Pensions Snapshot - October 2017
This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of September 2017 in relation to occupational pension schemes.
This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of September 2017 in relation to occupational pension schemes. The topics covered in this edition are:
- Pension Protection Fund (PPF) levy – changes afoot for the new triennium
- The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 – HMRC launches online trusts registration service
- FCA Guidance on Providing Support with Financial Matters
- Work and Pensions Committee launches pension freedoms inquiry
- Ombudsman applies Webber case on limitation
Pension Protection Fund (PPF) levy – changes afoot for the new triennium
The Board of the PPF has published a further consultation on changes to its levy policy for the next triennium (levy years 2018/19 to 2020/21). The consultation is set to run until 5pm on 1 November 2017 and responds to a number of comments and suggestions made on the initial consultation document that was issued in March this year.
The PPF expects that it will collect £550 million in levy receipts in the 2018/19 levy year, about 10% less than the 2017/18 levy year, reflecting its view that the lifeboat arrangement's funding position is strong.
Key legal points to bear in mind:
Contingent assets – new standard forms
The PPF intends to press ahead with issuing new standard form documents to be used for new contingent assets that are entered into for the 2018/19 levy year. At present, the PPF are proposing to accept existing contingent assets for the 2018/19 levy year, with an expectation that existing Type A and Type B agreements will be changed or replaced in order to be recognised in the 2019/2020 levy year. The status of contingent assets that have been executed using the existing standard form this year, but not yet submitted for a levy reduction, is unclear. This (and the likely content of the new standard forms) should become clearer in a separate consultation that is due to be issued this month, with finalised standard forms issued in December.
Contingent assets - guarantor strength reports
Where a Type A guarantee results in a levy reduction of £100,000 or more, Trustees will be required to obtain a formal guarantor strength report before certifying or recertifying the guarantee. The report should be prepared by a professional covenant adviser with input from other advisers, such as legal advisers. The PPF has suggested a number of non-exhaustive issues that it would expect to be covered in the report, or for there to be an explanation as to why those issues are not relevant. The adviser will need to provide a statement that the report can be relied upon by the PPF as well as the pension scheme's trustees.
Insolvency risk assessment
The PPF currently assesses the insolvency risk of sponsoring employers and guarantors using scorecards that generally relate to an entity's size. Five of the eight scorecards have been 'rebuilt', in part to prevent scorecard arbitrage where employers artificially alter their group structures to attain a scorecard that suits them best. In addition, the PPF will assess the insolvency risk of certain employers using credit ratings for rated agencies and Standard and Poor's credit model for regulated financial institutions.
The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 – HMRC launches online trusts registration service
As reported in the August 2017 edition of Snapshot, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the Regulations) came into force on 26 June 2017. Among other things, the Regulations require occupational pension scheme trustees to keep a record of, and report to, HMRC a certain amount of basic personal information about the "beneficial owners of the scheme", which includes the members, the trustees and the sponsoring employer.
Various industry bodies are seeking urgent clarification from HMRC as to how these information requirements will work in practice in relation to occupational pension schemes and whether or not pension scheme trustees can benefit from an exception in the Regulations.
In the meantime, trustees of occupational pension schemes would do well to look at their common data now to ensure it is up-to-date, accurate and in a form ready to be transferred to HMRC, if required. With this in mind, it is worth noting that HMRC has launched its online Trusts registration service. This is currently only available to individual trustees and provides:
- a central register of the beneficial owner information for relevant trusts; and
- a means for trustees to register their trust with HMRC for the purposes of obtaining a Unique Tax Reference Number and delivering tax returns.
All trusts (whether resident in the UK or not) which generate a "UK tax consequence" and do not benefit from an exception under the Regulations are required to register online. A UK tax consequence will arise if the trust incurs UK liabilities for income tax, capital gains tax, non-resident capital gains tax, inheritance tax, stamp duty land tax or stamp duty reserve tax. Trustees will also need to update the register each year that the trust incurs a UK tax liability.
The date by which a trust must register depends on that trust's particular circumstances. However, generally speaking, trustees of relevant trusts which incur the above UK tax liabilities will need to register and provide the necessary beneficial owner information on or before 31 January 2018.
The registration is required even where trustees have already registered with HMRC using the old paper form 41G (Trusts) and/or are already paying UK tax. Trustees who fail to register by the relevant deadline risk both fines and convictions for criminal offences.
FCA Guidance on Providing Support with Financial Matters
On 28 September 2017 the Financial Conduct Authority (FCA) released its finalised guidance for employers and trustees on providing support with financial matters without needing to be subject to regulation. The guidance (which is produced as a short 4 page factsheet) is intended to explain what information employers and trustees can provide to employees and members without being FCA authorised.
The guidance arises from recommendations in the Financial Advice Market Review (FAMR), a joint FCA and HM Treasury initiative launched in August 2015. Published in March 2016, the FAMR recommendations set out the outcome of a review which was intended to explore the "ways in which government, industry and regulators can take individual and collective steps to stimulate the development of a market to deliver affordable and accessible financial advice and guidance to everyone, at all stages of their lives".
As a general rule, employers and trustees would not need to be authorised by the FCA unless they are in the business of providing investment advice and receive a commercial benefit for helping their employees. Takeaway points include:
- just because a firm's pension and benefits package results in a more productive or motivated workforce that would not be sufficient to be a commercial benefit that triggers the requirement for authorisation.
- informing employees of the merits of participating in an occupational pension scheme (which is not a stakeholder pension scheme or a workplace pension scheme) would not be caught by the restrictions on promoting financial products.
- in the case of stakeholder pension schemes or workplace personal pension schemes, communicating factual information would not ordinarily amount to a financial promotion. However, trustees and employers could inadvertently stray into making a financial promotion if they were to present factual information in such away so as to encourage a switch to a particular fund or to persuade individuals to join a particular pension scheme.
- when faced with questions from employees, employers or trustees might want to signpost publically available resources such as the Pensions Advisory Service, the Money Advice Service and Pensions Wise.
- employers and trustees are unlikely ever to be in a position where they can give detailed advice on certain questions, including as to:
- which investment funds a member should choose;
- whether an employee would be better off investing in something other than a pension scheme; or
- whether the transfer of a member's pension benefits is a good idea.
The guidance also signposts external resources which may be helpful to employers and pension trustees, including the guide on promoting pensions to employees (which was released under the former FSA regime) and the Pensions Regulator's guide on how to talk about DC pensions with employees.
On the same day (although perhaps of lesser relevance to trustees and managers of pension schemes) the FCA released its Finalised Guidance on Streamlined Advice and Consolidated Guidance. In overview, this guidance suggests further measures (including triage systems, tightening risk management controls and regular monitoring of services) which firms can take to ensure that their streamlined advice services meet the needs and objectives of their clients. The guidance notes that some pensions advice (the example given is transfers associated with defined benefit pension schemes) may not always be suitable for the streamlined advice process due to the amount of information which the firm is likely to need in order to make a suitable recommendation.
Work and Pensions Committee launches pension freedoms inquiry
The Work and Pensions Committee, chaired by Frank Field MP, has launched an inquiry into whether the pension freedom and choice reforms are achieving their objectives. The inquiry has a broad scope and will cover:
- the decisions people are making with their pension pots and whether they seeking or taking informed advice.
- the adequacy of advice being provided, particularly in relation to Pension Wise and automated pensions advice.
- the state of competition in the market, both in relation to new products and the reforms' effects on the annuity market.
- whether adequate steps are being taken to prevent scams.
The Committee is inviting written evidence on any or all of these areas, including recommendations for improvements, by 23 October 2017. Whilst we await the outcome, the scope of the inquiry already appears to be widening, with the Committee's announcement that defined benefit transfers will be also reviewed.
Ombudsman applies Webber case on limitation
In PO-1918 the Pensions Ombudsman applied the High Court of Webber v Department for Education and another [2016] EWHC 2519 (Ch) decision to restrict the amount of overpayments that could be recovered as a result of a limitation period applying.
The member had incorrectly received increases on his pre-1988 guaranteed minimum pension and the trustees of the scheme had sought to recover the overpayments made. The Ombudsman held that the trustees could only recover six years’ worth of payments (applying the limitation period set out in section 5 of the Limitation Period Act 1980). Applying the Webber case, the Ombudsman decided that the relevant “cut-off” date for the purposes of applying the limitation period was 25 May 2016 which was the date that the trustees replied to the Ombudsman complaint made by the member. As a result, the Trustees could only recover any overpayments made in the six years up to 25 May 2016.
The case demonstrates that the Ombudsman will continue to apply the Webber decision to overpayment cases meaning that recovery could be significantly restricted were a complaint to proceed to the Ombudsman. The issue of whether limitation should apply at all in cases of equitable recoupment and at what point the limitation defence becomes available to a member in this type of case remains unclear.