Pensions Bulletin 2020/18

DB schemes asked to issue Covid-19 transfers warning

In guidance published on 29 April, the Pensions Regulator is asking DB pension scheme trustees to issue a letter to those seeking to transfer from a DB to a DC scheme to warn that, in most cases, transferring out is unlikely to be in the member’s best long-term interests. The letter, jointly signed by the Pensions Regulator, the Financial Conduct Authority and the Money and Pensions Service, warns of scam risks, the PPF protection that will be lost, that once transferred the member cannot change their mind, and urges the recipient to consider their decision carefully, pointing them towards the guidance service provided via MaPS.

This letter, which the Regulator would like to see issued “for the foreseeable future” is just one part of new guidance covering how trustees and their scheme administrator delegates should communicate to members during Covid-19. Other aspects covered are:

• Guiding principles for keeping members informed about the steps being taken to continue running the scheme
• Communicating with members when they request a transfer or to access benefits – this includes a request for DB trustees to actively monitor the number of transfer requests received, which advisers are supporting the members’ requests and if any unusual or concerning patterns are identified, to contact the Financial Conduct Authority
• Stopping contributions and ceasing membership – making members aware of the employer contributions and other benefits they may lose
• Pension scams – reminding trustees that they are the first line of defence
• DC investments and market volatility – making specific mention of messages that ought to accompany any annual benefit statements or statutory money purchase illustrations due for release over the next few months

Other Covid-19 pension-related announcements

Since last week’s Pensions Bulletin, other announcements and posts influenced by the Covid-19 health emergency in the world of pensions include the following:

• On 22 April Economic Secretary to the Treasury John Glen announced to Parliament that the Government intended to temporarily suspend selected pensions tax rules. This was to protect, from significant tax charges, the pension income of key workers in the public sector who had recently retired aged between 50 and 55 and have since returned to work due to the Covid-19 crisis. There are no further details, but it is thought that these individuals retired with the benefit of a “protected pension age”. If so, their return to the same or similar work could invalidate the tax conditions under which their benefits were put into payment, with the risk that future pension income would be treated as an unauthorised payment and subjected to penal tax. HMRC is to set out detailed operational guidance in due course

• On 23 April HM Treasury announced a significant revision to the Debt Management Office’s financing remit for 2020/21, covering May to July 2020 due to the support measures announced by the Government and the economic impact of Covid-19. Planned gilt sales will now total £180 billion over this three-month period based on the Government’s assessment of its financing requirements. This higher volume of issuance is not expected to be required across the remainder of the financial year, but a further update to the DMO’s financing remit and planned issuance schedule for 2020/21 will be announced on 29 June

• On 24 April the DWP and Department for Business, Energy and Industrial Strategy jointly announced a package of measures to ensure that workers about to take family-related leave are not penalised by being furloughed. An employee’s eligibility for family-related statutory pay and their earnings-related rate of Statutory Maternity Pay, Maternity Allowance or Statutory Adoption Pay, will be the same as it would have been had they not been furloughed. A statutory instrument laid in Parliament on the same day makes the necessary changes

• On 24 April regulations were laid in Parliament allowing claims for State Pension Credit to be made electronically in addition to the existing methods of claiming by post and telephone. This digital system is due to be available online during the week commencing 4 May 2020

• On 27 April the Under Secretary of State for Pensions & Financial Inclusion, Guy Opperman announced to Parliament the pensions-related steps that the Government is taking during the Covid-19 emergency. However, with one exception this written statement was essentially no more than a round-up of previous announcements falling largely within his remit. The exception relates to those who access State pension and other benefits in cash form via the Post Office Account system. There are approximately 900,000 who use this service. Since 10 April 27,000 people, who the DWP consider may need support to access their payment, have been contacted. The minister says that “The Department has worked tirelessly to identify those older, vulnerable customers who urgently require help to access their payments”

• On 27 April the Department of Health and Social Care announced a new time-limited life assurance scheme to operate for the duration of the pandemic in respect of health and care workers. A flat £60,000 will be paid to the families of eligible workers who die from coronavirus in the course of their “frontline essential work”

• On 28 April the Institute and Faculty of Actuaries’ Continuous Mortality Investigation published its third weekly report on mortality data. This latest report shows a further increase in adverse mortality to that previously reported (see for example Pensions Bulletin 2020/17). The number of deaths in England and Wales in the week ending 17 April of 22,351 was 13,197 (144%) greater than expected, with 8,758 having Covid-19 mentioned on the death certificate. The IFoA says that the true impact of the pandemic is likely to be “roughly double that of commonly-quoted figures for deaths in hospitals” with the accompanying report suggesting that by 27 April there could have been between 38,000 and 44,000 more deaths in England and Wales since the beginning of 2020 than expected

• On 28 April HMRC put back by three months the closing date for its call for evidence on the tax advice market (see Pensions Bulletin 2020/14). This was in order to give stakeholders, who may be affected by Covid-19, time to submit their views

• On 28 April the Pension Protection Fund posted a note on its website where it sought to reassure its levy payers that Covid-19 will have a minimal impact on the amount of levy that it intends to charge this autumn. This is because levy invoices in 2020/21 are based on rules that were fixed, and information that was largely collected, before the Covid-19 pandemic. More significantly, the PPF is “considering all options” to help levy payers who may have difficulty paying these invoices. As to the 2021/22 levy year and beyond the PPF will be considering the impact of Covid-19 as it develops rules for this year – and in any event legislation does not allow the overall levy to be more than 25% higher than that in the previous year. Related to this development, on 27 April LCP noted that individual firms could face significant increases in 2021/22 levies due to a combination of three factors – a weakening of the overall funding of the PPF, a substantial deterioration in the funding position of individual schemes, and individual firms being judged as being at a higher risk of becoming insolvent

Coronavirus – some considerations for employers with DC pension schemes

We have recently published some examples of pensions issues uncovered and actions taken by employers who sponsor DC pension schemes. The case studies cover contribution options for furloughed employees, budgeting for increased overtime and bonuses, retaining life assurance and understanding how salary sacrifice is potentially impacted.

The document concludes with a brief run through some other areas which employers need to consider which are linked to DC scheme membership.

High Court upholds Pensions Ombudsman’s reasoning in RPI to CPI indexation case

In February we reported (see Pensions Bulletin 2020/06) on the Thales case where, unusually, the Pensions Ombudsman was asked to rule on an attempt to switch from RPI to CPI for calculating pension increases. In this case the pension increase rule provided that the rate of increase shall be:

“the percentage increase in the retail prices index…subject to a maximum of 5 per cent as specified by order under Section 2 of Schedule 3 of the Pension Schemes Act".

The problem was that, once the Government started to make revaluation orders under the Pension Schemes Act based on CPI instead of RPI the two limbs of this definition became inconsistent. Should increases be RPI-linked under Limb 1 or CPI-linked under Limb 2?

The Pensions Ombudsman determined that the ordinary and natural meaning of this provision was that the rate of pension increases should be RPI, ie Limb 1 prevails, and directed that the switch (which had already been made) be unwound and affected members put back where they would have been, with interest.

It is reported that the scheme liabilities on its scheme funding basis, are £20m higher if the answer is RPI.

The employer appealed to the High Court on a point of law. There, Mr Justice Nugee upheld the Pensions Ombudsman’s conclusion and dismissed the appeal, despite the employer’s counsel advancing seven grounds that the Ombudsman had got it wrong. The judge did this on the basis of his own analysis of the language used in the rule and held that RPI was the natural and ordinary meaning of the words.