Welcome to the winter edition of Pensions Points. It’s hard to believe we‘ve had three Prime Ministers and four Chancellors since the last edition, but here we are with 2023 almost upon us with more pensions points to consider.
Wishing all our readers an enjoyable Christmas holiday and a Happy New Year from everyone here at Bevan Brittan.
The McCloud remedy – tax consequences of rectifying pensions
Following the December 2018 Court of Appeal ruling that younger members of public sector pension schemes had been discriminated against by the protections given to older members, schemes have had to implement changes in order to remedy this discrimination.
As part of this remedial process, changes must also be made to the pensions tax framework. Ordinarily, pensions tax legislation provides an individual with tax relief on their pension saving in the current tax year; it does not allow for changes to pension saving in earlier tax years. A problem has arisen because the McCloud remedy creates tax anomalies due to the fact it makes retrospective changes to public sector pensions. HMRC have now published the Public Services Pension Schemes (Rectification of Unlawful Discrimination) (Tax) draft regulations in order to implement the required changes. These regulations aim to put members in the position that they would have been in had the discrimination not occurred, as far as it is possible to do so.
The regulations aim to ensure that members remain entitled to tax relief on their pension contributions made in relation to the pension provision being remedied, and make changes to how schemes calculate a member’s pension input amount. Also dealt with in the regulations are issues around annual allowance, lifetime allowance, transfers and compensation.
The consultation will close on 6 January 2023 and the legislation is due to take effect from 6 April 2023, although some provisions will have retrospective effect.
Scheme administrators will find the guidance issued alongside the regulations will help them understand the proposed amendments. Not all tax consequences are dealt with in these regulations, however. Expect to see further legislation and guidance dealing with voluntary contributions, ill-health retirement considerations, pension sharing on divorce, and the potential for opted out members to be retrospectively opted back in as part of the remedy at a later date.
FCA consults on “greenwashing”
In recent years, there has been substantial growth in the number of investment products with a “green” or “sustainable” label. It is reasonable for investors to expect these products to contribute to positive environmental or social outcomes. The Financial Conduct Authority (FCA) has growing concerns, however, that “firms may be making exaggerated, misleading or unsubstantiated sustainability-related claims about their products; claims that don’t stand up to closer scrutiny (so-called ‘greenwashing’)”. The worry is that this is eroding trust and confidence in the market for sustainable investment products.
In an effort to protect consumers and improve trust in the green investment market, the FCA launched its much anticipated consultation paper on this issue in October. In it are a proposed set of rules which will hopefully improve customer confidence.
The FCA is proposing to:
- Require labels, based on objective criteria, be given to sustainable investment products
- Restrict the use of sustainability-related terms – such as ‘ESG’, ‘green’ or ‘sustainable’ – for products which don’t qualify for the sustainable investment labels
- Mandate disclosures to help consumers and investors understand the key sustainability-related features of an investment product
- Require investment platforms to ensure that the labels and disclosures are accessible and clear to consumers
- Enhance its own supervisory and enforcement strategy in this area.
In the first instance, the focus is on funds and portfolio management based in the UK. There is an intention to expand this, via a further consultation, to overseas products offered by FCA-regulated firms.
The consultation will close on 25 January 2023. The final rules will require firms to implement them immediately upon publication; this is planned for 30 June 2023.
Brexit date rescues DWP from PPF assessment liabilities
The Employment Appeals Tribunal (EAT) has reversed the verdict of an Employment Tribunal earlier in the year which had ruled that an exemption in UK law which via An Equality Act order from 2010 exempted all pensionable service before 1 December 2006 from Age Discrimination was incompatible with the EU Framework directive.
The original claim was brought by 17 claimants in relation to the 90% cap on scheme benefits paid to Deferred members of schemes entering the Pension Protection Fund (PFP), suggesting they had been treated less favourably than pensioners (who receive 100% of their benefits) due to their age. The Department for Work and Pensions (DWP) had appealed the original verdict under five different grounds, three of which were rejected, and one of which never went to full hearing. The EAT upheld the appeal against all but two of the claimants, who will be allowed to continue their proceedings on the basis of the fifth ground.
The basis for the DWP appeal and the Tribunals dismissal of the 15 other cases was the fact the claims were brought after the conclusion of the Brexit implementation date of 31 December 2020. Because the European legislation had not been incorporated into UK law as part of the withdrawal from the EU, the claimants no longer had the rights they claimed.
Prior to Brexit the EUs non-discrimination principles applied via the EU charter, the claimants had relied on the same principles continuing via the Withdrawal Act which covered ‘retained EU law’. However the EAT agreed with the DWPs’ assertion that the EU Charter was excluded from UK domestic law following the conclusion of the Brexit period. Separately, the Court of Appeal had previously held in 2021, that there was a three-year period from the UKs withdrawal from the EU where removal of rights connected to EU law didn’t apply. As the claims for the two successful claimants began in November 2019 (before Brexit), they were covered by the scope of this judgement.
The Judgement shows that reliance on EU law, unless it has been incorporated on UK statute books, cannot continue and whilst the threat of age discrimination claims across UK schemes had receded, we are left in a curious void where many EU Principles such as non-discrimination have no legal basis and by December 2023 all EU will be struck down unless specifically incorporated into UK Statue, but there is little sign of many laws being specifically retained.
To CPIH or not to CPIH – High Court throws out Judicial Review case
What is this debate again? Well, the minimum percentage increase in a member’s pension or deferred pension is published annually by the Government, calculated by reference to a particular index. Historically, this was the Retail Price Index (RPI), but for over a decade the Government has been trying to move towards using the Consumer Price Index including owner occupiers’ housing (CPIH). The Office of National Statistics has since distanced itself from RPI as a national statistical measure followed by Government consultation and a flurry of case law looking at the impact of the changes on pension schemes.
On 1 September 2022, the High Court ruled on the long-running case of BT Pension Scheme Trustees (including the Ford Pension Scheme and Marks & Spencer Scheme) against the UK Statistics Authority (UKSA) concerning a claim for judicial review of the latter’s decision in 2019 to align the RPI with CPIH. The Chancellor of the Exchequer then confirmed in 2020 that the Government would not pay compensation to those with UK index-linked gilts affected by the UKSA’s decision. Essentially, the Trustees’ claim failed, which means that from 2030 onwards a new (more CPIH looking) method of calculating pension increases will come into effect.
Why does it matter? For members whose benefits are already linked to CPIH or they receive no annual increases, it doesn’t really. But for members whose benefits are linked to RPI, the change is likely to result in a reduction to their benefits over the course of their lifetime.
For employers and scheme sponsors, the impact will vary depending on the construction of the scheme rules and the extent to which they are sufficiently flexible to change with the (Government) tide. But for Trustees, they will find themselves questioning how to explain the impact on members in a ‘sorry the current RPI calculation is overstated, we’re actually switching to a cheaper model of calculation’ way. Not to mention whether there will be greater need for discretionary increases or other changes to safeguard scheme benefits in line with members’ expectations.
Crack down on non-compliance with auto-enrolment duties
The Pensions Ombudsman (TPO) has recently fined Bionica Systems £1,000 for the “serious distress” caused when it failed to pay both its own and the member’s contributions into an employee’s Nest pension scheme, despite having made deductions from the member’s salary. This fine is in addition to Bionica making right the missing contributions.
In this case, Bionica failed to produce any evidence that the contributions had been paid, nor did it respond to the member’s complaint to TPO.
This decision comes amidst a warning from The Pensions Regulator (TPR) that a number of recent routine compliance inspections, at over 20 large UK employers, have found a number of errors concerning organisations’ automatic enrolment duties. Although eligible employees had been successfully enrolled, common administrative errors were found to have been made both in respect of calculating pensions contributions and in communications to staff.
Simple errors may put employees at risk of not receiving the pensions they are due. This puts employers in danger of unintended non-compliance which could lead to costly backdated contributions and fines.
Do (re)familiarise yourself with TPR’s guidance on your ongoing duties as an employer.
Bevan Brittan’s pensions team is available to offer assistance where required.
Professional trustees forecast to be in short supply
ISIO’s Fiduciary Management Survey 2022 highlights that 18% of UK defined benefit (DB) schemes now use professional trustees. DB schemes currently make up 89% of the fiduciary management market.
Increased governance, reporting requirements, burdensome regulations and long-term objective setting are some of the reasons more schemes are making the move to employ professional trustees. A number of smaller schemes are increasingly also choosing this option.
Concerning, then, is research from Charles Stanley Fiduciary Management, which has found that 80% of professional DB scheme trustees are planning to step down from their roles in the next three years, 40% of those planning to do so in the next 7-11 months.
The majority of those planning to step down are either reaching retirement age or are the end of their tenure. Although the industry is taking steps to attract new talent, this is worrying; a wealth of experience will be lost at a time of volatility in the market. As we see increased regulatory and reporting requirements for schemes, trusted experts are in need now, more than ever.
Schemes must ensure they have a robust plan in place to guarantee they get proficient advice amidst an increasingly complex regulatory environment.
If you would like to discuss any of these topics in more detail, please contact our Pensions team.