In this week’s edition, we look at the looming deadline for submission of the CMA Order compliance statement, the possible reversal of some amendments to the Pension Schemes Bill made by the House of Lords, the latest position in the United Biscuits’ VAT case, identity theft risks posed by including signatures in pension scheme documents posted online, the closure of UK bank accounts of members resident in the EEA and a move to simpler benefit statements.
7 January 2021 deadline for submission of CMA Order compliance statement
Development:
The 7 January 2021 deadline by which trustees need to submit their first annual compliance statement to the Competition and Markets Authority (the CMA), certifying that they have complied with their obligations under the Investment Consultancy and Fiduciary Management Market Investigation Order 2019 (the Order) is fast approaching.
The Order requires trustees of most pension schemes who are receiving fiduciary management services to competitively tender for these services and, for trustees receiving investment consultancy services, to set 'strategic objectives' on the services and advice provided by investment consultants.
It was expected that the Department for Work and Pensions (the DWP) would finalise draft regulations implementing the Order earlier this year, which would require trustees to confirm compliance with the Order to the Pensions Regulator (TPR) through its Exchange system. However, as a result of Brexit and COVID-19, finalisation of the regulations has been delayed, and they will not now be brought into force before the 7 January 2021 deadline set out in the Order. Accordingly, the first compliance statement will need to be submitted directly to the CMA by 7 January 2021.
Trustees should be mindful that there are also reporting requirements in respect of failure to comply with any part of the Order; such reports need to be made to the CMA within 14 days of the trustees becoming aware of the failure.
Key point:
If they have not done so already, trustees need to determine if they have obligations under the Order and, if they do, take the necessary steps to comply with the applicable parts of the Order. The compliance statement must be submitted to the CMA in the correct format with relevant accompanying certification (as set out in the Order) by 7 January 2021.
Trustees should also consider whether they need to hold a competitive tender exercise for existing fiduciary management arrangements before 10 June 2021 and start to plan for such an exercise if so. Such an exercise may be required where 20% or more of the scheme's assets were held under fiduciary management on 10 June 2019 and those arrangements were not competitively tendered. Any arrangements that were not competitively tendered will need to be tendered within five years of the date of the first appointment and before 10 June 2021, if later.
If you are unsure about the requirements of the Order and how they may apply to you, please get in touch with your usual Gateley contact.
Government proposes reversing House of Lords’ Pension Schemes Bill amendments
Development:
The Government has proposed reversing four amendments to the Pension Schemes Bill (the Bill) which were put forward by the House of Lords during the Bill's June 2020 report stage. The amendments relate to pensions dashboards (two amendments), collective defined contribution schemes and the funding of defined benefit schemes, in particular, that open schemes should have different funding requirements to closed schemes.
Key point:
The Government gave indications that the House of Lords’ amendments might not be accepted during the second reading of the Bill on 7 October 2020 and this has proved to be the case. The next stage of the Bill is the Committee stage during which the Bill will be subject to detailed scrutiny. This is due to be concluded on 5 November 2020 and we will provide further updates on the final stages of the Bill's progression through Parliament in our weekly update. The Pensions Minister confirmed back in September 2020 that the Bill is expected to come into force before the end of 2020. However, this remains to be seen given that both the House of Lords and the House of Commons need to agree on the final version of the Bill.
United Biscuits case: ECJ has confirmed pension fund management services by non-insurers not VAT exempt
Development:
Following a reference from the Court of Appeal, the European Court of Justice (the ECJ) has confirmed that pension fund management services provided by non-insurers to trustees do not benefit from a VAT exemption for insurance services provided under an EC VAT Directive (Council Directive 2006/112/EC). (United Biscuits (Pension Trustees) Ltd and another v HMRC (Case C-235/19) EU:C:2020:801)
Until 1 April 2019 HMRC permitted authorised insurers to treat the supply of pension fund management services as VAT exempt, but non-insurers had to charge VAT.
The trustees' case was that the supply of pension fund management services was an 'insurance transaction' which should attract mandatory exemption from VAT and that UK legislation had failed to provide an exemption. They argued that they should be able to reclaim the VAT paid on investment management fees which had been charged by non-insurers because payment to insurers for similar services was exempt.
The High Court rejected the claim but upon appeal, the question of whether the services provided by insurers and/or non-insurers were 'insurance transactions' under the EC VAT Directive was referred to the ECJ.
The ECJ has followed the opinion of the Advocate General and confirmed that the pension fund management services could not benefit from the VAT exemption because the services were not insurance transactions; they did not include any indemnity for risk, unlike insurance transactions whereby the insurer undertakes to provides services in the event that a risk occurs.
Another EC Directive (the First Life Assurance Directive: Directive 79/267/EEC) which referred to 'insurance and pension fund management activities' was of no assistance to the trustees. This was because pension fund management activities could be included within the scope of this Directive without necessarily being insurance.
Key point:
This decision was foreseeable especially given the Advocate General's opinion which the ECJ does tend to follow. The difference in treatment between insurers and non-insurers has now been eliminated because as from 1 April 2019, the supply of all pension fund management services has attracted VAT.
Potential risk of identity theft using signatures in online pension scheme documentation
Development:
There have been recent reports of fraudsters attempting identity theft by using signatures uploaded onto pension scheme documents that are published online. This could include the statement of investment principles, the chair's statement, annual reports and accounts and other documents that a scheme publishes online which contain signatures.
To deal with the threat of identity theft in respect of Companies House documents, the September 2020 Government response to the consultation on corporate transparency and register reform has confirmed that signatures on historical Companies House documents will be suppressed and that the Government will also consider showing relevant filing data at Companies House without the signature for future publicly available information.
Key point:
To guard against this fraud risk, we recommend that trustees review existing scheme documents that are published online and either redact signatures or include a typed name in place of the signature in the version that is put online. They should also adopt safeguarding measures for future online documents that require a signature.
Closure of UK bank accounts for residents in the European Economic Area
Development:
There have been recent reports of certain UK banks informing customers living in the European Economic Area (the EEA) that they will no longer be able to provide UK-based banking services after 31 December 2020 when the UK exits from the European Union.
This is because the 'passporting' arrangement which currently allows certain UK financial services to operate across the EEA is due to expire at the end of the year and, unless necessary arrangements are implemented which allow services to continue to be provided, banks will no longer be permitted to provide services to EU based customers. Certain banks have decided that it is not commercially viable to obtain the necessary licences to continue servicing such accounts and are therefore ceasing to provide such services.
The Financial Conduct Authority (the FCA) expects affected banks to engage with national regulators to assess how customers will be affected and to let customers know of any changes in good time.
Nikhil Rathi, the Chief Executive of the FCA, confirmed on 9 October 2020 that firms must be able to show "they have considered how their plans for the end of the transition period may affect their customers" in line with their requirement to treat customers fairly. The banks' responsibilities include identifying whether closing accounts would cause undue financial hardship taking into account whether alternative products are available. The response also covers notice periods and how the FCA has been engaging with the banks.
Key point:
Trustees should discuss with their scheme administrators whether there are any potentially affected members and, if so, liaise with them as regards relevant arrangements which will ensure benefit payments can continue to be made.
Simpler benefit statements: Government response to 2019 consultation
Development:
In its response to the November 2019 consultation on simpler annual benefit pension statements for workplace pensions, the Government has confirmed that it will consult later in 2020 on making it mandatory for defined contribution (DC) schemes used for auto-enrolment to adopt a simpler statement.
A two-page statement template set out in the original consultation will be used as the starting point for development, the idea being that a shorter document will improve engagement and understanding amongst members.
The Government has also proposed referencing costs and charges by way of a brief signpost to the detail which has to be set out in other documents rather than including detail in the new statement.
Key point:
The initial focus will be on those DC schemes used for auto-enrolment with a further consultation at a later stage on applying a similar approach to all schemes. We will report further on this as matters develop.