Pensions Insight: 13 March to 20 March 2023
In this insight we provide a further update on the Spring Budget. We also report on other latest developments including those relating to the Pensions Regulator, transfers, dashboards and auto-enrolment.
Spring Budget: follow-up to our in-depth article
Since our in-depth insight was drafted, HMRC has issued pension schemes newsletter 148 which, amongst other things, addresses the Spring Budget. By way of recap, the Budget confirmed that,
from 6 April 2023:
- the lifetime allowance (LTA) charge is being removed;
- the annual allowance (AA) is being increased from £40,000 to £60,000;
- the money purchase annual allowance is being increased from £4,000 to £10,000;
- the tapered AA (which reduces the AA for the highest earners) is also being increased to a minimum level of £10,000 and the income threshold at which the taper starts is going up from £240,000 to £260,000;
- the maximum pension commencement lump sum (PCLS) is being frozen (but not for those with a higher protected PCLS) at the current level of £268,275; and from an expected date of 6 April 2024,
- the LTA is being abolished.
Although the LTA charge is being removed from 6 April 2023, the LTA itself is not going to be removed until 2024. Therefore, HMRC confirms that until it is abolished, LTA checks will still need to be undertaken by scheme administrators.
Broadly, removing the LTA charge means that benefits above the LTA will be subject to income tax at the recipient’s marginal rate rather than a 25% charge on top of income tax for excess LTA pension and a 55% tax charge for excess LTA lump sums.
The LTA removal will have several consequences including that LTA protections will become largely irrelevant going forward, although as the HMRC newsletter notes, they will allow members with protection to a higher PCLS to retain this, and furthermore, those members will be able to build up further benefits.
It will also mean that certain issues relating to Guaranteed Minimum Pension (GMP) conversion and LTA protection being lost because of benefit uplifts will fall away – this may be particularly relevant for those schemes undertaking GMP equalisation exercises. Other exercises such as pension increase exchange exercises and bridging pension options may also be simplified. Potential AA issues for all these types of exercise may also be eased given there will be more flexibility because of the higher limits.
How will all the tax allowance changes be made?
The changes will be made via the Finance Bill 2023 with the exception of the LTA removal which will be legislated for in a separate Finance Bill.
There may also be changes to automatic-enrolment legislation to deal with the current exemption for individuals with tax protection as this exemption will no longer be necessary from a policy viewpoint following the removal of the LTA.
Such individuals will need to be automatically enrolled.
Key issues for schemes to consider
There are a number of key issues that schemes will need to consider as a result of the pensions tax allowance changes. These include:
- immediate issues arising from those members who may wish to delay retirement pending removal of the LTA charge;
- reviewing scheme rules to assess the implications for the scheme generally and whether any references to the relevant tax provisions such as the LTA or AA require amending – for example, scheme rules may cap benefit accrual to stop members’ benefits going above the LTA and schemes may wish to either remove this restriction or consider retaining this to avoid scheme liabilities potentially increasing;
- communicating with members about the Budget changes and considering what general communications will need amending, for example, scheme booklets and retirement communications;
- ensuring that the scheme’s administration processes are updated;
- considering the approach to members with LTA protections and auto-enrolment in due course (see above);
- revisiting arrangements where employers pay cash in lieu of DC contributions for employees who would otherwise be impacted by the LTA or AA;
- looking at any pension and life assurance arrangements that were set up to deal with LTA matters and whether, and if so how, these might need to change. For example, certain employers provide life assurance benefits under an excepted group life scheme as benefits provided in this way are outside of the LTA regime (see our Insight) – an employer may decide to revisit such arrangements going forward.
There are clearly many things from the Budget for schemes to think about.
Pensions Regulator round-up: ERI guidance and blog on VFM
On 14 March 2023, the Pensions Regulator published new guidance on employer-related investments (ERI).
The guidance emphasises the legal requirements that, subject to a restrictive ‘small scheme’ exemption (i.e. for schemes commonly known as small self-administered schemes or SSASs), no more than 5% of the current market value of a scheme’s assets should be invested in ERI. In addition, a scheme should not invest in employer-related loans or a transaction at an undervalue.
Breach of the ERI restrictions can be a criminal offence and can lead to a fine (up to £5,000 for an individual and up to £50,000 for a corporate trustee) and/or a prison term. The guidance comes on the back of a recent spate of prosecutions for such breaches.
Amongst other things, the guidance notes that trustees, employers and scheme advisers have a duty to report ERI breaches to the Regulator. They must also provide details of all ERI in the scheme’s annual report. Any scheme resources that have been illegally invested in ERI must not be included within the asset calculation used for a valuation.
Only a small proportion of schemes will have ERI, but for those that do, it is essential that they satisfy the legislative requirements as the Regulator will “take firm action” where assets are invested in breach of them.
Blog clarifying approach on new value for money (VFM) framework
The Pensions Regulator’s 20 March blog ties into the joint consultation (see our In-depth Insight) on a new value for money (VFM) framework that is going to be introduced. Ensuring VFM forms part of a trustee’s fiduciary duty to act in the members’ best interests. The blog clarifies the Regulator’s approach on:
- why there is a focus on default arrangements first. Because these are for those who do not necessarily make an active choice and will in the future be extended;
- data disclosures – using standardised data aids understanding;
- who the data is for. Essentially, it is to be used by schemes to improve value, advisers to support, and employers and regulators to provide assurance that where there is poor VFM this will not exist for long; and
- what the overall goal is. Basically, real VFM with poor VFM schemes improving or moving out defined contribution (DC) benefits.
Pensions dashboards update
Updated TPR pensions dashboards guidance
The Pensions Regulator has made substantial updates to its initial pensions dashboards guidance to reference the DWP’s decision to delay the start of dashboards which means there will be an amended staging timetable. There is reiteration of its previous warning for trustees to liaise with relevant third parties to prepare for their connection date given the amount of work involved - trustees should continue with their preparations.
The Regulator will contact each scheme which will have to comply with the pensions dashboards requirements before their connection deadline.
Pensions Dashboards Programme FAQs
On 15 March 2023, the Pensions Dashboards Programme issued some frequently asked questions and responses on the recent ‘reset’ of pensions dashboards (see our Insight).
The FAQs explain that although a lot of the central architecture work has been completed, some still requires completing. There are no exact timings on the length of the delays although an update will be provided by the DWP to Parliament before the summer recess on 20 July. The FAQs note that schemes should continue preparing for dashboards whilst further details are awaited.
PSIG Interim Practitioner Guide on transfer assessments
The Pension Scams Industry Group (PSIG) has published an Interim Practitioner Guide and accompanying Short Summary which sets out the main due diligence steps that pensions practitioners should carry out when assessing a pension transfer.
The Interim Guide follows the April 2021 Combating Pension Scams Code of Good Practice Version 2.2 and reflects the November 2021 transfer regulations (see our Insight). It contains only one interim updated part of the code, the Practitioner guide. All of the code will be revised hopefully by the end of 2023 after the Department for Work and Pensions (DWP) has completed its review of the regulations which should take place by May 2023 (see our Insight).
The Interim Guide is split into different parts relating to statutory transfers, discretionary ones and further guidance.
Statutory transfer part: This covers due diligence, the different red and amber flags, how to decide if one is present, the risks around the incentives and overseas investments.
Discretionary transfer part: The discretionary transfer section notes that due diligence must still be undertaken (as also noted in the joint DWP and Pensions Regulator joint statement). A decision will be needed as to which factors are relevant and what weight should be given to each. Some guidance is provided.
Clean list: Schemes should consider keeping a ‘clean list’ of those schemes in which there is high confidence that the scheme is not a scam arrangement. This would need to be reviewed and updated regularly. The Interim Guide covers the risks involved.
Further guidance: This final part notes the importance of good governance and having processes in place to cover data protection, management information and member appeals. It also references what resources and bodies to use when looking at a concerning case and covers how to report concerns.
Action for trustees: Trustees should familiarise themselves with the Interim Guide and liaise with the scheme administrator to ensure that their systems reflect the updated practitioner guide.
Expansion of automatic enrolment update
During the committee stage of the Pensions (Extension of Automatic Enrolment) (No. 2) Private Members' Bill (see our Insight), the Pensions Minister Laura Trott MP, confirmed that a consultation on implementation approach for the expanded regime may come out this autumn and the Government still plans to implement the reforms in the ‘mid-2020s’. The Bill’s third reading in the House of Commons will take place on 24 March 2023.
The intention is that auto-enrolment will be expanded to those aged between 18 and 21 and that the Lower Earnings Limit of the qualifying earnings band will be removed. Although these changes will help increase pensions savings there are still many people for whom the minimum level of contributions will not provide a sufficient level of retirement income and there are calls for the statutory minimum contribution levels to be increased to address this issue. The current Bill does not cover this area.
WPC inquiry into DB pension schemes
On 16 March 2023, the Work and Pensions Committee launched an inquiry into defined benefit pension schemes. The inquiry comes off the back of a general improvement in scheme funding levels. It will look at the regulatory framework and whether this supports good governance and outcomes and how DB schemes can be consolidated or benefits bought out.
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