23 July 2020
- Pension Schemes Bill leaves the Lords
- Royal Assent for the Finance Act 2020
- Finance Bill 2020-21 draft legislation published along with other announcements
- MPs question the value of pensions tax relief
- Public sector pensions – the Government sets out its proposals to fix the “McCloud ruling” age discrimination issue
- HMRC publishes more guidance on GMP equalisation
- Annual report season underway
- HMRC finalises anti-money laundering regulations
- Pension Wise guidance nudge research published
- HMRC updates industry on its managing pension schemes service
The Pension Schemes Bill had its Third Reading in the House of Lords on 15 July which was little more than a formality and it is now waiting to be examined by the House of Commons after its formal First Reading on 16 July. However, this will not happen until 1 September at the very earliest because the Commons is now in recess.
In bringing proceedings to a conclusion in the Lords, Baroness Stedman-Scott for the Government acknowledged the four amendments made to the Bill not of the Government’s making (see Pensions Bulletin 2020/27) and promised to “look at these carefully along with the strong arguments made in support of them as the Bill progresses in the other place”.
Acknowledging that an important milestone had been reached the DWP issued a statement in which it said that the Bill will now “be taken through the House of Commons later this year”.
So, the Bill continues its progress through Parliament. We assume that Royal Assent will be achieved before the end of the year. Any later will put back once more the necessary work on the associated regulations, Codes of Practice and other forms of guidance. But quite when its many provisions can start to come into force is yet to be made clear.
The Finance Bill introduced to Parliament following the March Budget completed its review by the House of Lords on 17 July and received Royal Assent on 22 July. The pensions aspects are limited and, as covered in previous Pensions Bulletins, include the following:
- Section 5 sets the main rate of corporation tax at 19% for financial years starting on 1 April 2020. It had been due to reduce from 19% to 18% from this point. The freezing of the rate will mean that employer pension contributions will attract greater corporation tax relief than had the 18% rate come into effect
- Section 22 contains the changes to the tapered annual allowance applicable from the 2020/21 tax year onwards and is as expected in its effect on high earners (for a reminder of the details see this LCP blog and factsheet)
- Section 98 moves HMRC up a notch in the insolvency priority order in relation to taxes collected and held by businesses ahead of transmission to HMRC, such as VAT, income tax and employee NICs. This clause, which was first seen when the Government published a draft of the Finance Bill last July (see Pensions Bulletin 2019/29), will result in there being less money for unsecured creditors, such as occupational pension schemes, but the overall effect for schemes is likely to be minor. It comes into operation for insolvencies falling on or after 1 December 2020
- Section 108 ensures that those who have retired but return to work to support the coronavirus response do not suffer adverse tax impacts by continuing to receive pension benefits at an age below the current normal minimum pension age. The changes have effect from 1 March 2020 and currently will cover those returning to work from this date until 1 November 2020
The biggest pension item in this year’s Finance Act is the additional scope for tax-relieved pension savings for high earners, delivered in order to address the NHS pension crisis in relation to senior clinicians. But with the focus elsewhere shifting to the validity of tax reliefs (see article below) and with the Government needing to take steps to raise taxes, it is not clear how long the current pensions tax regime will last.
On 21 July the Government published draft clauses for the next Finance Bill that should be published following the Autumn Budget. Alongside this the Government made announcements on a number of areas of tax policy and published a number of previously announced tax policy documents.
Amongst this welter of information there are two items relating to pensions.
- The promised call for evidence on the two main methods for administering tax relief on pension contributions (ie net pay arrangements and relief at source) and whether the system can be reformed in order that lower earners in net pay schemes can have the same outcomes as lower earners in relief at source schemes. Four suggestions are set out in the paper, with more welcomed, but to date the paper says that a solution meeting the Government’s principles of simplicity, deliverability and proportionality has not been identified. Consultation closes on 13 October 2020
- Draft clauses to allow collective money purchase benefit schemes to operate as UK-registered pension schemes, as set out in the Finance Act 2004. The Pension Schemes Bill is introducing such schemes and these amendments are necessary to ensure that they can be treated as registered pension schemes under the Finance Act 2004 and not suffer any unintended pensions tax consequences. The proposed legislation, which in keeping with the Pension Schemes Bill, starts on the premise that these schemes are a special species of “money purchase arrangement”, also reflects the intended defined benefit aspects of the pension, lump sum and other payments that these schemes will make. The clauses are intended to take effect from 6 April 2021. Consultation on these and other draft clauses in different areas closes on 15 September 2020
The long-awaited call for evidence is particularly welcome, but with no favoured option at this stage it is not clear whether those campaigning for an end to the disparity of outcomes for lower earners will be able to convince the Government to end this pensions tax anomaly.
MPs on the Public Accounts Committee have challenged the Government, in a report published on 20 July, about what they know in relation to tax reliefs, including whether they deliver on policy objectives, offer value for money and how much they cost.
Unsurprisingly, pensions tax relief is highlighted, with MPs saying that the Government has not made any assessment of whether the £38 billion cost in 2018/19 encourages saving for retirement or reduces dependence on state retirement benefits, or whether it just enables those already saving comfortably to save more.
The MPs are also concerned that some groups are not benefiting from pensions tax relief when they should – such as low-paid and part-time workers earning less than the personal allowance after being auto-enrolled into employer pensions.
The MPs demand that HMRC evaluate the impact of pension tax relief and report to them within 12 months.
More mood music from Parliament, but what really counts is the Chancellor’s view on the subject, on which we might hear more in the Autumn Budget.
Public sector pensions – the Government sets out its proposals to fix the “McCloud ruling” age discrimination issue
HM Treasury has announced proposals for addressing the issues arising from the transitional arrangements introduced when the main public service pension schemes were reformed in 2015. This follows the December 2018 Court of Appeal ruling in McCloud and Sargeant (in relation to judges and firefighters respectively) that those changes represented unlawful discrimination.
The proposal is to provide those who were in service on or before 31 March 2012 and on or after 1 April 2015 with the option to choose between receiving legacy or reformed scheme benefits in respect of their service during the period between 1 April 2015 and 31 March 2022 (known as the “remedy period”).
This consultation promised earlier this year (see Pensions Bulletin 2020/14) seeks views on that proposal and especially on which of two possible approaches should be taken to making this choice, and how each of these approaches might work. The two possible approaches both involve members choosing whether they receive benefits under the legacy Final Salary scheme or the reformed Career Average Revalued Earnings (CARE) scheme.
The difference between the approaches involves the timing of that decision – under one the choice is made as soon as practical after the option is implemented, whilst under the other the choice is made at retirement. The options are known respectively as the “immediate choice” and the “deferred choice underpin” (DCU).
It is also proposed that from 1 April 2022 all members will accrue benefits under the reformed CARE scheme, although the final salary link for accrued benefits in the legacy scheme will remain.
The consultation, which ends on 11 October 2020, outlines some of the tax implications for those involved and how those issues will be addressed.
The HM Treasury consultation is accompanied by a similar consultation on the Local Government Pension Schemes by the Ministry of Housing, Communities & Local Government, although in the LGPS case an underpin rather than a choice of benefits is proposed. There are also three consultations on judicial pensions by the Ministry of Justice – covering reform of the scheme, addressing the unlawful age discrimination identified in McCloud in respect of the 2015 reforms of the judicial pension scheme, and proposals to increase the judicial mandatory retirement age.
At the same time the Government has issued a policy note stating that the pause on the employer cost control mechanism, announced in January 2019 (see Pensions Bulletin 2019/05), will be lifted. Although intended as a means to protect the taxpayer from unforeseen increases in scheme costs, the final negotiated mechanism also sought to protect scheme members and was likely to see taxpayer costs increase following the results of 2016 valuations (see News Alert 2018/06). Allowing for the increased value of the adjusted benefits outlined above should mitigate the need to increase taxpayer costs further.
At a total cost of around £20bn the price of making these adjustments is not cheap, though this seems to be unavoidable in the circumstances given the background to the changes and the legal rulings that they represent unlawful discrimination. However, the Government may have been able to resolve the “cost control mechanism” issue arising from the 2016 valuations.
Yet there could be more expense to come. If the roughly 3 million potentially affected members of the schemes are given options about their future benefits, they will surely need some sort of financial advice to help make what could be a significant (and potentially difficult) financial decision. If providing this advice were to cost £500 on average for each member, this could add an additional £1.5bn to the total bill.
It’s also worth noting that the main consultation document contains eight pages on pensions taxation issues – primarily focusing on how to reverse out the additional tax that might otherwise be payable by members as a result of the improved benefits. This illustrates how complicated the current pensions taxation regime is and how, in an already complex world, it can add inappropriate and unnecessary levels of extra complexity to schemes delivering benefits due to members.
On 16 July HMRC published its second tranche of guidance on the tax treatment of adjustments to benefits required as a result of GMP equalisation. This guidance is concerned with the tax status of lump sum payments already made, and of lump sum payments to be made in the future (including top-ups to a lump sum paid previously) as a result of GMP equalisation.
A reading of the guidance shows that for most types of lump sum benefit, where an unequalised lump sum has been paid in the past, trustees will have a route to pay a top-up to members without adverse tax consequences. However, an exception is some trivial commutations where a need to equalise could trigger an additional tax charge for some individuals and schemes.
HMRC concludes its guidance by saying that it is unable to provide guidance on the tax treatment of benefits arising as a result of the GMP conversion approach to GMP equalisation. This is because “more detailed work needs to be done on the wider issues associated with that methodology”. It is not clear whether HMRC will now undertake this work.
As LCP partner Alasdair Mayes makes clear in his blog, this guidance does contain some welcome flexibility, but it is gravely disappointing that HMRC is unable to publish guidance on the pension tax implications of using GMP conversion – the favoured route of many schemes – even if to simply set out the pitfalls.
In the run up to the summer recess a number of public bodies related to the world of pensions have presented their annual reports to Parliament. They include the following:
- The Law Commission published its annual report for 2019/20 on 14 July, which notes amongst other things the implementation of the Commission’s recommended reforms in relation to the minimisation of barriers to social investment by pension funds
- The Debt Management Office’s annual report and accounts for 2019/20, published on 15 July, is notable for its record of the significant increase in gilt sales necessitated by the Covid-19 challenge - £137.9 billion raised in 2019/20 compared to £98.6 billion in 2018/19. The financing remit for 2020/21 was initially for £156.1 billion, but now stands at £225 billion for just the first four months of 2020/21
- The Pensions Regulator published its annual report and accounts for 2019/20 on 16 July in which it highlights a number of successes playing to its mantra of being ‘clear, quick and tough’ on those it regulates. It came in £5m under budget and met 12 of its 18 key performance indicators set for the year (with 2 of those failures attributed to the Covid-19 outbreak)
- The Pensions Ombudsman published its annual report and accounts for 2019/20 on 16 July and its contents are in keeping with its corporate plan recently published (see Pensions Bulletin 2020/29) showing a number of successes in terms of demand for its services and increased efficiency in delivery
- The NEST Corporation published its annual report and accounts for 2019/20 on 16 July along with the annual report and accounts for the NEST pension scheme. Over the past 12 months membership has grown from 7.9 million to 9.1 million members and assets under management have grown from £5.7 billion to £9.5 billion. NEST is also providing pensions for 803,000 employers (up from 720,000). Looking forward, NEST reports that it should be able to cover its operating costs from scheme member charges from 2026 onwards and to have repaid its loan from the UK Government by 2039
- The Financial Reporting Council’s annual report and accounts for 2019/20 was published on 17 July in which it sets out significant progress in its transformation to the Audit, Reporting and Governance Authority (ARGA) as a result of the Kingman report (see Pensions Bulletin 2018/51). However, the Government has yet to conclude on a number of this report’s recommendations, including who is to regulate actuaries in the FRC’s place and the FRC has been able to implement only 20 of the Kingman report’s 83 recommendations. For 2020/21 the FRC promises (amongst other things) to launch a post-implementation review of the Technical Actuarial Standards
- The Office of Tax Simplification published its 2019/20 annual report on 21 July. It noted that its paper on “Taxation and Life Events: Simplifying tax for individuals” included recommendations on “net pay” versus “relief at source” taxation and the anomalies surrounding the annual allowance and lifetime allowance (highlighted recently in relation to the NHS)
By contrast the Financial Conduct Authority has announced that due to Covid-19 it will be publishing its annual report and accounts in September. We understand that the annual report and accounts of the Pension Protection Fund is similarly delayed.
Whilst the full effect of Covid-19 has not been felt in most of these annual reports and accounts, the Debt Management Office figures might give a glimpse into future impacts. That the Government has borrowed more than twice as much in April – July 2020 as in the whole of 2018/19 shows just what sort of effect the pandemic can have on finances.
HMRC has responded to its consultation on extending the Trust Registration Service (TRS) as a result of the EU’s Fifth Money Laundering Directive (see Pensions Bulletin 2020/04) and there is some good news for pension schemes.
A number of trusts will be exempted from registration on TRS and these include UK registered pension trusts, pure protection life insurance policies and those paying out on critical illness or disablement, including group policies.
Draft regulations have been laid before Parliament and amongst other things, they set out those trusts that are to be exempt from the registration requirement.
And so comes to an end an unnecessary amount of confusion as to whether pension schemes that by their very nature are already registered with HMRC had to also sign up to the TRS as a result of anti-money laundering laws, although thankfully HMRC has made clear for a while now that such ‘double registration’ is not required.
The Money & Pensions Service has published the results of some behavioural trials indicating that orally ‘nudging’ customers asking about access to their workplace savings and making it easy for them to book an appointment can significantly improve the take up of Pension Wise guidance.
Currently the law requires providers to ‘signpost’ in writing the existence of this service. However, DWP regulations and FCA rules, both to come as a result of provisions in the Financial Guidance and Claims Act 2018 (see Pensions Bulletin 2018/19), will require those running personal or stakeholder pension schemes, or providing flexible benefits within occupational pension schemes, to ask members or their survivors at the point at which they require access to or transfer of their pension assets, if they have received information and guidance.
This research was carried out as a necessary precursor to the development of these regulations and rules. The DWP intends to consult on this issue at some point in 2020 (see Pensions Bulletin 2020/09). It is not clear when the FCA will launch its consultation.
It is unsurprising that this sort of intervention yields considerably better results than written communications. What is interesting is that, according to the report, this particular nudge is more effective than most other policy interventions that use nudges.
HMRC’s latest newsletter on its managing pension schemes service reveals new accounting for tax (AFT) features and processes, further changes to its delivery timelines and some information on migration from the Pension Schemes Online service, although how and when this migration will take place remains unknown. There is also a warning that those who have not signed into any of HMRC’s online services for three years will shortly be at risk of having their credentials deleted.
Accompanying the newsletter is a new guide to help administrators submit an AFT return using the managing pension schemes service.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.