• Open DB scheme funding – is a softening in approach on the cards?
• HMRC updates its guidance on in-specie contributions
• Scheme return season beckons
• State pension transitional protection increases put through
• FCA sets out a number of concerns on SIPPs

Open DB scheme funding – is a softening in approach on the cards?

In a blog published on 8 December, David Fairs, Executive Director of Regulatory Policy, Analysis and Advice appears to imply that the Regulator’s intentions around regulating open DB schemes set out in the Scheme Funding consultation document published in March have been slightly misunderstood.

The blog indicates that it always “seemed elegant” to the Regulator that under its Fast Track proposals “a truly open scheme could not mature, would not be expected to de-risk and would be able to continue to invest in a long-term way” and goes on to note that “in Bespoke, we could see perfectly acceptable scenarios where open schemes propose to fund and invest based on their expectation that they will remain open.  But trustees should be able to evidence to us how they could (among other things) manage the risk of their scheme closing or maturing faster than expected”.

The consultation document made no such statement around open schemes, but instead said “Trustees who use different assumptions or a different approach to funding [to that proposed for closed schemes] because the scheme is open to future accrual or new members would need to explain why this is appropriate in terms of the employer’s plans for staying open and the future covenant strength”.

This subtle change in language gives the feel of a softening in the Regulator’s approach to open schemes and is also consistent with statements made by Guy Opperman, the Minister for Pensions and Financial Inclusion, during the final stages of the Committee stage debate on the Pension Schemes Bill on 5 November (see Pensions Bulletin 2020/46) that the significant lobbying that had taken place on this issue “will definitely influence the regulator’s approach”.  David Fairs also acknowledges the possibility that the lawmakers may decide that a different regime should apply to open schemes and that regulations will be framed accordingly (see Pensions Bulletin 2020/47).

The blog expresses the Regulator’s surprise at some of the debate generated by the new funding proposals, noting that having read the 130 or so consultation responses, they are now reflecting on whether any of the proposed principles need to be adjusted.  Some airtime is also given to the wider issues around de-risking for more mature schemes and the importance of being aware of a scheme’s liquidity needs.

In a separate development, in one of a series of articles written for Professional Pensions covering some of the key areas of the Pension Schemes Bill, Guy Opperman discusses how, in his view, members will be better protected by the revised funding arrangements for DB schemes.  Although he does not expose any new thinking on the measures proposed, the article confirms, for the first time, that the regulations that will set out the detail of these arrangements will be subject to consultation.

Comment

It goes without saying that the consultation document caused great consternation for open schemes, precisely because it seemed to many that the Regulator intended to treat open schemes as if they had immediately closed.  This softening in the Regulator’s tone around how it expects to regulate open schemes is therefore welcome, whether that is what was intended to be conveyed in the consultation document or not.

However, there is no getting away from the fact that the Regulator is still saying that such schemes will need to put in place concrete contingency plans and evidence these, so will still need to take the Bespoke route – unless of course open schemes are differently legislated for in the regulations when they finally appear.  And if we do have such legislation, it will need to address how ‘open’ a scheme needs to be to qualify.

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HMRC updates its guidance on in-specie contributions

HMRC’s latest pension schemes newsletter covers a multitude of topics with some reminders and updates in relation to the Managing Pension Schemes service, updates on relief at source submissions, pension scheme returns and on signing in to online services.

There is also the usual request at this time that scheme administrators remind members who have exceeded their annual allowance for 2019/20 and who do not have sufficient unused annual allowance to carry forward to cover the excess, to declare this on their self-assessment tax return – even if the scheme is paying the tax charge.

But what is particularly noteworthy in this edition of the newsletter is that HMRC has updated its guidance in relation to in-specie contributions following the Upper Tribunal’s ruling in the HMRC v SIPPChoice case in May (see Pensions Bulletin 2020/21).

Although HMRC glosses over the detail, presenting its adjustments as a clarification of its long-standing position, the offending “Giving effect to cash contributions” guidance at PTM042100 has been substantially rewritten.  The second paragraph now makes clear that paying an asset to a scheme in satisfaction of an earlier obligation to contribute money will not attract tax relief.

However, a contractual offset agreement, which is fully described and acknowledged as such for the first time in the guidance, can lead to tax relief being provided.  Under this the member (or employer) with the contribution obligation enters into an agreement with the trustees in which the trustees purchase the asset instead of receiving the contribution.  For the asset transfer to give rise to tax relief the contribution effected in this way must retain its monetary form.  And for this to happen three conditions are set out, with contemporaneous documentary evidence required for each of them – ie there must be:

• A clear obligation on the contributing party to pay a contribution of a specified monetary sum
• A separate agreement between the trustees and the contributing party to sell an asset to the scheme for market value consideration
• A separate agreement whereby the two parties agree that the cash contribution debt may be offset against the consideration payable for the asset

If the asset’s market value is lower than the contribution debt the balance must be paid in cash in order for the entire contribution to qualify for relief.

A consequential change to the guidance at PTM043310 regarding asset-backed contribution arrangements has also been made.

HMRC concludes by saying that it is continuing to review in-specie cases for those who have claimed and received relief.  However, a contribution paid under a contractual offset agreement as now described at PTM042100, or where HMRC clearance has been obtained in relation to an asset-backed contribution arrangement, will be unaffected.

Comment

So it appears that in-specie contributions remain possible, but only under what is now described as a contractual offset arrangement.  This would seem to create the possibility of a return to the position that existed prior to May, but with slightly more involved documentation.

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Scheme return season beckons

Scheme return season will soon be upon DB and hybrid schemes and with that in mind the Pensions Regulator has provided some useful information ahead of it, including an example return.

Previous years’ scheme returns may not be available on the Exchange online system after 31 December and so the Regulator recommends that those completing returns download the pdfs of any relevant historic returns before the end of the year.

The Regulator is also considering adding two new questions to the return this time round (any changes will be confirmed in early January):

• The web address of the published statement of investment principles
• The assessment of the employer covenant grade (using the Regulator’s four-point grading system)

Scheme Return notices will be issued from the end of January and schemes will have more time to submit them than normal – until 31 March 2021.

Comment

It would seem that the request for the SIP web address is in order for the Regulator to build its SIP repository, the go ahead for which was announced by Guy Opperman recently (see Pensions Bulletin 2020/49).  Covenant grade is also a vital component of the forthcoming revised scheme funding regime and it appears that the Regulator now requires an assessment to be carried out at least annually and at each scheme valuation as a minimum.

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State pension transitional protection increases put through

Two sets of regulations have been laid which for those reaching State Pension Age on or after 13 April 2021:

• Increase that part of any transitional new State Pension, which when calculated as at 6 April 2016, was above the then full rate (the “protected payment”), by the increase in the CPI (so by 8.8% for the five year period ending on 5 April 2021)
• Increase that part of any pension debit or credit on divorce, that has been applied to such a “protected payment”, by the increase in the CPI since the debit or credit was created on or after 6 April 2016

The State Pension Revaluation for Transitional Pensions (No. 2) Order 2020 (SI 2020/1392) and The State Pension Debits and Credits (Revaluation) (No. 2) Order 2020 (SI 2020/1391) come into force on 12 April 2021 for most purposes.

Comment

These are part of the annual adjustments necessary to the new State Pension and are broadly as expected.

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FCA sets out a number of concerns on SIPPs

The Financial Conduct Authority has published a warning about overseas advisory firms encouraging expatriates to transfer their UK pensions into self-invested personal pensions, often marketed as international SIPPs and using offshore investment bonds.

The FCA is concerned that those investing in this way may be exposed to high and/or unnecessary charges, with questionable tax benefits as well as exit penalties.  The FCA recommends that those thinking of transferring out of their DB scheme into an international SIPP contact the Pensions Advisory Service for impartial guidance before taking any further action, as leaving their DB scheme is unlikely to be in the best interests of most consumers.

The FCA has also issued a “Dear CEO” letter to SIPP operators setting out a number of concerns about how the market is operating and its expectations for SIPP operators.  International SIPPs are mentioned as are pension scams using SIPPs and the likely need for operators to hold sufficient capital to be able to meet potential liabilities arising from complaints.

Comment

Parts of the SIPP market are increasingly becoming a cause for concern in relation to DB transfers.  It will be interesting to see what the promised “red flags” have to say when a DB scheme member proposes transferring to a SIPP.

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