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Pensions Bulletin 2022/26

Our viewpoint

Official statement clarifying the anti-scam regulations

The Government’s regulations (see our News Alert) intended to reduce pension scams have been in force for over six months.  There have been concerns about how some aspects of the regulations are operating to remove the right to transfer in certain bona fide transfer cases, prompting the Pensions Regulator and the DWP to issue a joint statement on the transfer regulations.  The statement notes concerns about applying the regulations where overseas investments or small-scale incentives feature in the transfer, and introduces changes to the Regulator’s guidance to address these.  The key change to the guidance is the inclusion of this statement:

“The regulations require trustees to carry out due diligence on statutory transfers and to refuse a statutory transfer or refer the member to guidance if the due diligence shows certain risk indicators.  Your scheme rules may still allow you to make non-statutory transfers even when these risk indicators are present.  You should consider the checks in this guidance when assessing whether to grant a non-statutory transfer, but the regulations do not prevent you from making a non-statutory transfer payment where you consider that the transfer is in the member’s interests and does not pose a risk.  You should not use non-statutory transfers to avoid carrying out due diligence”.

This statement is deemed to be necessary because the regulations specify that any “incentive” is a red flag meaning that the member loses their statutory right to a transfer.  The joint statement confirms that a transfer could still proceed on a non-statutory basis despite being red-flagged.

Comment

This appears to be an unsatisfactory workaround to defective legislation.  It would be better if modest marketing incentives were not a red flag and allowed trustees to continue down the statutory transfer route.

Pointing trustees to the non-statutory option, which may not always be available and may present its own issues, hardly helps.  Moreover, it is possible that the actual fraudsters will jump on this statement and encourage members to pressure trustees and administrators into using the non-statutory route where something genuinely crooked has been red-flagged.

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HMRC’s Pension schemes newsletter 140

In HMRC’s latest pension schemes newsletter published on 30 June 2022, the key topic is at the top – the tax treatment of interest paid alongside arrears when a pension has been underpaid.  We cover this in the article below.

The other topics covered are little more than a reprise of messages carried in earlier newsletters in relation to the managing pension schemes service and accounting for tax returns and an article which highlights the new guide to reporting pension scams (see Pensions Bulletin 2022/24).  There is also a clarification of the reporting requirements in relation to Scheme Pays consequential to the laying of regulations in March (see Pensions Bulletin 2022/12).

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Pension arrears – Schemes should usually pay any interest element with no tax deduction

In Pension Schemes Newsletter 140, HMRC has provided useful clarification on the tax treatment of interest paid alongside arrears when a pension has been underpaid.  This confirms the recent statement published by the Association of Consulting Actuaries and others (see Pensions Bulletin 2022/14) about interest on “GMP equalisation” arrears, and extends it to the general case.

In the newsletter HMRC confirms the following:

  • Interest payment on pensions arrears qualifies as a “scheme administration member payment” under the Finance Act 2004 (and so is an authorised payment under that Act) – and as such is chargeable to income tax in the tax year in which the interest payment is made – all provided that the interest is no more than an arms-length commercial rate.  Where the interest payment is in connection with arrears in a GMP equalisation exercise, this would encompass interest provided at 1% above base rate (either on a simple or compound basis), or at an interest rate specified in the scheme rules
  • Whether the entity paying interest is required to withhold any income tax (and then only ever at basic rate) depends on the status of the entity, and whether the interest is ‘yearly’ or ‘short’ interest.  HMRC says that in the context of GMP equalisation pension arrears (and many other cases paid by or for scheme trustees), the interest is likely to be ‘yearly’.  In such a case the paying entity is typically not required to make any tax deduction (the exception is if the recipient’s usual place of abode is outside the UK)
  • From the recipient’s perspective the interest received qualifies as “savings income” – and most people can earn some interest from their savings without incurring tax. So in many cases no income tax will actually be due.  Where tax is due the recipient should contact HMRC eg by including the interest in a self-assessment tax return

HMRC also reminds the contrasting position (already set out in past HMRC guidance) with the pension arrears themselves – these are taxed on an accruals basis and the payer must deduct income tax under PAYE.

Comment

As we have noted before, the clarifications are very welcome given unclear existing guidance and the number of payments being made.  This will be a matter for each pension scheme to take tax or legal advice on, but we assume the conclusion will be that schemes should not deduct tax at source on the interest payment relating to GMP equalisation (or other) arrears in most instances (by contrast to the arrears themselves).

Instead, members should be advised that they are responsible for accounting to HMRC for any tax due on this (and in many cases there will be no tax to pay because the interest is less than the member’s available personal savings allowance)

HMRC’s guidance comes with useful links to technical sources for those who wish to follow through the logic.

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TPR’s 2021 DC survey is interesting snapshot of scheme awareness of topical issues

The Pensions Regulator has announced the results of its latest survey of DC trust-based schemes, which was carried out in October to December 2021.

Apart from the usual statistics of key governance requirements there are some interesting findings on some topical issues.  These include:

  • Overall, 94% of schemes with 100 members or more had heard of pensions dashboards and 83% were aware of changes to pensions law about them. Awareness about dashboards was, unsurprisingly, highest for Master Trusts and decreased as scheme size decreased.  With the caveat that the survey was carried out between October and December 2021, and so awareness has probably grown since then, the results show that many schemes have not yet started work on dashboard projects yet
  • Overall, only 17% of surveyed schemes had allocated time or resources to assessing any financial risks and opportunities associated with climate change. Although every Master Trust has done so, as have 92% of large schemes and 55% of medium schemes, the overall figure of 17% is heavily skewed by the lack of action about this by small and micro schemes
  • Of those respondents aware of the forthcoming Single Code of Practice, 62% thought it would make it easier to understand the Regulator’s expectations, but only 29% thought it would improve how their scheme was governed, and 60% thought it would increase the work required. All Master Trusts and 94% of large schemes were aware of the forthcoming Code but overall awareness dropped to 32% when including smaller schemes
  • There is an interesting note in the survey about the Regulator’s supervision of Master Trusts noting that there had been "reduced regular TPR engagement with Master Trusts in 2021 due to resource constraints and a significant increase in the amount of work required to respond to triggering events"
  • Overall, just 14% of schemes recorded any form of trustee diversity, although for Master Trusts this was more than double at 31%. The main reason for not gathering trustee diversity data was that there was no perceived need to collect the data (43%) followed by schemes not thinking of doing so (30%).  The most common uses for the diversity data collected were for monitoring purposes (32%), trustee recruitment (29%) and to develop training for trustees (24%).  Apparently only 2% of schemes were using the diversity data collected for the purpose of improving diversity and representation
  • Awareness of the new value for money requirements for <£100m schemes stood at 24% for micro schemes and 46% for small schemes – as well as both Master Trusts with <£100m assets being aware of this. Interestingly, of the schemes who were aware of it, overall, 51% had carried out a self-assessment of their governance and administration but only 17% had compared costs and charges and only 10% had compared net investment returns with three other schemes

In the covering press release the Regulator has bluntly warned trustees of smaller schemes (<100 members) to “ensure they are ready to meet new regulatory requirements after a survey suggested many are lagging behind”.

Comment

Since the data was collected for this survey more than six months ago it is likely that awareness of various issues has increased in the meantime but this snapshot of awareness and perceptions is still interesting to read.

And it is no surprise that the Regulator has used the results of the survey to again highlight its continued serious concern that too many savers are being left in small, potentially poorly governed schemes which may not offer the same value as larger schemes.

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Roundtables to discuss actuarial standards

The Financial Reporting Council has invited interested stakeholders to a series of roundtables to discuss its current work on the Technical Actuarial Standards.  This follows on from the FRC’s launch of the second phase of its post-implementation review of its suite of TASs (see Pensions Bulletin 2022/19) and of the consultation on its proposed revamp of TAS 100 (see Pensions Bulletin 2022/24).

The FRC will be holding a roundtable for each of the TASs, where subject matter experts will be available to outline the current plans for future work, and will welcome any questions or comments.  The generic TAS 100 consultation takes place on Wednesday 27 July with the consultation on the pensions specific TAS, TAS 300, on Wednesday 20th July.

Comment

The TAS 100 proposals in particular appear to represent a significant change in approach by the FRC and we encourage all those affected, including those receiving advice and in-house actuaries, to engage with this consultation.

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Top ESG tips from covenant advisers

As environmental, social and governance (ESG) factors increasingly take centre stage some timely guidance has been published by the Employer Covenant Practitioners Association, the representative body for covenant advisers, together with Accounting for Sustainability (a charity established by the Prince of Wales).  This top tips document aims to provide trustees of DB schemes with peer-tested, practical guidance on how to consider the impact of ESG factors as well as the potential opportunities when undertaking employer covenant assessments.

Noting that ESG-related risks may impact the sponsor’s financial capacity to support the scheme and the strength of the covenant over time, the guide sets out the following six top tips for embedding ESG considerations into the employer covenant process and ways to achieve them:

  1. Define: Identify the scheme’s relevant time horizon
  2. Scope: Broaden your understanding of sponsor-related ESG risks and opportunities
  3. Research: Gather relevant data and information, and engage with your sponsor and peers
  4. Assess: Leverage expert advice to assess potential impact
  5. Engage: Undertake evidence-based discussions with the sponsor
  6. Review: Measure, monitor and reassess accordingly

Comment

This is a very useful document for trustees and others who wish to understand the impact that ESG factors may have on sponsor covenant.

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Fourth climate change metric regulations finalised

The regulations that provide for a portfolio alignment metric to be added to the climate-related disclosure requirements for larger schemes (see Pensions Bulletin 2022/24) have now been made and come into force on 1 October 2022.  No changes were made to the draft regulations issued last month.

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Public sector pensions age discrimination resolution may not be the end after all

The Fire Brigades Union has been granted permission for a judicial review of the Government’s method to resolve the unlawful age discrimination in the 2015 reforms to the judicial and firefighters’ pension schemes (see Pensions Bulletin 2021/06).

The FBU’s position is that the way the Government’s remedy interacts with the public sector schemes’ cost control mechanism effectively means that the cost of remedying the age discrimination is borne by scheme members.  By failing to use financial improvements in the scheme to improve member benefits (as would be required under the public sector schemes’ cost control mechanism), the FBU argues that younger scheme members are being discriminated against.  The Treasury and Secretary of State dispute this claim.

Comment

The cost control mechanism has thrown up some interesting features over time, and the impact of the Government’s remedy for age discrimination appears to be another one.  There may yet be another twist in the story from the December 2018 Court of Appeal ruling in McCloud and Sargeant.

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Working Group publishes Dashboard Accuracy Data Guidance

The Pensions Administration Standards Association’s (PASA) Data Working Group published guidance on dashboards data accuracy this week.

The short and helpful guidance notes the importance of ongoing data validation, the requirement of UK GDPR that data should be accurate and, where necessary, kept up to date, and provides example data sources that can help validate member information.

Comment

For a document of only a couple of sides it outlines the various data sources available to confirm the key member information well.  With dashboard launch dates creeping closer pension schemes will need to be taking these steps to make sure that key matching data is present and accurate.

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This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.