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Pensions Bulletin 2023/02

Our viewpoint

Pensions Regulator provides some pointers for DC scheme trustees in the current economic climate

The Pensions Regulator has launched a guidance statement for trustees of DC schemes and their advisers, which sets out the main points on how schemes should communicate with and support savers through a period in which the value of some DC pots have fallen.  The guidance also sets out how trustees can strengthen the governance and oversight of DC schemes and ensure their investment strategies support stronger saver outcomes.

The guidance acknowledges that many of its key messages have been taken from pre-existing material.

The guidance first explains how DC savers may have been impacted by current market conditions, before going on to set out a long list of expectations under three headings:

  • Review governance and investment arrangements
  • Support pension savers
  • Communicate with pension savers

The guidance concludes with a bulleted checklist ranging over the three headings, for DC trustees to develop an action plan specific to their situation.

Comment

The guidance has been published with support from a number of parties, but the guidance itself is not saying anything particularly new.  This is not a surprise.  Despite the economic backdrop, all that the Regulator can realistically do is remind DC trustees of their legal obligations and set out what ‘good’ looks like when it comes to effective trusteeship.  The danger with the latter is that the Regulator overeggs the activity that can be undertaken, when in fact there are some key aspects, typically around investment, on which DC trustees ought to focus.

What 2022’s financial markets have exposed is that the investment strategy for a number of default funds is not consistent with some DC savers’ retirement income intentions, resulting in avoidable loss for those close to retirement, as their retirement savings were ‘de-risked’ into bonds that proved to be wholly unsuitable.

In a number of places, the guidance talks about ‘supporting’ members, but this can be little more than providing timely communications.  What trustees cannot do is mitigate member losses.  It is inevitable that every now and then there will be a challenging period in the financial markets, and all that DC trustees can do is prepare themselves and their members for such an eventuality and hope that over time any losses will be recovered.

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PLSA updates its retirement living standards income levels

The Pensions and Lifetime Savings Association has published its latest guidelines to the income people will need in order to lead a certain lifestyle in retirement, and in this edition, what really comes through is the impact of heightened inflation on expenditure needs and desires since the 2021 update (see Pensions Bulletin 2021/42).

As before, there are three levels as follows:

  • The minimum living standard (“covers all your needs, with some left over for fun”) now requires an income of £12,800 pa for a single person and £19,900 pa for a couple; these figures have increased from £10,900 pa and £16,700 pa in 2021 respectively
  • The moderate living standard (“more financial security and flexibility”) now requires an income of £23,300 pa for a single person and £34,000 pa for a couple; these figures have increased from £20,800 and £30,600 pa in 2021 respectively
  • The comfortable living standard (“more financial freedom and some luxuries”) now requires an income of £37,300 pa for a single person and £54,500 pa for a couple; these figures have increased from £33,600 pa and £49,700 pa in 2021 respectively

The figures are for outside London.  Higher amounts are required if living in London, as set out in the full report, other than for the minimum level, the figures for which are promised for the end of February 2023.

The required percentage increase is significantly higher for those on the minimum living standard than those on the comfortable living standard – and all are higher than the increase in the Consumer Prices Index (of 9%) over the period in question (the year to April 2022).

The PLSA says that for the moderate level a couple sharing costs with each in receipt of the full new state pension would need to accumulate a retirement pot of £121,000 each, whilst for the comfortable level, a retirement pot of £328,000 each would be required.

The full report can be found on the Retirement Living Standards website.  It is also apparent that unlike 2021, where some adjustments to the expenditure basket were undertaken, the 2022 levels have been worked out on an unchanged basket, through applying relevant sub-inflation indices to each element of that basket in the main.  The exception was domestic fuel (and water rates) where a repricing was undertaken at a more fundamental level.

Comment

These latest figures are indicative of the cost-of-living challenge being experienced by retirees, demonstrating that price inflation can be particularly cruel for this segment of the population, as they are unlikely to be able to increase their income commensurately.

As these latest figures are based on inflation as it stood in April 2022, it does not take account of inflation since then (which on a CPI measure adds a further 6% from April to December 2022 alone), or the significant rise in fuel bills in October 2022.  The 2023 results, which are to operate on an updated basked of expenditure needs and desires, is likely to be significantly higher than these 2022 results and once more will reveal the challenge, not only for retirees, but for pension savers who wish to achieve a moderate, let alone a comfortable living standard in retirement.

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Its official – pensions tax relief exceeds £50bn

HMRC has updated its collection of tax relief statistics, divided into non-structural and structural, with the former being tax reliefs “designed to help or encourage particular types of individuals, activities or products in order to achieve economic or social objectives”.  These non-structural reliefs include two of the key forms of tax relief relating to pension savings, both of which are intended to encourage saving for retirement.

  • The first relates to deferral of income tax – that is, income tax not being deducted from contributions paid by individuals, employer contributions/ employer-funded benefit accrual not being regarded as a benefit in kind on which income tax would also be paid, investment returns being largely free of taxation, but income tax being paid on benefits (other than the tax-free lump sum). The projected costs of these taken together is £27.0 billion in 2022/23 – up from £19.8 billion five years earlier
  • The second is employer contributions/ employer-funded benefit accrual not being regarded as earnings/ benefit in kind for the purpose of national insurance contributions, reducing both employer and employee NICs. The projected cost of this relief is £27.8 billion in 2022/23 – up from £16.7 billion five years earlier

As usual, the release gives HMRC’s first provisional estimate for the most recent closed tax year 2021/22, and a projection for the current open tax year 2022/23.

In both cases HMRC suggests that the main drivers for the increase (from 2017/18 to 2020/21) “could be automatic enrolment and wage growth”.  Taken together, the relief delivered in supporting retirement provision is estimated to have exceeded £50 billion, in both provisional estimates for 2021/22 and projections for 2022/23.

Comment

Readers of these pensions tax relief costings should always remember that their reliability is heavily caveated (inevitably, being a challenge, as a combination of some very different elements (DC, DB, private and public sector DB), available statistics and chosen methodologies).  The current release follows through a significant rewrite (and jump up) of past numbers after HMRC announced and implemented a material “improvement in methodology and data sources” in September 2022.  And the statistics “do not represent the gain to the exchequer should a relief be abolished” so should be used with care.

Nevertheless, an increasing official cost of tax relief on pensions would be a natural and positive consequence of – among other things – successive Governments encouraging more people to save for their retirement and seeking to ensure that past promises are adequately funded.  We hope that these figures, being published in the run up to the Spring Budget, will not be used to justify cuts.

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HMRC to legislate to tackle unscrupulous tax repayment agents

HMRC is to introduce new legislation to change the way that repayment agents are paid for their services in order to make it easier for taxpayers to stay in control of their repayments when they ask such agents to act for them.  This decision follows on from a consultation last summer which itself arose from concerns about unscrupulous tactics used by some repayment agents.

The response to that consultation has also been published confirming the need to improve agent transparency and standards, with the overall aim of better protection for taxpayers.  HMRC has also published an updated standard for agents, which includes greater transparency arrangements, and a new HMRC registration process for repayment agents.

This standard sets out HMRC’s expectations of tax agents and tax advisers in their dealings with HMRC and provides an overview of the way HMRC will tackle the minority of agents who do not meet the standard.

The plan for legislation announced by HMRC tackles a known issue in a segment of the tax advice market.  There is no news yet on November 2021’s promise to re-open consultation on ways to improve the wider regulatory framework around standards in the tax advice market, with the possibility of a definition in law of what constitutes “tax advice” for such a framework (see Pensions Bulletin 2021/50).

Comment

In the standard, HMRC notes that “tax agents are agents and advisers .. who are acting professionally in relation to the tax affairs of others” and can include “legal and other professionals providing tax advice or accountancy services alongside other work” and so arguably includes actuaries and other pension professionals who comment on pensions tax matters as part of giving rounded advice to their clients.  The standard says that it expects professional body members to follow their body’s code of ethics (for actuaries this will be the Actuaries’ Code) and notes that if they do so, the standard should not place any further requirements on them.

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UK Government vetoes Scottish Gender Recognition Bill

As has been widely reported, on 17 January 2022 the UK Government announced that it will use a power under the Scotland Act 1998 to withhold Royal Assent for the Gender Recognition Reform (Scotland) Bill that had recently been passed by the Scottish Parliament following its introduction last March (see Pensions Bulletin 2022/09).  The UK Government published a policy statement of the reasons it took this decision and these show, amongst other things, that one concern was the creation of a dual gender identity which would have consequences for the administration of tax, benefits and State pensions which are matters reserved to the UK Government.

It appears that an individual who changes their gender identity under the Scottish Bill would only do so for the purposes of Scots Law.  This means that they would continue to be regarded as being of their previous gender for reserved matters.  The policy statement also says that such a dual system would (amongst other things) have an adverse effect on service providers, employers etc for whom it may be unclear what status a Scottish or UK-wide gender recognition certificate has in different contexts.

Comment

It seems that these and many other arguments will now play out in Court.  Only should this Bill subsequently proceed to Royal Assent will trustees and pension providers have to consider its ramifications for the administration of their schemes.

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PASA publishes dashboard guidance for master trusts

In the latest addition to its suite of pensions dashboard guidance, the Pensions Administration Standards Association has published guidance aimed at master trusts, the pure DC variety of which will be amongst the first of occupational pension schemes required to connect to the MaPS digital architecture, with the window for the largest opening on 1 April 2023.

The guidance considers three areas that master trusts will need to consider as part of their preparation to connect – data, technical considerations and the ecosystem, and legal requirements and compliance – and looks at these topics through the lens of a master trust.  For example, the accuracy of the matching routine might be particularly problematic for the largest of master trusts due to their sheer size, a high proportion of deferred savers and the prevalence of legacy data, “much of which won’t have been checked for accuracy for a considerable time”.  Another issue that the largest of master trusts are likely to face is the need to automate the upload of data.  The guidance also points to a likely adverse impact on master trusts operational resources and IT infrastructure as a result of their also undertaking their pensions dashboard duties.

Comment

Although billed as being for master trusts, these schemes are likely to be the most prepared and therefore have little use for this guidance.   The guidance also suffers, from a presentation point of view, as despite being dated January 2023 it does not take account of any regulatory developments since July 2022, of which there have been many, including the settling of the DWP’s regulations, much of the PDP’s standards and guidance and the Pensions Regulator publishing for consultation its compliance and enforcement policy.  Nevertheless, the guidance contains some useful insights into the distinct issues that master trusts are likely facing right now as the largest prepare to connect and deal with all the inevitable practical difficulties that will arise.

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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.