RPI must be fixed says the House of Lords’ Economic Affairs Committee

On 17 January, the House of Lords’ Economic Affairs Committee published its long-awaited report on the use of the Retail Prices Index as an appropriate measure of UK price inflation (see Pensions Bulletin 2018/25).  The report makes strong recommendations about correcting the RPI, moving towards an agreed measure of inflation in the long term, and puts the onus on the National Statistician and his Advisory Panel to progress this.

Making the headlines is the report’s recommendation that there should be an “immediate” correction of the most well-known error in the RPI – the “clothing/formula” effect.  This could reduce RPI inflation by at least 0.3% pa in the longer term and by potentially a lot more.  Such a move may require the UK Statistics Authority to consult the Bank of England and obtain the Chancellor’s agreement.  If this route is necessary, the Committee says that the Chancellor should consent to the change.

The report goes on to recommend:

• Agreement between the Government and the UK Statistics Authority within five years on a single inflation measure for the long term – with it to contain a satisfactory measure of owner-occupier housing costs
• To prevent “index shopping” in the interim, the Government should switch to CPI from RPI in all areas of present use that are not governed by private contracts – including issuing new index-linked gilts linked to CPI rather than RPI
• Once agreement has been reached on the new inflation measure any new index-linked gilts should use it; and
• The UK Statistics Authority and the Government should then decide whether to continue to publish the RPI as a separate index for legacy measures, or whether it should set out a programme of adjustments so that the RPI converges on the single general measure in the long term

Comment

The recommendations appear to be at the strongest end of what might have been expected, including querying whether the National Statistician has been operating in line with his legal duties.  Although the report in and of itself carries no authority such that changes are not inevitable, it will be interesting to see how the Government has reacted when the Committee publishes its response to the recommendations.

In the meantime, it would not be a surprise if those setting long-term assumptions for the purpose of valuing DB liabilities react to this development by narrowing the extent to which CPI inflation is assumed to fall short of RPI inflation – with potentially significant impacts on DB scheme funding and accounting deficits, hedging, bulk annuity pricing, member option pricing, RPI/CPI pension increase considerations etc.

Review of communication and support provided to British Steel pension scheme members published

An independent review of the communications and support provided to British Steel Pension Scheme (BSPS) members during the 2017-18 pension restructuring exercise has been published.  This was commissioned by the Pensions Regulator after the House of Commons’ Work and Pensions Committee recommended last February that it conduct such a review, in its hard-hitting report on the restructuring.

Undertaken by Caroline Rookes (formerly CEO of the Money Advice Service, Director of Private Pensions at DWP, and currently a trustee of NEST amongst other roles), the report notes that the intention was “not to look to blame the employer, trustees or any other organisation involved in the pension restructuring” and that “the vast majority of BSPS members selected the right option for them”.  Rather, the point of the review was to see whether there are lessons that can be learned from the BSPS experience that can be of help to schemes facing similar situations and to minimise the difficulties and distress suffered by some members.

The review makes 18 main recommendations, nearly all of which are aimed at the Pensions Regulator, with highlights being:

• The Pensions Regulator should discuss with the DWP whether there is any scope for legislation to simplify the choices in the event of a restructuring, whether through allowing a partial default into a new scheme or setting requirements for a new scheme to provide better benefits than the PPF
• The Pensions Regulator and the Financial Conduct Authority should explore with the DWP whether there is scope for framing a new power for the Regulator to consider the preparedness of a scheme to handle the member consultation in the event of a regulated apportionment arrangement and if necessary delay or stop it
• The Pensions Regulator should publish “best practice guidance” for trustees facing restructure and other major changes (and not just point to the minimum required by law)
• The Single Financial Guidance Body and the FCA should review their “adviser directories” to ensure they are fit for purpose and members should by implication not simply be pointed to the “Unbiased” website (which the report states is not unbiased)
• The Pensions Regulator should explore ways in which trustees can appoint IFAs for members to select from (this is currently possible, and a growing trend, but some trustees have concerns about doing so)

In a joint statement the heads of the Pensions Regulator, FCA and SFGB welcome the report, promise to consider the recommendations made and have published a joint protocol to ensure that in future they work in a co-ordinated way to help DB trustees ensure that their members are adequately and fully informed when considering transferring their DB pensions.

Comment

This report makes for rather sobering reading for the regulatory bodies.  The list of recommendations includes lots of good ideas that we would fully support.  For example, we have also had concerns about the quality of the SFGB and FCA “adviser directories” and are glad the report highlights this.

When considered together with Frank Field’s latest inquiry on contingent charging (see Pensions Bulletin 2019/01), and the Pensions Regulator and FCA’s joint strategic objective to review this whole area again in 2019 (see Pensions Bulletin 2018/42), we anticipate that there will be significant developments in the near future.  It will be important for trustees and employers to keep these in mind as they review member communication strategies.

Bridging proposal to acknowledge a rising state pension age

The DWP has launched a short consultation on a draft Order whose purpose is to enable those pension schemes that provide an additional “bridging” pension to members between the scheme’s normal retirement age and the member’s state pension age, not to breach their age-related equality obligations under the Equality Act 2010, now that state pension age is increasing beyond age 65.

This is being done by means of an Order amending the Equality Act (Age Exception for Pension Schemes) Order 2010 (SI 2010/2133), which sets out numerous permitted exceptions from the general premise that occupational pension schemes must not, under EU law, discriminate on grounds of age.

One of the exceptions relating to bridging pensions currently only allows such a pension to cease at some point between 60 and 65, but as since 6 December 2018 state pension age has started to increase beyond age 65, the DWP is proposing to extend the cut-off on this exception to the member’s state pension age, which currently could be anything up to age 68.  It is also proposing to adjust the maximum bridging pension under this exception so that the reduction can be anything up to twice the full rate of the single tier pension at the point the reduction happens.

The consultation closes on 30 January.

Comment

This is a most straightforward proposal which should hopefully pass into law very soon.  Thankfully, HMRC changed its law back in 2016, along very similar lines, so any scheme that is extending its bridging pension payment period ought not to run into difficulties such as that the pension constitutes an unauthorised payment.

This latest change does speak to the need for the DWP to give the whole area of age discrimination law a health check.  Pension schemes are, by their very nature, age-discriminatory and the approach adopted of setting down in the 2010 Order a list of precise exceptions for pension schemes risks becoming dated as well as preventing scheme design from innovating.  Plus, there are some known issues with the Order that really ought to be addressed.

It’s official: DC pension funds to be VAT exempt

In 2014 the Court of Justice of the European Union ruled in the ATP case (see Pensions Bulletin 2014/11) that defined contribution pension funds are “special investment funds” for the purposes of EU VAT law.  This means that they are exempt from VAT.

For some time HMRC in the UK has accepted (see most recently Revenue and Customs Brief 3 (2017)) that DC funds meeting the criteria set out in the ATP judgment (as interpreted by HMRC) may be treated as VAT exempt.  Now, as part of Brexit housekeeping, a statutory instrument has been made which puts the ATP exemption on a statutory footing in the UK.

The Value Added Tax (Finance) (EU Exit) Order 2019 (SI 2019/43) amends the Value Added Tax Act 1994 by adding a new exemption – “recognised pension fund” – to the list of existing exempt supplies in Schedule 9.  A recognised pension fund is defined as a pension fund meeting all of the following conditions:

• It is solely funded by its “pension members” (defined as persons to or in respect of whom retirement benefits are paid from the fund) either directly or indirectly (“indirectly” explicitly includes contributions paid by a third party on behalf of a member)
• The pension members bear the investment risk
• The fund contains the pooled contributions of more than one pension member; and
• The risk borne by the pension members is spread over a range of investments

The Order comes into force on “exit day” as defined in Section 20 of the European Union (Withdrawal) Act 2018, being 11pm on 29 March 2019 or such later day as may be specified by regulations to align with when the EU treaties actually cease to apply.

Comment

It is welcome to see the position set out in statute rather than for schemes to have to rely on occasional statements of HMRC practice.  The definition seems to cover most conventional UK DC schemes, but before moving to operate on a VAT exempt basis (if they have not already) trustees should check that they do tick all the boxes.

Just before the ATP case the CJEU ruled in the PPG case (see Pensions Bulletin 2013/32) regarding the VAT treatment of defined benefit funds.  We wonder whether the Treasury will legislate before exit day to similarly codify the application of the PPG judgment in the UK.

HMRC says more on relief at source

HMRC’s latest newsletter on the operation of relief at source covers some familiar ground for those who need to take an interest in how this form of tax relief on member contributions operates.  It covers the following topics:

• Pension consequences of the proposed Scottish income tax rates for 2019/20 – in particular, noting that those paying 19% income tax will continue to get 20% relief on their pension contributions (ie as is the case in 2018/19). HMRC promises to provide an update in a future pension schemes newsletter once the Scottish income tax rates are confirmed
• Confirmation from the Welsh Government that the Welsh income tax rate for 2019/20 will be the same as that in England and Northern Ireland – and so no changes will be needed in respect of Welsh taxpayers in this tax year for pension schemes operating relief at source
• HMRC starting to release its residency status reports (enabling schemes to apply the correct rate of relief for 2019/20) along with various procedural and technical details
• A reminder of the need to inform HMRC if too much tax relief has been claimed

Comment

Devolution of certain aspects of income tax has spawned a whole new complexity when it comes to tax relief on member contributions, whether through the relief at source or the net pay methods, but at least for the time being tax relief is still available on member contributions on a UK-wide basis.

Auto-enrolment earnings parameters – draft Order published

The draft Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2019, which will give effect to the 2019/20 earnings parameters agreed in December (see Pensions Bulletin 2018/49), has been published.  The Order contains the annualised lower and upper limits of the qualifying earnings band (£6,136 and £50,000 respectively) and by reference to other pay reference periods.  As the earnings trigger remains unchanged at £10,000 this is not mentioned.

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.