Pensions Bulletin 2022/29
Our viewpoint
28 July 2022
- DWP consults on funding and investment regulations
- Government consults on some of next year’s Finance Bill
- Is part of the ‘stronger nudge’ policy not fit for purpose?
- MPs criticise the FCA’s role in the British Steel scandal
- Pensions Ombudsman issues age discrimination factsheet for public sector schemes
DWP consults on funding and investment regulations
On 26 July 2022 the DWP launched its long-awaited consultation on draft regulations that will provide the necessary legislative backing to enable the Pensions Regulator to deliver its new approach to DB scheme funding oversight through an updated Code of Practice on which it set out its first thoughts over two years ago.
The DWP’s consultation package comprises the consultation document, draft regulations and an impact assessment. Consultation closes on 17 October 2022. It is not clear when the new regime will be in force.
Comment
This consultation is somewhat overdue, but welcome nevertheless as it enables the next step to be taken in what has been a much lengthier journey than had been envisaged. For further details of this important development please see our News Alert.
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, for each measure, comprises 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 2022.
When it comes to pensions tax there are three items of interest.
1 Tax relief for contributions made by low earners
At the Autumn Budget 2021 (see Pensions Bulletin 2021/44), the Government committed, from in respect of tax years 2024/25 onwards, to paying a top-up to low earners making personal contributions to registered pension schemes using a net pay arrangement. This should end the tax disadvantage for such individuals compared to low earners contributing to schemes that operate the relief at source method.
The Bill clause (accompanied by a statement from the Financial Secretary) provides for HMRC to make such top-up payments directly to eligible individuals. HMRC will determine eligibility based on whether individuals have contributed to a net pay pension scheme in a tax year and if their employment income (less the contribution) is below the personal allowance in the same tax year. Those eligible will be contacted and provided with details of how much they are entitled to, which will be calculated by HMRC systems. The policy document then explains that “individuals will [then] need to confirm or provide their payment details via a digital service for the top up payment to be made”.
For the purposes of income tax, the amount paid will be chargeable and the relevant rate is the basic rate of tax based on the individual’s residency.
Comment
Any news that over a million low paid people will be getting some money in their pockets (albeit a currently expected average receipt, says HMRC, of £53 a year) is welcome. However, it takes an approach that is known to be clunky, and that appears to be why the draft law requires HMRC to get the right payments to the right people “as far as reasonably practicable”. The impact assessment amounts (which suggests costs for an average pay-out much less than £50 per person) imply that HMRC is not expecting all eligible members to apply for the amount due – perhaps inertia, perhaps worry about interaction with means tested benefits? We (and others) will be checking the legislation carefully in case there are any unintended consequences. It is yet another difficult patch to the current complex pension tax relief system.
2 Collective money purchase benefits being paid in wind up
The Pension Schemes Act 2021 introduced legislation to allow collective money purchase pension schemes to operate in the UK, with the Finance Act 2021 introducing the necessary tax legislation so that such schemes can operate as registered pension schemes and have payments made from them treated as authorised for tax purposes. However, it became clear that there were instances where this may not be achieved.
The Bill clause provides that payments of periodic income will be considered authorised pension payments when made from a collective money purchase pension scheme that is in the process of being wound up. It also clarifies that where funds used to pay that pension are transferred, they can provide drawdown pension.
Comment
This restates the original policy intention which appears to have been subverted by regulations made under the Pension Schemes Act 2021.
3 Reclaiming pension assets from the Dormant Assets Scheme
The Dormant Assets Act 2022 (see Pensions Bulletin 2022/08) expanded the UK’s Dormant Assets Scheme and for the first time certain pension assets that are dormant can be transferred to the authorised reclaim fund where a proportion can be used for good causes. However, in common with other transferred assets, their original owners can reclaim money owed to them in full at any time.
The Bill clause provides that in such an eventuality these payments are treated for income tax purposes as if they were from the pension asset that was initially transferred. There is also a provision which will ensure that where an asset has been transferred to an authorised reclaim fund and its owner was alive at the time of transfer but subsequently dies before the asset has been reclaimed, the owner will be treated for inheritance tax purposes as still owning the original asset.
Comment
These are straightforward provisions, necessary to ensure that the act of reclaiming is tax neutral.
Other matters
These provisions are also highlighted in HMRC’s latest pension schemes newsletter.
The newsletter goes on to mention that not all administrators have submitted their annual relief at source return for 2021/22, reprises some messages about migrating to the Managing Pension Schemes service, including that Accounting for Tax returns must be done on this service, and publishes the latest pension flexibility statistics and QROPS transfer statistics.
Is part of the ‘stronger nudge’ policy not fit for purpose?
A number of large pension schemes have written to Stephen Timms MP, Chair of Parliament’s Work and Pensions Committee, raising concerns that the “stronger nudge” policy, implemented by regulations with effect from 1 June 2022, is likely to result in member confusion and potentially members making decisions that are not in their interest when it comes to Pension Wise giving guidance in relation to DC pots that are associated with otherwise DB schemes. The stronger nudge requirement applies to such situations (as we reported in Pensions Bulletin 2022/16) as well as in relation to pure DC schemes.
The schemes are concerned because Pension Wise has not been set up to provide guidance on AVC options within a DB arrangement. For many such members, it may be in their interest to use their DC AVCs as their first port of call for the tax-free lump sum that could otherwise only be taken through commuting part of their valuable DB pension, but Pension Wise may not be able to make this clear to affected members.
The pension schemes say that they have engaged with the DWP on this issue, who will give consideration to exempting money purchase AVCs and small DC pots in hybrid schemes from the regulations following the collection of data on member reaction.
The Work and Pensions Committee has been approached by this group of pension schemes given its interest in this policy, with a request to keep this issue under review and to ensure that the impact on DB and hybrid schemes forms part of the scrutiny.
Comment
It is early days for the “stronger nudge” requirement, but these pension schemes are right to raise concerns, as it seems that the policy was very much developed with just pure DC schemes in mind, but the regulations went further and brought into scope all DC benefits, including those associated with DB schemes. Unless this issue is addressed soon one can see ‘misguidance’ claims coming down the track, as a result of those who take tax-free cash doing so inefficiently from their DB pension and paying more income tax on their DC pot than they need to.
MPs criticise the FCA’s role in the British Steel scandal
In a short report published by Parliament’s Public Accounts Committee there is strong criticism of the Financial Conduct Authority in relation to the pensions transfer advice market as it operated for members of the British Steel Pension Scheme who had to consider their options, including transferring out of the Scheme, under time pressure. The FCA, which regulates this market, is said to have been “consistently behind the curve” in responding to unsuitable pension transfer advice, provided “inadequate oversight” of the firms involved and its response involved a “light touch regulatory approach failing to take swift action and adequately protect consumers”. The remedy that the FCA settled on for victims has “proved ineffective” and the redress scheme (see Pensions Bulletin 2022/13) may end up costing much more than has been estimated.
Looking at the wider issues to be drawn from the case, the Committee says that these include the FCA’s authorisation and oversight of small firms, its access to data and intelligence to identify problems, and its use of enforcement powers to respond to them quickly. The Committee also says that the case highlights significant risks including the overall function of the pension advice market and the capacity of redress organisations to manage large scale consumer detriment.
The report contains six recommendations including that the FCA should be more proactive and consumer-focussed in its engagement with stakeholders, have better mechanisms in place for responding to consumer harms and collect more evidence on a regular basis to pick up on issues that are being raised, especially from emerging risks in financial markets. There is also a call for a review of the FCA’s handling of the wider DB pension market “as there could be thousands more cases of mis-selling which may be eligible for financial redress, given the significant amount of unsuitable advice seen across the sector”.
Comment
Rather than rehearse the well-known regulatory failures which led to such bad outcomes for many BSPS members and their families it would be better if the Committee could help the FCA to improve its performance so that there can be no repetition. Hopefully, this is happening.
Pensions Ombudsman issues age discrimination factsheet for public sector schemes
The Pensions Ombudsman has published a factsheet setting out its approach to complaints it receives in relation to age discrimination in public sector pension schemes on which the Government is intending to deliver a remedy by October 2023, following the McCloud and Sargeant judgments.
The factsheet sets out a brief background of the issues, the Ombudsman’s view on what affected members and schemes can do now and the Ombudsman’s present approach to complaints and disputes concerning these issues. On this last issue, the general starting point is that the Ombudsman will not investigate such complaints, but it will carefully look at the facts of each case before making any decision. Examples of where it may investigate include allegations of maladministration, and where a member is suffering severe financial hardship or other serious injustice and the scheme is not putting in place any interim arrangements to address the injustice within a reasonable period.
Comment
It is proving difficult to deliver the remedy and the elapsed time is no doubt resulting in some cases reaching the Ombudsman, but, as the factsheet states, many members should be able to wait until the remedy is rolled out. However, for those whose pensions or death benefits are due, or have already come into payment there may be an immediate detriment that schemes will need to consider how to tackle.