In our latest Entrust article, we report on key pensions developments since our last update in July 2023. Included are relevant links to more in-depth information that has been produced by our colleagues in Gateley Legal’s pensions team and a note where we have identified that action is or may be required.
Article / 15 Sep 2023
The trustee agenda: key developments from July 2023 onwards
Insight shared by:
Key cases
‘Interests’ in proviso to amendment power covers both past and future service benefits
The High Court has ruled that a proviso in a pension scheme’s rules that restricts active members’ ‘interests’ from being amended applies to both past and future service benefits. This means that the sponsoring employer, that wishes to reduce ongoing pension costs, is significantly restricted in how it can amend active members’ future pensions including how they are accrued and closing the scheme to future accrual. The employer is considering whether to appeal. See here for Gateley Legal’s case summary.
Action
This case will directly impact schemes which have amendment provisions with the same or sufficiently similar wording – trustees should check if this is the case and liaise with their legal advisers as appropriate.
Derivative claims from ClientEarth and members of Universities Superannuation Scheme dismissed
The courts have dismissed two derivative claims brought against companies under which the claimants alleged breach of duties in respect of the management of climate change. The dismissals highlight the challenges associated with such claims. Given the prominence that ESG matters have at present we are likely to see more claims on this area in the future (see Gateley Legal’s insight for more details).
High Court approves trustee decision to issue petitions to wind-up sponsoring employers
Brass Trustees Ltd v (1) Hayley Goldstone (2) the Board of the Pension Protection Fund [2023]
The High Court has approved a trustee’s decision to issue petitions to wind-up both sponsoring employers of a hybrid occupational pension scheme with a £28.3m deficit.
The trustee decided that it should issue winding-up petitions to bring about the employers’ insolvency which would then enable it to trigger wind-up. The employers owed around £39.74m, had not been paying scheme contributions, and were in significant financial difficulties. The scheme was also suffering from both scheme and Pension Protection Fund (PPF) drift.
The trustee asked for the court’s ‘blessing’ of its decision to wind-up the employers given the importance of the decision. The court was satisfied that the relevant tests as regards the trustee decision were met and that the trustee had considered all relevant and no irrelevant factors (the latter would have included the existence of the PPF). For further details about the case see here.
The Pensions Ombudsman
Cyber incident update
On 19 July 2023, the Ombudsman confirmed that those services that were temporarily disabled following a recent cyber incident had been restored. There may be delays in services because of the disruption caused by the incident.
Member factsheet on incorrect pension information complaints
The Ombudsman has published a factsheet for members on incorrect pension information. Among other things it explains that, in most cases, members will not have an entitlement to higher benefits that were incorrectly quoted – however, a scheme may have to make good loss suffered (and in limited cases, a member may be entitled to the higher benefits). Gateley’s insight has further details.
Review of Ombudsman in 2024
The next arm’s-length body review of the Ombudsman will take place in 2024. This will look at matters such as the efficacy, governance accountability and efficiency of the Ombudsman. It will also consider whether people have adequate appeal routes for making pension complaints. Gateley’s insight has further information.
Legislation: Spring Budget 2023 – Finance (No. 2) Act 2023 and Finance Bill 2024
The Spring Budget 2023 heralded a shake-up of the pensions tax regime including removal of the lifetime allowance (the LTA) with effect on and from 6 April 2024. The Finance (No. 2) Act 2023 began the process by abolishing the LTA charge as from 6 April 2023 replacing it with a charge to income tax at the individual’s marginal rate (see Gateley insights (1) and (2)).
On 18 July 2023, HMRC and HM Treasury issued a joint consultation on draft Finance Bill 2024 measures which will remove the LTA together with explanatory notes and a policy paper. The consultation runs until 12 September 2023.
It is proposed that the LTA removal will involve the following five principal changes:
- Proposal 1: There will be no LTA limiting pension savings on and from 6 April 2024 and pension benefits will just incur income tax.
- Proposal 2: The Government proposes that in place of the LTA there will be two new allowances for lump sums and lump sum death benefits: (1) a new overall personal ‘lump sum and death benefit allowance’ of £1.073m which will apply across all registered pension schemes; and (2) a new ‘lump sum allowance’ of £268,275 that will apply to the payment of relevant lump sums including a pension commencement lump sum (a PCLS), uncrystallised funds lump sums, trivial commutation lump sums and winding-up lump sums. There will be no maximum amount of authorised lump sums and authorised lump sum death benefits that can be provided – however, amounts paid above the allowances will trigger a charge to income tax at the individual’s marginal rate. For defined benefit (DB) schemes, this potentially means the introduction of defined contribution (DC) style pension freedoms. For example, it would be possible to pay a higher PCLS than currently (subject to a scheme’s rules), albeit HMRC has asked for views on the implications for PCLS as it is not the Government’s plan to “significantly expand pension freedoms.”
- Proposal 3: Income tax will be applied where a DC member dies before age 75 and uncrystallised funds are paid to a beneficiary via drawdown or an annuity. This marks a change from the current position where such benefits can be provided without a charge to income tax.
- Proposal 4: Individuals with relevant protections will keep existing rights to higher amounts of tax-free lump sums and higher tax-free parts of lump sums.
- Proposal 5: Removing the LTA means that most ‘benefit crystallisation events’ (BCEs) will no longer be needed. However, BCEs which relate to relevant lump sum and lump sum death benefit payments will be kept as such lump sums need to be tested against the new allowances.
Transitional provisions specifying how those who have received benefits during the existence of the LTA will be treated have not yet been published.
Gateley’s insight has more detail about the proposed LTA removal changes.
Action
Trustees will need to check their scheme’s rules to see whether the pensions tax allowance changes will have an impact. Scheme administration processes will need to be updated. Trustees will also need to consider member communications.
The Pensions Regulator (the Regulator)
Regulator blog on midlife MOTs
The Regulator’s 26.7.23 blog encourages schemes to signpost the new Midlife MOT service that was launched by the Government on 5 July 2023 to members. The service is to provide workers in their 40s to mid-60s with help on financial planning (including pensions), health and labour skills. Gateley Legal’s insight has more information.
Action
Trustees should consider with the scheme administrator how signposting can be included within member communications.
Upper Tribunal confirms contribution notices not restricted to loss to scheme
On 28 July 2023, the Upper Tribunal upheld the Regulator’s decision to issue a £1.875m contribution notice (a CN) in 2020 to Anant Shah, the former owner of the sponsoring employer of the Meghraj Group Pension Scheme.
In 2020, a CN of £3.6m was issued on a joint and several basis to Mr Shah and his nephew following payments made to the employer’s parent company after the employer disposed of shares in a joint venture company. The Regulator found that the payments should have been made to the scheme and that the acts satisfied the material detriment test – one of the grounds upon which a CN can be imposed.
The Tribunal confirmed that the CN met the requisite statutory requirements, the amount of CN was reasonable, and that the calculation of CNs (at least in respect of the material detriment test, the relevant ground in this case) is not restricted to the loss suffered by a scheme in connection with the relevant acts, albeit there is a legislative cap, the ‘shortfall sum’ which is the section 75 debt.
As well as providing helpful clarity on certain elements of CNs, the judgment has cleared up uncertainty regarding the scope of the CN amount and whether it should be compensatory only. It means that sponsoring employers (or those connected or associated with them) could be liable for more than the pure loss to the scheme arising from the acts concerned. The emphasis for the amount should be on the “extent to which the act or failure to act … has caused detriment to the prospects of members … receiving” their benefits.
See Gateley Legal’s insight for more information.
Updated DB superfunds guidance
The Regulator has updated its DB superfunds guidance following a review. The key changes make it easier for schemes to join superfunds and decrease the security of member benefits. These include:
- changes to assist the transfer process including to the Gateway period, clarification of the Regulator’s views on when it might be appropriate for a scheme to consider a transfer, and providing more time to demonstrate that its capital expectations have been met;
- amendments to the Regulator’s expectations on funding with a change to the discount rate from Gilts+0.5% to Gilts+0.75%;
- adjustment of the Regulator’s position on profit extraction with further industry engagement and an update to follow; and
- clarity on the Regulator’s expectations on the assessment process.
The Regulator’s superfunds guidance for prospective ceding trustees and employers has also been updated. See Gateley’s insight for further details.
Defined contribution (DC) code and guidance updated for 6 April 2023 investment changes
On 24 August 2023, the Regulator updated its DC code of practice, DC investment guidance and DC communications and reporting guidance to incorporate reference to new regulatory requirements that came into force on 6 April 2023 which will require trustees of most DC trust-based schemes to include in the default statement of investment principles their policy on illiquid investments and disclose in the chair’s statement asset allocation and any performance-based fees in default arrangements.
Action
Trustees will need to ensure they satisfy the new requirements having due regard to the Regulator’s updates and the Department for Work and Pensions (DWP’s) statutory guidance when reporting on asset allocation and performance-based fees (see Gateley’s insight).
Blog on climate scenario analysis limitations
The Regulator’s 29 August 2023 blog on climate scenario analysis sets out steps trustees (see here) can take to facilitate improvement of the climate scenario analysis used by trustees of large schemes when preparing their annual climate change reports. This follows research criticising some of the analysis which the Regulator notes appears “to seriously underestimate the financial risk from climate change” and is “at odds with the established earth and climate science.”
Action
Trustees of schemes within scope – £1bn or more of relevant assets, master trusts and Collective Defined Contribution (CDC) schemes – should contact their advisers to discuss action required. Other schemes should keep up to date with developments on this area given the importance that climate change will have in future years.
The PPF
PPF annual report and accounts 2022/23 published
The Pension Protection Fund’s (PPF) 2022/23 annual report and accounts revealed that the PPF’s total consolidated reserves were £12.1 billion at 31.3.23 (+£0.4 billion from last year). The accounts also included an update on Hampshire and Hughes compensation payments, the impact of the Bauer judgment following the introduction of the Retained EU Law (Revocation and Reform) Act 2023 and its decision not to increase post-97 compensation increases. You can read about these updates here.
Mansion House pension reforms
The Chancellor’s 10 July 2023 Mansion House speech contained nine pension reforms, all designed to improve pension saver outcomes and deliver ‘greater economic growth’ (see Gateley Legal’s insight). The following day, HM Treasury published a suite of documents relating to the reforms (see Gateley Legal’s insight).
In essence, the reforms are designed to consolidate pensions (DC, DB and the Local Government Pension Scheme) and to increase investment in productive finance – an umbrella term for equity capital, investment in UK companies (start-ups, infrastructure and private equity) and illiquid assets. The reforms include:
- The Government’s response to its 2018 consultation on DB consolidation confirming that it will introduce primary legislation as soon as parliamentary time allows for superfunds and “other relevant models of consolidation”;
- A DB options call for evidence on how DB schemes can invest ‘more flexibly’ and increase their investment in productive finance – the PPF’s 6.9.23 response notes that the PPF would be ‘well placed’ to operate a public consolidator model alongside commercial consolidator and buyout providers but that the current DB framework needs materially changing to allow DB schemes to change their investment objectives and increase investment in productive finance;
- Another call for evidence on trustee skills, capability and culture focusing on investments and including discussion on barriers to trustee effectiveness;
- The consultation response on the new value for money (VfM) framework that will replace the current VfM assessment and which will have a standardised and transparent assessment covering investment performance, costs and charges and service quality. The necessary legislation will be introduced when parliamentary time allows;
- The response to the January 2023 collective defined contribution (CDC) consultation that confirms the Government will consult on draft regulations to expand CDC provision to whole-life multi-employer schemes for non-associated and unconnected employers and master trusts this autumn;
- A DWP consultation on helping savers understand their pension choices outlining the Government’s proposals for a decumulation framework which will require trustees to offer decumulation services “suitable for their members and consistent with pension freedoms”;
- A DWP consultation on ending the proliferation of deferred small pots which proposes using a small number of authorised schemes to act as consolidators;
- A consultation on proposals covering Local Government Pension Scheme (LGPS) investments and in particular the acceleration and expansion of asset pooling by March 2025 and increasing investment in private equity with the aim to reach a 10% allocation level.
The Regulator has welcomed the Mansion House pension reforms saying they “support our ambition for pension savers to be in large, well-run schemes that deliver good outcomes at every stage of their retirement journey.” Its 12 July blog noted that there needs to be a fundamental mind shift in the industry on investment governance, efficiency through scale and increased professionalism of trustees. The Regulator will publish new productive finance guidance and update the DB and DC investment guidance this autumn.
Action
Watch out for further developments on relevant areas. The Chancellor expects decisions to be made on all of them before the autumn statement which will be delivered on 22 November 2023.
Pensions dashboards
DWP updates deferred connection guidance
On 9 August 2023, the DWP updated its Pensions dashboards: guidance on deferred connection to reflect The Pensions Dashboards (Amendment) Regulations 2023 that introduced a new single connection deadline of 31 October 2026. You can read more about the limited circumstances in which a deferral application can be made here.
Other developments
APPT review of professional trustee accreditation process
The Association of Professional Pension Trustees (the APPT) has published its review of the APPT accreditation framework – this ties in with the Mansion House evidence call on trustee skills, capability and culture, which asks for views on the sufficiency of the current framework. Overall, the APPT Council believes that the accreditation scheme has ‘worked well’ and would be fit for purpose under a mandatory regime (the accreditation system is currently voluntary). You can read about the APPT’s other findings here.
MaPS evidence review into pension scams
On 10 August 2023, the Money and Pensions Service published an evidence review into pension scams in the UK. Its key findings include underreporting and inconsistency in data collection, changing tactics remaining an issue, a risk of re-targeting and risk factors including higher education levels, having financial knowledge (overconfidence) and approaching retirement with less income than required. The review also sets out some proposed actions that could assist in scam prevention including around intervention, increased uptake of support services and ways to reduce re-targeting. See here for more information.