Pensions Bulletin 2022/47
Pensions & benefits Pensions dashboards Policy & regulation
- New DB funding code issued for consultation
- IFS proposes an end to tax-favourable treatment of DC pension pots on death
- FRC adjusts its plans as ARGA transition is delayed
- The income tax gap increases for high-earning Scottish taxpayers
- Pensions dashboard gets ready for a year of connection
- No change to SMPIs until October 2023
- Christmas and New Year break
New DB funding code issued for consultation
On 16 December 2022 the Pensions Regulator followed up on its earlier promise (see Pensions Bulletin 2022/46) to launch its much-awaited consultation on the new DB funding code by Christmas.
The consultation package comprises the consultation document, draft Code, a further consultation document that focuses on the Fast Track parameters, and a response to the Regulator’s first consultation of March 2020 (see News Alert 2020/02). At some point in the New Year, the Regulator intends to issue extensive new covenant guidance that will form an important part of the new regime.
For further details of this important development see our News Alert.
Comment
The Regulator has supplied a lot of Christmas reading for DB scheme trustees and their advisers, with the promise of more in the New Year. After a significant delay, 2023 promises to be a year of delivery. The Regulator’s consultation closes on 23 March, with the DWP regulations and the Regulator materials needing to be finalised by mid-June to deliver on the current intention that the new DB funding regime can come into being for actuarial valuations with effective dates from October.
IFS proposes an end to tax-favourable treatment of DC pension pots on death
The Institute for Fiscal Studies has issued a report in which it calls for “a more coherent tax treatment of funds that remain in a pension at death” in order to address concerns that the wealthy are using DC pensions funds as tax-planning vehicles to deliver wealth to their children, rather than to deliver retirement income to themselves. The IFS also highlights that where an individual dies before age 75, the funds remaining in their DC pension usually escape income tax completely, despite income tax relief being received when the money was paid in.
The IFS suggests that basic rate income tax should be levied on all DC funds that remain at death. Alternatively, current income tax rules could extend to those inheriting DC pension pots from someone who dies before age 75. In addition, DC pension pots should be included in the value of estates at death for the purposes of inheritance tax, with say 80% of the funds in such pots to count where they are to subsequently be subject to income tax.
Comment
The limited extent to which inheritance tax arises on pension benefits reflects a system that was designed to generate retirement income through annuitisation, rather than tax-deferred wealth to be accessed in any manner (including not at all) during retirement.
Now those fortunate enough to have accumulated wealth in a number of areas, such as property, investments and DC pensions behold a tax system where bizarrely, it may make better financial sense (at least for their children) to run down non-pensions wealth before accessing funds that were specifically built up to secure a comfortable retirement. At some point a government may address this, but the longer this is left the more difficult it will become, given the inevitable retrospectivity involved in any reform.
FRC adjusts its plans as ARGA transition is delayed
The Financial Reporting Council has announced its draft 3-year plan for 2023/26, which has been influenced by the delay of anticipated legislation to create the Audit, Reporting and Governance Authority (ARGA). As a result of this delay, the FRC has had to re-prioritise its work, focusing on the changes it can make that are within its existing powers and remit – and as a further consequence, the FRC’s costs and headcount are not on the same upwards trajectory as had been anticipated a year ago.
One of the changes the FRC can make under its current powers is to update the UK Corporate Governance Code. This is promised for 2023. There is also a promise to complete the post-implementation review and revision of Technical Actuarial Standards.
This time last year the FRC had been working on the assumption that ARGA would be in business by April 2023. It is now working on an April 2024 date. However, since the Government responded to its White Paper on audit reform at the end of May 2022 (see Pensions Bulletin 2022/21) there has been complete silence from the Department for Business, Energy and Industrial Strategy as to when it will introduce the necessary Audit Reform Bill and whether there has been any progress in its production, suggesting that the FRC’s latest planning date may also be in doubt.
Recently the Government has given itself until autumn 2023 to pass the many prospective laws that were announced in the May 2022 Queen’s Speech (see Pensions Bulletin 2022/18). But it is not clear whether this will include the Audit Reform Bill, which was to be issued in draft form initially.
Comment
The Sunak administration needs to decide whether it wants to deliver the reform promised by its Johnson predecessor last May, as time is fast running out to get the necessary Bill through Parliament before the next General Election has to be held. The silence does appear ominous – and for good reason. There must surely be more important things to get on the statute book before this Government’s time runs out.
The income tax gap increases for high-earning Scottish taxpayers
On 15 December 2022 the Scottish Government announced that it was to add 1 pence in the pound to the higher and top rates of income tax paid by Scottish taxpayers. As a result, in 2023/24 the rates will be 42% and 47% (compared to 40% and 45% in the rest of the UK). It also proposed to reduce the top rate threshold from £150,000 to £125,140 (in line with the rest of the UK), whilst keeping all other Scottish thresholds unchanged.
Separately, the Welsh Government has proposed income tax rates for 2023/24 that do not differ from those set by Westminster for England and Northern Ireland.
Comment
As a result of these proposals high-earning Scottish taxpayers will pay even more income tax than their rest of the UK counterparts. For such Scots, making personal contributions to registered pension schemes becomes even more attractive – so long as they are not held back by the UK-wide annual allowance.
Pensions dashboard gets ready for a year of connection
In a blog that wraps up on the significant progress made by the Pensions Dashboards Programme during 2022, Chris Curry, Principal of the PDP at the Money and Pensions Service, confirms that the technology build for the central digital architecture has been delivered and the PDP is currently working through final assurances of this software. The programme will enter a vital and delivery focussed period in 2023 as the first group of pension providers and schemes connect to the dashboard ecosystem.
Comment
2023 will be the year in which the baton is passed from policy and systems people in government to pension providers and (where chosen) their integrated service provider conduits. It has been a significant achievement to deliver a near-completely functional dashboard and to have this surrounded with nearly all the necessary regulatory requirements. However, the biggest challenge is yet to come – getting all but the smallest of pension schemes connected and for such connected schemes to regularly supply accurate data about the pension entitlements of all their active members and deferred pensioners in a secure manner.
No change to SMPIs until October 2023
The Financial Reporting Council has announced that, following a review, there will be no changes to the assumptions in the current version of Actuarial Standard Technical Memorandum 1 (AS TM1), which sets out the required approach for producing Statutory Money Purchase Illustrations (SMPIs) received every year by those saving for retirement through DC arrangements.
AS TM1 version 4.2 will therefore continue to be used for SMPIs until it is replaced by the radically different version 5.0 for illustrations issued on or after 1 October 2023 (see Pensions Bulletin 2022/37).
In a separate development, the Institute and Faculty of Actuaries has announced, through its Continuous Mortality Investigation, the publication of unisex mortality rates that, amongst other things, will be needed for AS TM1 illustrations during 2023/24 (with separate rates produced for versions 4.2 and 5.0).
Comment
The FRC announcement comes as little surprise. In the upcoming illustration season, for one last time, SMPI providers will be able to set accumulation rate assumptions that they feel best represent the returns that their customers may achieve, rather than their being set for them through the measured volatility of past returns.
Christmas and New Year break
This is the last edition of the Pensions Bulletin for 2022. It will return after the Christmas and New Year break. We wish readers a merry Christmas and a prosperous and healthy New Year!
