Pensions Bulletin 2022/38
Pensions & benefits Policy & regulation Pensions dashboards
- September’s CPI - a landmark for Government and many pension schemes
- DWP lays pensions dashboards regulations
- Government to give at least a six-month warning of dashboards ‘go live’ date
- Pensions dashboards’ deferral application guidance published
- Jeremy Hunt completes a near reversal of the mini-budget
- Concerns expressed as DWP consultation on scheme funding and investment regulations closes
September’s CPI - a landmark for Government and many pension schemes
The announcement on 19 October 2022 that the Consumer Prices Index rose by 10.1% over the twelve months to September 2022 sets the scene for the calculation of a number of pension benefits and limits for the next tax year. Over the same period the Retail Prices Index rose by 12.6% and the CPIH by 8.8%. However, this is no ordinary uprating year – either for the Government or for pension schemes.
State pensions
If the triple lock is to be retained by the Truss / Hunt administration (which we now understand to be the Government’s position), the Basic State Pension (currently set at £141.85 pw) and the Single Tier State Pension (£185.15 pw) will increase next April by 10.1% as this is the higher of the CPI figure of 10.1%, the earnings figure of 5.5%, and 2.5%.
SERPS and S2P entitlements should increase by 10.1% next April if the price inflation linkage is to be retained in full.
Occupational pensions
Next year, schemes that use September CPI as a reference point and apply the Limited Price Indexation rules to pensions in payment will have to increase them by at least 5.0% for the pension that accrued between 6 April 1997 and 5 April 2005 and by at least 2.5% for the pension that accrued after 5 April 2005. Both fall far short of price inflation and, as a result, some trustees may come under pressure to consider discretionary top ups.
GMPs that accrued after 5 April 1988 should increase by 3.0%.
For pensions still in deferment, the statutory minimum uses September inflation as a reference point and the revaluing of any pension in excess of any GMP will reflect the CPI of 10.1%, but subject to how the overriding cumulative cap bites in each case. As a result, the 10.1% increase may ultimately come through in full for many, thanks to earlier periods of low inflation. However, at the extreme, for members who retire at or before normal pension age in 2023 after just one year since leaving, the required minimum revaluation of that part of a deferred pension in excess of any GMP should only be 2.5% for the 2.5% capped order and 5.0% for the 5% capped order.
The above comments relate to statutory minima. Many schemes will have increases in their rules that are in excess of this in some areas and use different inflation reference months in other areas. The interaction of high inflation, scheme rules, and statutory minimum rules should be considered particularly carefully this year.
Pensions tax
The Lifetime Allowance for pensions tax purposes remains frozen at £1,073,100.
The Annual Allowance also remains frozen at £40,000, potentially tapering to as low as a frozen £4,000 for those on the highest incomes. In the defined benefits or cash balance world, for those accruing benefit (or with deferred benefits if they do not have one of the common “carve outs”), the increase in the CPI of 10.1% is effectively the inflation allowance made before the Annual Allowance starts to be used up in the 2023/24 tax year. The Money Purchase Annual Allowance (where it applies) remains frozen at £4,000.
Comment
The legal minimum increase in the state pension is the earnings figure of 5.5%. Breaking the triple lock would be a high-risk political gamble, especially as many pensioners have faced a big squeeze on their standard of living this year following a very low pension increase in April 2021.
For some DB pension schemes, high inflation may improve schemes’ funding positions as the statutory cap on pension increases bites, but it will depend on the extent to which their assets can keep pace with inflation, aided in many cases through hedging strategies. For those schemes providing uncapped increases the situation could be very different. With the inflation outlook being so uncertain, it is important that schemes understand and review their exposure to inflation risk on a regular basis.
High inflation and frozen pension tax allowances will, particularly in the DB world, mean more individuals hitting Lifetime or Annual Allowances. For those within the Annual Allowance regime, some unintuitive Annual Allowance usage figures may emerge due to the sharp rise in inflation over the last year, where there are mismatches between how benefits grow and how the Annual Allowance tax rules read that growth.
DWP lays pensions dashboards regulations
On 17 October 2022 the Department for Work and Pensions laid before Parliament its finalised regulations that, amongst other things, set out what occupational pension schemes must do to connect with and supply information to pensions dashboards and by when they must do these things. The provisions within the regulations are in keeping with the consultation outcome published by the DWP in July 2022 (see Pensions Bulletin 2022/28).
The Pensions Dashboard Regulations 2022 will need to be approved by both Houses of Parliament before they can come into force.
For further details of this important development see our News Alert, in which we set out and comment on these now-settled regulations.
Comment
All large and medium sized schemes now need to ensure that they will be ready to connect to the dashboard ecosystem and supply information to it by the connection date set out in the regulations. This will be no easy task, but as it has been clear for some while that dashboards are coming, most affected schemes should be making progress with their connection projects.
Government to give at least a six-month warning of dashboards ‘go live’ date
On the same day as finalising the regulations, the Department for Work and Pensions published its response to a consultation it held in July 2022 on two matters (see Pensions Bulletin 2022/25) – when pensions dashboards should become available to the public, and how information should be exchanged between the Money and Pensions Service and the Pensions Regulator.
- Dashboards availability – the DWP had proposed that 90 days’ notice be given of the “Dashboards Availability Point”. In response to concerns about this timescale it has now settled on at least six months’ notice. The Secretary of State will also need to be satisfied that the dashboard ecosystem is ready to support widespread use of qualifying pensions dashboard services by the general public before the notice can be issued. The DWP intends that the necessary assessment process to reach such a decision can begin in April 2023. It also expects to publish progress towards the decision to ensure that the pensions industry is aware of the likely go live date
- Information sharing – on MaPS sharing information with the Pensions Regulator the DWP intends to proceed as planned
These aspects have now been included in the finalised regulations on which we have reported immediately above.
Separately, the DWP intends to lay an Amending Order to enable the Pensions Regulator to share restricted information with MaPS where the Regulator considers that such sharing would enable or assist MaPS to exercise its functions in connection with the above regulations. However, this cannot be done until these regulations have been approved by Parliament.
Comment
We welcome the extended formal notice that is to be given for the go live date but remain concerned about the resource implications for schemes should they have to deal with a large number of enquiries as a result of a single switch on date, accompanied by much Government-funded publicity.
The Dashboards Availability Point itself remains open to speculation, but given that the regulations do not require public sector schemes to connect before 30 September 2024 it is difficult to see how the Secretary of State can be satisfied that dashboards will be ready for the general public before that date.
Pensions dashboards’ deferral application guidance published
Also on the same day as finalising the regulations the Department for Work and Pensions published draft guidance along with an application form for schemes who wish to ask that their deadline for connecting to the dashboard ecosystem, as set out in the regulations, is deferred.
Deferral is limited to situations where there is a change of administrator and evidence can be supplied to show that complying with the connection deadline would be disproportionately burdensome or would put the personal data of members at risk.
It is not possible to make an application until the regulations come into force. If granted, such deferral can only be for up to 12 months from this point.
Comment
This is very concise guidance most of whose contents are simply reciting the regulations. It is clear from the regulations and guidance that deferral will only be entertained in the narrowest of circumstances. Trustees also need to realise that the window for deferral is linked to when the regulations come into force and not to their own connection date.
Jeremy Hunt completes a near reversal of the mini-budget
Immediately following the sacking of Chancellor Kwasi Kwarteng MP on 14 October 2022 and his replacement by Jeremy Hunt, HM Treasury announced that the increase in the corporation tax rate from 6 April 2023, legislated for under the Johnson administration but overturned by the Truss administration in the 23 September 2022 mini-budget (see Pensions Bulletin 2022/35), would, after all, go ahead. This decision had been flagged in the short press conference given by Prime Minister, Liz Truss, on 14 October 2022 and added to the earlier u-turn on the removal of the 45% income tax band.
More followed on 17 October 2022 when Mr Hunt made an emergency statement that brought forward a number of measures that had been due to be announced in the Medium-Term Fiscal Plan on 31 October 2022. After confirming that the corporation tax rate increase would go ahead, he announced that nearly all the tax measures in the mini-budget that have not been legislated for in Parliament will be reversed. In particular:
- The reduction in the basic rate of income tax from 20% to 19%, due to come into effect from 6 April 2023, has been scrapped on an indefinite basis and will only be considered when economic conditions allow
- The 1.25% cut to the dividend tax rate, also due to take place from 6 April 2023, will now not happen
However, the abolition of the Health and Social Care Levy and the reversal of the 1.25% rise in national insurance contributions for the 2022/23 tax year with effect from 6 November 2022, will continue.
The support on energy costs is being scaled back from the two-year universal support announced in the mini-budget. The current support will remain in place until April 2023, but with a Treasury-led review to come up with a cheaper and more targeted system to operate from then.
Mr Hunt also said that there will be more difficult decisions to take on both tax and spending.
Comment
This latest announcement completes a near reversal of the mini-budget – an extraordinary turn of events with no precedent in modern times.
Concerns expressed as DWP consultation on scheme funding and investment regulations closes
Concerns have been expressed by many in the pensions industry around the potential impact of proposed scheme funding and investment regulations, consultation on which closed on 17 October 2022.
The proposed regulations, issued for consultation by the Department for Work and Pensions in July 2022 (see Pensions Bulletin 2022/29), are intended to set the legislative framework within which the Pensions Regulator can deliver a new approach to its oversight of DB scheme funding.
Although all the responses we have so far seen are supportive of the intentions underlying the proposals for the new regime, the responses from the Association of Consulting Actuaries (ACA) and the Society of Pensions Professionals (SPP), amongst others, echo the concerns set out in LCP’s recently published on point paper about the unintended consequences that could arise from the way the regulations have been drafted. A major concern across these responses is that the regulations as drafted risk forcing all schemes into a single one-size-fits all approach which could lead to some sponsors being asked to pay unaffordable levels of contributions with the resulting potential for job losses and insolvencies.
Among other specific concerns are:
- Requiring funding deficits to be recovered “as soon as the employer can reasonably afford”. Although this has been a broad Regulator principle for some time, there are concerns about the impact of putting this into law and giving it primacy above other considerations
- Schemes that remain open to new members may be forced to fund as if they will close to new members at a given future date, increasing their costs potentially unnecessarily
- The lack of clarity around how the regulations will fit with the Regulator’s proposed new code of practice, details of which are awaited
- The absence of a meaningful impact assessment
Comment
It was expected that the Regulator’s second consultation on its scheme funding code of practice would follow in short order once the DWP finalises these regulations, or possibly even before that if the direction of travel is clear. However, the extent of the concerns about the DWP’s proposals coupled with the fact that we have a new Pensions Minister who will need to weigh up these concerns, may mean that the next steps will take some time.
