Pensions Bulletin 2022/13
Our viewpoint
7 April 2022
- GMP equalisation – new HMRC guidance starts to address some key tax issues
- Contribution Notice issued in failed management buyout case
- Former owner of Norton Motorcycles sentenced for pension self-investment
- British Steel – FCA proposes redress scheme
- PPF sets out its plans for the next three years
- FRC gets ready to be replaced
GMP equalisation – new HMRC guidance starts to address some key tax issues
On 6 April HMRC issued its third tranche of guidance on how pensions tax interacts with exercises to remove inequalities arising from GMPs (GMP equalisation). This latest guidance covers two new areas: solutions following unequalised transfer out, and GMP equalisation using GMP conversion. The latter has been much awaited and was trailed in Parliament on 25 March (see Pensions Bulletin 2022/12).
Comment
This important new guidance will allow DB schemes to take further steps in their equalisation journey, subject to receiving and considering advice. For details of the guidance and what it means for scheme sponsors, trustees and scheme administrators, please see our News Alert.
Contribution Notice issued in failed management buyout case
The Pensions Regulator has used its powers to issue a £2m Contribution Notice to SMT Scharf AG, a German mining equipment manufacturer, relating to the management buyout of the UK based Dosco Group. The Regulator had also targeted the Chief Executive of the Dosco Group, Martin Cain, for regulatory action and reached a settlement with him for around £130,000.
The regulatory intervention report sets out the circumstances of the sale of the Dosco Group for EUR 2m in May 2013. Some notable features include:
- There was a small DB pension scheme which had assets of £53m and a section 75 deficit of £38.8m at the time of the 2013 management buyout
- Scharf had acquired the Dosco Group from another company in 2010 and because this weakened the sponsor covenant an application was made to the Regulator for a clearance to the effect that no regulatory action would be taken in respect of that transaction
- In 2012 the supervisory board of Scharf decided to sell Dosco and end Scharf’s connection to and financial support of the pension scheme (the same board meeting also decided to defer the insolvency of one of the group companies so as not to trigger a section 75 debt)
- Mr Cain was incentivised by a fee of a minimum of EUR 250,000 to find a buyer
- The Dosco Group was sold in May 2013 to a shell company owned by Dosco’s UK management (including Mr Cain who received his fee) and financed by loans on onerous terms extracted from two Group companies (who were the pension scheme’s statutory employers) and a loan from Scharf
- No clearance application was made, no mitigation for the loss of parental support was offered and the pension scheme trustees were kept in the dark until the day after the sale
- After eight months the two Group companies went into administration and as a result the scheme went into PPF assessment. In December 2015 the benefits were secured with a buyout for reduced benefits
Comment
A £2m Contribution Notice seems largely symbolic compared to the huge deficit. However, it is all that the Regulator could reasonably demand, having regard to the loss caused to the scheme as a result of the transaction.
However, what is interesting to contemplate is what would have happened if this transaction had taken place after the new Regulator powers came in last October (see our News Alert). Looking at the events described in the Regulator’s report it seems highly likely that an investigation for either or both of the new criminal offences would have ensued. Moreover, it is hard to see how any reputable business executive or adviser could go along with such an overt plan to sever a pension scheme from sponsor support under the new regime. While no doubt some will test the boundaries the risks of criminal liability will surely have the desired effect of chilling such activity.
Former owner of Norton Motorcycles sentenced for pension self-investment
Following a prosecution brought by the Pensions Regulator in August 2021 (see Pensions Bulletin 2021/35), Stuart Garner, a former owner of Norton Motorcycles has been sentenced to eight months’ imprisonment, suspended for two years, after pleading guilty in February 2022 to three charges of breaching the employer-related investment pensions legislation by investing more than 5% of assets from three pension schemes for which he was sole trustee into his business, Norton Motorcycles Holdings Ltd. Mr Garner was also disqualified from acting as a company director for three years and ordered to pay the Regulator’s costs.
The prosecution followed the Pensions Ombudsman's June 2020 Determination (see Pensions Bulletin 2020/27), following complaints brought by scheme members and the Independent Trustee appointed by the Pensions Regulator in 2019. In the Determination, the Ombudsman ordered Mr Garner to repay the members' pension funds, amounting to around £10m plus interest, and make distress and inconvenience payments to the members who had complained to the Ombudsman.
Publicising the sentencing, the Pensions Regulator said that the pensions legislation relating to employer-related investments is vital to protect members’ savings, and that it will take action against those who flout them. Meanwhile the Pensions Ombudsman referenced the work that its recently-established Pensions Dishonesty Unit is undertaking, and whose principal aim is to hold wrongdoers responsible for the unlawful gains they have made and ensure they repay these monies to scheme members.
The Pensions Regulator also published the Determination Notice under which Mr Garner was replaced, in 2019, as sole trustee of the three pension schemes.
Comment
This was, of course, no ordinary technical breach of the self-investment legislation, nor were these ordinary occupational pension schemes. However, it does provide a stark warning that trustees who breach this legislation, for whatever reason, are exposing themselves to criminal prosecution.
British Steel – FCA proposes redress scheme
The Financial Conduct Authority has published proposals for a redress scheme for former members of the British Steel Pension Scheme (BSPS) who received unsuitable advice to transfer out of the BSPS and suffered financial loss as a result. The redress scheme, which is intended to deliver a lump sum payment to those adversely affected, is intended to cover those who transferred out between 26 May 2016 and 29 March 2018.
The proposals follow findings by the FCA that former members of the BSPS received significantly higher levels of unsuitable advice than other transfer cases.
The FCA estimates that under its proposed scheme some 1,400 members who transferred out will receive £71.2m in total redress payments.
If the scheme goes ahead the FCA will publish rules setting out how advisers must determine whether they gave unsuitable advice and whether they must pay compensation. Independent checks and monitoring will be put in place to ensure that firms comply with the rules and consumers can be confident in the outcome of the review.
The FCA estimates that around 40 advisory firms that provided pension transfers to BSPS members will become insolvent as a result of the implementation of the redress scheme. The FCA goes on to estimate that this will result in about £20m of redress liabilities being passed to the Financial Services Compensation Scheme (FSCS).
Consultation closes on 30 June 2022, but the FCA has requested comments on its high-level proposals for redress calculations by 12 May 2022. This earlier date is because the FCA is also reviewing its existing guidance for firms on how to calculate redress for unsuitable DB transfers and in July 2022, when it consults on revisions to this guidance, the FCA will also consult on the detailed rules for how firms should calculate redress under the proposed BSPS redress scheme.
If confirmed, the redress scheme is expected to be in place by early 2023, with consumers starting to receive compensation from late 2023.
Comment
This redress scheme has been expected given the unique circumstances of the case. It is highly likely to go ahead and, because under it, advisers are required to revisit their files, it will pay out significantly more than had those potentially adversely affected been required to lodge a complaint.
The gaping hole in this official response to the BSPS scandal is that where the FSCS picks up the tab compensation is capped at £85,000 which may be well short of the loss incurred by the member given the large transfer values often involved.
There are 2,100 members who were advised by firms that are either insolvent or no longer exist compared to 4,000 in scope of the redress scheme as well as the clients of the 40 firms that may become insolvent as a consequence of the redress scheme. Without reform of the FSCS itself, many of the members who have been so ill-served by the regulators will remain badly disadvantaged.
PPF sets out its plans for the next three years
Having achieved the goals set out in its last strategic plan in 2019-22 (see Pensions Bulletin 2019/14), the Pension Protection Fund promises another ambitious programme for the next three years in its 2022-25 strategic plan with some short-term goals set out in its 2022-23 business plan.
The PPF splits its three-year strategy into member services, asset and liability management, ESG areas, and technology. Looking across both documents, the PPF promises in particular to:
- Increase its self-service and automation online functionality, with at least 75% of member services transactions being completed online
- Complete implementation of “Hampshire” uplifts (PPF compensation should be at least 50% of the value of scheme benefits) for all eligible members and the removal of the cap for impacted PPF members in 2023, with 80% of these completed by December 2022
- Simplify the calculation of the PPF levy in the future, ensure value for money, and identify necessary legislative changes which will enable the PPF to have the flexibility to set levy intake according to the level of risks it faces
In terms of future publications, the PPF promises to:
- Develop and publish a complete sustainability strategy including the PPF’s response to climate change, responsible investment and D&I
- Undertake a stakeholder engagement programme to support the PPF’s funding strategy review in 2022, and finalise and publish the results
- Consult on the 2023/24 levy by October 2022 and publish final rules by the end of January 2023
Comment
In relation to possible legislative changes the Pensions Act 2004 currently restricts overall estimated levy intake so that it cannot increase from one year to the next by more than 25%. This means that, for example, the PPF cannot seek to collect more than approximately £490m in 2023/24 given its low expected levy intake of £390m in 2022/23 (after a dramatic drop from the expected £520m in 2021/22). The 25% uplift limitation also means that the PPF could be reluctant to make any further levy cuts, for fear it would be unable to readily recoup any future losses. As the PPF looks towards self-sufficiency in 2030, the removal of this piece of legislation will enable the PPF to collect levies more flexibly reflecting the level of risks it expects to face, the assets it already has in hand and the investment returns it achieves.
FRC gets ready to be replaced
The Financial Reporting Council has published its 3-year plan as it continues to wait for the Government to legislate for the establishment of its successor body – the Audit, Reporting and Governance Authority (ARGA). The Government has yet to respond to its March 2021 White Paper which covered its plans for the creation of ARGA (see Pensions Bulletin 2021/13), but it is widely expected to take the next steps soon, with the possibility of a Bill being announced in the Queen’s Speech, scheduled to take place on 10 May.
The FRC’s 3-year plan spanning 1 April 2022 to 31 March 2025 assumes that it will be replaced by ARGA at some point during this period. It sets out a detailed breakdown of its intended expenditure for 2022/23, alongside a summary of its expected trajectory on overall costs and headcount for the following two years.