Turns out death and taxes are indeed inevitable

The Court of Appeal has ruled in Parry v HMRC.  This is a very technical case about inheritance tax and pensions, but with potential implications for DB to DC transfers.

Mrs Staveley had a “Section 32” pension policy.  The money in it came from a divorce settlement involving a company she had previously run with her ex-husband.  Mrs Staveley was diagnosed as being terminally ill and was concerned that the terms of the Section 32 policy were such that there could be a “surplus” which would go back to her ex-husband’s company when she died, instead of her two sons who were the beneficiaries of her will.

Mrs Staveley did not want this to happen and so transferred her pension assets from the Section 32 policy to a personal pension plan.  However, there was a crucial difference between the two schemes: any money remaining in the Section 32 policy would go to her estate and be liable to IHT whereas anything in the personal pension was payable under discretionary trusts (with an expression of wish form in favour of her sons), outside of the IHT net.

HMRC claimed that IHT was payable.  This was because Section 3 of the Inheritance Tax Act 1984 brings “dispositions” creating “transfers of value” into the scope of an IHT charge.  Mrs Staveley’s beneficiaries used the defence in Section 10(1) of the Act that the disposition in this case was not a transfer of value because it was not “intended…to confer any gratuitous benefit” and met some other conditions.

The First Tier Tribunal held in HMRC’s favour.  The beneficiaries’ appeal was upheld by the Upper Tribunal.  Now the Court of Appeal (unanimously but for varying reasons) has upheld HMRC’s latest appeal.  The ruling is complicated and the judges cite different reasons for their conclusions in places, but in essence they found that the Section 10(1) defence failed due to the “associated operations” aspect of the Act when deciding about Mrs Staveley’s intention; in this case because she had not drawn any of her benefits from the personal pension, this taken together with the transfer are to be seen as forming part of a scheme intended to confer gratuitous benefits.

Comment

This case illustrates the risk that an IHT charge could arise when a DC to DC transfer is made where the transferring scheme has a binding nomination rule for death benefit payments and the receiving scheme has a discretionary distribution rule.  The vast majority of pension schemes pay out death benefits under discretionary trusts, but not all (the scheme in this case and, for example NEST – see Pensions Bulletin 2018/13).

It also plays to wider concerns that those who transfer from DB to DC, with no intention of seeking an IHT advantage could find that they trigger an IHT charge under the current legislation.  Indeed, we understand that HMRC operates a “two-year rule” whereby if a person survives two years after making a transfer then HMRC will not take any action.  But if a person knowing they are in serious ill health transfers their pension benefits and then dies within two years HMRC may well consider that disposition to be subject to a potentially substantial IHT charge.

IORP II regulations laid

On 23 October the DWP laid two sets of regulations under the European Communities Act 1972 which reveal how it is transposing certain articles from the IORP II Directive.

The Occupational Pension Schemes (Governance) Regulations 2018 (SI 2018/1103)

As previously flagged (see Pensions Bulletin 2018/32), these legislate for the IORP II requirement for occupational pension schemes to have an “effective system of governance” which must be “proportionate to the size, nature, scale and complexity” of the scheme.  They do this by amending the internal controls section of the Pensions Act 2004.

They also require the Pensions Regulator to set out the detail of this governance requirement and some other provisions of the Directive in a Code of Practice.  These include certain key functions, outsourcing and written policies in relation to both, the carrying out and documentation of an “own-risk assessment” of the system of governance, and where environmental, social and governance factors are considered in investment decisions, how the trustees assess new or emerging risks.

We understand that the Code will be subject to consultation next year, with UK occupational pension schemes expected to become subject to its requirements during 2020.  Compliance with the own-risk assessment will follow after this, with details of the timing being set out in the regulations.

The Code will apply in its entirety to schemes with 100 or more members, whilst those with less than 100 members will be subject only to the governance aspects of the Code.

The Occupational Pension Schemes (Cross-Border Activities) (Amendment) Regulations 2018 (SI 2018/1102)

The current cross-border authorisation framework was introduced by the 2003 “IORP I” Directive.  IORP II makes some changes to the existing authorisation process including reducing the time the Pensions Regulator has to communicate with regulators in other EEA States.

IORP II also introduces a new authorisation process for schemes wishing to undertake bulk transfers with a separate scheme located in another EEA state.  This includes ensuring that the cross-border transfer is approved by a majority of members and a majority of the beneficiaries concerned or, where applicable, by a majority of their representatives.

All of these requirements have been reflected in the above set of regulations.

Both sets of regulations come into force on 13 January 2019 – the latest date by when IORP II has to be transposed into the national legislation of EU member states.

Comment

The governance regulations and associated Code may yet have a significant role in how occupational pension schemes, both DB and DC, are run.  See Tony Bacon’s blog for more on this week’s developments.

FCA and Pensions Regulator set out their joint pension strategy

The Financial Conduct Authority and the Pensions Regulator have launched their joint regulatory strategy aimed at tackling what they have identified as the “overarching harm in this sector”, namely “the prospect of people not having adequate income, or the income they expected, in retirement”.  This follows on from the joint call for input published in March (see Pensions Bulletin 2018/12).  It is also a further evolution of the regulators working together – for example, the launch of the ScamSmart campaign in August (see Pensions Bulletin 2018/33).

The strategy is intended to cover the next five to ten years and to make clear the regulators’ joint areas of priority.  Two areas are highlighted where both organisations will work together.  The first is a strategic review of the entire consumer pensions journey – taking an in-depth look at what tools are needed to enable people to make considered decisions about their pensions – to be launched at some point in 2019.  The second is using the powers of both regulators to drive value for money for members of pension schemes, including the setting and enforcement of clear standards and principles where relevant.

The strategy is predicated on four key issues the regulators have identified which lead to the overarching harm already mentioned.  These are:

• People struggling to maximise their pension savings
• Money not being managed in line with savers’ needs
• Pensions not being well looked after; and
• People not being enabled to make good decisions

The paper goes on to set out four corresponding regulatory objectives linked to these issues:

• Pension and retirement income products should support people to increase their financial provision for later life
• Pensions should be well-funded and invested appropriately
• Pensions should be well-governed, well-run and deliver value for money; and
• People should be able to access helpful information, guidance and advice that enables them to make well-informed decisions

Comment

Anybody reading this paper will be able to nod along in agreement with it since there is little of surprise or controversy in it.  But neither is there much substance.  Being charitable, one may hope that these high-level principles will guide future more detailed initiatives, but we will have to wait and see if this joint strategy leads to any visible material change.

PASA issues guidance on GMP stalemate cases

The Pensions Administration Standards Association has launched guidance which focuses on cases which were unable to be rectified during a reconciliation exercise and so reach a “stalemate” status in terms of seeking to resolve them with HMRC.  They comprise two types – where the scheme membership cannot be reconciled and where there are differences in the GMP amount held between HMRC and the scheme.

The guidance (which requires a password to access) suggests that in such cases there are three possible options available to schemes:

• Accept that HMRC is correct – this may mean accepting a liability or that the figures held by the administrator may need to be corrected
• Take no action – which PASA says only applies if trustees are confident the GMP figure they hold is correct; and
• Undertake further investigative work

According to the GMP Forum – an industry group – when a difference is identified between HMRC and a scheme’s record, then in around two-thirds of cases investigated HMRC’s record is shown to be correct, whilst in a third, it is the scheme that is correct.

PASA says that the right solution will depend on a number of factors and hopes that its latest guidance will assist administrators reach an appropriate conclusion.   In many cases, the guidance points to taking no further action and accepting the scheme’s record.

At the end of this month HMRC is scheduled to withdraw its Scheme Reconciliation Service – which allows schemes to query and resolve disputed contracted-out and GMP records en masse.

Comment

One would have hoped that the number of cases where stalemate had been reached would be relatively few, but it appears that this is far from the case.  The obvious answer to this is for the Government to bend to numerous requests from the pensions industry to extend the HMRC deadline and provide more resource to it so that working together, member records can be fully reconciled and rectified where necessary.  But the Government does not wish to move and as a result it is possible that up to a million pensioners will be stuck with potentially incorrect payments from both their scheme and their state pension.  This in turn could well feed into any subsequent GMP inequality resolution exercise.

More details emerge of the likely shape of CDC schemes

The pensions minister has put more flesh on the bones of the consultation to come on how the Government intends to legislate for collective defined contribution schemes.

Responding to the report of Parliament’s Work and Pensions Committee (see Pensions Bulletin 2018/29), Guy Opperman said that this autumn’s formal consultation on CDC schemes will consider, amongst other things, whether CDC members should be allowed to transfer out in the decumulation stage, whether a specific qualification should be required for trustees of CDC schemes and their advisers and how to safeguard against employers being held liable to the scheme at a later date.

He also confirmed that:

• It would not be possible to rely solely on existing powers in the Pensions Act 2011 to provide the necessary framework – further primary legislation will be needed, alongside secondary legislation; and
• His current focus is on delivering a legislative framework that is appropriate for the needs of the proposed Royal Mail scheme – only later might the Government legislate for a wider CDC framework

In a separate development, Conservative MP, Paul Masterton, has introduced a Private Member’s Bill to enable the establishment of CDC schemes.  Introducing his Bill, Mr Masterton concurred with his Conservative colleague’s suggestion that legislation should focus initially on the Royal Mail scheme, going on to suggest that by bringing in his Bill, he hopes to give the minister a helpful nudge.  This Bill is due to have its second reading on 23 November.

Comment

Many questions need to be answered and a clear regulatory regime established before a CDC scheme can be safely allowed to operate.  We look forward to this consultation, which we understand will be accompanied by the publication of details of the proposed Royal Mail scheme.

A Simpler Annual Pension Statement

An industry group headed by Ruston Smith has collaborated to design a two page “Simpler Annual Statement” for DC benefits which was launched at the PLSA annual conference on 18 October.

The Statement has been developed as an alternative to current practice for DC benefits which tends to closely follow the detailed requirements of the disclosure regulations and has become increasingly lengthy as further requirements have been added.  The Statement is divided into three colour-coded sections – separately showing “what you’ve got now”, “what that could get you in the future” and “what you could do to give yourself more” and aims to present the detail in an intuitive format and using simpler language than is commonly found in annual statements.  There is some interesting commentary on the objectives driving the design in the notes to the launch announcement.

This statement has since been embraced by the Pensions Administration Standards Association, with the template statement, accompanying technical guide and report on the research exploring members’ reactions to the simpler statement all being published on its website.

Some of the research highlights exactly why a simpler statement was needed: only 57% of members surveyed had read a pension statement in the last year, and fewer than one in four of those understood the information very well.  The initial feedback on the simpler annual statement was considerably better – 87% of members would read it if they were sent a hard copy, and 70% of people thought it was easier to understand (3% thought it was more difficult).

The technical guide makes clear that the projection aspect of the Statement assumes that no lump sum will be taken and that a single life, non-escalating annuity is provided.  Such a simplified statement inevitably also involves caveats, so it may not be suitable for complex benefit structures and links to additional information may be required in order to be fully compliant with the disclosure regulations under which annual statements are provided and which the Government has no intention of changing.

Comment

A simpler statement that is easy to digest and more likely to encourage members to engage with their pension savings has to be welcomed.  However, this simplicity does come with its limitations, and whilst it is easy for interested members to request additional disclosures there will need to be more significant changes for complex contribution structures.

But perhaps of most concern is the basis of calculation for projections – a non-increasing single life annuity with no lump sum taken gives the largest annuity a member could buy and as such is likely to be unrealistic in many cases and could lead to disappointment at retirement.

It is also contrary to the flexibility introduced into SMPIs from April 2014 to illustrate the impact of taking a lump sum or opting for pension increases or a contingent pension when purchasing an annuity – and may therefore be incompatible with the illustrations that members have received in recent years.

HMRC consults on Welsh income tax rates

Ahead of a Welsh rate of tax being introduced from the 2019/20 tax year on non-savings and non-dividend income, HMRC is consulting on the necessary secondary legislation required for its successful operation.

Under the Wales Act 2014 the Welsh National Assembly can set Welsh rates of income tax.  The system is similar to an earlier incarnation of that operating in Scotland, reducing the UK basic, higher and additional rates of income tax (currently 20%, 40% and 45% respectively) by 10% for Welsh taxpayers (essentially those who in a given tax year spend more days living in Wales than any other constituent part of the UK) and enabling the Welsh Assembly, unconstrained by the UK Parliament, to then set its own rates for each of these income tax bands.

The [draft] Devolved Income tax rates (Consequential Amendments) Order 2018 deals with consequential changes to tax law to allow for potential differences between the Welsh basic, higher and additional rates of income tax and the UK basic, higher and additional rates.

In relation to pension savings the Order adjusts the relief at source provisions on member contributions as follows:

• By setting tax relief at source at the Welsh basic rate if HMRC has so notified the Scheme Administrator
• By allowing Welsh taxpayers to claim higher rate tax relief (though their tax return, rather than at source) at the Welsh higher rate or the Welsh additional rate; and
• By enabling additional relief to be delivered if an individual receives relief at source at a rate set by another constituent part of the UK whilst being a Welsh taxpayer and the Welsh basic rate is higher, or receives relief at source at the Welsh basic rate whilst being a taxpayer of another constituent part of the UK and the non-Welsh rate is higher

The Order also provides for Welsh taxpayers whose pension savings are in excess of the annual allowance and are also liable for an annual allowance charge, to have such a charge calculated at Welsh rates of income tax.

A draft technical guide provides more detail of these changes, including mention that special tax charges for payments out of pension savings will remain subject to current UK income tax rates unless Welsh and other UK taxes diverge to any significant degree.

There is also a further set of draft regulations that are concerned with consequential amendments to the Income Tax (Pay As You Earn) Regulations 2003.  Amongst other things they provide for a new “C” prefix to the standard tax code as an indicator that Welsh rates of income tax apply.

Comment

Yet further complexity is being introduced into the pensions tax system as a consequence of changes to the devolution settlement, but given that this latest change is built upon the system that was to operate in Scotland, we trust that it should run smoothly on implementation should those in Cardiff Bay decide to set income tax rates that differ from those operating in England and Northern Ireland.

Master Trust Code of Practice comes into force

The Pensions Regulator’s Code of Practice 15 on the authorisation and supervision of Master Trusts has now come into force, having been finalised and then laid before Parliament back in July (see Pensions Bulletin 2018/27).

The Pensions Act 2004 (Code of Practice) (Authorisation and Supervision of Master Trusts) Appointed Day Order 2018 (SI 2018/1097) brought this Code into force on 18 October.

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.