to COVID-19, their automatic enrolment responsibilities towards their employees have not.
Fraudster ordered to repay charity pension scheme money
Convicted pension fraudster Patrick McLarry has been ordered to repay more than £250,000 of stolen savings.
McLarry, who spent the money that he stole on a house and warehouse in France, a house in Hampshire and to repay debt, is currently serving a five-year prison sentence for defrauding the Yateley Industries for the Disabled pension scheme.
The Pensions Regulator used the Proceeds of Crime Act 2002 to secure a confiscation order against the former charity chief. The Crown Court has ordered McLarry to pay £286,852 to the Yateley Industries for the Disabled Pension Scheme, to compensate members for the sums he stole adjusted for inflation.
He is required to pay the amount in full within three months. If he fails to do so, the judge has ordered him to serve an additional three years and he will still be required to pay the money back to the scheme.
TPR will not flinch from using every weapon in our arsenal to tackle pension fraudsters and will continue to protect savers’ retirements."
Erica Carroll, Director of Enforcement at The Pensions Regulator
Pension Protection Fund (PPF) developments
Pension Protection Fund (PPF) developments
In August, the Pension Protection Fund (PPF) issued a press release to allay concerns that it would be negatively affected by the current economic situation.
Our latest modelling shows that we are well placed to achieve our self-sufficiency target and our 2020 / 21 levy estimate remains unchanged from its announcement last year."
David Taylor, PPF Executive Director
Legal developments - appeals launched
In June 2020, the Administrative Court upheld the PPF’s general approach to calculating increases in compensation as a result of the Hampshire ruling .
However, it also required the PPF to make sure that members and survivors each receive at least 50% on a cumulative basis of the actual value of the benefits that their scheme would have provided. The PPF lodged an appeal with the Court of Appeal on 20th August 2020 concerning that latter point.
The Department for Work and Pensions has also lodged an appeal against the ruling in the recent Hughes case that the compensation cap is unlawful. For the time being, the PPF will continue to apply the cap on the existing basis.
PPF consultation on changes to the 2021 / 22 levy
The PPF has now published its consultation on changes to the levy rules in 2021 / 22.
The consultation closes on 24th November 2020.
In the consultation, the PPF acknowledges the challenges faced by the economy due to COVID-19, and the long-term impact that this will have on the sustainability of employers and their related schemes.
Due to these challenges, the PPF wants to adopt a more flexible stance to levies and to be prepared to adjust the rules annually rather than the current three-year period.
The consultation proposes two important developments for 2021 / 22:
The levy for schemes with less than £20m in liabilities will be halved, and this reduction will be tapered so that only schemes with more than £50m in liabilities will be subject to the full charge
The cap on the amount of levy paid by any individual scheme will be reduced from 0.5% to 0.25% of its liabilities.
With these proposed changes in place, the PPF expects to collect £520m in 2021 / 22, £100m less than in 2020 / 21.
While there is a case for the PPF increasing the levy in 2021 / 22 due to an expected rise in employer insolvencies, the Fund entered the pandemic in a strong financial position, which has allowed it to avoid any immediate changes to its levy strategy.
The new annual review of levies by the PPF will require schemes to monitor developments to the levy more closely going forward.
However, a reduction to both the levy for smaller schemes and the levy cap generally will be welcome news for pension schemes in financial difficulty.
Overseas pensioners may lose their UK bank accounts
Recent press reports have highlighted that some UK banks have started to contact customers living overseas to inform them that they will not be able to retain a UK account with them after 31st December 2020.
This move by the banks is out of concern that the as a result of Brexit and the fact that the transition period ends this year. Without a trade deal with the EU, current ‘passporting’ arrangements will expire and the banks will have to work within the confines of each individual country’s laws. This may mean that certain services currently provided for a UK account won’t be able to continue.
Clearly this is a matter for the banks to monitor and then resolve with their customers. However, if a deal with the EU is not in place very soon, we’re likely to see a surge in notifications to change bank account details at short notice.
This could create short-term resourcing problems for administrators, especially in the run-up to the festive period.
Online “Using a Lasting Power of Attorney” service launched
The Office of the Public Guardian, the Government organisation responsible for granting powers of attorney, has launched an online service to make checking the validity of a Lasting Power of Attorney (LPA) easier. The service can be accessed here and is available for use immediately: http://www.gov.uk/view-lpa.
The service will allow third party organisations to check an LPA online after being given a secure access code by the LPA holder.
The service will allow third-party organisations to check an LPA online after being given a secure access code by the LPA holder.
The service is currently only available where the LPA has been registered on or after 17th July 2020. The Office of the Public Guardian is working on extending the system to LPAs registered earlier in 2020, however no date has been set for this facility.
To view an LPA online, the third party doesn’t need to register for the service but will need the donor’s name and the access code. Using these details, it can view a summary of the LPA and check whether it’s valid.
The digital service removes the need for paper copies of an LPA to be sent to third parties, making the process easier for all involved.
Cross-sector working group on small pots
Automatic enrolment has introduced millions of new savers into the pensions market. However, as people move jobs, they do not necessarily consolidate their savings, leading to the existence of large numbers of small pension pots.
There are currently around 8 million deferred pension pots, but this could rise to around 27 million by 2035 if no action is taken.
Small pots can be a risk to members as they can be eroded by charges over time and potentially reduced to £0. Over time members can lose track of their small pots, an issue looking to be addressed by pension dashboards.
Small pots also pose an issue for pension providers where the charges associated with smaller pots may not cover their administration costs.
To address these problems, the Government has launched a cross-sector working group to provide recommendations on developing policy for minimising proliferation and consolidating small pots.
The working group will report later in autumn after completing its initial assessment.
With the launch of the cross-sector Working Group and our ongoing efforts to make Pensions Dashboards a reality, we are focused on ensuring that consumers can stay on top of their pension savings, make more informed choices about their financial futures and have real returns from their savings."
Guy Opperman, Minister for Pensions and Financial Inclusion