Inevitably, the articles in this week’s Pensions Bulletin are heavily influenced by the disruption caused by the Coronavirus / Covid-19 outbreak.  No less than seven of our nine articles reflect actions and delays necessitated by this health emergency.  We will continue to bring you the Pensions Bulletin each week and trust you are all keeping well.

Pensions Regulator issues further Coronavirus guidance

On 27 March, a week after issuing substantive guidance on the impact of the Coronavirus emergency on pension schemes (see Pensions Bulletin 2020/13), the Pensions Regulator published further guidance in three parts – for trustees in relation to DB scheme funding, investment and transfer values, for employers in relation to DB scheme funding and for trustees in relation to DC investment.

Trustee guidance: DB scheme funding, investment and transfer values

In relation to DB schemes, amongst many other things, the Regulator says:

• That trustees who are currently in the process of signing off a valuation “are not required to take into account post valuation experience” (as is permitted under legislation), but the Regulator expects trustees to consider post valuation experience when agreeing recovery plans, focussing on whether provisionally agreed deficit recovery contributions are still affordable
• For current valuations nearing completion, where trustees consider it is in the best interest of their members to take more time to consider the scheme and employer’s current situation, they can delay valuation submission by up to 3 months (that is, 3 months beyond the 15-month statutory deadline)
• Trustees should “be open to” requests to suspend/reduce deficit reduction contributions for up to 3 months if they are not yet able to fully assess the employer’s position as per the Regulator’s guidance published on 20 March 2020.  In such cases, all dividends and other shareholder payments must be suspended (and this must be supported with legal documents) and the Regulator is careful to highlight a number of other considerations for trustees to take into account to ensure that pension schemes are fairly treated and appropriately protected
• Trustees can decide to suspend transfer quotations and payments for up to 3 months to give them time to review transfer terms and/or to assess the administrative impact of any increase in demand for transfer quotes.  Where this results in a breach of law, the Regulator does not intend to take regulatory action against trustees in the next three months.  After three months trustees can continue with the suspension of quotations and payments but must notify the Regulator and be clear about their reasons for the continued suspension or delayed quotation.  Trustees should also be mindful of the heightened risk of members being targeted by scammers and unscrupulous financial advisers

The regulatory easements above will be maintained until 30 June 2020, with this date being reviewed as matters progress.  The Regulator will also consider whether more specific flexibilities or restrictions are required.

The guidance also sets out detailed considerations on a number of other matters.  In relation to scheme investments similar requests are made of DB trustees as are made of DC trustees (see below).

Employer guidance: DB scheme funding

This much shorter guidance explains that the Regulator will be pragmatic in scenarios where trustees are being asked to agree to a previously unforeseen arrangement (such as deficit reduction contribution reductions or suspensions, or additional debt being secured over employer assets) provided that certain conditions are met.  These comprise the need to be justified, plans to be made for deferred scheme payments to be caught up and for mitigating any detriment caused to the scheme; and the scheme to be treated fairly compared with other stakeholders.

The guidance reminds employers to provide trustees with regular updates on employer outlook and contingency planning, make all reasonable endeavours to provide trustees with the information that they need and strongly recommends that employers document their position regarding the treatment of their schemes.

Trustee guidance: DC investment

This guidance examines a number of investment issues that DC trustees may be facing, with the Regulator asking that trustees:

• Consider how members might react to headline market/fund value falls or reduction/loss in earnings, with the risk of them making inappropriate decisions, crystallising losses or being exploited by scams
• Review and manage specific risks that may now exist within their portfolios or with their service providers
• Review any previously agreed investment and risk management decisions to be implemented in the future – to ensure they remain appropriate, efficient and do not introduce risks or crystallise losses
• Review their investment governance structures and delegations to ensure they can continue to function and make decisions in the event of trustee incapacity or absence
• Assess, following the recent performance of their scheme, whether any changes to their governance framework or provider arrangements should be made at an opportune time

The Regulator acknowledges that some DC schemes may struggle to meet statutory deadlines or comply with statutory requirements.  It says that it will continue to take a pragmatic approach, using its discretion, where it can, to decide whether it would be appropriate to take action regarding specific breaches.

Comment

The 20 March guidance helpfully pointed out issues for DB and DC scheme trustees to focus on, whilst very much seeking to hold the regulatory line.  By contrast the 27 March guidance for DB schemes acknowledges that some flexibility may well be needed in the areas of DB funding and transfer values, whilst providing for both types of scheme a shortlist of investment issues to consider.

In these exceptional times, we are pleased that the Regulator is starting to respond to calls across the industry for regulatory easements.  However, as it is unable to change the law or the scheme rules, DB trustees will need to carefully consider whether they wish to make use of the easements, which will not be without risk.

Coronavirus Job Retention Scheme provides limited pension contribution coverage

On 27 March the Government announced details of the temporary scheme open to all UK employers operating a PAYE payroll scheme for at least three months starting on 1 March 2020, which it hopes will be up and running by the end of April.  Separate guidance is available for employers and employees on the scheme.

Under it, if an employer has no work for an employee because of coronavirus, then if both parties agree, the employee can go “on furlough”, as part of which they must not undertake any work for the employer.  All changes to the employee’s contract must be by agreement.

The Government will then pay to the employer a sum equal to 80% of the furloughed employee’s usual monthly wage, up to a cap of £2,500, along with the employer NIC and the employer 3% minimum auto-enrolment employer pension contribution on this capped wage.  The employer must, as a minimum, pay the furloughed employee this capped wage (less the normal deductions that would apply, such as income tax, employee national insurance contributions and any employee pension contributions).  HMRC will provide guidance on how employers should calculate their claims for employer NICs and minimum auto-enrolment employer pension contributions before the scheme becomes live.

Where this scheme is used, there are many pensions issues for trustees and corporate sponsors of both DB and DC schemes to consider and take specific advice on.  Some, but not all of these are:

• What is the definition of final pensionable pay in a DB scheme for members approaching retirement?  Are employees approaching retirement who are put onto furlough also going to suffer a 20% haircut to their retirement pension?
• How are employer and member contributions going to be calculated for the foreseeable future?  This is relevant for both DB and DC schemes
• Will active members who are furloughed be regarded as still accruing benefit in their scheme, and will any ancillary benefits such as life cover be maintained and if so at what level?
• Will members be able to opt-out on affordability grounds?  Will they be able to re-join on the same terms in the future?
• Will any salary sacrifice arrangements under which an otherwise member contribution is turned into an employer contribution, through reduction in salary, need to be revisited?

All these issues, and more, will need to be carefully considered for each scheme with reference to their scheme rules.  Some are more likely to be material than others, but all should be considered.  It is obvious to say that very few, if any, scheme rules will have been written anticipating the furlough concept.

There is a parallel Government arrangement for the self-employed, under which a taxable grant worth 80% of trading profits capped at £2,500 per month, is available for three months for those who had average profits of no more than £50,000 over the last three tax years.  However, there is no NIC or pension contribution add-on.  HMRC guidance on the Self-employment Income Support Scheme was published on 26 March.

Comment

As indicated above this welcome scheme for employers and their employees will necessitate affected occupational pension schemes establishing how their active members will be treated on being furloughed, with a clear risk that scheme rules will not currently appropriately address such a new and temporary ‘category’ of membership.

Suggestions that the auto-enrolment employer duty might be suspended during the Covid-19 emergency are clearly not in current Government thinking as this scheme implies.

HMRC sets out temporary changes to registered pension scheme processes because of Covid-19

HMRC’s latest pension schemes newsletter reports on a number of matters, starting with recapping the pension measures announced in the Budget (see our Budget Bulletin).

Perhaps the most significant of these is the changes to the Tapered Annual Allowance for 2020/21, but later in the newsletter HMRC notes that it has not yet updated its Annual Allowance calculator for the Budget changes and recommends that pension scheme members do not yet use it for 2020/21.  The rest of the measures include the annual increase in the Lifetime Allowance to £1,073,100 (for which regulations have now been made), the call for evidence about the net pay / relief at source anomaly and repeating the promise that tax legislation will be introduced for collective money purchase schemes.

The newsletter goes on to set out HMRC’s revised procedures in several areas due to Covid-19.  These temporary changes will apply for the next three months with an update being provided in June 2020.

• Rent and loan payment holidays: To help scheme administrators and businesses affected by the current situation, HMRC is content that any arm’s length commercial decisions relating to registered pension schemes, including rent holidays, will not give rise to an unauthorised payment charge and can be agreed without independent valuations taking place
• Signatures on APSS105 relief at source payment claims: HMRC has introduced a process of replacing “wet” signatures on these forms with scanned copies sent by email
• R63N repayment requests: Similar to the above, HMRC will accept scanner repayment requests
• Relief at source excess relief schedules: Easements are introduced if scheme administrators are unable to submit these schedules at the moment
• Accounting for Tax return submission and payment delays: The AFT return for the quarter ending 31 March 2020 is due by 15 May 2020.  HMRC acknowledges that doing so at the moment may be difficult and therefore will retrospectively cancel any penalties or interest on this quarter’s return if HMRC is contacted
• Reporting transfers to QROPS (APSS262): Similarly to the above if a penalty is issued by HMRC for a late report then HMRC will cancel any penalty in the current circumstances if contacted

There are also other general “housekeeping” announcements about relief at source, annual returns, introducing AFT forms to the Managing Pension Schemes service (relevant to the few schemes that are on that platform – many schemes remain on the old platform for the time being) amongst other matters.

Comment

The changes to the above compliance and reporting processes are welcome.  There may well be more that HMRC will need to address in the coming period.

On the tapered annual allowance, if any scheme communications are currently pointing members to the HMRC annual allowance calculator to project 2020/21 positions, trustees/employers may wish to put in a warning.

DWP revokes general levy increase

Another consequence of the Covid-19 crisis is that the expected increases to the general levy payable by occupational pension schemes due to take place in April (see Pensions Bulletin 2020/09) have been cancelled.  Emergency regulations have been made to effect this and it is noted that “DWP will reassess the rate of the General Levy in the future”.

The general levy recovers part of the core running costs of the Pensions Regulator and the Money and Pensions Service, and all the running costs of the Pensions Ombudsman.

Comment

The revocation of the April 2020 levy increase will save pension schemes some money in the short term, but the levy increase will need to be revisited when “business as usual” resumes, whenever that is.

Covid-19 emergency volunteers to have pension accrual protected

Pension accrual must be maintained for pension scheme members who are absent due to participating in the government’s emergency volunteer programme.  So provides paragraph 7 of Schedule 7 to the Coronavirus Act 2020.

The legislation is couched in similar terms to that protecting pension accruals for employees on the various types of childcare leave.  Thus an “employment-related benefit scheme” (defined as including both occupational and workplace personal pension schemes) is deemed to include an “emergency volunteering rule” so that any “relevant term” (relating to membership, benefit accrual or determination of the amount of benefits) treats time when an employee is volunteering in the same way as when they are not.

Conversely, if an employer is treating a period of absence due to volunteering as unpaid leave (or paying a reduced rate of pay) then the scheme member will only be required to pay member contributions based on the reduced rate of pay.

Comment

Emergency volunteering for this purpose is the official scheme under which a volunteer needs to be certified by an appropriate authority to work in health or social care.

Progress on the Pension Schemes Bill stalls

One of the consequences of Parliament’s early Easter recess and the need to make time for the Coronavirus Act 2020 is that progress on the Pension Schemes Bill has stalled.  Last debated on 4 March, the Bill awaits its Report stage in the House of Lords which is now unlikely to happen until late April at the earliest.

In the meanwhile, two useful indicators of Government thinking have emerged in letters written by Baroness Stedman-Scott to peers in response to questions raised at Committee stage:

• Dividends – the Government believes that the Pensions Regulator’s ‘Fair Treatment’ regulatory initiative in which the trustees of 250 schemes have been contacted, is starting to bear fruit, and gives a number of examples where greater deficit recovery contributions have been paid as a result.  It rejects the suggestion by some peers that the Regulator should be able to oversee or approve the payment of dividends
• Statements of Investment Principles, Implementation Statements and DC Chairs’ statements – the idea of a central depository is being taken seriously, with the Regulator’s scheme return being the potential collection mechanism for web-links

Comment

There would still appear to be plenty of time for the Bill to reach the statute book by the summer, but it will now all depend on how Parliament can function during what is increasingly looking like an extended lockdown and what the Government will want to prioritise during this period.

FCA delays changes to DB transfer advice rules

The Financial Conduct Authority is putting back by up to six months new rules to govern DB pension transfer advice that could include a ban on contingent charging by advisers alongside a requirement for advisers to demonstrate why any scheme they recommend is more suitable than the individual’s DB scheme (see Pensions Bulletin 2019/30).

The rules had been expected to be finalised by the end of March, but on 23 March and without any announcement, the FCA adjusted its webpage containing the consultation paper so that its “next steps” were for a Policy Statement to be issued in the second or third quarter of 2020.

Comment

This is highly regrettable.  In July last year the FCA made clear it believes that consumer detriment from poor quality advice runs into billions of pounds per annum.  Its proposals are intended to address an issue that could become even more prevalent if, as a result of the Covoid-19 emergency, DB scheme members become fearful of the security of their employer-sponsored pensions and seek to transfer in greater numbers.  But with the Regulator enabling trustees to suspend DB transfer quotes and payments for the next three months, the DB transfer market may become paused anyway.

Public sector pension reforms – the Government provides an update

In a further statement made in the House of Commons the Government has provided a progress report on the proposals it is developing to address the unlawful age discrimination identified by the Court of Appeal in the McCloud challenge to the 2015 reforms to the Judicial and Firefighters’ pension schemes.  This follows the statement made last July (see Pensions Bulletin 2019/28) which acknowledged that there was an issue that needed resolution across all the main public sector pension schemes.

Since February the affected schemes have discussed the Government’s high-level proposals with member and employer representatives.  Under these, affected members will be able to choose whether they accrued service in the legacy or reformed schemes for periods of relevant service, depending on what is better for them.  These high-level proposals don’t appear to be publicly available.

The Government has also said that if an individual’s pension circumstances change as a result, the Government may also need to consider whether previous tax years back to 2015-16 should be re-opened in relation to their pension.  This is thought to imply that any pensions tax calculations may need to be revisited with the possibility of the individual facing additional tax charges.

Detailed proposals are promised, in a public consultation, later this year.  These will also contain proposals to remove the discrimination for future service.  At the same time the Government intends to provide an update on the cost control mechanism in public sector schemes to which it announced a pause in January 2019 following the Court of Appeal’s judgment (see Pensions Bulletin 2019/05).

Comment

This is clearly becoming a lot more complex than simply reinstating affected members in the legacy scheme.  We will need to wait for the promised public consultation to see precisely what is being proposed, but it seems likely that resolving an age discrimination issue will result in complex calculations and difficult decisions for millions of public sector workers.

Raising standards in the tax advice market

On 19 March HMRC launched a call for evidence on the tax advice market, noting that it is not working as well as it should be, with some advisers being incompetent, some unprofessional and a few actively corrupt.

HMRC acknowledges that the market for tax services is diverse, ranging beyond accountants to include legal professionals, financial advisers and pension providers.  Bookkeepers, payroll companies and even software providers are stated as playing a wider role in providing services relating to tax.

The consultation document sets out evidence of the problems in this market caused by a few participants and discusses a range of options to address it, from improving current HMRC interventions and/or consumer protection, to full regulation (by introducing a statutory body enforcing regulated standards on tax advisers).

Consultation closes on 28 May 2020.  Further consultation is promised should the Government decide to proceed with any reform in this area.

Comment

This is a consultation with the clear aim of tackling the bad apples, but quite how HMRC is going to achieve this without burdening everyone else – including the very many parties that are essential to enable pension schemes to comply with the complex pensions tax regime – remains to be seen.