Pensions Bulletin 2023/29
Our viewpoint
20 July 2023
- Abolition of Lifetime Allowance features in consultation on some of next year’s Finance Bill
- Another challenging year for the Pensions Regulator
- PPF reports that it is in excellent financial health
- FCA finds that investment pathways are working as intended
Abolition of Lifetime Allowance features in consultation on some of next year’s Finance Bill
HMRC and HM Treasury have jointly launched a consultation on draft legislation intended for next year’s Finance Bill. For each measure, the collection of documents includes a tax information and impact note, the draft legislation itself and an explanatory note that provides a more detailed guide to the legislation. The purpose of the consultation is to make sure that the legislation works as intended. Consultation on the Finance Bill proposals closes on 12 September 2023.
When it comes to pensions tax there are two items of interest.
1. Abolition of the Lifetime Allowance
The intention to abolish the Lifetime Allowance was announced in Budget 2023 (see Pensions Bulletin 2023/11), and now HMRC has released some of the legislative changes it deems necessary to achieve this, to take effect from 6 April 2024. This follows the first steps already bedded into law, including abolition of the Lifetime Allowance charge from 6 April 2023.
Whilst all mentions of the Lifetime Allowance are to be removed from the statute book (along with, effectively, most of the associated benefit crystallisation event testing), in its place is a new “lump sum allowance” of £268,275 (25% of the current Lifetime Allowance) and a new “lump sum and death benefit allowance” of £1,073,100, with (broadly) individuals needing to pay income tax at their marginal rate on any lump sums taken in excess of these allowances. As per the stated policy intent, both allowances are frozen. Higher limits are to operate for those with various LTA protections. There are various other changes covering a range of areas.
A News Alert is under preparation that will look at these proposed changes in more detail.
2. Digitisation of relief at source
First promised at the Autumn Budget and Spending Review 2021 (see Pensions Bulletin 2021/44), necessary updates to the legislative framework are proposed so that the relief at source mechanism for delivering tax relief on member contributions can move from its current paper-based system to being fully digitised. There will first be changes to the Finance Act 2004, including the ability for HMRC to withdraw registered pension scheme status from a scheme for non-compliance with the relief at source regulations, mirroring current HMRC practice in other areas. Regulations will then follow that will set out the process by which pension scheme administrators can claim tax relief due to their members.
The intention is for the new system to operate from 6 April 2025. No changes are intended to the principles of pensions tax relief, including those who are eligible for relief. However, in the new set up, it will be possible for the rate of tax relief to be set by regulations and so differ from income tax basic rates. It is not clear why this is being done.
Comment
The draft Lifetime Allowance abolition clauses are lengthy and complex and as such warnings apply about the devil being in the detail and unintended consequences, even more so than usual given the speed at which this is being approached – this new regime is intended to be in operation in less than nine months.
Another challenging year for the Pensions Regulator
The Pensions Regulator has published its 2022/23 Annual Report and Accounts and maintains it continues to focus on savers’ needs in what it calls a “pivotal time for pensions”, given the ongoing transfer of pension risk from employers to employees as a consequence of the steady move from DB to DC pension arrangements.
Among the initiatives highlighted for the year are the focus on helping trustees understand the value of having a diverse trustee board and the importance of taking climate and sustainability into account when making investment decisions. The report also highlights the new trustee guidance that was published in the face of the shortcomings in the resilience of LDI funds brought into sharp relief last autumn.
The report mentions nine consultations published in the year, including on the DC value for money framework and the second on the draft DB funding code. This year also saw the launch of a new campaign to raise trustees' awareness of their legal duties in relation to reporting on environmental, social and governance (ESG) matters. Special mention is also made of supervisory interventions in response to employer events, criminal prosecutions for scams and illegal loans, multi-million pound settlements in avoidance cases and regulatory initiatives targeting thousands of schemes – one covering the ESG element of a scheme’s statement of investment principles and the other to ensure that members in smaller DC schemes are benefiting from new value for money assessments.
Yet again expenditure came in under budget, this time by £6.4m, due to lower spend on projects, IT contracts and other professional services.
The Regulator achieved 16 of its 23 Key Performance Indicators as updated in June 2022 (see Pensions Bulletin 2022/23) and came close with three others. Three of the four that were missed by a significant margin were due to circumstances outside the Regulator’s control as they required legislative change (the DB funding code, the General Code and pensions dashboards) and the fourth was due to service levels at its call centre in the early part of the year, which has since been rectified.
And in a blog published shortly before the annual report was released, Nausicaa Delfas, the new Chief Executive, while making supportive comments about last week’s Mansion House package, also posited that there needs to be a fundamental shift in mindset in the pensions industry in order to deliver value for pensions savers. She noted that to this end the Regulator will soon update its DC guidance to reflect new duties on trustees to report on their policy on illiquid investments and to support trustees to make well-informed decisions, and that in the autumn it will provide new guidance on investing in productive finance and update its existing investment guidance for DB and DC schemes. She also said that the new DB funding code will clarify where DB schemes are able to accommodate investment in growth assets, particularly for open and immature schemes.
As to the timing of the new DB funding regime, it appears, from oral evidence given by the Pensions Minister Laura Trott to the Work and Pensions Committee, that we are unlikely to hear more about the Code from the Government until the autumn. The General Code also appears stuck until then, despite the minister’s desire to issue it “as quickly as possible”.
Comment
It is frustrating that yet again the Regulator is reporting falling short on Key Performance Indicators, where this has been because it is waiting on legislation to be delivered by the DWP. We hope that time will soon be found to move these long outstanding issues forward.
PPF reports that it is in excellent financial health
The Pension Protection Fund has reported on another year of progress for the lifeboat fund, with the ratio of assets to liabilities (the funding ratio) increasing from 137.9% to 156.0% over the year ending 31 March 2023. However, assets under management fell for the first time, from £39bn to £32.5bn, due to the move into a higher interest rate environment over this period. Liabilities fell by even more, from £27.4bn to £20.3bn, resulting in the excess over liabilities notching up slightly, from £11.7bn to £12.1bn.
This £12.1 bn figure is of note because, for the first time in the PPF’s existence, the reserves held by the PPF exceed the combined deficit of every single DB scheme that is running a deficit on PPF compensation benefits – estimated to be around £6bn (down from £60bn at 31 March 2022). In other words, the PPF now has twice what is needed should the sponsor of every DB scheme in deficit fail at the same time. This is in stark contrast to the position over the years during which the PPF has been building up its reserves, where there was always the worry that the sponsor of a large underfunded scheme going bust could put a severe strain on the PPF’s finances.
In common with many DB schemes, the PPF has an LDI strategy using leverage to balance managing its interest rate sensitivity whilst continuing to invest in return seeking assets to allow it to grow its reserves. The PPF reports that the sharp rise in interest rates last September was not a problem for it as it keeps lots of suitable assets to meet collateral calls on its LDI strategy. It was also able to react very quickly due to an earlier decision to manage its LDI strategy in house.
Claims remained very low at £14m in value, compared to £12m in 2021/22.
The PPF, which is now in the maturing phase of its funding journey, is in a position of significant financial strength. It wants to maintain its financial resilience through to around 2035 when it expects to move into a run-off phase when its balance sheet will be reducing as it settles members’ benefits.
Comment
Another good year for the PPF which should give great comfort to those who rely on it, with successes beyond asset and liability management including customer service. The PPF has also met every one of its 2022/23 objectives.
The PPF’s success as a consolidator of some 2,000 DB schemes whose employers failed has not gone unnoticed, with the possibility that it may be called upon to do more in the coming years.
FCA finds that investment pathways are working as intended
The Financial Conduct Authority has published a post-implementation review of investment pathways for drawdown, created for those in contract-based DC plans who do not take advice. Under these rules, which came into force in February 2021, when a non-advised customer either asks to enter drawdown or wishes to transfer assets already in drawdown, they will be prompted to choose from four objectives for how they intend to take their retirement pot – and in most cases be offered an investment solution based on their choice.
The FCA has found that the investment pathways rules are working as intended, setting a “foundation of support”, but is of the view that there is more to do to support consumer decision-making. The FCA says that it is working closely with the DWP as it develops proposals for supporting members of trust-based schemes as they move into the decumulation phase (see Pensions Bulletin 2023/28). The FCA goes on to list a number of existing workstreams, including its work on the advice / guidance boundary with HM Treasury that was mentioned in a speech in September 2022, with further details announced in a speech in March 2023.
However, and importantly at this stage, there are no proposals to make any changes to the investment pathway rules. The FCA also says that it is expecting to publish the results of its retirement income thematic review (see Pensions Bulletin 2023/03) around the end of 2023.
Comment
One can’t help but think that there is more to come from the FCA on this topic, but maybe not until the DWP’s work has progressed for trust-based schemes.