In this Insight we provide an update on legislative developments, HMRC’s latest newsletter, the Pension Protection Fund’s (PPF’s) response to the Work and Pensions Select Committee’s (WPC) defined benefit (DB) inquiry and the FCA’s position on UK firms that accept transfer referrals from overseas firms.
Legislation round-up
Act preventing trustees from using scheme assets to reimburse dashboards penalties
The Pensions Dashboards (Prohibition of Indemnification) Act 2023 received Royal Assent on 2 May 2023. This Act expands the prohibition in section 256 of the Pensions Act 2004 that prevents scheme assets from being used to reimburse trustees for certain fines and civil penalties, to include civil penalties in respect of breaches of the pensions dashboards legislation.
Regulations made extending clearing exemption
Regulations will come into force on 12 June 2023 which extend the exemption for pension funds from the clearing obligation relating to over-the-counter derivatives by two years to 18 June 2025 and the temporary intragroup exemption regime to 31 December 2026.
Since 2012, financial organisations operating in the EU derivatives market have had to satisfy the requirements of the European Market Infrastructure Regulation (EMIR) – this includes pension schemes which use derivatives to deal with longevity risks and to hedge inflation and interest rate risk. Under the EMIR, financial counterparties are required to clear and report trades – the requirements would involve pension schemes having to post collateral. However, certain UK and EU pension schemes have been exempted from these central clearing requirements. The latest exemption is due to expire on 18 June 2023 for both the UK and the EU.
The government is extending the UK clearing exemption (which also extends to EEA pension scheme arrangements) but the corresponding EU exemption for European pension schemes is still currently due to expire on 18 June 2023 (although the EU has proposed introducing a clearing exemption for transactions with pension schemes established in a third country that are exempt from clearing under its national law).
HM Treasury will review the exemption arrangements before June 2025.
HMRC newsletter 149 confirms legal PR is responsible for tax on lump sum death benefits
HMRC Newsletter 149 follows informal notification to stakeholders and confirms that the deceased member’s legal personal representative will remain responsible for dealing with HMRC in respect of any tax due on DB lump sum death benefits and uncrystallised funds lump sum death benefits. This is instead of having scheme administrators take over responsibility for determining tax due as HMRC had initially intimated would happen following removal of the lifetime allowance (LTA) charge in the Spring Budget. HMRC reverted back after concerns were raised about the change in process by the LTA working group.
PPF written evidence on WPC inquiry into DB schemes
The Pension Protection Fund’s written evidence to the Work and Pensions Select Committee’s inquiry on DB pension schemes and their governance and regulation (see our Insight) covers a number of areas including:
- looking at how the small subset of stressed schemes (approximately 240) can be helped to secure better outcomes than ending up with the PPF;
- addressing difficulties small schemes have in buying-out;
- the benefits of consolidation for all schemes including smaller ones;
- PPF compensation and pension increases; and
- progress on Fraud Compensation Fund pension scam cases.
FCA webpage on UK firms’ duties when accepting pension transfer referrals from overseas advisers
On 27 April 2023, the FCA published a webpage on its increased concerns that overseas firms are targeting overseas members and their UK DB pensions. The FCA wishes to highlight the duties of UK firms that deal with such overseas firms or provide advice to non-UK based scheme members – duties include the Consumer Duty to deliver good outcomes and to avoid causing foreseeable harm.
The webpage details how the ‘overseas advice model’ operates, the applicable FCA rules, the FCA’s harm assessment (which includes issues around poor due diligence, lack of member interaction, the appropriate independent advice requirement, inadequate review of charges and coaching by the overseas firm), what UK advice firms should do (including carrying out sufficient due diligence and contacting the member) and how the FCA will address cases of consumer harm.