Pensions Insight: 3 January to 29 January 2024

Aside from the final version of the Pensions Regulator’s new general code of practice being published it has been a relatively quiet start to the year with just a handful of developments so far including a High Court case on severance of a partially invalid scheme amendment, progress of the Finance Bill 2024, Government evidence to the WPC on DB schemes, Anthony Arter’s appointment as interim Chair of TPO, our usual TPR round-up and the introduction of two pieces of legislation on pensions dashboards.

High Court confirms that partially valid amendment switching scheme from final salary to CARE can be saved

In the recent Avon Cosmetics Ltd v Dalriada Trustee Ltd case, the High Court concluded that the valid part of an amendment to the Avon Cosmetics Pension Plan which had broken the final salary link between accrued service and future pensionable salary increases upon switching from a final salary basis of accrual to one based on CARE (career average revalued earnings) in September 2006 could be severed from the invalid part (which breached the scheme’s amendment power) and thereby saved.

This case demonstrates the conditions that must be satisfied when considering whether the valid part of an amendment can be severed from the invalid part: (i) it must be possible to ‘conceptually separate’ the valid part of the exercise of the amendment power from the invalid exercise; and (ii) it must be shown that the relevant parties would still have exercised the power knowing its limitations (tested objectively considering the overall purpose of the exercise, rather than looking subjectively at what was “actually in the minds of the” trustee).

You can read more about the case in our summary which is available here.

Removal of LTA: Finance Bill 2024 progressing through Parliament

The Finance Bill 2024 which will remove the lifetime allowance from 6 April 2024 (see our insight) is progressing through Parliament. The provisions relating to the lifetime allowance (LTA) removal were debated and agreed by the House of Commons Public Bill Committee on 16 January 2024 and the Bill will now go through the report stage (consider what happened during committee stage) and third reading (last chance for Commons to pass or reject the whole bill).

HMRC Newsletter 155: LTA removal

HMRC’s Newsletter 155 focuses on various technical points and FAQs relating to the Finance Bill. The technical issues which HMRC confirm are being considered further include how the new pension commencement excess lump sum works for members in multiple schemes and several minor drafting errors in the legislation.

The FAQs cover a wide range of matters including confirmation that available lump sum allowance is only needed for winding-up lump sums and trivial commutation lump sums not small lump sums and that the amount available does not need to cover the whole amount of the lump sum.

HMRC is going to communicate further and set up LTA working groups on reporting and transitional arrangement matters as a priority. It intends to issue general communications on the LTA changes on a fortnightly basis.

See here and here for relevant background details about the Finance Bill.

WPC: Government commentary on DB funding regime

In an 18.12.23 letter from the Pensions Minister to the Work and Pensions Select Committee, and 10.01.24 evidence from HMT and the DWP (including Mr Maynard), several matters were discussed regarding the defined benefit (DB) funding regime including:

• that the new funding and investment regulations (which are expected imminently) will not provide separately for open schemes but will make “it explicit … that open schemes can take account of both new entrants and future accruals in setting their funding plans. TPR will also ensure that open schemes are more prominently referenced and highlighted in their revised Code.”;
• the LDI joint report accounting for the impact on pension schemes of the liability-driven investment episode which was expected by the end of 2023 has been put back – it will now be published “in due course”;
• superfunds legislation will be produced “as soon as possible”;
• the Government will ‘monitor’ the impact that reducing the tax charge on authorised surplus repayments to 25% from 6 April 2024 will have on schemes;
• there will be a ‘strong regulatory framework’ for removing and distributing surplus where scheme rules do not cover this (consultation expected this winter); and
• any public consolidator (see our insight – consultation due this ‘winter’) will “focus on schemes that would be unserved by commercial consolidators or insurers.”

Anthony Arter new interim chair of TPO

Anthony Arter (former TPO and current interim Deputy PO) has been appointed as the Interim Chair of TPO whilst a new permanent Chair is recruited. This follows the passing away of TPO’s former Chair, Caroline Rookes, in October 2023. See also DWP press release here.

TPR round-up

ERI prosecution of former pension trustee results in suspended prison sentence

The Pensions Regulator (TPR) has provided an update on its prosecution of two former pension trustees of the Worthington Employee Pension Top Up Scheme, a money purchase trust-based occupational pension scheme, for employer-related investment (ERI) offences. For further background see here.

It has been confirmed that, one of the former trustees has received a 10-month prison sentence, suspended for 12 months, for making five prohibited loans to entities connected to the sponsoring employer. He must also complete community service and pay £1,000 in prosecution costs. None of the money loaned has been recovered because, although the initial monies were paid back, they were paid out again as another ERI which failed.

Proceeds of Crime Act prosecution of two convicted pensions fraudsters

Following TPR’s April 2022 prosecution of two former pension trustees for fraud in which they each received 10 years’ imprisonment, TPR has successfully prosecuted them under the Proceeds of Crime Act 2002 to recover most of their “ill-gotten gains” (£9,771 – Barratt and £25,010 – Dalton). The 2002 Act allows for money that has been gained from criminal conduct to be recovered after a confiscation investigation which will follow a conviction. The conclusion of these proceedings means that a Fraud Compensation Fund claim can now progress.

Scheme return additional information

TPR’s updated scheme return information page confirms that for the first time, (in addition to questions on investment consultants and fiduciary management) it will be asking questions on liquidity and leverage (and controls), the primary contact on pensions dashboards, and AVC providers. The asset breakdown information that must be provided has also been clarified. Schemes should expect to receive the scheme return notice (DB and hybrid) in late January/early February 2024.

TPR guidance on private market investments

The Pensions Regulator (TPR) has published private markets guidance that clarifies that “with the right advice and effective governance, private market assets can play a valuable part in a diversified portfolio that aims to improve and protect saver benefits”. It warns that “those who do not have the skills or resource to explore a more diversified portfolio should consider changing their governance model or consolidating.”

The guidance comes off the back of the Mansion House Reforms which are predominantly focused on increasing investment in productive finance. It explains:

• what private market assets are – private equity, private debt, private real estate and infrastructure & natural resources;
• how they can be accessed, including through – limited partnership arrangements, regulated funds & collective investment vehicles, pooled funds, fund of funds and co-investments or direct investments;
• how they differ to public investments;
• their opportunities and risks;
• the interaction with a trustee’s legal duties;
• key considerations – having sufficient knowledge and understanding, obtaining advice, investment and scheme requirements, understanding how the investment will work as regards the scheme, liquidity risk management, performance fees, public market alternatives and member communications;
• additional resources; and
• some case studies.

The guidance refers to trustees looking at both public and private opportunities, but when doing so considering risks and diversification impact.

Pensions dashboards

Regulation of dashboards providers

The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2024 will come into force on 11 March 2024 (subject to requiring approval of both Houses of Parliament). They provide that operating a pensions dashboard will be a regulated activity meaning that commercial dashboards providers must be either authorised under the Financial Services and Markets Act 2000 or be exempt.

Prohibition from using scheme assets to reimburse for fines and penalties in force

Commencement regulations have also brought into force section 1(1) of the Pensions Dashboards (Prohibition of Indemnification) Act 2023 as from 1 January 2024. This expands the Pensions Act 2004 to prohibit scheme assets from being used to reimburse trustees for civil penalties imposed for breaches of the pensions dashboards legislation.

Latest PPF 7800 index shows funding has increased

The latest Pension Protection Fund report setting out the estimated funding position on a section 179 basis as at the end of December 2023 of the eligible 5,050 DB schemes shows that:

• the aggregate surplus of these schemes increased over the month to £428.2bn from a surplus of £425.5bn at the end of November 2023;
• total assets were £1,428.2bn and total liabilities were £1,000bn;
• the funding ratio reduced from 145.7% compared to 142.8% at the end of November 2023; and
• there were 582 schemes in deficit and 4,468 schemes in surplus.