In this Update we take a look at key legal developments for trustees of occupational pension schemes over the past quarter. These include an important Court of Appeal decision on the extent of the Pensions Ombudsman's powers in overpayments cases. We also look at some important Pensions Ombudsman determinations, including a case where a member challenged a trustee's decision to pay a scheme surplus to the sponsoring employer when a section of a scheme wound up, and a case in which a scheme administrator was ordered to compensate a member after it failed to spot the warning signs that a fraudster was impersonating the member. The Chancellor's Autumn Statement on 22 November included proposals for radical changes to the UK pensions regime. We take a look at the key proposals and their implications.
Trustee Quarterly Update - December 2023
Important changes to recovering pension overpayments (Pensions Ombudsman v CMG Pension Trustees Limited)
The Court of Appeal has confirmed that the Pensions Ombudsman (PO) does not have the power to authorise trustees to make deductions to members' pensions to recover past pension overpayments.
If the member disputes the amount of overpayment which the Trustee wants to recoup from a member's future pension the Trustee must first get an order from the County Court permitting deduction.
So if the PO determines the amount of an overpayment and that it can be recouped the Trustee must then make an enforcement application to the County Court before actioning any deduction. The Court of Appeal said that this is an administrative task. That is right given that PO decisions are final and binding (absent a successful appeal) so the County Court cannot revisit the substance of the dispute.
In future we expect that the PO will change practice so the wording of PO determinations can be easily enforced by the County Court. In the meantime, we recommend that trustees ask the PO to set out in the determination both the amount of the total overpayment and the amount and frequency of the deductions that the trustee may make. Unless this happens the enforcement process in the County Court will not be an easy administrative exercise.
No order of the County Court is needed if the member does not dispute the amount of the overpayment and this will be the position in the vast majority of cases.
Addleshaw Goddard LLP acted for the Trustee of the CMG UK Pension Scheme.
BBC pension case: permission to appeal granted
The BBC has been granted permission to appeal the High Court's judgment in British Broadcasting Corporation v BBC Pension Trust Limited, which considered a scheme amendment power restriction on amendments which would "substantially prejudice the interests" of active members. It held that the reference to active members' "interests" included the ability of members to accrue future benefits under the scheme on the same terms as applied immediately before the amendment.
Pensions (Extension of Automatic Enrolment) Act 2023 receives Royal Assent
The Pensions (Extension of Automatic Enrolment) Act 2023 received Royal Assent in September. The Act gives the Government power to make regulations to:
- reduce the minimum age from which automatic enrolment applies (currently 22); and
- reduce or remove the lower limit for "qualifying earnings" (currently £6,240 p.a.).
The Act requires the Government to consult before exercising the regulation-making powers conferred by the Act. Until such time as regulations are made, there is no change to an employer's obligations in relation to auto-enrolment.
Pensions Ombudsman decision on transfer value regulations and overseas investments
The Pensions Ombudsman has dismissed a complaint by a member who complained that his transfer value had been delayed due to the trustee unnecessarily insisting on him taking MoneyHelper scams guidance (Mr W CAS-93568-H0D0). This is the first Pensions Ombudsman determination to consider the overseas investments "amber flag" under the transfer values regulations. For more detail, click here.
Ombudsman rejects member complaint re payment of surplus to employer
The Pensions Ombudsman has dismissed a complaint by a member about a surplus being paid in full to the Scheme's employer when the relevant section of the Scheme was wound up (Mr S CAS-92093-N4D9). The rules of the Scheme gave the Trustee discretion to increase benefits in consultation with the employer, with any assets remaining being paid to the employer. The Trustee decided that, after buying out the Scheme benefits, the net surplus would be paid to Bristol Water plc, the relevant employer. For more detail, click here.
Ombudsman orders administrator to compensate member where payment made to fraudster's bank account
The Pensions Ombudsman has ordered a scheme administrator to compensate a member after a fraudster tricked the administrator into paying a £20,000 benefit payment into the fraudster's bank account (Mr N CAS-38681-W2H9). For more detail, click here.
Ombudsman rejects complaint re amount provided by section 32 policy
The Pensions Ombudsman has dismissed a complaint from a member who complained that the amount provided by his section 32 buy-out policy was significantly lower than the amount shown in an illustration at the time the member decided to transfer to the policy (Mr R CAS-71055-X2X7).
In 1989 the member had received an illustration of his annual benefits from his original occupational pension scheme compared to the benefits he might receive if he transferred to a section 32 buy-out policy. If the member remained in the original scheme, he was projected to receive an annual pension of £2865.60 from his normal retirement age. If he transferred to the section 32 policy, he was guaranteed to receive his GMP of £1360.32 pa. The illustration stated that this could increase to an estimated £5690.00 annually.
The returns actually received in relation to the with profits policy proved to be much lower than those estimated in 1989. When the member reached normal retirement age in 2022, the annual pension which he actually received from the section 32 policy was £1400.36 pa.
The Ombudsman did not uphold the complaint. He noted that the member had argued that the returns on the policy had been affected by the relevant insurance company's demutualisation, but said it was not possible to know what the policy's value would have been if demutualisation had not occurred. None of the documents issued by the insurance company had guaranteed benefits higher than the member's GMP, and the policy's failure to perform as well as hoped did not constitute maladministration on the part of the insurance company.
This case illustrates the potential for benefit estimates to turn out to be very wide of the mark, particularly when the estimate relates to a date years into the future. Whilst members may appreciate that a figure is an estimate, they may not necessarily appreciate quite how much the actual benefit figure may diverge from an estimate, so it is essential that communications make clear the significance of a figure being an estimate or an illustration.
Call for evidence on move towards "lifetime provider" model for UK pension system
One of the pensions measures announced as part of the Chancellor's Autumn Statement on 22 November was a call for evidence on whether the government should make fundamental changes to the UK pensions regime in the long-term by moving to a "lifetime provider" model. Broadly, this would aim to achieve a situation where a member has a single pension fund to which contributions will be made regardless of how many times the member moves from one job to another during the member's working life. The call for evidence cites the regime in Australia where (broadly) an employer will make contributions to an employee's existing "stapled" fund arising from previous employment. The employer will only start to contribute to a new fund for an employee if the employee has no existing pension fund or actively chooses the new employer's scheme.
The call for evidence suggests that a "lifetime provider" model should have defaults built into it to continue to build on the power of inertia. This would require a form of "central architecture" to allow employers to identify which scheme an employee is using as the "lifetime provider" without having to rely on the employee to provide details.
As a transitional step towards a full lifetime provider model, the call for evidence suggests looking to implement a form of voluntary member-led lifetime provider model by allowing employees to insist on the employer making contributions to a scheme into which the employee has previously been enrolled.
The call for evidence suggests that a key "building block" of the system would be the "default consolidator" for small pension pots. (See separate item on this.) The Government anticipates that exemptions to the lifetime provider model would be needed where an employer provides a better offering than the lifetime provider, eg because it offers contribution levels that are significantly higher than the minimum. The call for evidence also seeks views on whether a lifetime provider model should seek to consolidate deferred pots or start from a point in the future without past consolidation. It also raises the question of whether employers would need to continue to offer a scheme at all under a lifetime provider model.
The call for evidence indicates that the Government is interested in promoting the use of "collective defined contribution" (CDC) schemes. However, the Government is also clear that it wants the "Pension Freedoms" introduced in April 2025 to be protected. The Government is also interested in combining the lifetime provider model with the use of CDC schemes.
The call for evidence closes on 24 January 2024.
If implemented, the measures considered in the call for evidence would amount to a fundamental change to the UK pensions regime. However, the call for evidence itself recognises that most of the measures could only be implemented over the longer term, as they rely on the creation of major new systems that do not currently exist, eg the means for an employer to identify a member's lifetime provider without input from the member.
Small pots consultation response
The Government has published its response to its consultation "Ending the proliferation of deferred small pots". This consultation on points of detail was published in July 2023 in conjunction with the Government's response to a previous call for evidence on this issue. In the July consultation response, the Government proposed that deferred pension pots worth less than £1,000 to which no contributions have been made in the past 12 months would be transferred to one a of number of default authorised consolidator schemes unless the member opted out of the transfer.
In the latest consultation response, the Government says that, where applicable, it will look to consolidate members' pots into a scheme where they already have a pot. If the member has a pot with more than one consolidator, the member's pot will be allocated to the consolidator holding the member's largest pot. Small pots for members with no existing pot with a consolidator scheme will be allocated equally between the authorised consolidators.
The latest consultation response contains more detail on which small pots will be in scope for automatic consolidation. It confirms the automatic consolidation will apply where:
- the pot is valued at £1,000 or less and has had no contributions made to it for at least 12 months;
- the pot was created since the introduction of auto-enrolment and is held within a charge-capped default fund that does not have a guarantee.
The Government will create an industry delivery group to support the Government in working through the issues involved in implementing its small pots plans.
Government announces changes to surplus rules and creation of public consolidator
As part of the Chancellor's Autumn Statement measures, the Government announced that the tax charge applicable to authorised surplus repayments will be reduced from 35% to 25% from 6 April 2024.
The Government also published its response to its call for evidence on options for defined benefit schemes. The Government wants to make it easier for employers to extract surplus from schemes that invest in "productive assets". It says that it is making changes to the DB funding code of practice to support a less risk-averse approach in order to encourage scheme investment in productive finance , and that the revised scheme funding regulations will "make explicit that there is headroom for more productive investment".
The call for evidence response says that the Government believes there is a place in the defined benefit market for a "limited public consolidator [of defined benefit pension schemes] aimed at schemes unattractive to commercial providers" and that the PPF should run such a consolidator. The Government intends to establish a public consolidator by 2026 and will launch a public consultation this winter to consider the detail, including the viability of a 100% PPF underpin.
The Government response notes a lack of consensus among respondents to the call for evidence, and scepticism on the part of many respondents regarding extraction of surpluses from pension schemes, the establishment of a public sector consolidator for defined benefit schemes, and the impact of these measures on the level of funds allocated to "productive finance". The proposed timescale for establishing a public sector consolidator takes us well past the date of the next General Election. In the event of a change of government, it is not yet clear whether the establishment of a public sector consolidator would go ahead.
Confirmation of abolition of lifetime allowance from 6 April 2024
The Autumn Statement announcements confirmed that the Government will go ahead with its plans to abolish the lifetime allowance (LTA) with effect from 6 April 2024. The Finance Bill containing the provisions to do this was subsequently published on 29 November. Two new lump sum allowances will be introduced limiting the tax free cash that can be paid to or in respect of an individual. Any lump sum paid in excess of the limits will generally be taxed at the recipient's marginal rate of income tax. The two new allowances are:
- the individual's lump sum allowance of £268,275 (ie 25% of the LTA before abolition) which, broadly, will limit how much tax free cash an individual can draw in total from registered pension schemes; and
- the individual's lump sum and death benefit allowance of £1,073,100 (ie the same as the LTA before abolition). Broadly, this is used when an individual becomes entitled to a tax free lump sum benefit (including one which also counts against the individual lump sum allowance), and also when a tax free lump sum death benefit is paid in respect of that individual.
The measures include detailed transitional provisions dealing with individuals who benefit from statutory protections against the LTA or who have already taken some benefits before 6 April 2024.
Pension scheme trustee register announced in Government response to call for evidence
The Government has published its response to its call for evidence on "Pension trustee skills, capability and culture". The Government says it will support the Pensions Regulator (TPR) to develop a register of trustees to enable TPR to collect information to assess whether trustee knowledge and understanding requirements are being met, and to improve communication with trustees, particularly those that are harder to reach and may not be fulfilling their obligations.
The response says that TPR is currently reviewing its trustee toolkit, and that the Government encourages all trustees to complete this on an annual basis to ensure their baseline understanding remains up to date.
The Government says that it understands that most professional trustees are already accredited through either the Pensions Management Institute (PMI) or the Association of Professional Pension Trustees (APPT). The Government strongly encourages all professional trustees to gain accreditation and says it will continue to review whether to mandate accreditation for professional trustees. The response says that TPR's new General Code will set accreditation for professional trustees as an expectation.
In relation to DC schemes, the Government criticises what it describes as the "current known emphasis" on low costs and fees, saying that employers should consider "cost, value and service in balance" when choosing a scheme.
The original call for evidence asked a broad range of questions, eg whether changes were needed to investment management to support trustee decision-making, whether risk aversion among legal advisers impacted investment decisions, and whether changes were needed to trustees' fiduciary duties. The responses to many of these questions indicated that no change was necessary or desirable. The changes being proposed are modest considering the broad scope of the issues originally raised in the call for evidence.
Government to force DC schemes to offer decumulation option
The Government has announced that it will place duties on trustees of DC schemes to:
- offer a "decumulation service with products" to members at the point of access at an appropriate quality and price; and
- offer a "backstop default decumulation solution" that a member will be placed into if the member accesses pension assets (eg through taking tax free cash) without making an active choice in relation to the remainder of the fund.
"Decumulation" is the term used for members taking benefits from the scheme. Currently there is no statutory requirement on occupational DC schemes to offer any kind of product or facility via which a member may receive their benefits (eg an annuity or drawdown).
Although the Government says it intends to legislate "at the earliest opportunity", it does not commit to a specific timescale and also says that the Pensions Regulator will publish interim guidance to show how schemes can meet the policy objectives without legislation.
The Government believes NEST should be able to expand on the products it offers to members at decumulation stage but does not intend that NEST should offer a centralised decumulation solution for members who have accumulated their benefits in other schemes.
TPR blog on capital-backed journey plans
The Pensions Regulator (TPR) has published a blog on capital-backed journey plans (CBJP). TPR says that the key characteristic of a CBJP is generally that it involves a third party providing additional capital to support the risks in the scheme with the scheme's assets being invested in a higher expected return portfolio. This is done on terms agreed between the trustees and third party funder. TPR intends to publish guidance for trustees on CBJPs in the new year. In the meantime, TPR's expectations of trustees considering entering into a CBJP are that they should:
- proactively engage as early as possible with the employer and TPR and, if applicable, the PPF;
- balance any additional investment risk against the level of capital put in place, and have ultimate say over the appropriate level of risk to be taken; and
- ensure the trustee board has sufficient collective knowledge and skill to navigate the arrangement and does not have a conflict of interest.
PPF levy consultation: 99% of schemes expected to see decline in levy
The Pension Protection Fund (PPF) has consulted on its levy rules for 2024/25. The PPF proposes to reduce its levy to £100 million (from £200 million in the current levy year). It expects 99% of all schemes to see a decline in their total levy under its proposals.
General Levy consultation proposes £10,000 levy premium for schemes with less than 10,000 members
The Government has consulted on changes to the General Levy for pension schemes. The Government's apparent preferred option will add a premium of £10,000 to the levy as of April 2026 for schemes with less than 10,000 members.
The General Levy (not to be confused with the PPF levy) is used to indirectly 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 amount levied on individual schemes is currently calculated according to the number of scheme members. The proposed hike in the levy is designed to cover a "deficit" that has arisen due to amounts raised by the General Levy being insufficient to cover in full the costs it is designed to fund.
The consultation sets out three options:
- Option 1: Continue with the current levy recovery rates and levy structure. This option would freeze rates at this year's rates until 2026/27. The Government states that this option would leave the deficit to continue to grow and would not meet the policy intent that the pensions industry should pay for the relevant pension bodies.
- Option 2: Retain the current levy structure and increase rates by 6.5% per year for all schemes. The Government states that this approach "does not support the policy direction".
- Option 3: Increase rates for all schemes by 4% per year and, as of April 2026, add a premium of £10,000 to schemes with memberships under 10,000.
It appears clear from the wording of the consultation that Option 3 is currently the Government's preferred option.
A decision by the Government to proceed with its apparent preferred option will lead to a significant increase in the General Levy for all schemes with less than 10,000 members, with the smallest schemes subject to the highest proportionate increases compared to their current levy.
DWP's Taskforce on Social Factors issues its Issues Guide for consultation
In October the DWP's Taskforce on Social Factors published an industry guide for consultation. The guide includes recommendations for the UK pensions sector about how to better incorporate social factors into investment decisions. Examples of social factors include workforce conditions and remuneration practices.
The guide is clear that trustees' fiduciary duties require them to act in the best financial interests of scheme members but emphasises that financially material factors include social factors.
The guide acknowledges that many trustees invest through discretionary mandates and pooled funds. In such circumstances it suggests that it the trustees should use the appointment process and formal reviews as a lever to manage social risks. The guide provides example questions that trustees can ask of managers and consultants during the Request for Proposal stage and during ongoing monitoring to ensure that they are adequately considering social factors. It suggests that trustees could ask asset managers which social issues are key priorities for them, and to what extent they participate in industry groups that are active on social issues. It suggests trustees could ask investment consultants how they feed social issues into their due diligence of fund managers.
The consultation closes on 1 December 2023.
First pension superfund transaction announced
Clara-Pensions has announced an agreement with the Trustees of the Sears Retail Pension Scheme to transfer its members to Clara in the UK's first pension superfund transaction. A superfund is a new type of pension scheme to which assets and liabilities of a defined benefit scheme can be transferred, severing the liability of the original employer to support it. Instead of a conventional employer covenant, the scheme's "covenant" is a "capital buffer" provided by external investors who expect a return and/or by the fee paid by the employer divesting itself of its defined benefit liabilities. To date, Clara is the only superfund to have successfully completed the Pensions Regulator's assessment process. According to Clara's press release, the Pensions Regulator (TPR) has given clearance for the proposed transfer of the Sears Retail Pension Scheme to Clara.
TPR first published its superfunds guidance in 2020, saying that it expected employers to apply for clearance in relation to a transfer from their scheme to a superfund and that it would not issue a clearance statement in relation to a superfund which it had not assessed in accordance with its guidance. It will be interesting to see whether this first transfer to a superfund prompts more schemes to seriously consider a transfer to a superfund as their "end game". TPR's guidance says that a transfer to a superfund should only be considered if a scheme has no realistic prospect of buy-out in the foreseeable future.
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