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Pensions Bulletin 2024/41

Pensions & benefits Policy & regulation Pensions tax Autumn budget

This edition: HMRC clarifies tax charge on surplus payments, Other news from HMRC, The PPF has another successful year, The Pensions Ombudsman has an exceptionally challenging year, Pension fraud highlighted by Regulator via old pension scam case, Lost pensions continue to increase and Pensions Regulator appoints three new executive directors.

Sunset over water

This Pensions Bulletin covers our normal weekly round-up of regulatory and other developments. It has been issued ahead of the Chancellor’s 30 October 2024 Budget speech. A separate Budget Bulletin is being issued looking at Budget-related announcements which are of potential relevance to pension schemes and their members. 

HMRC clarifies tax charge on surplus payments 

On 24 October 2024 HMRC published Pension Schemes Newsletter 163 with arguably the most significant article appearing right at the end. 

Under the heading of “authorised surplus payment charge”, HMRC states that this charge arises on the gross amount of the authorised surplus payment and not the amount received by the sponsoring employer on the refund of surplus. HMRC promises to update the guidance included in the Pensions Tax Manual at PTM145200 with examples to reflect this. 

Comment

This may sound like a minor piece of tidying up, but it is an important issue for DB schemes that are or could be in surplus at the time of winding up, and where part of that surplus is to be paid to an employer. Until now HMRC has not made clear in guidance what constitutes the surplus payment that the tax rate (25% since 6 April 2024, 35% before that) is applied to and this has recently been the subject of some discussion in the industry.   

To take an example, if it is agreed that £10m of surplus (before tax) will be paid out of the scheme as an authorised surplus payment, does the administrator deduct £2.5m and remit this to HMRC and pay the balancing £7.5m to the employer, or does it pay £8m to the employer after deducting £2m (being 25% of £8m)? HMRC’s announcement confirms that it is expecting to receive £2.5m rather than £2m. 

We estimate that this clarification could bring in £10bn more tax for HMRC over the short to medium term than the alternative approach, with more to follow as pension schemes run-on and seek to grow surplus further.  However, it may take more than this clarification before the position becomes certain. 

Other news from HMRC 

Much of the rest of the content of Pension Schemes Newsletter 163 is taken up in setting out the content of the two sets of further regulations recently laid before Parliament, following consultation, whose purpose is to complete the legislative work needed to deliver on the abolition of the Lifetime Allowance. These regulations make many changes to the new pensions tax law, correcting errors and dealing with omissions.  HMRC has also promised that it will provide responses in its November Newsletter to further questions raised by respondents to the consultation held on these regulations that were not addressed. 

There is also an update to the position on payroll reporting, with new reporting requirements operative from April 2025 when there is an excess over an individual’s lump sum allowance or lump sum and death benefit allowance. The requirements where the lump sum is any of uncrystallised funds pension lump sum, serious ill-health lump sum, pension commencement excess lump sum and stand-alone lump sum are set out. 

Three other topics are covered – pension flexibility statistics, registration statistics and managing pension schemes service. 

The PPF has another successful year 

The Pension Protection Fund has reported on another year of strong financial performance, with the ratio of assets to liabilities (the funding ratio) increasing from 156.0% to 166.5% over the year ending 31 March 2024. Although assets under management fell once more, from £33.8bn to £33.1bn, liabilities fell by even more, from £21.7bn to £19.9bn, resulting in the excess over liabilities increasing from £12.1bn to £13.2bn. (These figures allow for schemes in assessment that are likely to transfer.)  

This £13.2bn figure compares with the estimated combined deficit of every single DB scheme that is running a deficit on PPF compensation benefits of around £3bn. This is stated to be down from £8bn last year, which must be a restatement as the estimate in last year’s report was around £6bn. 

Claims remained very low at £14.7m in value (21 by number), compared to £13.5m in 2022/23. Although claim levels could increase if insolvency rates worsen, the improved scheme funding position is such that the PPF believes that a significant number of such schemes would not transfer to the PPF.  

By contrast the Fraud Compensation Fund has seen a rise in cases due to pension liberation. There have been 164 cases to date and these are being assessed over a number of years. The net cost of claims in 2023/24 was £115m, up from £78m in 2022/23 and the fund’s reserves reduced by £75m in the year to net liabilities of £75m. 

Comment

The PPF is in an extraordinarily strong position and could comfortably absorb every single underfunded DB scheme in the country and still have a £10bn surplus. Inevitably, questions are being asked as to what to do with this surplus, with suggestions that the restrictions on, and in some cases, the absence of annual increases in PPF compensation need to be addressed. Raising a £100m levy to fund the PPF is also being called into question by respondents to the levy consultation which closed recently.  

The Pensions Ombudsman has an exceptionally challenging year 

The Pensions Ombudsman has published its annual report and accounts for the year to 31 March 2024, providing some insight into the challenges it has faced, including the impact the cyber incident in June 2023 has had on its performance over the year.  In particular it appears that the precautionary closure of systems resulted in a period in summer 2023 where no casework could be progressed and that the careful assessment of systems that followed resulted in reduced capacity over the autumn. The Ombudsman also describes other challenges faced, including market challenges in recruiting and retaining skilled staff on fixed-term contracts commensurate with its funding model, and an increase in the number of complex cases that remain in its historical caseload. This is reflected in the casework statistics – 6,923 new “pension complaints” were raised in 2023/24, a drop of 5% from the 7,280 in 2022/23, thought to be at least in part due to the switch from online applications to a PDF version in the wake of the cyber incident.  Those closed fell by 15%, from 7,784 to 6,634.   

As in previous years, contributions, administration, transfers and retirement benefits make up over 50% of the complaints that were settled in 2023/24. The report also notes that in 2023/24 the number of active pension complaints aged over 18 months have increased by 23%. Interestingly, 443 of these cases are about the recovery of overpaid pension benefits, with over half of these being over 3 years old and impacted by the October 2023 Court of Appeal ruling (see Pensions Bulletin 2024/01) that the Ombudsman is not a competent court for the purposes of concluding overpayment disputes where recoupment is sought. 

The report also goes on to discuss with some pride the significant progress made over the year by the Pensions Dishonesty Unit (PDU) in their work investigating cases of suspected pension scheme wrongdoing and attempting to bring justice to members affected. 

The Ombudsman is aware that while continuing to work with the DWP to develop sustainable models of funding, it also needs to look at what it can do to improve efficiency and provide earlier resolution of complaints. To this end it has embarked on a ‘root and branch’ review of its Operating Model to identify efficiencies across its ‘customer journey’. 

Comment

It is unfortunate that the cyber incident last year has impacted the delivery of the Ombudsman’s service to the extent that many improvements of the previous year have not been repeated. However, we are hopeful that the root and branch review currently underway will lead to improvements in both the number of unresolved complaints and the waiting time for resolution of cases currently under review.

Pension fraud highlighted by Regulator via old pension scam case 

On 24 October 2024 the Pensions Regulator urged those running pension schemes to help protect pension savers from scams through the publication of a number of videos – two of which are aimed at trustees and administrators and another two at pension savers. All are based around a nurse, Pauline Padden, who lost her entire £45,000 pension savings many years ago to fraudsters operating under the umbrella of Friendly Pensions Ltd. The Regulator asks that trustees and administrators share the saver videos with their members to help them know how to spot and avoid the tactics that scammers use. 

This was the first part of the Regulator’s contribution to Scams Awareness Week which ran between 21 to 25 October this year. The second was the publication of the regulatory intervention report relating to Friendly Pensions Ltd. 

Between 2012 and 2014, 245 individuals were persuaded to transfer pension savings totalling £13.7m into 11 fraudulent pension schemes under the umbrella Friendly Pensions Ltd. Following intervention by a number of bodies after the scams had taken place, Alan Barratt and Susan Dalton were jailed in April 2022 for their part in defrauding Pauline Padden and others of their pensions (see Pensions Bulletin 2022/16).

The above report also confirms that following the completion of confiscation proceedings against Barratt and Dalton in January 2024 (with only just under £35,000 found), the Fraud Compensation Fund has approved compensation for the pension schemes involved in this case, with an initial £13.2m being paid into the schemes. Members of these schemes will be informed of what this means for them individually in due course. 

The Regulator also calls on the pension industry to adopt higher standards of anti-scam practice, by taking the pledge to combat pension scams, deliver on it and report any suspicions to Action Fraud.

Comment

Unfortunately, pension scams seem to be a fixed part of the pensions landscape, although statistics are hard to come by as to the extent to which regulatory and other action is helping to turn the tide. Reminding scheme members regularly of the ever-present risks has to be a good thing, but the Government must do its part too and this includes making necessary changes to 2021 regulations governing scam checks on transfers so that they work properly. 

Lost pensions continue to increase 

National Pensions Tracing Day fell on Sunday 27 October this year, the logic being that the extra hour as the clocks went back, along with the nights drawing in, could be used by individuals to start to trace any missing pensions. There is a useful website for those keen to hunt down missing pension pots.  

To mark this occasion the Pensions Policy Institute reported on the results from its 2024 Lost Pensions Survey. The PPI reckons that there are now an estimated 3.3 million lost pension pots, containing £31.1bn worth of assets, with the average size of a lost pot being highest among the 55-75 age group, at £13,620. These figures are up on the 2022 survey when the PPI reported an estimated 2.8 million lost pension pots, containing £26.6bn worth of assets.  

A pension pot is considered lost when the pension provider who administers it is unable to contact the saver who owns it.  

Comment

This is the third survey in this area that the PPI has carried out, with the number and amount of lost pensions increasing on each occasion. The main culprit is almost certainly the successful auto-enrolment policy which has substantially increased the number of pension pots being held. 

The survey puts further pressure to deliver the pensions dashboard because although there are other methods by which individuals can trace their lost pension entitlements, it is only likely to be the dashboard, along with a solution to the small DC pots issue, that can turn this problem around. 

Pensions Regulator appoints three new executive directors 

The Pensions Regulator has announced the permanent holders of the Executive Director roles for each of the regulatory directorates announced in February 2024 (see Pensions Bulletin 2024/08). Gaucho Rasmussen, Neil Bull and Nina Blackett head up the Regulatory Compliance, Market Oversight and Strategy, Policy and Analysis directorates respectively. 

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