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Pensions Bulletin 2021/30

Our viewpoint

Draft regulations pave the way for new CDC era

The Department for Work and Pensions has launched a consultation on a number of draft regulations that, combined with the provisions of the Pension Schemes Act 2021 (see Pensions Bulletin 2021/07), will enable employers to set up the UK’s first Collective Defined Contribution (CDC) schemes.

As a reminder, a CDC scheme (known in the legislation as Collective Money Purchase or CMP schemes) is part way between a Defined Benefit and a Defined Contribution scheme.  Key features include:

  • Like DC schemes, the contributions are fixed for the employer and employee, so no deficits or other unexpected costs should emerge over time; but
  • For members the benefit is presented much like a DB scheme, with an amount of pension accrued each year that will be payable on retirement. A key characteristic is that benefits are not guaranteed, with future expected pension increases updated each year to reflect experience (and keeping the scheme’s assets and liabilities in balance)

It is widely thought that the first UK CDC scheme will be put in place by Royal Mail, and the main set of draft regulations appear to only enable schemes with features consistent with the Royal Mail design.  They limit schemes to single rates or amounts of benefit accrual, employer and employee contributions and normal pension ages.  Should a scheme wish to provide different levels of any of these features it would have to do so in a completely separate section.  And for the time being at least, schemes can only be set up by single or connected employers.

The draft regulations fill in quite a lot of the detail regarding the operation and authorisation of CDC schemes.  Annual valuations will be performed on a “central estimate” basis, adjustments to benefits must be made to all members “without variation”, and the target level of pension increases must not be lower than the CPI.

There will also be value for money tests – one comparing at the outset and during live running, for each member, the value of expected accruing benefits against member contributions, and the other looking back over live running to see whether the value of expected accruing benefits across all active members is between one half and twice all the contributions paid.

Also included are rules on how the scheme shows it is financially sustainable and the scheme design is sound, the mechanism for reducing benefits should experience have gone badly, the systems and processes in place for governance and administration, and how the scheme can wind up.

The draft regulations are accompanied by draft amendments to the disclosure regulations (communication is a key aspect of CDC schemes, to ensure members understand the non-guaranteed nature of the benefit) and other consequential amendments.  Consultation closes on 31 August 2021.

A Code of Practice from the Pensions Regulator on a number of detailed aspects of authorisation and supervision will be consulted on in due course.

Comment

These draft regulations are very welcome, and the six-week consultation period shows that the DWP wants to get them in place quickly to allow the Royal Mail scheme to start its authorisation process.

But this is also very much a first step.  The regulations have a relatively limited scope as they don’t currently support features other CDC schemes might want to incorporate.  Companies that think CDC might be a good solution in the future may wish to engage with the DWP over the coming months to ensure the next set of regulations accommodates the scheme designs they would like to implement.

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Government consults on some of next year’s Finance Bill

HMRC and HM Treasury have jointly launched a consultation on draft legislation intended for next year’s Finance Bill.  The collection of documents comprises, for each measure, a tax information and impact note, the draft legislation itself and an explanatory note that provides a more detailed guide to the legislation.  The purpose of the consultation is to make sure that the legislation works as intended.  Consultation on the Finance Bill proposals closes on 14 September 2021.

When it comes to pensions tax there are two items of interest – increasing the normal minimum pension age (see article below) and an extension to the information and notice deadlines for mandatory Scheme Pays.  There is no news on the outcome of last July’s call for evidence on the ‘net pay anomaly’ (see Pensions Bulletin 2020/30).

Mandatory Scheme Pays extension

Mandatory Scheme Pays is the mechanism under which individuals can require their pension scheme to settle an annual allowance charge of £2,000 or more, from a previous tax year, in exchange for an actuarial reduction in their scheme benefits.  It applies only if the member’s annual allowance usage in the scheme exceeds £40,000 for the tax year.  This mechanism has specific reporting and payment deadlines that are linked to the tax year in question.

Under the proposals there is a window during which the scheme administrator can give the member information about a change to the member’s annual allowance usage in the scheme for a tax year.  Where this change activates mandatory Scheme Pays, the member will normally have three months to give notice that they wish to use this mechanism.  Where they elect for the mechanism, the scheme administrator will have certain deadlines by which to report and pay the annual allowance charge.

The reason for this proposal is to deal with individuals who have retrospective increases in pension contributions or entitlement causing new or additional annual allowance charges – an issue brought into focus by the changes needed to public sector pensions to deal with age discrimination issues following the McCloud and Sargeant rulings (see Pensions Bulletin 2021/06).  However, the proposals will apply to all individuals within scope of a retrospective annual allowance tax charge of £2,000 or more who meet the conditions to qualify to use mandatory Scheme Pays.  The measure is backdated to 6 April 2016.

Comment

The mandatory Scheme Pays extension is an inevitable consequence of the need for public sector schemes to make backdated benefit improvements for some members, but it may also be of assistance where retrospective benefit upward adjustments have to be put through in other schemes.

We do note that the proposals will only help members with a reduced annual allowance due to the taper to the extent that their revised annual allowance usage in the scheme exceeds £40,000.

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Treasury fills in the detail on the increase to Normal Minimum Pension Age

HM Treasury has responded to its consultation in February 2021 (see Pensions Bulletin 2021/07) on how it intends to increase normal minimum pension age from 55 to 57 on 6 April 2028, including the new protections against this increase it intends to put in place for some individuals.  And, as indicated then, the draft legislation and accompanying documents have now been published.

From a policy stance, little has changed as a result of the consultation – the protections against the new NMPA change will still centre around whether a scheme’s rules on 11 February 2021 conferred an unqualified right to take pension benefits below age 57.  However, there are two key new easements relating to the new protection regime, compared to the original policy proposals:

  • Protection is available not only to those in the scheme under the rule on 11 February 2021, but also to any joining the scheme by 5 April 2023
  • Individuals will now be able to retain a new protected pension age following an individual as well as a block transfer – albeit that for individual transfers the protection only applies to the transferred rights so these will need to be ringfenced in the receiving scheme

These are in addition to the already stated plan that the new protections will continue even if a member draws benefits in a staggered way.  Another (unhighlighted) change, in response to lobbying, is that the new protection will survive even if a block transfer happens more than 12 months after the individuals involved have joined the receiving scheme.

The above is qualified with a warning that the legislation is complex in itself and its interaction with other sections of the Finance Act; and there are some possibly unintentional ambiguities about transfer conditions before and after 5 April 2023 that HMRC will need to clarify.

Quite what constitutes an unqualified right in scheme rules leading to the new protection remains potentially troublesome, with the Government not willing to publish detailed guidance on the subject (in the face of the many likely permutations of wording in scheme rules) beyond two broad examples.  These confirm that references to the “NMPA” or underlying legislation do not confer an unqualified right to a protected pension age.  Other than clear cut cases (and although there may be further explanation and examples within future HMRC guidance), legal advice is likely to be necessary.

Disappointingly those already enjoying a protected pension age of less than 50 or 55 under current legislation (from the 2006 and 2010 changes to tax rules) will see no change in respect of how their protections operate as the easements are not extended to them.

Comment

It is good news for individuals that the new protection regime has some extra easements beyond those originally proposed.  This will make it easier for them to gain and keep the new protection.  The challenge for schemes will be the inevitable difficulties of interpretation with some scheme rules, and in the personal pension market the fact that only some providers will have products with this protection by accident of historic wording.

However, with no change to the rules for earlier protected ages – which means that there will be two sets of ongoing tax rules – an opportunity has seemingly been lost to extend these simplifications to these groups.  Projects such as bulk transfers will still find this area a minefield.

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PPF compensation cap confirmed as unlawful

On 19 July the Court of Appeal handed down judgment that the PPF compensation cap, which limits the compensation for members who transferred to the PPF before they reached retirement age to around £35,000 pa (depending on age), is unlawful.  This outcome upholds a substantial part of the High Court ruling in the Hughes v PPF case last June, against which both the Department of Work and Pensions and the PPF appealed last August (see Pensions Bulletin 2020/35). 

The PPF had previously estimated that the future cost of removing the cap for those who were already in the PPF would be about £200m, which was just under 1% of the PPF’s liabilities, plus a further £40m for past underpayments.  The PPF placed a reserve of £200m in its 2019/20 Annual Accounts but has not indicated how it might recoup this extra cost.

The Court of Appeal has, however, overturned two parts of the original High Court judgment.  As a result:

  • The PPF’s current method of implementation of the Hampshire case, whereby a member’s PPF compensation is uplifted to 50% of the value of the original scheme entitlement using an actuarial value test (see News Alert 2018/05), is deemed to be valid. However, the judgment makes clear that this conclusion does not mean that in principle the PPF’s calculation is immune from challenge, and in particular the actuarial assumptions used in the PPF calculation are not considered in this case
  • A survivor’s PPF compensation can continue to be 50% of the member’s compensation before death, irrespective of whether this is less than 50% of the benefits which the survivor would have received under the original scheme

The DWP has until 30 July 2021 to apply for permission to appeal to the Supreme Court.  The PPF has confirmed that it will await DWP’s decision on whether to appeal before making any changes to the current level of compensation payments.

A further twist to this saga comes with the ending, on 31 December 2020, of the transition period of the UK’s withdrawal from the European Union.  As many of the points in this case rely on the interpretation and application of case law of the European Court of Justice, the DWP also has until 30 July 2021 to submit an alternative argument that it is possible to depart from ECJ case law.  Unless this submission is made, 30 July 2021 will mark the time when the compensation cap as defined in the Pensions Act 2004 is disapplied.

Comment

The successful appeal on the Hampshire implementation method is a small victory for the PPF compared to the £200m cost that must now be found, and the extra workload added to the PPF administration team.

Schemes with significant proportions of members who would currently be subject to the cap might want to quantify the potential impact of this ruling on their future PPF levies.

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Superfunds – DWP promises to respond to its 2018 consultation

Tucked away in the DWP’s latest annual report and accounts is some news about DB scheme consolidation via Superfunds on which there has been near silence from DWP since it launched its consultation in December 2018 (see Pensions Bulletin 2018/50).

Consolidation is not just about Superfunds, but in respect of them, DWP now says that it has been working closely with representatives from the pensions and insurance industries, and with other government departments and regulators, to design a robust authorisation and supervision regime.  It now aims to set out its vision for the future regulation of Superfunds in autumn/winter 2021, in response to the 2018 consultation.

DWP is continuing to develop the future regulatory regime for Superfunds and will look to legislate as soon as parliamentary time allows.

The report also ranges across a number of other state and occupational pension topics.

Comment

It is now clear that the interim regime being operated by the Pensions Regulator will be superseded at some point by a legislatively backed authorisation and supervision regime, but this will require an Act of Parliament so is likely to be a number of years away.

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Ombudsman finds DWP at fault in communicating State Pension Age changes to 1950s born women

The Parliamentary and Health Service Ombudsman has found that the DWP failed in a number of respects when it came to communicating changes to State Pension Age for women.

According to the Ombudsman, between the passing of the Pensions Act 1995 up to 2004, the DWP’s communications met the standards expected of it.  However, in 2004, DWP commissioned research showed that only 43% of women affected by the changes knew their State Pension Age was 65, or between 60 and 65.  The report recommended that particular groups should be “appropriately targeted with accessible information”.

The DWP did not take up the recommendation until much later, and it is this delay which the Ombudsman finds as maladministration and resulted in women affected not being told individually about their increased State Pension Age for at least 28 months.

Comment

This is the first stage in a process being undertaken by the Ombudsman (see Pensions Bulletin 2020/04).  He will now have to consider whether such maladministration led to any injustice and if so what redress, if any, is appropriate.

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FCA promises to be a more innovative, assertive and adaptive regulator

The Financial Conduct Authority has published its 2021/22 business plan in which it promises to be a more innovative, assertive and adaptive regulator.

In relation to pensions-related areas the FCA is to focus in the coming year on continuing to improve standards of pension advice and to deliver a consumer campaign on scams and high-risk investments.

It also intends to focus on product design during the accumulation phase, promising to:

  • Design and launch an evidence-led review of how best to drive value for money in pensions. It will do this work jointly with the Pensions Regulator to help ensure comparability across products, using evidence and insight on what information firms should give consumers and how these disclosures can help them in making informed choices
  • Consult on changes for non-workplace pension providers to help ensure consumers are offered an appropriate default solution where they need it

There is also an interesting passage where the FCA promises to speak out when it sees the need for legislative change – with reference made to its desire for the Online Safety Bill to include online adverts.  It has already spoken out on this issue via the Chief Executive’s letter of 11 June to the Work and Pensions Select Committee.

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FCA calls a halt to its retirement income advice project

The Financial Conduct Authority has decided not to restart work on its project looking at the advice that consumers receive around retirement income for the time being.  It had launched a review in January 2020 (see Pensions Bulletin 2020/03) only to pause a few months later as the pandemic took hold.

This decision has been set out in its workstreams update where the FCA says that this will enable it to focus on other priority work, including the DB pension transfers work that was last publicised in June 2020 (see Pensions Bulletin 2020/24).

Despite pausing the project, the FCA says that it remains committed to ensuring firms give suitable advice, including retirement income advice, that leads to good consumer outcomes.  It will continue to monitor the market, and where it identifies concerns will consider whether additional work is needed.

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