WELCOME TO OUR LATEST EDITION OF OUR TRUSTEE QUARTERLY UPDATE!
This update covers the legal position in England and Wales.
- Budget: pensions tax changes
Budget: abolition of lifetime allowance and other pensions tax changes
In his Budget on 15 March the Chancellor announced the following pensions tax changes:
- abolition of the Lifetime Allowance charge: the Lifetime Allowance charge no longer applies with effect from 6 April 2023 and the lifetime allowance will be abolished altogether from April 2024;
- maximum tax free cash frozen at current level of £268,275 (25% of the current Lifetime Allowance) with effect from 6 April 2023. Those individuals who already have a protected right to take a higher tax free cash lump sum will generally continue to be able to do so;
- Annual Allowance increased from £40,000 to £60,000 from 6 April 2023;
- minimum Tapered Annual Allowance increased from £4000 to £10,000 from 6 April 2023. (The tapering rules gradually reduce the Annual Allowance for those classed as "high income individuals".) The "adjusted income threshold" for the Tapered Annual Allowance is increased from £240,000 to £260,000 from 6 April 2023;
- Money Purchase Annual Allowance increased from £4,000 to £10,000 from 6 April 2023. (Broadly, this is the reduced annual allowance which applies to those who have already accessed money purchase benefits.)
The distinction between the removal of the lifetime allowance charge (effective from 6 April 2023) and the abolition of the lifetime allowance (due to happen in 2024) is important because while there is a Lifetime Allowance, certain lump sum benefits (lump sums payable on death or on full commutation in the event of serious ill health) which exceed the member's Lifetime Allowance will continue to be taxable. From 6 April 2023, the lump sum will be subject to tax at the recipient's marginal rate of income tax rather than the Lifetime Allowance charge which was a flat rate of 55% which applied before.
In its Pension schemes newsletter 149, HMRC announced that schemes could use the existing process for taxation of defined benefit lump sum death benefits or uncrystallised funds lump sum death benefits. Under this process, it is the responsibility of the deceased member's personal representatives to report to HMRC if the payment of lump sum death benefits has resulted in the deceased member's lifetime allowance being exceeded. HMRC will then raise a tax charge on the beneficiaries if applicable. Any tax charge will now take the form of income tax at the beneficiary's marginal rate, not the lifetime allowance charge. (HMRC's original intention following the Budget announcement had been that schemes would need to contact the deceased member's personal representatives to ascertain how much lifetime allowance the member had.)
The Finance Bill giving effect to the 2023 changes provides that, from tax year 2023/24, events which would previously have resulted in an individual losing their "enhanced protection" or "fixed protection" against the Lifetime Allowance will no longer do so. This applies provided the individual had obtained the relevant protection before 15 March 2023 (Budget Day).
Government abandons plans for mass repeal of retained EU law by default
On 10 May the Government announced fundamental changes to the Retained EU Law (Revocation and Reform) Bill. The Bill as originally introduced into Parliament provided for most UK regulations derived from EU law to be repealed by default at the end of 2023. The latest announcement reverses the policy of repeal by default. Only regulations specifically listed in the Bill will be repealed. The regulations currently due for repeal do not include pensions legislation.
- Pensions Regulator
Annual funding statement
In April the Pensions Regulator (TPR) published its Annual Funding Statement 2023. The statement is particularly relevant to schemes with valuation dates between 22 September 2022 and 21 September 2023, as well as to those undergoing significant changes that require a review of their funding and risk strategies.
Key messages in the statement are:
- Most schemes have improved funding levels following the significant rise in gilt yields. Trustees should consider whether buy-out is a viable option and whether long-term targets remain appropriate.
- If funding levels have improved significantly, trustees should consider whether continuing with the existing level of risk is appropriate or whether some of the funding gains should be applied towards a less risky funding and investment strategy.
- Where a scheme's funding level has fallen, trustees will need to re-set funding and investment strategies and should review their operational governance processes to ensure future resilience.
- The level of risk trustees build into their funding and investment strategy should be supported by the level of support available from the employer covenant. Trustees should ensure effective information sharing protocols are adhered to and assess the impact of any changes. Trustees should consider obtaining independent specialist advice, particularly if the employer covenant is complex or deteriorating, or if it has been materially affected by recent market events.
The statement contains some specific guidance for trustees depending on whether the scheme's funding level is (a) at or above buy-out, (b) above technical provisions but below buy-out, or (c) below technical provisions.
Where funding level is at or above buy-out, TPR says trustees should consider whether proceeding with a buy-out, either outright or in stages, is the best way to lock in funding gains. TPR notes capacity constraints in the buy-out market, making it particularly important that trustees seeking buy-out consider whether they have the data insurers require and whether their investments are in the types of assets preferred by insurance companies. Where trustees decide that running on the scheme is a better option, TPR suggests trustees may wish to use some of the surplus to create a specific "risk buffer".
Where funding level is above technical provisions (TPs) but below buy-out, TPR says that exceeding TPs should trigger further actions to keep the scheme on the path to its long-term objective, eg strengthening the TPs and reducing investment risk. It says that schemes that have not yet agreed a long-term funding objective should do so as a priority.
Where funding level is below technical provisions, TPR says trustees' focus should be on bridging this gap first and that any deficit should be repaired as soon as the employer can reasonably afford. The approach the trustees take will be dependent on circumstances, eg a recent steady improvement in funding may indicate that the existing strategy should be maintained, whereas if the funding position has recently deteriorated significantly, trustees will need to understand the reasons and seek to re-build the strategy. If there has recently been a significant improvement in scheme funding due to an unhedged position against interest rates, TPR says trustees should consider whether it is appropriate to adopt a less risky funding and investment strategy.
As in previous years, the statement contains a table setting out TPR's expectations according to the employer's covenant strength and other factors such as the length of any recovery plan and the maturity of the scheme.
New guidance on LDI
In April the Pensions Regulator published new guidance on LDI which replaces its previous LDI statement and guidance. Key points from the guidance include:
- An LDI fund should operate a market stress buffer to allow the fund to operate on a business as usual basis even where there are sharp market movements. The buffer should be at least 250 basis points (bps) in normal times, but can be drawn down on in periods of stress. This minimum assumes the scheme is able to replenish the buffer with additional cash or assets within 5 days. A larger market stress buffer may be appropriate if this will take longer or if the assets held within the buffer are more volatile than assets typically held in LDI arrangements. (It may be acceptable to use a lower market stress buffer if the composition of the LDI fund is intrinsically less volatile than a gilt-related LDI fund.)
- Trustees should understand the conditions for cash calls and put in place and record processes for dealing with cash calls.
- Trustees should consider whether the circumstances which are likely to lead to a cash call are also likely to lead to a reduction in the value of the scheme's assets.
- If trustees are relying on arrangements with the employer (eg a short-term line of credit) to replenish collateral, such arrangements should be reviewed legally to ensure the facility will be available when needed.
- Trustees should understand the process for meeting cash calls.
- Trustees should test the resilience of their LDI arrangements and processes
- Trustees should understand the roles and responsibilities in relation to LDI arrangements (eg who advises on the extent to which liabilities should be hedged).
- When setting delegations, trustees should make sure they are not delegating key strategic decisions which should remain with the trustees.
- Trustees should have legal agreements setting out the service each party is providing and any discretion or limitations.
- Trustees "may also want to ask [their] LDI manager" what steps they have taken to meet the good practice in LDI management set out by the FCA. (The FCA published new recommendations for LDI managers on the same day that TPR published its guidance.)
- In relation to pooled funds, trustees "may…want to ask" their LDI manager how they meet the guidance put out by the National Competent Authorities (ie the Central Bank of Ireland and the relevant authority in Luxembourg).
- Trustees may need to consider whether delegations remain appropriate, eg fiduciary managers' freedom to increase allocations to illiquid assets.
- Trustees should consider how often they want to receive information and how quickly this will need to be provided and balance frequency of monitoring against costs. If the trustee board meets infrequently, the guidance suggests delegating the oversight of LDI to a sub-committee or adviser.
- the guidance suggests trustees should consider asking for certain information to be provided outside the normal reporting cycle if certain triggers are met, eg the buffer dropping below a certain level.
New funding regime delayed until April 2024
In its corporate plan for 2023/24, the Pensions Regulator announced that the new DB funding code and regulatory framework are now due to be launched in April 2024.
General code of practice to be launched "this year"
The Pension Regulator's corporate plan for 2023/24 says that it will launch its general code of practice (aka the "single code" or "combined code") in Q1. We understand that the reference to Q1 relates to TPR's business year and that it therefore intends to publish the code by the end of June.
Equality, Diversity and Inclusion guidance
In March the Pensions Regulator (TPR) published its EDI guidance for trustees and for parties with the power to appoint trustees. The guidance is intended to help trustees and those who appoint them to improve equality, diversity and inclusion (EDI). TPR believes that a focus on EDI increases the likelihood of trustees making good decisions. The guidance does not impose legally binding obligations, but sets out TPR's view.
Key points in the guidance include:
- the chair of trustees has an important role to play in promoting EDI on trustee boards by setting the tone for discussions and ensuring that any EDI policies are followed. The guidance gives some specific examples of measures chairs can take to support EDI, eg chairing in a way that encourages contributions from all trustees;
- schemes should put in place an EDI policy, possibly starting with EDI principles that can be built into a policy. The policy should generally cover an agreed definition of EDI, the EDI aims of the trustee board and an EDI training plan;
- any performance assessment of the trustee board, individual trustees or advisory firms should include how well EDI has been, and continues to be, embedded into their processes;
- employers are encouraged to widen the pool of trustee candidates to include those outside senior management positions who can also bring valuable skills and life experience;
- trustee boards should assess their diversity of characteristics, life experience, expertise and skills (including both broader skills and technical knowledge);
- trustee boards should have succession plans in place, both in relation to the chair of trustees and other trustees. If using fixed term appointments, consideration should be given to staggering the turnover of roles so that they don't all start and finish at the same time;
- having longstanding trustees can be helpful because of their knowledge of the scheme and employer, but limiting new appointments can make it harder to meet EDI objectives. Where a professional firm is appointed as a trustee, changing the individual representative of the professional trustee over time may be one way of supporting diversity;
- consideration should be given to appointing trustees from among the deferred member population;
- consideration should be given to whether existing MNT selection procedures promote diversity, eg by making clear that training is available for the role;
- when seeking tenders from service providers, consideration should be given to asking questions relevant to EDI.
Major pension scheme administrator data breach: Regulator issues statement
The Pensions Regulator (TPR) has published a statement following a data breach at a major pension scheme administrator due to a cyber security incident. The statement says that trustees who use that administrator's services should check whether their pension scheme's data could be affected, and should keep communicating with the administrator as the situation evolves. TPR's statement says that trustees should contact members proactively to warn them about scams, and keep members updated while confirming whether a data breach has taken place. It says that trustees should also monitor increased or unusual transfer requests. The statement flags that if a scheme has experienced a data breach, it may be necessary to notify affected individuals and that trustees should direct them to the data breaches guidance for individuals from the National Cyber Security Centre. It may also be necessary to notify TPR and the Information Commissioner's Office.
The statement remarks that this incident shows the importance of having a robust cyber security and business continuity plan in place. Trustees should review their plans and ensure that they are up to date and that appropriate steps are being taken to ensure that service providers, particularly third party scheme administrators, are complying with their policies and notifying trustees of any breaches.
Trustees encouraged to engage promptly with Regulator if scheme sponsor in difficulty
The Pensions Regulator has published two blog posts over the past quarter which encourage scheme trustees to engage promptly with TPR if the scheme's sponsoring employer is in difficulty. In a post published on 8 March, TPR highlights its involvement in ensuring the Arcadia pension schemes were given security over Arcadia group assets to protect their position when Arcadia entered into company voluntary arrangements with its shareholders. In a post on 10 May, TPR reiterated its message that trustees of DB schemes whose sponsoring employer is demonstrating signs of stress should engage with TPR at an early stage. The post also announced that TPR had republished its guidance "Protecting schemes from sponsoring employer distress" which it originally published in Autumn 2020.
Regulatory initiative to check compliance with SIP and implementation statement requirements
In a blog post "The ESG elephant is now in the room" published on 17 May , the Regulator (TPR) announced a regulatory initiative whereby it will:
- check that all schemes required to publish their statement of investment principles (SIP) and "implementation statement" have done so; and
- review a cross-section of SIPs and implementation statements in relation to the climate, ESG and wider sustainability provisions in those documents.
TPR wants to see a move away from "vague and generic" disclosures in this area and will focus on the extent to which trustees are following the DWP's guidance.
- Pensions Ombudsman
Trustees correct to limit pension increases in accordance with pre-A-day Revenue limits
The Pensions Ombudsman has dismissed a complaint from a member who complained that pre-A-day Revenue limits under the scheme rules had been applied to limit his pension increases despite the fact that HMRC did not require such limits to be applied post-A-day (Mr S CAS-51076-L6K5).
The Scheme rules, adopted in 1995, provided that the maximum amount of pension permitted under Revenue limits rules could be increased by 3% per annum or in accordance with RPI increases if greater. As the member's pension was equal to the maximum amount permitted under Revenue limits rules, the pension increases were limited by the Revenue limits rules as well, even though the increases under the general rules of the scheme provided for increases of 5%. The Ombudsman concluded that there had been no change to this rule post-A-day and that the Scheme's trustee had exercised its discretion to retain existing Revenue limits under the Scheme after A-day.
This case illustrates that pre-A-day Revenue limits that have been incorporated into a Scheme's rules may continue to apply. The question of whether pre-A-day limits are still relevant to the calculation of benefits can be a complex one which depends on the precise wording of a scheme's rules, whether trustees exercised their statutory power to retain pre-A-day Revenue limits post-A-day and, if so, whether they have subsequently amended the Scheme to remove some or all of the limits.
Independent advice required where contracted-out underpin exceeded £30,000
The Pensions Ombudsman has held that the statutory requirement to take "appropriate independent advice" applied to a member who was entitled to money purchase benefits, but subject to an underpin (ie a promise of a minimum level of pension) calculated by reference to the SERPS pension the member would have received had the scheme not been contracted-out (Dr R CAS-53517-H3N1).
Section 48 of the Pension Schemes Act 2015 provides that where a member has "safeguarded benefits" with a value of over £30,000, the trustees must ensure that the member has received "appropriate independent advice" (ie advice from an FCA-authorised independent financial adviser) before allowing a member to take a transfer to a money purchase scheme. "Safeguarded benefits" is defined as meaning benefits other than money purchase benefits and cash balance benefits. The Ombudsman held that the underpin benefits fell within the definition of safeguarded benefits. As the underpin benefits had been valued at over £30,000, the member could not take a transfer to a money purchase scheme without first taking appropriate independent advice.
Ombudsman orders council to reconsider decision regarding lump sum death benefit
In the case of Mrs S (CAS-45793-J6Y3), the Pensions Ombudsman has ordered a local authority to reconsider its decision regarding the recipients of a lump sum death benefit. The rules of the scheme gave the local authority discretion regarding the recipients of the lump sum death benefit. Following the death of the member, Mr S, the local authority had decided to split the lump sum equally between Mr S's widow, Mrs S, and Mr S's three adult sons. At the time of Mr S's death, the sons were aged, 42, 39 and 21. The two older sons were from Mr S's previous marriage. Mrs S made a complaint regarding the local authority's decision. Mrs S said that it had been Mr S's view that it would not be in his sons' best interests to receive a lump sum payment immediately following his death, and that his sons did not wish to receive a share of the lump sum under the pension scheme. She explained this by reference to the eldest son's health issues, the middle son's current marital situation and the risk that receipt of a lump sum would exacerbate the youngest son's issues with substance abuse.
Mr S had not completed a nomination form in respect of the lump sum death benefit. In reaching its decision regarding the death benefit, the local authority attached considerable weight to Mr S's will. This provided that, whilst Mrs S could live in the marital home for the rest of her life, the proceeds of sale of Mr S's 50% share in the marital home would be shared 30% each between his sons, with the remaining 10% shared between any grandchildren. However, the local authority failed to appreciate that Mrs S was the sole beneficiary of the residue of Mr S's estate. The Ombudsman held that the local authority's decision was flawed, both because it had based its decision on an incorrect interpretation of Mr S's will, and also because it had failed to seek additional information from Mr S's sons. As well as ordering the local authority to reconsider its decision, the Ombudsman ordered the local authority to pay Mrs S £1000 for the distress and inconvenience caused.
This case illustrates the importance of obtaining as much relevant information as reasonably practicable before making a decision, and the complexities that can arise in discretionary death benefit cases. Trustees should consider that there may be reasons why it may not always be in an individual's best interests to receive a lump sum payment. It also highlights the importance of taking appropriate minutes as a Trustee's decision is more open to challenge if it is clear from the minutes what factors were determinative.
- Pensions Dashboards
Dashboards implementation delayed, but trustees told to continue preparations
On 2 March the Government announced a delay to the implementation of the pensions dashboard programme. The announcement said that the DWP would legislate at the earliest opportunity to amend the timescale within which schemes are required to connect to dashboards, and that the pensions minister would provide a further update before Parliament's summer recess. The Pensions Regulator has amended its pensions dashboards guidance to say that it encourages schemes to continue with their dashboard preparation notwithstanding that they do not currently have a confirmed connection deadline. In its April Progress update report the Pensions Dashboards Programme also said that it is important that industry continues to prepare for pensions dashboards.
On 2 May the Pensions Dashboards (Prohibition of Indemnification) Act 2023 received Royal Assent. The Act will prevent trustees from being reimbursed from scheme funds in respect of penalties imposed on them for breaches of dashboards legislation.
In March the Pensions Administration Standards Association (PASA) published two additional pieces of dashboards guidance: an addendum on data matching when there is no National Insurance number, and guidance with specimen wording for member enquiries about dashboards.
- DC developments
New asset class disclosure requirements
In our previous Update we reported that the DWP would be going ahead with proposals to require schemes to report in the chair's statement on the percentage of default arrangement assets allocated to each asset class, and to include in the default arrangement SIP their policy in relation to investment in illiquid assets. The final form regulations to bring these changes into force have now been made.
New initiative to check schemes complying with VFM requirements
In our September 2021 Update we reported on the introduction of requirements for DC schemes with less than £100 million in total assets to carry out "value for members" (VFM) assessments by comparing their scheme with at least three large schemes and reporting on their assessment as part of the chair's statement and in the annual return. In March this year, the Pensions Regulator announced that it would be launching a new regulatory initiative to check that trustees are complying with the regulations. The move follows a survey which found that the majority of affected schemes were unaware of the obligation to complete VFM assessments.
Deadline approaching for annual review of investment consultant's performance against objectives
In 2022 the Pensions Regulator took over responsibility from the CMA for enforcement of trustees' obligations regarding setting objectives for investment consultants. The relevant regulations, which came into force on 1 October 2022, introduced a new requirement for trustees to review at least annually the performance of the investment consultant against the objectives set. Trustees that have not reviewed their investment consultant's performance against objectives since 1 October 2022 should ensure they have plans in place to do so before 1 October 2023.
Government to back Private Members Bill to extend auto-enrolment requirements
At the start of March, the Government announced that it will back a Private Members Bill to abolish the lower limit for qualifying earnings in relation to auto-enrolment and reduce from 22 to 18 the age at which workers must be automatically enrolled. The announcement said that the change would not be immediate and that the Government would consult before using the powers in the Bill.
PSIG pension transfer interim practitioner guide
The Pension Scams Industry Group (PSIG) has published an interim practitioner guide on combating pension scams, effective from 20 March 2023. The code does not have any official status, but is intended to set a good practice industry standard.
The introduction to the guide says that PSIG's original intention had been to update its code to coincide with the change to the regulations governing transfer values which took effect from 30 November 2021 and introduced the concept of red and amber flags. However, the mismatch between DWP stated policy intent and the wording of parts of the legislation has made it impossible for PSIG to issue definitive good practice guidance, as PSIG has found differing views between its members and little consistency in practice for it to incorporate into the guidance. The points of greatest concern to PSIG are the inclusion of overseas in investments in a receiving scheme as an amber flag and the broad definition of the offer of an incentive as a red flag. PSIG notes the current absence of Pensions Ombudsman determinations and court judgments relating to these key issues.
The guidance considers the arguments for and against using a "clean list" of receiving schemes considered not to involve a pension scam risk and to which the transferring scheme is willing to make a transfer without seeking evidence of the absence of red or amber flags. It also considers the issues around transfers made using discretionary transfer powers. The guidance explains the different types of red and amber flags and sets out PSIG's view of the information which should be included in member communications.
FRC consults on changes to Technical Actuarial Standards
The Financial Reporting Council (FRC) is consulting on proposed changes to the Technical Actuarial Standards (TAS) which apply to actuaries when giving advice. Whilst the TAS impose obligations on actuaries, not the scheme trustees, the points covered in the consultation highlight some issues which can arise in relation to actuarial advice given to trustees. The proposed changes include:
- a requirement for actuaries carrying out a review of actuarial factors to advise on the circumstances in which factors should be reviewed again and how the period until the subsequent review should be decided, with justification required for a period of more than three years between reviews;
- a proposal that actuaries should seek to arrange for a review of actuarial factors to be undertaken at a time which would allow decisions on factors and funding to be made together, unless there is justifiable reason not do so;
- if decisions on factors and funding are not made concurrently, a requirement for actuaries to make clear in their advice on the funding valuation how actuarial factors and any future change in actuarial factors have been allowed for, and the potential impact on funding of a future review of actuarial factors;
- a requirement for actuaries to consider whether, and if so how, to allow for demographic features or benefits which differ to a material extent between groups of members. The actuary would be required to communicate this to the person making the decision on factors in relation to the scheme;
- a requirement for the actuary to consider a comparison of proposed commutation factors with all other relevant bases (eg the CETV basis and on the basis of purchasing an annuity);
- a requirement for the actuary to consider whether, and if so how, to allow for future changes in investment strategy when advising on CETV bases, and to communicate this to the trustees.
The consultation closes on 4 August 2023.
PLSA publishes resource for schemes to use to support savers during cost of living crisis
The PLSA has published a standardised resource for schemes to use to support members during the cost of living crisis. The resource is intended to provide guidance to schemes that wish to share additional information with members struggling due to the increased cost of living. It seeks to consolidate information from a range of sources that schemes may wish to share with their members, for example links to websites providing information on state benefits and how to avoid falling victim to scams. It also includes suggestions regarding what schemes might say to members looking to opt out of the scheme or reduce their contributions.