Welcome to our latest edition of our Trustee Quarterly Update!
This update covers the legal position in England and Wales.
- GMP equalisation
Act to amend GMP conversion legislation has received Royal Assent
The Pension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022 received Royal Assent on 28 April. The Act is designed to address issues with existing GMP conversion legislation. In particular, it makes clear that conversion can be undertaken in relation to GMPs of survivors as well as members. It removes some existing provisions regarding the post-conversion benefits that must be provided for survivors and instead provides that survivor benefits will have to be provided in accordance with (yet to be published) regulations. The Act also removes the existing requirement for employer consent and instead provides that regulations will prescribe which parties have to consent. (The meaning of the original employer consent requirement was ambiguous where the participating employers had changed over time.) The Act has not yet been brought into force.
Once the Act has come fully into force and the necessary regulations have been published, this legislation will hopefully address some of the issues with GMP conversion legislation. However, this Act does not address the tax issues that can arise.
HMRC guidance on GMP equalisation tax issues
On 6 April HMRC published a Guaranteed Minimum Pension equalisation newsletter clarifying HMRC's views on some of the tricky tax issues that can arise when dealing with GMP equalisation. For more detail, see our e-bulletin.
HMRC has also clarified its view of the tax position in relation to interest on late payments made as a result of GMP equalisation exercises. In most cases schemes should not be deducting income tax at source on interest payments relating to correction payments. The interest is likely to be "yearly interest" for tax purposes. Members should be advised that they are responsible for accounting to HMRC for any tax due. In many cases the interest is likely to be covered by the member's Personal Savings Allowance, though this will depend on individual circumstances. HMRC's guidance relates specifically to GMP equalisation, but there is no reason why the same approach would not apply to other correction payments.
PASA GMP equalisation FAQs
PASA's GMP Equalisation Working Group (GMPEWG) has published an FAQ document designed to help administrators implement GMP equalisation measures by providing the views of PASA's GMP Equalisation Administration sub-group on good practice. The GMPEWG anticipates that the FAQs will be updated and added to as equalisation projects progress.
- Pensions Regulator
Annual Funding Statement 2022
The Pensions Regulator has published its Annual Funding Statement 2022. The statement is particularly relevant to schemes with valuation dates between 22 September 2021 and 21 September 2022. For more detail, click here.
Updated enforcement and prosecutions policy
On 4 May the Regulator published for consultation:
- a revised enforcement policy that will replace its existing policies for defined benefit, defined contribution and public service pension schemes; and
- an updated prosecutions policy which incorporates reference to the Regulator's Criminal offences policy which deals specifically with the criminal offences introduced by the Pension Schemes Act 2021 and on which we reported in our December 2021 Update.
The Regulator also published its:
- High fines policy (avoidance) which broadly covers the Regulator's new power to impose financial penalties of up to £1 million for various breaches of the law including breaches of the notifiable events regime and conduct risking accrued scheme benefits; and
- High fines policy (information requirements) which deals with non-compliance with the notifiable events regime and knowingly or recklessly providing false or misleading information to the Regulator or the scheme trustees.
- Pensions Ombudsman
No change of position defence where member turned "Nelsonian" blind eye to overpayment
In the case of Mrs G (PO-27022), the Pensions Ombudsman has held that a member could not succeed with a "change of position" defence to a claim for recovery of an overpayment where the member had turned a "Nelsonian" blind eye to the overpayment and had therefore not acted in good faith. For more detail, click here.
Member not entitled to benefits in incorrect benefit statement
The Pensions Ombudsman has held that a member who received retirement quotations which overstated his benefits is not entitled to the higher benefits (Mr N CAS-53720-V9X4). For more detail, click here.
- DC developments
"Stronger nudge" requirements in force from 1 June
As we reported in our last Update, the "stronger nudge" requirements come into force on 1 June. The new rules will require scheme trustees to offer to book an appointment with the Pension Wise guidance service for members in certain circumstances (-broadly, where it appears likely that the member will start to receive benefits soon).
Facilitating investment in illiquid assets by DC schemes: recent developments
On 30 March the Government published the consultation document Facilitating investment in illiquid assets. This comprises two Government responses to previous consultations and two new consultations, all related to investment by DC schemes. For more detail, click here.
Feedback statement on driving Value for Money in DC pensions
On 24 May the Pensions Regulator (TPR) and FCA published a feedback statement on driving value for money (VfM) in defined contribution pensions. The statement summarises the responses received to the joint discussion paper published by TPR and the FCA in September 2021 in which they invited views on developing a framework and related metrics to assess VfM in all DC schemes regulated by TPR or the FCA. The statement says that there are a number of areas where there is no clear consensus on the way forward, and that TPR and the FCA will need to engage further with the industry in order to understand the potential impact of any proposals. TPR and the FCA aim to consult on their proposals towards the end of 2022.
Do you know what your scheme rules say about discretionary pension increases?
With the current inflation rate higher than it has been for many years, we are seeing some clients considering whether to make use of powers under their scheme rules which allow them to grant pension increases on a discretionary basis. Key questions to consider are:
- Do the scheme rules contain a power to grant discretionary pension increases?
- If there is such a power, who exercises it? Is it the employer or the trustees or is agreement between both required?
- Do the scheme rules say how often exercise of the power should be considered, or specify factors to be considered?
Often the scheme rules won't specify how often a discretionary increase power should be considered. During periods of low inflation, it may be relatively easy for employers and trustees to justify not having considered the discretionary increases power for many years, as increases payable as of right may have been enough to ensure that pensions increased broadly in line with the cost of living.
During periods of high inflation, it is more likely that a court would consider trustees to be in breach of their duties if they fail to even consider the discretionary increases power. That's not to say that it will always be appropriate to grant an increase. There are many factors which may be relevant to such a decision, including the scheme's funding position and the employer's covenant strength. However, trustees are likely to be in a stronger position to defend themselves against member complaints if they can show that they have properly considered making use of any discretionary increase power.
Court approves charity's investment strategy excluding investments on ethical grounds
In the recent judgment in Butler-Sloss v The Charity Commission for England and Wales the High Court has confirmed that the trustees of two charities whose principal purposes were environmental protection and the relief of poverty could lawfully adopt an investment policy which excluded investment in a significant portion of the market on climate-related grounds. For more detail, click here.
Legal action against Uber for failure to offer Sharia-compliant pension arrangements
The App Drivers and Couriers Union (ADCU) has announced that its legal representatives have written to Uber to demand that the pension provision arranged for drivers be made Sharia-compliant. ADCU estimates that up to 75% of Uber drivers are Muslim and says that Uber's failure to provide a Sharia-compliant pension option effectively means that the majority will be forced out of participation in the pension scheme and that those that do participate are forced to accept a compromise of the tenets of their faith to do so. It alleges that Uber's pension arrangements amount to a violation of the Equality Act 2010. ADCU says that Sharia investment screening is comparable to screening for "so called ESG ethical funds".
Government confirms intention to proceed with ban on corporate directors
In a White Paper published in February, the Government confirmed its intention to prohibit companies from being directors, subject to an exception allowing corporate directors where all the directors of the corporate director are natural persons. In other words, corporate directors are permitted provided there is not more than one "layer" of corporate directors.
It is common for schemes to have an "in-house" corporate trustee whose directors include a corporate professional trustee. Under the Government's proposals, this structure will still be permitted provided all the directors of the corporate trustee are natural persons.
Where a corporate professional trustee is due to be appointed as a director of a corporate trustee, the corporate trustee should check whether all of the professional trustee's directors are natural persons. It may be advisable to address this issue in the appointment terms by providing that the professional trustee will not appoint or retain any corporate directors to its board where this would result in the in-house corporate trustee being in breach of the prohibition. In most cases we think it is in practice likely that all the directors of the corporate professional trustee will be natural persons. However, it is worth checking this point.
The Government has not yet given an indication of the timescale within which the ban will be brought into force.
Effective date of notifiable events changes still unknown
In our December 2021 Update we reported on proposed changes to the notifiable events regime which requires certain events, such as a decision to sell a scheme employer, to be notified to the Pensions Regulator. It was widely expected that the changes would take effect from 6 April 2022, but that did not happen. The Government has yet to respond to its consultation on the notifiable events changes and has not indicated a date from which the changes are likely to come into force.
Income tax and NI changes announced in Chancellor's Spring Statement
The Chancellor's Spring Statement on 23 March did not announce any changes to pensions legislation. However, the Chancellor did announce some changes to the wider tax regime which may mean that member literature for some pension schemes needs to be updated, particularly where contributions are made via salary sacrifice arrangements and include worked examples. Specifically:
- the threshold from which employees pay National Insurance contributions will increase from £9880 to £12,750 from 6 July 2022. This increase will align the NI contribution threshold with the threshold for paying income tax; and
- the basic rate of income tax will be reduced to 19% from April 2024.
PASA good practice guidance for DB transfers
On 3 May the Pensions Administration Standards Association (PASA) published its good practice guidance for individual defined benefit transfers. The guidance is intended to set out principles and suggested approaches for faster, safer and more efficient transfers which comply with regulations. The guidance has no official status, but PASA anticipates that the Pensions Ombudsman will reference it as a source of what good industry practice looks like.
Points covered in the guidance include:
- where a third party (eg an adviser) creates a delay in the processing of a transfer, the scheme administrator should make this known to both the third party and the member;
- a recommendation all requests for transfer information requested by advisers and provided by administrators should be based on the FCA's Transfer Template to improve the quality and consistency of information flows;
- a suggestion that in cases where the scheme actuary reviews the transfer value calculation, this should where possible be done by the actuary checking the administrator's calculation rather than carrying out a new calculation, and that thresholds for requiring actuary checking should be regularly reviewed;
- if it is the scheme's practice to process transfer values requested after the statutory deadline for making a request has passed, it should be made clear to the member in advance if this could result in the transfer being less than originally quoted; and
- where a receiving scheme is willing to accept a transfer value in more than one instalment and the transfer value includes AVCs, each component of the transfer value should be transferred at the earliest opportunity, particularly where there's a delay in an AVC disinvestment.
Changes to "scheme pays" legislation
In our December 2021 Update we reported on changes to the timescale for members to opt to use the "scheme pays" provisions where an annual allowance charge arises as a result of a retrospective change to the "pension input amount" (the value of benefits accruing in a tax year for annual allowance purposes). As expected, the changes came into force on 6 April 2022.
Deadline for registering EFRBS with Trust Registration Service is 1 September 2022
We have reported in previous updates on the requirement for all "employer-funded retirement benefit schemes" (EFRBS), ie pension schemes that are not registered pension schemes under the Finance Act 2004, to register with the Trust Registration Service. (Initially the requirement applied only to EFRBS that fell within the definition of a "taxable relevant trust".) The deadline for registering is 1 September 2022.