Welcome to your weekly update from the Allen & Overy Pensions team, covering all the latest legal and regulatory developments in the world of workplace pensions.
This week we cover the following topics: Autumn statement: pensions announcements; DC decumulation – consultation response; Ending the proliferation of small DC pots – consultation response; Looking to the future: ‘pot for life’ and CDC – call for evidence; Options for DB schemes – response to call for evidence; Trustee effectiveness – response to call for evidence; Review of the master trust regime and the wider market; Supporting documents: research and correspondence; HMRC guidance on abolition of LTA; Court of Appeal: member who had ceased working was still in service due to untaken leave.
Autumn statement: pensions announcements
The Chancellor’s Autumn Statement on 22 November was followed by a raft of pensions-related announcements building on the Mansion House proposals. The individual papers published following the speech are covered in more detail below; the headline developments from the speech itself were:
- Reforms intended to increase the flow of capital from pension funds to the UK’s most promising growth companies, including the development of new investment vehicles (LIFTS) and a growth fund within the British Business Bank; and a consultation on how the PPF can act as a consolidator for DB schemes that are ‘unattractive to commercial providers’ (see below).
- A call for evidence on giving individuals a right to require a new employer to contribute to a pension ‘pot for life’ of their choice, and on an expanded role for collective DC (CDC) schemes (see below).
- Commitment to developing a multiple default consolidator model to reduce the number of small, deferred pots (see below).
- A consultation response on options for DB schemes, including steps to encourage investment in productive finance and a consultation to be launched this winter on possible changes to rules on the repayment of surpluses (see more below). The authorised surplus repayment charge will be reduced from 35% to 25% from 6 April 2024.
- Confirmation that the government will proceed with legislation to remove the Lifetime Allowance (LTA) with effect from 6 April 2024 (read below about new HMRC guidance on this).
There is little immediate progress on the proposed new Value for Money (VFM) framework, which would require primary legislation (no pensions Bills were included in the recent King’s Speech). However, the Financial Conduct Authority (FCA) has announced that it will consult in spring 2024 on detailed rules for a new VFM Framework for DC workplace pensions (read more) and the Pensions Regulator (TPR) has encouraged trust-based schemes to engage with the FCA consultation ‘so that there are no barriers to implementing the VFM framework in the trust-based environment’ (read more).
No further steps were announced on the regulatory framework for DB master trusts or ‘superfunds’, which would also require primary legislation. However, the government has previously said that it ‘strongly recommends’ that providers come to market in the meantime using TPR’s interim superfunds guidance.
Read the statement and supporting paper on pension reforms and see below for details of specific proposals.
DC decumulation – consultation response
The government has confirmed that it intends to introduce legislation at the earliest opportunity to place duties on all occupational pension scheme trustees to offer a suite of decumulation products and services suitable for their members and consistent with pension freedoms. These can be offered in-scheme or through partnership with an external provider; schemes will need to offer a default decumulation solution for members who do not make a choice. Schemes that do not have the scale or expertise to provide appropriate decumulation solutions should consider consolidating into a scheme that can provide this, where this is in members’ best interests.
Until legislation can be introduced implementing these changes, the DWP will work with TPR on interim guidance to encourage voluntary adoption. The government will continue to consider the role of collective DC (CDC) arrangements in decumulation and has also published a call for evidence discussing access to CDC arrangements and opportunities to stimulate the market (see below). It will not pursue its proposal to introduce a centralised scheme to provide decumulation solutions.
Read the consultation response.
Ending the proliferation of small DC pots – consultation response
In response to its consultation on reducing the number of small, deferred pots the government has confirmed that it will proceed with a multiple default consolidator approach. Members with (broadly) pots worth up to GBP1,000 that have not received contributions for at least 12 months will be automatically consolidated by default into one of a small number of authorised schemes. An industry group will be launched shortly to work through design and delivery issues, aiming to provide proposals in late 2024 for Ministers’ consideration.
The response concludes that a central clearing house, which would be responsible for matching deferred pots and lead on communication with members and schemes, is the preferred way of delivering consolidation (as opposed to a central registry that schemes could access to identify a member’s consolidator). Where savers do not make a choice as to which consolidator their funds should go into, new pots will be consolidated into the vehicle in which they already have savings, if any, or otherwise allocated on a ‘carousel approach’, dividing pots in an equal proportion between the authorised consolidators.
Read the consultation response.
Looking to the future: ‘pot for life’ and CDC – call for evidence
The ‘looking to the future: greater member security and rebalancing risk’ call for evidence (included as a Part 2 to the consultation response on small pots) focuses on introducing a lifetime provider model, drawing on examples from other countries such as Australia. This would require employers to pay contributions into an active employee’s chosen or existing pension arrangement. This proposal could create serious logistical issues for many employers (as well as additional complexity for workers) and would require significant legal changes.
The call for evidence also considers how to grow the CDC market, including requiring schemes to offer CDC options and the possibility of requiring employers to auto-enrol employees into a scheme offering a CDC option, though noting this would be ‘a significant regulatory and culture change’. It gives an update on the development of CDC schemes, noting that regulations for unconnected multi-employer schemes are expected later in 2024.
Tying these two themes together, the consultation seeks views on whether there is merit in considering a CDC lifetime provider model and how this could work. The call for evidence will close on 24 January 2024.
Read the call for evidence.
Options for DB schemes – response to call for evidence
The key points to note from the response to the government’s call for evidence on options for DB schemes are:
- The government intends to make changes to the forthcoming DB funding code of practice to encourage scheme investment in productive finance: ‘The revised funding regulations will make clearer what prudent funding plans look like, make explicit that there is headroom for more productive investment, and require schemes to be clear about their long-term strategy to provide member benefits’.
- It aims to establish a public sector consolidator by 2026 for DB schemes that are unattractive to commercial providers; it believes that the Pension Protection Fund has the necessary skills and experience to address this gap in the market.
- It will consult this winter on the detail of measures to make surplus extraction easier, including design, eligibility and safeguards (for example, the conditions for paying out surplus, and the viability of a 100% PPF underpin). The response recognises that there is scepticism across the industry in relation to both surplus extraction and public sector consolidation.
- The rate of taxation applicable to authorised surplus repayments to sponsoring employers will be reduced from 35% to 25% from 6 April 2024.
Read the response.
Trustee effectiveness – response to call for evidence
This call for evidence has not resulted in immediate proposals for legislation. The government supports TPR’s intention to develop a register of trustees, to enable targeting of trustees and schemes that require additional support. It also ‘strongly encourages’ all professional trustees to seek accreditation and will consider whether legislation should be taken forward to mandate this in future. Responding to the announcements, TPR commented that it believes ‘Every trustee body should include someone who meets professional standards, be highly qualified and able to balance competing priorities to deliver the best outcomes for savers [and] where this is not possible, trustees should consolidate’ (read more).
The response also references the government’s proposed VFM framework, which will require DC schemes to provide standard metrics and follow a consistent VFM assessment approach. The government considers that there is ‘a damaging and continual focus on cost and minimising all risks throughout the pensions industry’, which presents a barrier to achieving the best outcomes for pension savers, and says that trustees, advisors, and employers should take action now (in advance of the implementation of the VFM framework) to ensure that they are not focusing on cost at the expense of value. Linked to this, the government intends to work with TPR to engage with employers to encourage a balanced consideration of cost, value and service (rather than a focus on low costs and fees) when selecting a pension scheme to comply with their auto-enrolment duties.
Read the response.
Review of the master trust regime and the wider market
Five years after the introduction of the master trust regime, DWP and TPR have published a joint review of the market looking at a range of issues including the relationship with wider DWP policies and proposals. The government sees master trusts as the engines of growth in the pensions market in the UK, providing the opportunity to invest billions of pounds in productive finance. The current master trust framework focuses on scheme resilience and reporting; TPR will in future shift the focus of its regulatory approach and enhance the supervision of investment governance. As part of this, TPR will seek an increased flow of asset management and investment information from master trusts, enabling it to review changes to strategies and understand trends in investment, to ‘challenge schemes at key moments’ and to focus on continuous improvement.
The government is also looking to master trusts as the future default consolidators of deferred small pots, as set out above, and as the likely pension provision of choice for schemes winding up under ‘value for members’ assessments and the proposed VFM framework. It also sees a role for master trusts in providing decumulation solutions and establishing a market for collective defined contribution (CDC) schemes (see above).
Read the review.
Supporting documents: research and correspondence
Alongside the above Autumn Statement documents, the government also published:
- A paper on trends in the DC trust-based market, discussing: the growth of DC, the consolidation of DC schemes, and projections of what the landscape might look like in 2030 (broad conclusions being increased consolidation and growth of master trusts). It also discusses the benefits of consolidation.
- Joint letters from the Chancellor of the Exchequer and the Secretary of State for Work and Pensions sent to each of the FCA and TPR, summarising the pensions investment measures announced at Autumn Statement 2023 and their vision for the pensions market in 2030.
Read the research on trends in the DC trust-based pensions market.
Read the joint letters.
HMRC guidance on abolition of LTA
Following the announcement that the government will proceed with removal of the LTA from legislation with effect from 6 April 2024, HMRC has published a policy paper providing further guidance on the proposed changes, as currently set out in draft legislation published in July (read more). It comments on a range of issues around lump sums and lump sum death benefits; pension and lump sum protections; LTA enhancement factors; benefit crystallisation events and charges; non-UK pension schemes; and reporting.
One concern flagged during the consultation was the lack of clarity on transitional provisions where individuals have taken benefits before 6 April 2024. The guidance suggests that transitional methods for calculating allowances will be provided and that the Treasury will have the power, if needed, to make additional necessary primary legislative changes via statutory instrument until 5 April 2026.
There will be further changes from the position set out in the draft legislation, including: the tax-free element of a trivial commutation lump sum, winding-up lump sum and small lump sum will not be deducted from the new thresholds on lump sums being introduced (but an individual must have available thresholds to be able to take those lump sums); and payment of lump sum death benefits where a member dies under age 75 will remain tax-free up to the deceased member’s tax-free limit, with the excess taxed at the beneficiary’s marginal rate.
Read the HMRC policy paper.
Court of Appeal: member who had ceased working was still in service due to untaken leave
The Court of Appeal has upheld earlier rulings that a member who died having ceased to work, but during a period of extended pensionable employment attributable to outstanding annual leave, had died in service rather than after retirement: Campbell v NHS Business Services Authority.
The member had applied for commuted ill-health benefits on 26 May 2018 and died on 6 June 2018. NHS BSA argued that the last day of her employment, taking into account her outstanding annual leave, was 20 June 2018 and that she had therefore died in service. This meant that the lump sum payable was approximately half what it would have been, had commuted ill-health benefits been payable. Mrs Campbell’s widower argued that under the rules, ‘retiring from pensionable employment’ required no more than that the member should have retired in the ordinary sense of having ceased to work, and that provisions about pensionable employment being ‘treated as continuing’ operated merely to extend the total amount of pensionable service.
The Court of Appeal upheld the decisions of both the Pensions Ombudsman and the High Court that the correct interpretation of the rules was that pensionable employment continued for the extended period of untaken leave. It noted that contributions would be payable for this period and that there was ‘a natural dichotomy between the receipt of benefits and payment of contributions’. While the outcome might appear harsh in Mrs Campbell’s case, there were circumstances in which this would work to a member’s advantage. A second ground of complaint, which was that NHS BSA had refused to authorise payment of commuted ill-health benefits prior to Mrs Campbell’s death, was not determined due to the finding that she had died in service.
The key takeaway for scheme administrators is to be aware of similar provisions in scheme rules and of member circumstances that could significantly affect the benefits payable. Serious ill-health lump sum cases are always sensitive; awareness of any extension to pensionable service may affect the information provided to members.
Read the case.
