- PPF to go ahead with 2024/25 levy proposals unaltered
- Pensions Ombudsman continues to be kept busy
- FRC pauses its plans to become ARGA
- Government decides that no action is needed on the VAT treatment of fund management services
- IFS examines the state pension
- CDC legislation adjusted to assist single employer schemes
- High earning Scots to pay even more income tax than the rest of their UK counterparts
- National Insurance cut passes into legislation
- Christmas and New Year break
PPF to go ahead with 2024/25 levy proposals unaltered
The Pension Protection Fund has confirmed that it will go ahead with its proposals for the 2024/25 PPF levy as set out in its consultation document in September (see Pensions Bulletin 2023/36). As a result, the PPF estimates that the total levy intake for 2024/25 will be £100m (down from £200m in 2023/24 and around a quarter of the 2022/23 estimate). The PPF also says that 99% of schemes can expect to pay less levy in 2024/25 than in 2023/24.
In addition, the PPF has also confirmed that:
- The Pensions Regulator is expecting to publish updated guidance on asset class reporting on Exchange in January 2024. This will clarify the preference for schemes to report their investments primarily via the available asset categories, only using the more detailed risk factor stress impact methodology for particularly complex arrangements that can’t be adequately described in the asset mix
- The PPF will cease to use Moody’s to provide credit scores for the credit-rated scorecard for the 2024/25 levy year. It will continue to use S&P and Fitch. The PPF will write to schemes that have had a Moody’s rating as part of the assessment of their insolvency risk. The D&B January 2024 score is expected to reflect this change, and the D&B April to December 2023 scores are expected to be updated shortly thereafter
The three other matters we reported on in September (relating to the Special Category scorecard, ABC certificates and payment plans) are going ahead as proposed.
Separately, the PPF is considering the responses it has received on the future direction of the levy and is engaging with the DWP on the legislative changes that would allow it to reduce from £100m (or not charge a levy) without jeopardising its ability to raise funds in the future. The PPF says that the DWP is expecting to legislate as soon as Parliamentary time allows.
Comment
The PPF’s conclusions for the 2024/25 levy are not a surprise and now that they have been published, schemes should start to work with their advisers to estimate the levy they are likely to face and possible actions to reduce it.
Turning to the PPF’s desire to have much greater flexibility in setting the levy (supported by its stakeholders), it seems unlikely that Parliamentary time will be found before the General Election, as some of the changes that the PPF needs will require an Act of Parliament. There is a clear risk that £100m will have to be charged in 2025/26 even if, like now, the PPF doesn’t need the money.
Pensions Ombudsman continues to be kept busy
The Pensions Ombudsman reports a challenging year in the latest annual report and accounts (for the year ending 31 March 2023), due to demand for its services continuing to rise at a much higher rate than anticipated. And although the Ombudsman met all its key performance indicators on processing times and quality, thanks to more staff and new ways of working, it was unable to meet the KPI’s it had set itself when it came to customer perceptions.
Enquiries raised as “pension complaints” rose by 17% from 6,216 in 2021/22 to 7,280 in 2022/23. Those closed rose by 49% from 5,221 to 7,784, so it would appear that the number remaining unresolved at the end of the year fell. However, no figures have been published of unresolved cases at the end of the year, still less how long they have been with the Ombudsman.
As in previous years four topics dominate the nature of the complaints the Ombudsman has to deal with – contributions, administration, transfers and retirement benefits making up over 50% of the complaints that were settled in 2022/23.
The Ombudsman reports that despite the additional resources and new efficiencies that have been put in place, customer waiting times are still too long and reducing waiting times will remain a key focus for the service. However, this is expected to remain a challenge.
Separately, Pensions Minister Paul Maynard has stated that an additional £1.7m of funding is being allocated in 2023/24 towards the case backlog and waiting times.
Comment
The report itself has been significantly delayed (it normally being issued in July following the year-end). We understand that this was due to the cyber-attack that the service suffered in June 2023, which has had an adverse impact on the management of the Ombudsman’s workload (and was noted in the recent consultation on increasing the pension scheme General Levy as “unavoidably” giving rise to “some additional cost to the levy” – see Pensions Bulletin 2023/39).
It would be unfortunate if this cyber-attack results in a much-needed service not being able to make progress in the 2023/24 year. The Ombudsman not only needs to bring down the number of unresolved complaints; he also needs to reduce the waiting time which for some cases is measured in years.
FRC pauses its plans to become ARGA
The Financial Reporting Council is freezing headcount growth and setting a one-year strategy, instead of its normal three-year horizon, as it takes stock of a new remit from the Government and it not expecting to receive further statutory powers in 2024/25, following the absence of the Audit Reform Bill from the King’s Speech in November. The FRC has also adjusted one of its strategic objectives to remove reference to it being transformed into the Audit, Reporting and Governance Authority (ARGA).
In its latest draft plan and budget, although the FRC remains of the view that ARGA powers are both necessary and proportionate to expand and modernise its toolkit, it no longer has a planning date for when it might receive such powers. In last year’s plans (see Pensions Bulletin 2022/47) the FRC was working on an April 2024 date.
Amongst seven areas of focus for the FRC in 2024/25 is for it to continue its actuarial work and engagement with all parts of the pensions system in support of reliable and consistent pension projections.
Consultation on the draft plan and budget closes on 26 January 2024.
Comment
Delay has turned into non-delivery causing the FRC to have to reassess its role. The FRC intends to undertake a full review of its strategy and objectives in 2024/25 which makes sense as the powers promised to it have failed to materialise.
Government decides that no action is needed on the VAT treatment of fund management services
The Government has responded to its December 2022 consultation on the VAT treatment of fund management services. The outcome is particularly relevant to DC schemes.
Currently, fund management services can be VAT exempt in one of two ways. First, because they fall within the current list of exempt fund types set out in UK VAT legislation. Secondly, because they can be regarded as “special investment funds” (SIFs) under EU VAT law.
The definition of a SIF was broadly left to member states to determine, within the bounds of EU law. Over the years there has been a lot of European Court of Justice case law about the types of investment vehicle which fall within the SIF definition, which kept changing, with consequential changes to UK legislation and practice. The 2022 consultation included a proposal to codify the SIF definition in UK legislation to remove any uncertainty as to whether a fund can be treated as a SIF.
Having examined the consultation responses and carried out wider engagement, the Government has decided not to proceed with the SIF codification. This is because the vast majority of fund types for which management services should be VAT exempt are already covered by the statutory lists.
HMRC guidance will be updated in due course.
Comment
So, the two ways in which fund management services can be VAT exempt continue, although in practice, it seems that falling within the UK’s “list” will suffice and the relevance of “SIF” is likely to fade. The revised HMRC guidance will hopefully shed further light.
IFS examines the state pension
The Institute for Fiscal Studies has published the first of its major reports from the Pensions Review that it launched earlier this year (see Pensions Bulletin 2023/17). Taking the post 2016 state pension as its topic the IFS considers its role in the UK pension system, analyses the key challenges for future generations of pensioners and sets out policies that would improve the current system.
The IFS finds that the UK state pension system has a number of attractive features that work well, but one of its challenges is that there is widespread pessimism about its future and a mixture of confusion and pessimism about its level.
Despite this and other challenges, the IFS believes that the state pension is not in need of wholesale change, but certain improvements are needed which it wraps up in the following ‘four-point pension guarantee’:
- A government target level, expressed as a share of median full-time earnings, with increases in the long run keeping pace with average earnings growth
- The state pension continuing to increase at least in line with inflation every year, both before and after the target level is reached
- The state pension not to be means-tested
- State pension age to only rise as longevity at older ages increases, and never by the full amount of that longevity increase
The IFS says that to set the target level, politicians should state what they believe to be an appropriate level for the state pension relative to average earnings. They should then legislate a pathway to meeting that target with a specific timetable. This would result in an explicit commitment from the Government to target a level of state pension relative to average earnings and the four-point pension guarantee would then maintain that value in the long run.
In addition, the IFS suggests that, as a simplification measure, the UK should move its state pension system towards being provided on a universal basis, with entitlement building for each year of life an individual lives in the UK.
Comment
The IFS’s four-point pension guarantee is mainly focussed on finding a way to leave behind the triple lock given the hugely uncertain long-term cost attached to this policy. As we go into a likely General Election year it will be interesting to see whether the IFS’s ideas gain any traction with the two main political parties.
CDC legislation adjusted to assist single employer schemes
Draft regulations have been laid before Parliament making some technical changes to the 2022 regulations that govern the operation of single and connected employer collective money purchase schemes.
As a result of these changes:
- Any benefit increases that follow an actuarial valuation must offset (as opposed to be added to) one or more of any planned reduction under a multi-annual reduction or reductions then in effect that have followed an earlier valuation. Certain additional detail must be contained in the actuarial valuation as a consequence
- If the scheme is winding up following a triggering event, it will be possible to transfer a beneficiary’s accrued CDC rights to dependant, nominee or successor flexi-access drawdown under the pensions tax legislation
Comment
Collective money purchase schemes have been possible since the Pensions Regulator opened shop to authorisation requests on 1 August 2022 following the finalisation of the necessary legislation and the Regulator’s Code of Practice. However, none are currently in operation and one reason for this is because of some technical difficulties with the legislation. Hopefully, these regulations will enable the single and connected employer variants to proceed and the DWP can now turn its attention to delivering for multi-employer schemes.
High earning Scots to pay even more income tax than the rest of their UK counterparts
On 19 December 2023 the Scottish Government announced that it was to add 3 pence to the income tax on earnings between £75,000 and £125,140, through the introduction of a new 45% tax band, and add 1 pence to the income tax on earnings above £125,140, resulting in a 48% tax charge for those on the highest earnings.
The Scottish income tax system is now constructed on six tax bands (19%, 20%, 21%, 42%, 45% and 48%), unlike the rest of the UK that is constructed on three (20%, 40% and 45%). The Scottish Government also increased the starting points for its 20% and 21% bands.
So, in 2024/25, all earnings above £75,000 will attract 3 pence more in Scotland than for those in the rest of the UK. And, as currently, Scots will pay 2 pence more on earnings between £43,663 and £75,000 than those in the rest of the UK.
In Wales the UK Government reduces each of the 20%, 40% and 45% bands by 10p, leaving the Welsh Government to decide whether to reinstate the 10p or set a different rate. As in previous years, the Welsh Government has decided to reinstate the 10p and as a result, on an overall basis, Welsh taxpayers will face the same income tax rates as those in England and Northern Ireland.
Comment
More income tax for high earning Scots also means more tax relief on any pension contributions they make, assuming they are not held back by the UK-wide annual allowance.
National Insurance cut passes into legislation
The legislation enabling the reduction in national insurance contribution rates for employees and the self-employed, which was the Chancellor’s headline giveaway in the Autumn Statement (see Pensions Bulletin 2023/47) has swiftly passed through Parliament and has now received Royal Assent. The changes made by the National Insurance Contributions (Reduction in Rates) Act 2023 are now set to take effect from 6 January 2024.
Christmas and New Year break
This is the last edition of the Pensions Bulletin for 2023. It will return after the Christmas and New Year break. We wish readers a merry Christmas and a prosperous and healthy New Year!
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
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