ONS reveals its plans for price inflation calculations during the health emergency
The Office for National Statistics has set out its plans for data collection, compilation and publication of its various price statistics that will apply whilst movement restrictions are in operation as a result of the Covid-19 pandemic. The ONS is facing a major challenge because of its reliance on price collectors who in April were unable to undertake their normal visit to outlets to obtain prices, as well as many goods and services not being available during the lockdown.
The prices collected feed into the construction of indices such as the Consumer Prices Index and the Retail Prices Index – key measures of inflation used in particular by DB pension schemes to determine benefit levels, but with much wider application including the calculation of index-linked gilts dividends.
The ONS has set out its workarounds, that will be operative from the April 2020 indices due to be published on 20 May. These include remote collection of prices (by phone and interrogation of websites) and “imputed pricing” where it is not possible to collect prices. For those items that remain available, the imputed price will be based on the prices and price movements of similar goods and services. For those items that are not available because the market has effectively been shut down, the imputed price will aim not to disturb the overall price index. Currently, approximately 20% and 18% of the CPI and RPI baskets respectively contain unavailable items.
These workarounds will continue indefinitely until such time as it is considered safe to resume an in-the-field local price collection and goods and services are once more available to consumers.
Separately, the UK House Price Index is being suspended until further notice given that the entire housing market has effectively been in stasis since the lockdown began and so it is not possible to collect a representative number of prices.
Comment
This action is an inevitable consequence of the lockdown and the “new normal” to follow. Whilst it should keep price indices more stable in the short term, it does create an instability risk for when goods and services come back on line. For DB pension schemes one risk is that the September 2020 measure of inflation is distorted and then becomes locked into pension increases that have to be paid due to the operation of legislation and scheme rules. Liabilities could increase unexpectedly if we experience a short period of deflation, because of it not being possible to reduce pensions in payment.
Supreme Court rules that statutory LGPS investment guidance is unlawful
The Secretary of State for Housing, Communities and Local Government issued guidance in 2016 regarding the investments of the Local Government Pension Scheme (LGPS). The guidance stated:
“…the Government has made clear that using pension policies to pursue boycotts, divestment and sanctions against foreign nations and UK defence industries are inappropriate, other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government.”
and
“[LGPS administering authorities] should not pursue policies that are contrary to UK foreign policy or UK defence policy.”
In 2017 the Palestine Solidarity Campaign Ltd challenged the lawfulness of this guidance. The High Court upheld this challenge (see Pensions Bulletin 2017/27). The Court of Appeal then found the other way (see Pensions Bulletin 2018/24), but now, by a 3-2 majority, the Supreme Court has restored the original decision; the guidance is unlawful.
The majority held that:
- There has been a misconception on the part of the Secretary of State that LGPS administrators are part of the machinery of the State which probably emboldened him to exceed his powers in issuing the disputed guidance
- Administrators of local government schemes have duties which, at a practical level, are similar to those of trustees and they consider themselves to be quasi-trustees who should act in the best interests of their members
- It is misleading to claim that pension contributions to the LGPS are ultimately funded by the taxpayer. According to long-established case law pension benefits “are part of the consideration which an employee receives in return for the rendering of his services”. The fund “is not public money”
- Power to direct how administrators should approach the making of investment decisions by reference to non-financial considerations does not include power to direct what investments they should not make
Comment
So, we are back to where we started with the Government found to have overreached itself in respect of this part of its statutory guidance. But this does not mean that LGPS authorities are free to do what the Government was seeking to proscribe.
Pensions Regulator publishes its 2020 statement on DB scheme valuations
On 30 April the Pensions Regulator published its delayed annual funding statement for DB schemes. Unsurprisingly, this year’s edition of the Regulator’s expectations in relation to schemes currently in the process of carrying out actuarial valuations (as well as schemes undergoing significant changes that require a review of their funding and risk strategies) is very much coloured by the Covid-19 emergency.
We covered this development on 30 April with a News Alert that summarises, analyses and comments on the statement. We also published a blog linked to this development.
Comment
As ever, this statement contains a number of messages pertinent to valuations currently being undertaken, many of which we have seen before. The focus on integrated risk management remains, but unsurprisingly in this period of great business uncertainty, the Regulator spends more time on covenant issues.
HMRC issues Pension Schemes Newsletter 119
HMRC’s latest pension schemes newsletter covers a number of topics, of which the more interesting are as follows:
- Potential loss of protected pension age – this in effect confirms that the 22 April announcement by Economic Secretary to the Treasury John Glen did relate to individuals, who having retired on pension, on returning to work to assist with the Covid-19 crisis, could put at risk their “protected pension age” with the danger that future pension income would be treated as unauthorised payments. However, the unauthorised payment repercussions will not come to pass if certain re-employment conditions are met. HMRC says that it accepts that returnees will meet the re-employment conditions if they are undertaking work relating to the Covid-19 outbreak
- BCE1 testing for drawdown – HMRC accepts that where, because of Covid-19, trading has been suspended or the closing prices are not a proper measure of market value, the value of the funds being designated ahead of drawdown can be determined using certain alternatives to the closing price. On a related matter, HMRC says that if valuing assets of a pension scheme and because of Covid-19 it is not possible to get “the most accurate valuation possible”, another method should be used which is “fair and reasonable” and can be supported. Both are likely to relate particularly to property – to property funds in the first instance, many of which have been “gated”, and to direct holdings in property in the second, where it may not be possible to get valuers on site
- Annual allowance calculator – HMRC says that this can now be used for 2020/21 tax year calculations
- Gibraltar and the overseas payment charge – HMRC acknowledges the uncertainty about whether the overseas payment charge applies if transferring to a Gibraltar-based QROPS after the UK left the EU on 31 January 2020 (which we first raised in January – see Pensions Bulletin 2020/04). In effect HMRC says that this charge does not apply whilst we are in transition, but worryingly “as soon as the position after the transition period becomes clear” it will update its guidance
Comment
It is good to see that HMRC has been able to resolve the returnee issue. We trust that the Gibraltar-based QROPS issue can similarly be resolved so as to avoid unnecessary tax charges from arising.
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 30 April the Institute for Fiscal Studies published an article exploring the impact of Covid-19 on DC pension pots, for those taking a significant income from a pot entirely invested in the UK stock market, which of course has suffered a substantial fall in value in recent months. After showing that the DC pot is unlikely to recover to where it might have been had there not been the crisis, it concludes that those accessing DC funds in flexible ways now face complex decisions about how to invest their funds and whether and how to adjust their pension withdrawal in response to large stock market shocks
- On 30 April the Pensions Policy Institute published a short Briefing Note exploring the impact the Covid-19 pandemic may have on pensions now and in the future. The Note concludes by saying that in most cases, pension savers could benefit from refraining from making any sudden decisions, whether or not their pensions are DB or DC
- On 1 May the Government announced that it will temporarily reduce, from 25% to 20%, the charge on unauthorised withdrawals from Lifetime ISAs – the new rate applying in respect of withdrawals taking place between 6 March 2020 and 5 April 2021. This will ensure that those making withdrawals in this period will have the same tax treatment as if they had saved in an ordinary ISA, rather than being penalised – the 25% Government bonus being cancelled out by the 20% charge
- On 5 May the Institute and Faculty of Actuaries’ Continuous Mortality Investigation published its fourth weekly report on mortality data. This latest report shows a slight reduction in adverse mortality to that previously reported (see Pensions Bulletin 2020/18). The number of deaths in England and Wales in the week ending 24 April of 21,997 was 11,794 (143%) greater than expected, with 8,237 having Covid-19 mentioned on the death certificate. The IFoA says that this is the first week in which there has been a reduction in the number of ‘excess’ deaths, before pointing out, once more, that the true impact of the pandemic is likely to be “roughly double that of commonly-quoted figures for Covid-19 deaths”. The accompanying report suggests that by 4 May there could have been between 51,000 and 59,000 more deaths in the UK since the beginning of 2020 than expected. There is also much media reporting of the UK now having the highest cumulative total of Covid-19 deaths in Europe, surpassing Italy. Also, the UK currently has one of the worst reported daily death tolls in the world, second only to the United States
Comment
Thankfully the number of announcements and posts are starting to diminish, but with commentators increasingly focussing on end of lockdown issues, no doubt there will be more to come as we take tentative steps towards a “new normal”.
