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End of Brexit transitional period may cause annuity issues for members resident in EEA
Following the end of the Brexit transitional period, UK insurance companies no longer enjoy "passporting" rights allowing them to conduct insurance business in the EEA. This has raised concerns that insurers may no longer be permitted to service annuity policies in respect of EEA residents. Some insurers have addressed this issue by transferring policies to an insurance company in the EEA. Some EEA member states have established "run off" regimes to ensure continuity of service in relation to policies already in existence at the end of the transitional period, but the terms of any such run off regime will vary between member states.
The opinion of the European Insurance and Occupational Pensions Authority (EIOPA) is that if a UK policyholder subsequently moves to the EEA, this does not give rise to cross-border business and so does not require the insurance company to be authorised in the EEA in order to continue to service the policy. However, EIOPA's opinion is not binding, so individual member states may interpret the rules differently, and we understand that France is adopting a more restrictive approach on this issue. In any event, EIOPA's opinion does not cover the position where a member is already resident in the EEA at the time the annuity policy is taken out, giving rise to the risk that both the issue of the policy and subsequently making payments under it could amount to carrying on business in the EEA.
A policy held in the name of UK-based trustees should arguably be viewed as solely UK business even if the member concerned is resident in the EEA, but whether individual member states would agree with this analysis remains untested. It is also unclear how individual member states would view the situation where a UK trustee transfers a policy into the name of a member resident in the EEA.
GDPR following end of Brexit transitional period
Following the end of the Brexit transitional period on 31 December 2020, the GDPR will be incorporated into "retained EU law" (ie EU law that is retained as part of UK law until such time as it is amended by UK legislation). The term "UK GDPR" will be used to refer to (a) the GDPR as it applied in the UK before the end of the transitional period, and (b) the version of the GDPR applicable in the UK following the end of the transitional period. The GDPR as it applies in the EU will be referred to as "EU GDPR". This means that there will effectively be two parallel data protection regimes with very similar requirements, one in the EU and one in the UK, though it is possible the two regimes may diverge over time.
The EU GDPR allows personal data to be freely transferred from one country to another within the EU. However, where personal data is being transferred outside of the EU, the person who is the data controller in relation to that data (generally the scheme trustees in a pensions context) must ensure that appropriate data protection safeguards are in place unless the European Commission has decided through an "adequacy decision" that the country to which data is being transferred has adequate data protection principles enshrined in its law.
During the Brexit transitional period, the UK was effectively treated as a member of the EU for data transfer purposes. Following the end of the transitional period, the Brexit deal provided for the continued free flow of data for up to six months following the end of the transitional period pending the anticipated adoption of a formal adequacy decision to allow free flow of data on a more permanent basis. On 19 February the European Commission published a draft decision to grant the UK adequacy status providing for the free flow of personal data between the UK and EU. The decision will remain in force for four years, but can be extended. The decision still needs to go through further approval processes, but we now have more certainty that the UK will be granted adequacy status before expiry of the current interim regime on 30 June 2021.
What does this mean for trustees?
If personal data is being shared with organisations in the EU, trustees need to monitor developments in relation to data transfer and be ready to put in place additional safeguards in the event that the expected adequacy decision fails to materialise. Trustees should also consider whether they have any contracts with provisions dealing with data transfer which need updating because they are drafted on the assumption that the UK is a member of the EU.
Pension Schemes Act 2021
The Pension Schemes Bill received Royal Assent on 11 February to become the Pension Schemes Act 2021. The substantive provisions of the Act (other than some provisions conferring power to make regulations) are not yet in force, as they will only come into force once the Secretary of State makes an order to this effect.
The Act will introduce a requirement for trustees to put in place a written long-term funding and investment strategy setting out the funding level they expect the scheme to have achieved by the "relevant date" (or dates). Much of the detail, including the definition of "relevant date", has been left to regulations. In an interim response to its DB funding code consultation, the Pensions Regulator has said that the DWP's consultation on draft scheme funding regulations is expected to happen "in the first part of this year".
The Act will also strengthen the Pensions Regulator's powers by:
- criminalising acts which reduce the likelihood of accrued scheme benefits being received, or avoid an employer debt under section 75 of the Pensions Act 1995 being triggered or recovered ( in both cases subject to a "reasonable excuse" defence);
- broadening the circumstances in which the Regulator can use its "moral hazard" powers to require an employer or connected party to provide financial support for a pension scheme;
- providing for the possibility of new regulations extending the "notifiable events" regime to require some corporate transactions to be notified to the Regulator and the trustees of the employer's pension scheme in advance; and
- allowing the Regulator to impose penalties of up to £1 million for some breaches.
As regards timing, the pensions minister has said the Regulator will produce guidance on the use of the new criminal sanction powers and plans to undertake a consultation first. The government intends that the other Regulator powers in the Act will be available to the Regulator by Autumn 2021.
The minister also said that none of the new powers in the Act will be retrospective and that the new criminal sanctions and information gathering powers will apply where the act occurs after the powers come into force. It is worth noting that the minister's confirmation on this point did not specifically mention the extended moral hazard powers, where the legislation works by extending the circumstances in which existing powers can be exercised. It may be that the minister's confirmation was carefully worded to allow for the possibility of the broader test for use of moral hazard powers being applied in relation to events which occurred before the coming into force of the Act.
The Act contains a power to make regulations requiring trustees to make extra checks, such as requiring evidence of employment, before paying a transfer value in respect of a member. The provisions are aimed at preventing members from transferring their pension funds into schemes that are being used as vehicles for scams. At a parliamentary Work and Pensions Committee session, the pensions minister said that new regulations on transfer values are expected to come into force in September or October 2021.
Regarding the Act's powers to make regulations dealing with governance and reporting in relation to climate change risk, see 'Consultation: "Taking action on climate risk: improving governance and reporting by occupational pension schemes"' below.
Supreme Court rules Uber drivers are "workers" under employment legislation
The Supreme Court has ruled that Uber drivers are workers for the purposes of employment legislation. Although the Uber case was not about pensions, the definition of "worker" in the relevant employment legislation is almost identical to the definition of "worker" under auto-enrolment legislation, so the case is relevant to employers determining who their workers are for the purposes of auto-enrolment.
The Supreme Court highlighted the following points as relevant to the classification of the Uber drivers as workers:
- the drivers' remuneration was fixed by Uber and drivers were not permitted to charge more than the fare calculated by the Uber app;
- the contractual terms applicable to the drivers were dictated by Uber;
- although drivers could choose when and where to work within the area covered by their licence, Uber monitored the drivers' rate of acceptance and cancellation and imposed penalties (in the form of logging the driver off the app for a period) if the cancellation rate exceeded a certain level. This placed drivers in a position of subordination to Uber;
- Uber exercised significant control over the way in which the drivers delivered their services, for example vetting the type of car which could be used, and managing performance through a driver rating system;
- Uber restricted communication between passenger and driver to the minimum necessary and took active steps to prevent drivers from entering into arrangements with passengers that extended beyond an individual trip.
Possible legal challenge to aligning RPI with CPIH
In our December Update we reported on the government's plans to align RPI with the Consumer Prices Index including owner occupiers' housing costs (CPIH) in 2030. As CPI is generally lower than RPI, the effect of this change will be to reduce the value of RPI-linked assets and RPI-linked benefits. The trustees of the BT Pension Scheme, Ford Pension Schemes and Marks and Spencer Pension Scheme are considering bringing a legal challenge to the decision to align RPI with CPIH from 2030. The deadline for bringing such a challenge had been due to expire on 24 February, but the trustees of the schemes concerned sought a six week extension to the time limit at the government's request. The government had asked the trustees to seek a time limit extension to allow the government more time to prepare a defence. The trustees now have until 7 April 2021 to decide whether to bring a claim.
Court of Appeal overturns refusal to approve transfer of insurance business from Prudential to Rothesay
The Court of Appeal has allowed an appeal from a High Court judge's refusal to give approval under Part VII of the Financial Services and Markets Act 2000 to the transfer of approximately 370,000 annuities from The Prudential Assurance Company to Rothesay Life plc.
Two key reasons for the High Court judge's decision to refuse to approve the transfer had been:
- Rothesay Life's capital management policies did not match those of Prudential and it could not rely on the support of a large well-resourced group over the lifetime of the policies with a "reputational imperative" to support a company carrying its name; and
- it had been reasonable for policyholders to have chosen Prudential on the basis that it would not seek to transfer their annuity to another insurer.
The Court of Appeal said the crucial question for the court was whether the proposed scheme would have a material adverse effect on policyholders, employees or other stakeholders. Even if the court does find that a scheme will have a material adverse effect on some groups of policyholders, there may be reasons that justify its approval.
On the facts of the case, the Court of Appeal held that the High Court judge had been:
- wrong to conclude that there was a material disparity between the two insurance companies' likely need for, or availability to them of, external support over the lifetime of the annuity policies;
- wrong to regard the likelihood of non-contractual parental support being available in the future as a relevant factor to be taken into account; and
- wrong to accord any weight to any subjective preference of policyholders for Prudential to provide their annuities in the light of Prudential's age and established reputation, or to accord any weight the fact that policyholders may reasonably have assumed that Prudential would continue to be the provider of their annuities for their full term.
In reaching its judgment Court of Appeal took into account: that Rothesay Life met the requirements of the "Solvency II" directive; the opinion of the independent expert; the non-objection of the FCA and the Prudential Regulation Authority; and the ongoing requirements of the regulatory system applicable to Rothesay Life.
The High Court's refusal to sanction to the transfer was widely regarded as having given a surprising amount of weight to the value that individual policyholders might attach to having their annuities with a particular well known insurance company. The Court of Appeal judgment brings helpful clarity to the test which a court should apply when asked to sanction a transfer of business from one insurance company to another.
- Pensions Regulator
Interim response to DB funding code consultation
On 14 January the Pensions Regulator published an interim response to the first part of its defined benefit funding code consultation. The response says that the second part of the Regulator's consultation won't be published until the DWP has consulted on draft scheme funding regulations. The Regulator expects the DWP consultation to happen "in the first part of this year". The Regulator expects to publish the second part of its own DB funding consultation in the second half of 2021.
The Regulator says that overall there was general support for its proposed approach to its new DB funding code, but that the following concerns were raised:
- where the parameters will be set for schemes wishing to use the "Fast Track" route, given the potential risk that some schemes might "level down" while others may see an increase in the cost of pension provision;
- how the proposed Fast Track guidelines will operate for open schemes;
- potential loss of flexibility (eg through benchmarking the "Bespoke" route against Fast Track);
- an increased evidential burden for schemes submitting valuations under the Bespoke route;
- that the Bespoke route may be perceived as being second best;
- reliance on the employer covenant being watered down.
The Regulator acknowledges the significant impact of COVID-19 on employers and schemes and says it will take this into account when developing Fast Track guidelines for consultation. However, it believes the key principles set out in its first consultation focusing on Integrated Risk Management remain relevant.
The Regulator anticipates that its second consultation will cover:
- a full summary of the responses to its first consultation, the approach taken in the light of those responses, and the final legislative package;
- the draft code for consultation and the Regulator's proposed regulatory approach including developing thinking around:
- the process to review and update Fast Track guidelines;
- the Regulator's approach to assessing valuations;
- engagement with defined benefit schemes; and
- an impact assessment and supporting analysis.
DC transfer requests and gated funds: update to guidance
On 11 January the Regulator updated its DC scheme management and investment: COVID-19 guidance for trustees to include a section on transfer requests where all or part of the member's fund is invested in a "gated" (closed) fund. The Regulator says that it appreciates that payment of a cash equivalent transfer value (CETV) is likely to be problematic where all or part of the member's fund is held in a gated fund. However, the Regulator does not believe the law allows it to grant an extension to the statutory timeframe for payment of a CETV in these circumstances. The Regulator says that it expects trustees to do everything they can to pay transfer requests promptly and that it may fine trustees who fail to take all reasonable steps to pay a transfer value within six months of the application date. It says that if only part of the member's fund is held in a gated fund, "reasonable steps" might include exploring with the receiving scheme whether the monies from the gated section could follow once the fund has re-opened and, if so, offering the member a partial transfer as an interim measure.
The Regulator says trustees should continue to report any significant failures to pay transfer values within the statutory period, outlining the reasons why and the steps taken by the trustees towards compliance.
- Pension Protection Fund
PPF Levy determination
On 26 January the PPF published its Determination and Levy Rules for the 2021/22 levy year.
The PPF has confirmed the introduction of a "small scheme adjustment" which it expects to be a long-term feature of the levy. This will halve risk-based levies for schemes with less than £20 million in liabilities, with the reduction tapered to £50 million of liabilities.
The PPF has confirmed that the cap on the amount of levy paid by any individual scheme will be cut from 0.5% of that scheme's liabilities to 0.25%. This will be kept under review for future years.
The PPF says that it will take a year by year approach for setting the levy rules up to 2023/24 to enable it to respond flexibly to the impact of COVID-19 on schemes and sponsors.
The PPF has amended its rules to say that supporting documents for contingent assets should be submitted to the PPF by e-mail rather than as hard copy. Contingent asset certificates need to be submitted by midnight on 31 March 2021, though a slightly later deadline of 5pm on 1 April 2021 applies for the supporting documentation.
PPF consults on changes to assumptions
On 4 February the PPF published a consultation on proposals to change the actuarial assumptions used for section 179 valuations (PPF levy valuations) and section 143 valuations (PPF assessment valuations). The PPF says that the changes are intended to bring the valuation assumptions in line with current pricing in the bulk annuity market. The key changes include:
- updating the mortality assumptions by moving to the latest Self-administered Pension Scheme (SAPS) "S3" series mortality tables and using the Continuous Mortality Investigation (CMI) 2019 mortality projections model;
- changing the post-retirement post-97 discount rates so that they better reflect current CPI pricing in the insurance market;
- amending the calculation of wind-up expenses and benefit installation/payment expenses.
The PPF estimates that the changes to the section 179 assumptions will move 261 schemes from deficit to surplus. The PPF proposes to introduce the changes for valuations with an effective date on or after 1 May 2021 on the basis that the changes are "relatively immaterial" for an "average scheme".
The consultation closes at 5pm on 18 March 2021. The PPF expects to publish its response and decision by 29 April 2021.
Consultation on increasing normal minimum pension age to 57
The government is consulting on the detail of its plans to increase normal minimum pension age (ie the age from which it is possible to draw a pension without incurring penal tax consequences) from 55 to 57 with effect from 6 April 2028. The government considers that it is in principle appropriate for normal minimum pension age (NMPA) to remain around 10 years under state pension age, though it does not currently intend to link NMPA rises automatically to state pension age increases. The government does not intend to apply the NMPA increase to pension schemes for the armed forces, the police or fire services.
The government is proposing that any individual who, at the date of the consultation, has a right under the scheme rules (not subject to any person's consent) to take benefits at an age below 57 will retain that right post-6 April 2028 (including in relation to benefits that accrue after that date). The government intends that such right will be retained on a bulk transfer.
The consultation closes at 11pm on 22 April 2021. The government plans to publish draft legislation in summer 2021 and to legislate for the increase in NMPA in the subsequent Finance Bill.
In money purchase schemes it is common to allow members to retire at the earliest age authorised under the pensions tax regime, so the government's current proposals could mean that a significant number of scheme members retain a right to draw benefits from age 55 after 6 April 2028, though this could hinge on whether the right is absolute or technically subject to trustee or employer consent. It is not entirely clear how the transitional protection for the right to retire earlier than age 57 will apply if, rather than specifying an age, the rules give the member the right to retire from NMPA as defined in legislation.
General Levy consultation
The government has consulted on the General Levy. The General Levy (not to be confused with the PPF levy) is used to fund the core activities of the Pensions Regulator, the activities of the Pensions Ombudsman, and the pensions-related activities of the Money and Pensions Service.
The consultation proposes four sets of levy rates: defined benefit; occupational DC (non-master trust); master trust; and personal pension schemes. It proposes higher levy rates for defined benefit schemes reflecting the additional work involved in supervising them.
Consultation: "Taking action on climate risk: improving governance and reporting by occupational pension schemes"
In our September Update we reported on the government's consultation "Taking action on climate risk: improving governance and reporting by occupational pension schemes" on proposals to impose detailed reporting and governance obligations on trustees of the largest occupational pension schemes (broadly, those with assets of £1 billion or more) and authorised master trusts (regardless of size) in relation to climate risk. (The obligations will also apply to trustees of authorised schemes providing collective money purchase benefits under the new regime provided for by the Pension Schemes Act 2021.) Alongside its consultation response in relation to the original policy proposals, the government has also published for consultation the draft regulations to give effect to the changes, and also draft statutory guidance. For more information, click here.
Government response: Review of the Default Fund Charge Cap and Standardised Cost Disclosure
On 13 January the government published its response to its Review of the Default Fund Charge Cap and Standardised Cost Disclosure. Currently, default funds in a scheme used for satisfying auto-enrolment obligations are subject to a charge cap of 0.75% of the value of a member's rights, but some costs, such as transaction costs, are excluded from the cap. There are also restrictions on permitted charge structures for members invested in the default fund. The government has decided not to change the level of the charge cap or to include transaction costs within its scope. However, it will introduce a minimum pot size, initially set at £100, below which flat fees cannot be charged in default funds. The government has decided not to legislate for standardised costs disclosure at present, but to closely monitor the Cost Transparency Initiative templates introduced in 2019 and legislate if take-up is insufficient.
No change to "alternative quality requirements" for auto-enrolment DB schemes
On 25 February the government published its response to its consultation "Automatic enrolment: alternative quality requirements for defined benefit and hybrid schemes being used as a workplace pension". The government has decided not to make any changes at present.
The "alternative quality requirements" apply to a defined benefit or hybrid scheme used by an employer to satisfy its obligations under auto-enrolment legislation. Up until the end of contracting-out in April 2016, a defined benefit scheme could meet the auto-enrolment quality requirements by being contracted-out or by meeting a standard known as the "test scheme standard". Following the end of contracting out, the DWP introduced two alternative quality tests which could be used by defined benefit and hybrid schemes to meet the quality standards required by auto-enrolment legislation. The DWP is required to carry out statutory reviews of the operation of the regulations which introduced the alternative quality standards. The next such review is due in 2023.
Delay to regulations transferring CMA responsibilities to the Pensions Regulator
In our December 2020 Update we reported on the duty to submit a compliance report to the Competition and Markets Authority (CMA) confirming that trustees have met their duties regarding running a competitive tender process in relation to the appointment of a fiduciary manager, and in relation to setting strategic objectives for their investment consultant. The government consulted in 2019 on regulations to transfer enforcement responsibility from the CMA to the Pensions Regulator. On 26 February 2021, the government announced that publication of the consultation response and final regulations has been delayed, but that it expects to be able to publish them in the first half of 2022.
- Pensions Ombudsman
Ombudsman orders compensation of over £25,000 for administrator's delay in confirming no court orders re member's fund
In the case of Mr G (PO-21110), the Pensions Ombudsman has upheld a complaint against the administrator and the trustee of a scheme for a delay in providing information requested by a receiving scheme in connection with a transfer value. In particular, it had taken some time for the transferring scheme administrator to confirm to the receiving scheme that the member's pension fund was not subject to any court orders in connection with divorce or bankruptcy. For more information, click here.
Ombudsman holds no requirement to disclose minutes re pension increase decision
In his determination in Mr N (PO-29382), the Ombudsman has held that disclosure of information legislation did not require the trustees to disclose the contents of a trustee minute regarding exercise of the trustees' discretion in relation to pension increases. For more information, click here.
Update on Managing Pension Schemes Service
HMRC's newsletter 127, published 3 February 2021, contains an update on the roll out of HMRC's Managing Pension Schemes service. The newsletter says that from March 2021, scheme administrators will be able to authorise practitioners to act on their behalf through the service. Only practitioners registered on the Managing Pension Schemes service will be able to report for schemes that are on that service. Such practitioners will be able to submit Accounting for Tax returns for schemes in relation to which they are authorised, and will be able to view the financial information for those schemes. HMRC says that further information on these features will follow in a future newsletter.
Media reports suggest Chancellor will announce lifetime allowance freeze in Budget
According to media reports, the Chancellor is planning to announce a freeze to the lifetime allowance for the rest of the current parliament as part of his Budget on 3 March.
ICO publishes data sharing code of practice
On 17 December the ICO published a new Data Sharing Code of Practice. The code is intended to be a practical guide for organisations about how to share personal data in compliance with data protection law. The code is a statutory code of practice, meaning that the Information Commissioner must take the code into account when considering whether an organisation has complied with its data protection obligations.
Pensions Dashboard Programme publishes Data standards guide
On 15 December the Pensions Dashboard Programme (PDP) published the key data standards which will underpin the initial technology and allow individuals to view their pensions via their chosen dashboard. The PDP's Data standards guide is aimed at the technical audience responsible for working on pensions data and is designed to ensure that providers can prepare their data for onboarding to pensions dashboards.
The PDP's previously published indicative timescale anticipates that 2023 will be the year that schemes are first compelled by law to connect to the dashboard.
Pensions minister launches Taskforce on Pension Scheme Voting
In our December 2020 Update we reported that the government had backed a call contained in the Association of Member Nominated Trustees' report "Bringing shareholder voting into the 21st Century" for a government-led working group to address barriers to scheme trustees being able to use voting rights in relation to scheme investments in order to exercise stewardship in relation to environmental, social and governance (ESG) issues. The launch of the Taskforce on Pension Scheme Voting Implementation has since been announced by pensions minister Guy Opperman.
GMP Equalisation Working Group sets out future plans
The cross-industry GMP Equalisation Working Group (GMPEWG) has published details of its plans for 2021. It plans to:
- publish a GMP conversion document by the end of August 2021 with example case studies;
- publish a "Guide to GMP Communications -Implementation Stage";
- publish some examples to help schemes understand and deal with the complexities of anti-franking as they specifically relate to GMP equalisation. The plan is for these examples to be published in the second quarter of 2021; and
- publish good practice guidance in relation to equalising past cash equivalent transfer values. An update on timescale for this will be published during the first quarter of 2021.
Since publishing details of its plans, the GMPEWG has published a Guidance Note on Tax Issues based on HMRC guidance and the GMPEWG's understanding of HMRC's current view on the interpretation of relevant tax legislation.
Job Retention Scheme extended to end of April 2021
On 17 December the government announced the extension of the Job Retention Scheme (furlough) to 30 April 2021.
DWP small pots working group report
On 17 December 2020, the small pots working group published a report on how to tackle the growth of deferred small pension pots in the auto-enrolment workplace pensions market. The working group is a cross-sector group chaired and facilitated by the DWP to make recommendations to the government. The working group concludes that the strategic goal for the government and pensions industry over the medium term should be to make consolidation of deferred defined contribution small pots the norm within the workplace auto-enrolment pensions market. It says that this will require automatic and automated solutions which will take time to develop and implement. The working group says that the first stages are for pension providers to work with government and regulators to address administrative challenges and test "proof of concept" proposals.
Review of auto-enrolment earnings trigger and qualifying earnings band
On 20 January the government published its review of the auto-enrolment earnings trigger and qualifying earnings band for tax year 2021/22. There will be no change to the earnings trigger which will remain at £10,000 for 2021/22. The lower limit for the qualifying earnings band will continue to be set in line with the National Insurance Contributions Lower Earnings Limit and so will remain at £6240. The upper limit for the qualifying earnings band will be set in line with the National Insurance Contributions Upper Earnings Limit at £50,270.