• MPs start to dissect the Pension Schemes Bill
• FCA outlines its climate risk reporting plans
• PLSA makes its final recommendations to help savers access their DC savings at retirement
• PPF anticipates Covid impact in annual report
• GMP inequalities in the public sector – is the sticking plaster to become permanent?
• Pre-pack sales to face independent scrutiny
• ECJ holds that investment management is not insurance in VAT case
• Brexit – paying pensions to EEA-based pensioners

MPs start to dissect the Pension Schemes Bill

The Second Reading debate on the Pension Schemes Bill took place in the House of Commons on 7 October where it was clear from the contributions made that it commands cross-party support, although the opposition parties in particular called for the four non-Government amendments made in the House of Lords (see Pension Bulletin 2020/27) to survive in some form in the Commons.

Thérèse Coffey opened for the Government, taking the MPs present through the Bill’s aims and content, largely in order.  The following interesting points came out in the debate:

• New Pensions Regulator powers – the Regulator will publish specific guidance on its new moral hazard powers, whose purpose is to deter individuals from “acting in a way that puts members’ savings at risk”, after consulting with the pensions industry.  Although it is not clear from the debate whether this guidance will be published before the new powers are turned on, an earlier commitment was given in the House of Lords to do so as well as consult on the guidance
• Pension scams – the Bill enables conditions to be placed on a scheme member’s right to transfer to another scheme in order to guard against pension scams.  Regulations will “set out the circumstances where there is a high risk of a transfer to a fraudulent scheme and could require members to obtain information or guidance before transferring”.  In response to an intervention from Stephen Timms it seems that the Government may go further in regulations and enable trustees to block a transfer where certain red flags are raised on which the pension scams industry group has been separately working.  Mr Timms for his part is planning on proposing an amendment to the Bill at Committee stage to this effect and Guy Opperman promised to continue the dialogue he has had with Mr Timms on this issue.  A letter from Guy Opperman to Stephen Timms and from the FCA to Guy Opperman have also been published on this issue from which it seems that regulations might be able to deliver a blocking power to trustees in certain situations
• DB scheme funding – Guy Opperman was asked to state his intentions on the possibility of the Government removing the House of Lords’ amendment whose purpose is to acknowledge that schemes that remain open to new entrants should be subject to a different approach by the Pensions Regulator to those that are closed to new entrants.  There was support for the amendment from a number of MPs on both sides of the House.  In response he said that he was open to the concerns being expressed and the Government continues to engage with affected schemes and the Regulator
• DB superfunds – on the absence of legislation to regulate DB superfunds with the Regulator having to operate an interim regime, Guy Opperman said that a formal regime is something he hopes to take forward and that he accepts that the Government does need to address it in due course

Inevitably the debate was also an opportunity for some opposition MPs to express regret at aspects that were not in the Bill.  The Bill now moves to Committee stage at a date yet to be scheduled, but as Report stage is expected by 5 November, the earlier Committee stage should not be long off.

Comment

So far the carefully built cross-party consensus seems to be holding for which Guy Opperman should take the credit.  As the Bill amendments start to come through and are discussed in Committee, we should hopefully get some more visibility on the Government’s intentions and timings.

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FCA outlines its climate risk reporting plans

In an exchange of letters with Guy Opperman, the Financial Conduct Authority has outlined a timeframe to align its climate risk reporting requirements with those flowing from the Pension Schemes Bill in relation to occupational pension schemes, on which consultation on the detailed requirements has just closed (see Pensions Bulletin 2020/35).

The FCA’s proposals will ensure that asset managers and contract-based pension schemes are required to report on their assets’ climate risks in line with recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD).

The FCA intends to consult on its proposals in the first half of 2021, and aims to finalise the rules by the end of 2021, with the new obligations coming into force in 2022.  The FCA will consider phasing the obligations, beginning with the largest or most interconnected firms.

Comment

This is a necessary step, not only on grounds of consistent treatment between contract-based and trust-based schemes, but also so that those running pension schemes will obtain the information they need in order to complete their own climate risk reporting.

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PLSA makes its final recommendations to help savers access their DC savings at retirement

The Pensions and Lifetime Savings Association has made its final recommendations about what should be in a new regulatory framework to help savers decide what to do when accessing their DC savings at retirement.  This follows the PLSA’s consultation in July (see Pensions Bulletin 2020/32).

The framework is broadly unchanged from the consultation and the key element is for DC schemes to support members by signposting them to a preferred product or solution in the scheme or to another scheme so that savers can navigate the risks they face.  The PLSA also believes that a new regulatory framework will mitigate the risk of litigation that schemes face in this area.

Comment

We are supportive of this initiative and hope that Government, Regulators and the industry will heed the PLSA’s calls to deliver this new framework.

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PPF anticipates Covid impact in annual report

The Pension Protection Fund’s 2019/20 annual report shows its funding remains strong despite numerous challenges over the year, but also gives a nod to the challenges still to come.  Headline figures of a fall in total reserves (ie those expected assets above expected liabilities) from £6.1bn in 2018/19 to £5.1bn means that the PPF’s funding ratio has reduced from 118.6% last year to 113.4% this year.

The accompanying probability of reaching the PPF’s stated funding target at 2030 has also dropped from 89% to 83%.  The two main drivers behind the fall in this “probability of success” are:

• An allowance for more expected sponsor insolvencies as a result of the Covid-19 pandemic – this reduced the probability by 3%, suggesting an expectation of well over £1 billion of additional claims due to the pandemic
• The reduction in the funding ratio causing the probability to drop by 2.3%.  Whilst matching assets performed well to mitigate falling yields increasing liabilities, relatively poor performance on return-seeking assets cost £1.1bn

Ironically the additional allowance for Covid-19-related insolvencies followed one of the PPF’s lowest ever years of actual claims – just £0.3bn of claims over the period compared to a Kodak-driven £1.7bn the previous year.

There have been plenty of other things potentially affecting PPF funding over the year.  The report notes that should RPI inflation be brought into line with CPIH from 2030 it could cost the PPF more than £600m.  The Hughes court case that ruled the compensation cap unlawful is estimated (subject to the current appeal) to cost around £200m and has been included in the expected liabilities.

Comment

A couple of weeks ago the PPF allowed its estimated levy take to drop by £100m (see Pensions Bulletin 2020/40).  Now, in its latest annual report and accounts it notes a £1bn drop in funding and 6% lower chance of reaching its intended funding target.

The fact that the PPF was confident enough to let its levy income drop so dramatically is testament to the strong financial position it has put itself in.  We noted in our recent paper that simply allowing the chance of reaching its target to drop was a reasonable way of dealing with small setbacks, and the PPF is going with that for now.

Last year the PPF’s annual report talked about Brexit being a major risk factor, but now the key unknown is the effect of Covid-19 on insolvencies and future markets.  It appears the PPF has allowed for around £1bn-2bn in extra claims as a result of the pandemic.  We all hope the actual experience is no higher.

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GMP inequalities in the public sector – is the sticking plaster to become permanent?

The temporary fix to deal with sex-inequality in public sector pensions due to differences in GMPs looks like it is going to become permanent under proposals set out by HM Treasury in its latest consultation on the issue.

The GMP inequality issue is different in public sector schemes to those in the private sector and, so the argument goes, only arose as a result of the ending of contracting out in April 2016.  No inequality occurred between leaving service and reaching retirement age as public sector schemes do not apply revaluation that differs between the GMP and the excess.  And although in payment pension increases differ between the GMP and the excess, no inequality arose here either, on the premise that public sector schemes could look to the top-up provided through the State Pension thanks to the operation of the contracted-out deduction.

Unfortunately for public sector schemes, the introduction of the new State Pension in April 2016 and the breaking of what had been a dynamic link with the contracted-out deduction for those reaching State Pension Age after this point, meant that the pension increase argument ceased to hold.  To buy some time whilst searching for a solution, in March 2016 the Government announced a temporary fix – those public service pensioners reaching State Pension Age between 6 April 2016 and 5 December 2018 would have the GMPs earned in public service fully indexed by the public service pension scheme.

In December 2018 this temporary fix was extended to 6 April 2021 (see Pensions Bulletin 2018/51) and now it will need to be extended yet again – this time to all those reaching State Pension Age before 6 April 2024.  But this time the consultation is asking whether this temporary fix should extend beyond a three-year period, or even become permanent.  In other words, whether all public service pensioners reaching State Pension Age after 5 April 2024 should also have the GMPs earned in public service fully indexed by the public service pension scheme.

The alternative permanent solution of applying GMP conversion appears to be falling out of favour given the work involved in delivering it, the likely lack of resources to undertake this work, especially given the McCloud adjustments necessary to public sector pensions (see Pensions Bulletin 2020/30) and that with the passage of time, the additional cost of the temporary fix vis-à-vis conversion is likely to be reducing.  The consultation also says that the DWP working group on conversion concluded that some changes to pensions legislation are needed before conversion could be used on a wide scale.  This seems to be a point not limited to public sector pensions and is one on which the DWP has yet to act.

Consultation ends on 30 December 2020 and although the consultation says that the Government has an open mind on the issue, its preferred policy on the basis of the current evidence, is to make the temporary fix permanent.

Comment

The decision taken following this consultation will impact not just public sector schemes as there are a number of private sector schemes whose trust deeds and rules explicitly require them to follow the indexation treatment of the public service pension schemes.  It is one thing for the Government to load additional costs onto the taxpayer through extending the temporary fix, but quite another when it directly affects the pension obligations of private sector entities.  Nevertheless, it seems that the latter will continue to remain hostage to action taken in respect of the former unless they can undertake a GMP conversion before next April.

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Pre-pack sales to face independent scrutiny

The Government has announced that pre-pack sales where connected parties, such as the insolvent company’s existing directors or shareholders, are involved in the purchase of a business within 8 weeks of a company entering administration, will be subject to mandatory independent scrutiny.  This follows concerns that the interests of creditors (which will include DB schemes in some cases) and the general public are not sufficiently protected, despite voluntary measures adopted in November 2015 following a review instigated by the 2010-15 Coalition Government.

The decision has been made at the same time as the Government has published the findings of a review into the operation of the voluntary measures.  This review sets out all the decisions now taken and is accompanied by draft regulations.  These regulations apply where there is a disposal in administration of all or a substantial part of a company’s assets.  They prevent the disposal from taking place to a person connected with the company within the first eight weeks of the administration without either the approval of creditors or an independent written opinion obtained by the connected party purchaser.  This opinion must state whether or not the case has been made for the disposal.  Where the case has not been made the disposal can still take place, but the administrator has to provide a statement setting out the reasons for doing so.

The regulations, made as a result of powers taken in the Corporate Insolvency and Governance Act 2020, will be introduced to Parliament in due course (and have to be introduced before the end of June 2021).  Steps are also promised to strengthen professional regulatory standards and improve the quality of the information provided to creditors.

Comment

This is a potentially noteworthy development, particularly in the current economic climate, but also given concerns expressed in the media in recent years that some pre-packs were being used as vehicles by DB scheme sponsors to avoid their pension liabilities.  However, although there have been some concerns, it is interesting that the Pension Protection Fund stated to the review that it does not generally see any evidence that pre-packs are being used as a vehicle for abandoning pension liabilities and that, in most cases, it has reasonable engagement with companies ahead of a pre-pack sale.

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ECJ holds that investment management is not insurance in VAT case

Defined benefit occupational pension schemes’ investment management costs cannot be categorised as “insurance transactions” (which has a specific VAT exception under EU law) according to the European Court of Justice.

In 2017 the United Biscuits trustee claimed in the High Court, on fiscal neutrality grounds, that they should be able to reclaim all of the VAT paid on investment management fees (back to 1989) supplied by non-insurers, as fees paid to insurers for similar services were exempt.  The High Court rejected the claim, but the Court of Appeal referred the following question to the ECJ:

“Are supplies of pension fund management services provided to the [applicants] by (a) insurers and/or (b) non-insurers “insurance transactions” within the meaning of Article 135(1)(a) of the [Directive 2006/112]?”

To which the ECJ in its judgment answered:

“Article 135(1)(a) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that investment fund management services supplied for an occupational pension scheme, which do not provide any indemnity from risk, cannot be classified as ‘insurance transactions’, within the meaning of that provision, and thus do not fall within the value added tax (VAT) exemption laid down in that provision in favour of such transactions”.

Comment

In other words, “no”.  Since the start of this lawsuit the UK tax authorities have stopped operating an exemption for fund management services where the insurer does not take on risk as part of the contract and so the discrimination the trustee was seeking redress for no longer exists.

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Brexit – paying pensions to EEA-based pensioners

There have been reports in the media that some banks will close the UK bank accounts of European Economic Area residents when the implementation period ends on 31 December 2020.

This may present difficulties for UK pension schemes that currently pay pensions to EEA residents via a UK bank account.  Trustees, administrators and payroll providers should consider communicating with potentially affected pensioners to ensure continuity of payment.

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