- Statutory right to transfer curtailed
- FCA explores SDR and sustainable investment labelling for investment products
- House of Lords puts back the triple lock
- DWP to proceed with de minimis for DC flat fee charges
- Finance Bill sets out three changes to pensions tax law
- Finance Bill – Normal Minimum Pension Age increase
- Finance Bill – Mandatory Scheme Pays extension
- Finance Bill – rectification of unlawful discrimination in public service pension schemes
Statutory right to transfer curtailed
The long-standing statutory right of members to transfer their benefits to another pension scheme is being curtailed as a result of regulations laid before Parliament on 8 November 2021.
The Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 (SI 2021/1237) come into force on 30 November and will apply to all transfer requests made on or after this date – whether from occupational pension schemes (of any type) or personal pension arrangements. The policy intention behind the regulations is to make it much more difficult for pension scams to be facilitated through individual transfers.
The regulations are significantly different to those on which the DWP consulted in May 2021 (see Pensions Bulletin 2021/21) as the response to the consultation makes clear. The four alternative conditions have been boiled down to two, with the vast majority of transfers likely to have to meet the second condition – needing red flags not to be raised, or a guidance session to be taken following any amber flag raising – before the transfer can go ahead. In addition, the second condition requires an employment link to be demonstrated for any proposed transfer to an occupational pension scheme, and a residency link for a proposed transfer to a QROPS.
The Pensions Regulator has also published guidance for trustees on the operation of the new transfer law. For the most part, this guidance is a ‘plain English’ guide to the regulations, with little guidance as such. Nevertheless, it is a valuable document as it explains, in clear terms, how this new regime operates.
MoneyHelper guidance sessions, for those who trip amber flags, can be booked from 30 November.
The Pension Scams Industry Group (PSIG) is working on a revised version of its Scams Code, which it will publish later in 2021, to give practical help on how to use the new rules.
Comment
This is a significant development in pensions law, requiring trustees and other pension providers to urgently revisit their transfer processes. For a summary and commentary on these regulations please see our News Alert.
FCA explores SDR and sustainable investment labelling for investment products
The Financial Conduct Authority has issued a discussion paper setting out proposals for sustainable disclosure requirements (SDR) for asset managers and certain FCA-regulated asset owners, and proposals for a sustainable investment labelling regime for investment products. This follows the signalling of such a paper by the Government when in October it launched its roadmap setting out details of new sustainability disclosure requirements (see Pensions Bulletin 2021/43).
The discussion paper seeks feedback on potential approaches based on the following three-tiered system incorporating labels and disclosures:
- Sustainable investment product labels
- Consumer-facing disclosures containing key product-level information
- Detailed disclosures at product and entity levels aimed at institutional investors and other stakeholders
On labelling, the FCA sets out definitions of “sustainable” (split into three types – impact, aligned and transitioning) and “responsible” with each needing to meet minimum criteria in order for an investment product to use the label. The FCA also proposes that investment products that do not take sustainability considerations into account should be labelled as “not promoted as sustainable”.
On disclosures, the FCA’s sustainable disclosure requirements are to widen the scope of the FCA’s recently settled TCFD disclosures beyond climate, to cover sustainability matters more broadly. They are to also extend beyond financial risks and opportunities to cover the impact firms and investment products are having on the environment and society.
The paper concludes with some thoughts on how this labelling and disclosure system might operate. The FCA will be supported by a Disclosures and Labels Advisory Group, whose membership includes industry experts and consumer representatives, as its work on this area develops.
Consultation closes on 7 January 2022 and the FCA intends to consult on policy proposals in Q2 2022. There is no date yet for implementation.
Comment
The FCA is somewhat late to the labelling party as in recent years various organisations have put forward a number of classification initiatives. However, it is for the FCA to lead in this area and do its part to curtail the amount of “greenwashing” by those falling within its remit.
House of Lords puts back the triple lock
The Government’s short Bill to remove the earnings element from the triple lock on state pension increases for one year only, in light of the distortion to the earnings measure as a result of Covid-19, has been materially amended at Report Stage in the House of Lords.
The Social Security (Up-rating of Benefits) Bill was introduced to Parliament on 8 September (see Pensions Bulletin 2021/37), reaching the Lords unamended in October. However, the Upper House has decided to put the earnings element back in modified form, requiring the triple lock to operate (for one year only) using an earnings element “adjusted to take account of the exceptional impact of the COVID-19 pandemic on the level of earnings”.
The Bill now returns to the Commons which will need to decide whether or not to run with their Lordships’ modified triple lock, or back the Government’s “double lock for one year” policy. It is now clear that the Government intends to reject the amendment.
Comment
There is some merit in this amendment – the triple lock is restored, but not the distortion that would have come to pass had the normal measure of earnings growth been used to uprate state pensions next April. It will be more expensive than the Government’s proposal as under the amendment the earnings element is likely to be higher than price inflation and 2.5%. However, had there not been the Covid-19 distortion the Government would presumably have kept the triple lock operating and so delivered an uprating next April along the lines of what the Bill now requires.
DWP to proceed with de minimis for DC flat fee charges
The Government has published its response to its consultation in May about introducing a £100 threshold for default DC funds used for auto-enrolment below which flat fees cannot be charged (see Pensions Bulletin 2021/22).
The response confirms that the Government will go ahead with this de minimis with effect from April 2022 with apparently only minor changes to the proposals. The final regulations to implement this, as well as accompanying non-statutory guidance, have yet to appear at the time of writing.
The response also addresses the other part of its consultation, namely the proposal to move away from the current three permitted charging structures for the default fund to a “universal” charging structure based on a single percentage annual management charge. However, the Government has not provided a detailed summary of feedback it received and states that it intends “to consider the evidence received in response … in more detail before making any policy decisions” and that it will publish its “proposed next steps, in a separate response, shortly”.
Comment
Providers and schemes affected by the £100 de minimis should now proceed with their projects to implement this by next April – just five months away.
The Government notes that “a broad majority” were against the proposal to move to a universal charging structure”. Might it be rethinking its plans about this?
Finance Bill sets out three changes to pensions tax law
The Finance Bill was published on 4 November 2021 and as expected contains three changes to pensions tax law.
The first sets out the increase to the normal minimum pension age from 55 to 57 from 2028, along with associated protections. The second is an extension to the mandatory scheme pays mechanism. Both were flagged by means of draft clauses set out for consultation in July (see Pensions Bulletin 2021/30) which in the case of the NMPA change followed consultation in February. The third change comprises enabling provisions for regulations to mitigate any adverse tax consequences that would otherwise arise as a result of the application of the ‘deferred choice underpin’ method of rectifying discrimination in public service pension schemes that the McCloud judgment found to be unlawful.
These three measures are examined in the following three articles. The Bill will go through Parliament and will (subject to any changes) be made into law sometime next year.
Finance Bill – Normal Minimum Pension Age increase
Clause 10 of the Finance Bill increases, on 6 April 2028, the age at which pension benefits can normally be first accessed (the normal minimum pension age) from 55 to 57 – and introduces certain protections against this increase for some individuals.
The key change to the draft legislation on which HMRC consulted in July is to immediately close the window for individuals to acquire protection by joining a scheme with the relevant rules (see later). This window was originally proposed to run until April 2023. The change (which, as a ministerial statement explains, was in response to concerns of some of the industry) also resolves a potential issue where it was not clear in the previous draft what the protection status would be for members transferring before 5 April 2023.
So the rules on the new protection brought into the Bill appear to be as follows (but bearing in mind that both the legislation and the variety of combinations are complex, and also that this is relevant only for those currently below age 50 – ie below age 57 in 2028):
- While most will, from 2028, have to wait to draw benefits from 57, some will retain rights to draw at 55. And some will be able to draw even earlier because old protections will continue unchanged and members of the armed forces, police and firefighter public sector schemes will not be affected by this increase
- A member has a new protected pension age in a scheme if they were a member as at 4 November 2021 under scheme rules in place as at 11 February 2021 giving a right to take pension at an age below 57 (the provisions also cover a member following transfer into a scheme with a relevant rule, if the transfer was requested before 4 November 2021 but completed after). This applies to personal pensions as well as occupational pensions. Protection is available not only to those in the scheme under the relevant rules on 11 February 2021, but – because of some to-ing and fro-ing of policy in this area – those who joined the scheme up to 23.59 on 3 November 2021
As with older protections the new protection applies not just to accrued benefits but future accrual and (usually) transfers-in as well (with one exception – see below). Unlike older protections, the new protection will continue if a member draws benefits in a staggered way.
Individuals with the new protection will retain it following a “block transfer”. Such transfers have a number of pitfalls, but unlike older protections, the new protections will survive even if a block transfer happens more than 12 months after transferring individuals had joined the receiving scheme. The Bill also picks up individuals who were included in block transfers on or after 11 February 2021 and up to 3 November 2021.
Individuals will be able to retain the new protection following a transfer that does not qualify as "block" (so an individual transfer, and – very helpfully – a bulk transfer where only some of a member's benefits are transferred such as DC leaving behind DB), but the protection applies only to the transferred rights so these will need to be ringfenced in the receiving scheme. But, unlike block transfers, this protection does not seem to apply for transfers between 11 February 2021 and 4 November 2021, which we hope would have been rare.
Comment
The closure of the window noted above fixes the number of individuals with the new protection, but they continue to present added complexity (including the challenge for schemes and their legal advisers to identify whether their rules have relevant rights). And there has been a missed opportunity to apply similar rules for the older protected ages.
The Government has indicated the possibility that it will increase NMPA again in future when and if State pension age rises – it is rather unthinkable that we might have a third tranche of protections like this, but schemes might want to bear this in mind as they modify their current rules!
Finance Bill – Mandatory Scheme Pays extension
Clause 9 of the Finance Bill extends the notice and payment deadlines for mandatory Scheme Pays so that members can access this right later (and without late payment penalty) where there has been a retrospective change of facts on annual allowance usage.
Mandatory Scheme Pays is the mechanism under which individuals can, subject to certain deadlines and conditions, require their pension scheme to settle an annual allowance charge of £2,000 or more for a tax year in exchange for an actuarial reduction in their scheme benefits.
Currently, where the individual is able and wants to invoke the mechanism, they must notify the scheme by 31 July in the year after the end of the relevant tax year (so some 16 months after the tax year in question). The scheme administrator must report and pay the charge to HMRC no later than their Accounting for Tax return for the quarter ending the following 31 December (which has to be delivered to HMRC within 45 days of that quarter ending).
Clause 9 creates new extended deadlines where there is a retrospective change of facts on annual allowance usage in a previous tax year, which broadly operate as follows:
- Where the member is notified of a retrospective change of facts, and mandatory Scheme Pays can operate (we believe that there will be regulations that spell out the exact circumstances), the member has three months to notify the scheme that they wish to use the facility
- The scheme administrator must report and pay the charge to HMRC no later than their Accounting for Tax return for the quarter that follows the quarter in which the member notification was received
Such retrospectivity is limited to broadly six years after the tax year in question.
The clause is very similar to the draft legislation on which HMRC consulted in July. Although produced to assist those in the public sector who elect for legacy benefits to settle their McCloud-based discrimination (see article below) and so have retrospective increases in entitlements causing new or additional annual allowance charges, the clause is not restricted to members of the public sector schemes.
The policy paper states that the measure will be operative from 6 April 2022, backdated to 6 April 2016.
Comment
While clearly written with a focus on the McCloud exercise, we will be interested to see what changes in other situations count as “retrospective changes of fact” – this will determine how useful this is for, in particular, the private sector.
We note that the right to mandatory Scheme Pays is not always available to help with an annual allowance charge – for example not for individuals who have already started receiving their pension, or whose benefits are building up across more than one scheme. In these circumstances, individuals will instead still be reliant on whether their scheme decides to allow voluntary Scheme Pays.
Finance Bill – rectification of unlawful discrimination in public service pension schemes
Clause 11 of the Finance Bill sets out regulation-making powers to address adverse tax impacts relating to the rectification of unlawful discrimination as provided for in the Public Service Pensions and Judicial Offices Bill. The latter Bill, introduced in July, provides for certain members of public service pension schemes to be able to choose between receiving legacy or reformed scheme benefits in respect of their service between 1 April 2015 and 31 March 2022 through the ‘deferred choice underpin’ method settled on by the Government (see Pensions Bulletin 2021/06) following the McCloud judgment.
The aim of the regulations is to “make the necessary changes to tax legislation so that, as far as possible, individuals can be put in the position they would have been in absent the discrimination”. As such, they will have effect on or after 6 April 2022 and will be capable of having retrospective effect.
The Explanatory Note lists five provisions that may be made under Clause 11. They include certain protections from the lifetime allowance, annual allowance and unauthorised payments charges that would otherwise arise as a result of the member electing for legacy benefits.
Comment
It is clearly welcome news that HMRC is willing to adjust pensions tax law to protect from adverse tax charges those in public sector schemes, who decide to receive 2015-22 legacy benefits to resolve the discrimination they suffered. It would be very helpful if changes could similarly be made to protect those in private sector schemes whose trustees wish to deliver adjusted benefits through GMP conversion to resolve the sex discrimination certain members have suffered in relation to the 1990-97 element of their benefits.
