In depth

Pensions legislation and case law update: the latest developments week ended 23 July

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In this week’s digest we cover the proposed increase to minimum pension age and changes to the scheme pays legislation being introduced by the draft Finance Bill 2022, the DWP consultation on regulations for collective defined contribution schemes and provide an update on the climate change and the draft employer resources test regulations under the Pension Schemes Act 2021. We also report on the Regulator’s and Pensions Ombudsman’s annual reports and accounts.

DWP consultation on draft CDC regulations

The Pension Schemes Act 2021 (the PSA 2021) set out the legislative framework for collective money purchase, also referred to as collective defined contribution (CDC), schemes leaving much of the detail to secondary legislation. 

The DWP has now published a consultation on the draft Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2021 that flesh out the detail of the PSA's framework. They set out what CDC schemes have to do to obtain authorisation, operate effectively with regulatory oversight, and what happens if changes need to be made to the scheme. 

The consultation closes on 31 August 2021. The Pensions Regulator will produce a Code of Practice which will give practical guidance on the regime.

Draft Finance Bill 2022: increase to minimum pension age & changes to scheme pays

On 20 July 2021, HM Treasury and HMRC published draft legislation which will be included in the Finance Bill 2022. There are two key pension measures; the first relating to the increase to normal minimum pension age (NMPA) from 55 to 57 and the second relating to the 'scheme pays' system under which an annual allowance charge can be paid. The consultation on the draft legislation closes on 14 September 2021.

Increase to NMPA

NMPA is the minimum age at which the majority of members can access pension benefits without the payment being unauthorised (unless for reasons of ill-health). 

The Government's February 2021 consultation 'reconfirmed' the coalition Government's 2014 announcement that NMPA would rise from age 55 to 57 in 2028 to coincide with the rise of state pension age to 67. The change will reflect longevity increases and changes in the amount of time people expect to continue in work. The consultation sought views on implementation and the proposed protection regime.

HM Treasury and HMRC have now published the Government's response to the consultation together with a policy paper, draft legislation and an accompanying explanatory note. 

Response

The response confirms that the Government will go ahead with the increase and will legislate for the necessary changes which will need to be made to the Finance Act 2004 in the next Finance Bill. NMPA will increase to 57 on 6 April 2028.

Protection regime

The response also confirms how the protection regime will work.

  • Uniformed public service schemes: Members of 'uniformed' public service pension schemes will be exempt from the increase. This will cover the armed forces, police and fire service schemes.
  • Protected pension age (PPA): Members of registered pension schemes who meet an 'entitlement condition' – essentially, if, on or before 5 April 2023, they had an "actual or prospective right" (an unqualified right) under the scheme rules as at 11 February 2021 to take any benefit before age 57 will retain that lower PPA. The PPA will apply to benefits accrued after 5 April 2028 not just to benefits accrued before this date.This provides a window during which someone may join a scheme after 11 February 2021 and before 5 April 2023 and also have a PPA where the rules of that scheme already provided for this on 11 February 2021.
  • Unqualified right: The response discusses the meaning of having an 'unqualified' right to retire before age 57 and notes that this would not include schemes whose rules refer to the NMPA or underlying legislation. 'As appropriate', HMRC will provide further clarification and examples of what is an unqualified right in its Pensions Tax Manual guidance. The Manual uses this expression (as does the response) although the legislation references an 'actual or prospective right' rather than an 'unqualified' one.
  • Retirement condition: currently, a PPA is subject to an entitlement condition and a retirement condition whereby the member must leave employment and become entitled to all benefits under the scheme at the same time. Individuals with the 'new' PPA will not have to meet a retirement condition.
  • Transfer: Individuals will retain their PPA if they transfer to another scheme under both a block or individual transfer (individual transfers were not mentioned in the consultation, but the position has now been confirmed). The protection will not apply to other rights accrued in the receiving scheme but will apply on subsequent 'relevant' transfers.

Advice on possible transitional issues will follow in 'due course'. This could include, for example, someone without an age 57 PPA who at 5 April 2028 is age 55 and has started, but not finished, the process of taking benefits. 

Scheme trustees should ensure they understand what their scheme rules provide and that this is clearly communicated to members so that expectations can be managed, and appropriate financial planning undertaken.

Scheme pays changes

There will be changes to the 'scheme pays' provisions of the Finance Act 2004 which are intended to assist the proposals which the Government has put forward to deal with the public service pension schemes' age discrimination implications of the McCloud case (Lord Chancellor and another v McCloud and others; Secretary of State for the Home Department and others v Sargeant and others [2018] EWCA Civ 844).

The scheme pays mechanism allows members who incur an annual allowance charge of £2,000 or more to notify the scheme administrator that they require the scheme to pay the charge (subject to certain conditions). 

The Finance Bill changes will extend the deadlines by which the member must give notice and by which the scheme administrator must report and pay the annual allowance charge. The changes will take effect from 6 April 2022 but have retrospective application from 6 April 2016. 

The scheme pays policy paper and draft legislation can be found here. 

Climate change regulations

The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 (SI 2021/839) and the Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions and Amendments) Regulations 2021 were made on 13 and 15 July 2021 respectively. They will come into force on 1 October 2021.

Together, these regulations introduce the new climate risk governance and reporting requirements for trustees of large occupational pension schemes (see our last Insight Update) in line with the recommendations of the Taskforce on Climate-related Financial Disclosures. There are also trustee knowledge and understanding requirements which must be met in relation to climate change risks and opportunities and disclosure and notification obligations.

The changes are being introduced in stages. The new requirements apply from 1 October 2021 to large schemes with relevant assets of £5 billion or more and authorised schemes. There will be a further rollout to schemes with £1 billion or more of assets the following year and a consultation in 2023 to decide on whether to widen the regime to smaller schemes as soon as 2024.

PSA 2021: draft contribution notice employer resources test regulations considered in House of Commons 

The draft Pensions Regulator (Employer Resources Test) Regulations 2021 were considered by the Delegated Legislation Committee of the House of Commons. These regulations set out details of the employer resources test, one of the two new contribution notice grounds introduced by the PSA 2021. They will now be considered by the House of Lords on 6 September 2021 and are due to come into force on 1 October 2021. 

Our last Insight Update discusses the Government's response to the consultation on these regulations.

Pensions Regulator Annual Report and Accounts for 2020/21

The Regulator has published its Annual Report and Accounts for 2020-21 which it says demonstrates how it gave 'clear guidance and easements' during the pandemic and 'made positive progress' in relation to PSA 2021 preparatory work.

It met, or nearly met, nine of the eleven key performance indicators including publication of COVID guidance and easements and defined benefit superfund guidance. The two KPIs not met were in relation to the Regulator's administration strategy and the design and implementation of new systems to support its regulatory functions.

Pensions Ombudsman: Annual Report and Accounts for 2020/21 

Annual Report and Accounts for 2020/21: These show that there has been a 6% increase in closed complaints since the 2019/20 set of accounts. A total of 16,673 contacts were made compared with 20,550 in the preceding year. 5,567 new complaints were received with a decrease early on in the pandemic and an increase in volume towards the end of 2020. 

The three most common topics of closed complaints were: retirement benefits; pension transfers; and misquotes/misinformation. 41% of complaints were upheld. 

29.1% of open investigations were older than 12 months which is higher than the 10% figure aimed for and dealing with older cases and improved closure times is a priority going forwards. 

The biggest success is regarded as being improvements in the customer journey which includes the launch of an online live chat facility and a new website.

Parliamentary and Health Service Ombudsman concludes DWP guilty of maladministration in relation to communication of SPA changes

On 20 July 2021, after considering six sample complaints by women regarding communication from the DWP about legislative state pension age (SPA) changes, the Parliamentary and Health Service Ombudsman, has concluded that the DWP did not: 

  • give due weight to relevant considerations after 2004 research recommended the appropriate targeting of information; and
  • did not act sufficiently quickly when it was proposed in November 2006 that the DWP write directly to affected women regarding the SPA changes.

(SPA was equalised for women and member between 2010 and 2018, and was then increased for both sexes above age 65.)
Acting reasonably, the DWP should have contacted those affected by December 20016, 28 months earlier than it actually did. The following part of the investigation will look at the effect of this maladministration.

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