Pensions Bulletin 2023/30
Our viewpoint
27 July 2023
- LCP’s analysis of the Lifetime Allowance abolition draft legislation
- Consumer Duty starts to take effect next week
- How do trustees “have regard” to the pensions dashboard connection guidance?
- FRC expresses frustration with the Government over slow progress on Audit Reform Bill
- Work and Pensions Committee examines the Norton collapse
LCP’s analysis of the Lifetime Allowance abolition draft legislation
Following on from last week’s release of draft legislation, intended for next year’s Finance Bill, that will abolish the Lifetime Allowance and make consequential changes (see Pensions Bulletin 2023/29), and some important clarifications in HMRC’s subsequent Newsletter 152, we are now pleased to make available our analysis of this important government project.
Our News Alert examines the proposed changes, stressing the many uncertainties arising from what is this first release of the legislation necessary to remove a key building block of pensions tax law. And with little time for what has been issued to be honed and what is to come to be delivered, the biggest challenge is the timeline, with a need to get the new regime clear and operational (and ultimately on the statute book) in time for the 2024/25 tax year.
Consumer Duty starts to take effect next week
It has been a long time coming but from 31 July 2023 the Financial Conduct Authority’s Consumer Duty (see Pensions Bulletin 2023/03) starts to take effect for firms regulated by the FCA.
The Consumer Duty is enormously significant as the FCA intends to use this to create a change in mindset in those it regulates, such as advisers and product providers, from thinking “Is this within the rules?” to “Is this right for consumers?”.
FCA-regulated firms should have been preparing for the launch of the Consumer Duty for several months now. It is also clear from the FCA’s own published material in recent months that the Duty is very much in the front of the FCA’s mind in everything it is doing.
Initially the Duty applies to all new products and services and existing products or services which remain on sale or open for renewal. The Duty will also apply to closed products and services from 31 July 2024.
Only firms conducting FCA-regulated activities in the UK are subject to the Duty and therefore most trustees of occupational pension schemes are unlikely to be directly affected by it. One exception will be extremely large schemes with in-house investment teams that are subject to FCA regulation and, for example, give investment services to the trustees.
The FCA’s guidance makes clear that FCA-regulated firms that can determine or materially influence retail customer outcomes need to consider the end customers in the distribution chain, whether or not such end customers are a direct client of the firm. The guidance goes on to explicitly state that these include beneficiaries of trust-based pension schemes where the trustees are the client of the FCA-regulated firm.
Comment
The FCA intends the Consumer Duty to bring in a new era in financial regulation to improve customer outcomes. Although the full impact of the Duty is unlikely to be known for some time, it appears that managers of contract-based pensions (who should have been preparing for the Duty for several months, if not years) will feel the impact sooner than trustees of most occupational-based schemes.
However, trustees who have appointed FCA-regulated firms to assist with running the scheme in any capacity should consider asking such firms how the Duty will affect the service they are offering.
It is also possible that pension providers that have two streams of business, one regulated by the FCA and one regulated by the Pensions Regulator, will end up applying the Consumer Duty requirements to both in order to avoid any reputational damage if differing standards are applied to essentially the same products.
How do trustees “have regard” to the pensions dashboard connection guidance?
On 19 July 2023, the Pensions Dashboards (Amendment) Regulations 2023 (SI 2023/858) (see Pensions Bulletin 2023/24) were laid before Parliament in their final form, coming into force on 9 August 2023. Prior to this, on 14 July the Pensions Regulator updated section 7 of its initial guidance which deals with where schemes fail to comply with their dashboard duties. Taking this, alongside the evidence given by the Pensions Minister and relevant DWP Director at a session of the Work and Pensions Committee on 12 July, it is becoming clearer how the DWP and Pensions Regulator intend the revised connection process for the Dashboards ecosystem to work.
The amended regulations require that trustees of schemes in scope must “have regard to the guidance on connection” issued by two or more of MaPS, the Pensions Regulator and the DWP. This connection guidance has not been issued but the updated Regulator initial guidance makes clear its position that failure to “have regard” will be a breach of the legislation and could lead to a financial penalty.
The Regulator sets out how trustees can demonstrate they have had regard to the connection guidance including by:
- Not making final decisions about connecting and whether to follow the connection date until they have engaged with the guidance
- Having adequate governance and processes for making such decisions, with such reasoning being clearly considered and documented, as well as how relevant risks are identified, evaluated and managed
- Making sure that trustees have access to all the relevant information before making decisions and acting upon them – clear and accurate audit trails must be kept demonstrating the decisions made, the reasons for them and the actions taken
The Regulator’s initial guidance says that the connection guidance to come will have a revised staging timeline indicating when schemes by size and type are scheduled to connect. The Minister’s evidence before MPs also indicates that dashboards may be made available to consumers before the end of the revised staging timeline. The Minister said that will be a matter for the Secretary of State to take a decision as to when they feel there is sufficient coverage.
The amending regulations also start the 12-month clock for any scheme that wishes to defer the 31 October 2026 connection deadline. Any such applications need to be lodged by 8 August 2024.
Comment
The new test – failing to be able to demonstrate regard to guidance when reaching a connection decision – is not the same as the test it has replaced – failing to connect in accordance with a strict deadline. And under this new test, the Pensions Regulator has a fine line to tread before sanctioning trustees.
We understand that the largest providers intend to connect by the time set out for them in the guidance – and it should go without saying that they will have had regard to the guidance before they do so. As for other schemes, although we suspect that the Regulator will take a dim view of any that don’t connect in accordance with their timeline, what may be more important is that the scheme has made a good effort but is not ‘fit to connect’. There is a potential tension here. Politicians will want to make dashboards available sooner rather than later, and so the Regulator will be particularly concerned if the larger schemes are having difficulties. It could yet be that the smaller schemes, whose presence is not necessary for the public launch, will be allowed some slack, but only if they can put forward some good reasons.
In any event, we encourage all trustees to do their utmost to connect in accordance with the revised timeline when it eventually appears.
FRC expresses frustration with the Government over slow progress on Audit Reform Bill
The Financial Reporting Council says, in its 2022/23 report and accounts, that it is continuing its focus on being an assertive regulator driving higher standards, as well as progressing towards becoming the Audit, Reporting and Governance Authority (ARGA), which is now to be headquartered in Birmingham. However, there remains no sign from the Government of the necessary Audit Reform Bill that will enable ARGA to become established. For the first time the FRC vents its frustration at the continuing delay but says it hopes that the Bill will be laid before Parliament “as expected later this year”, implying that the Bill may yet feature in the King’s Speech now set for 7 November 2023.
This year’s report is couched very much on the assumption that the FRC’s journey to becoming ARGA will happen, and to that end the FRC says that it “has progressed well beyond the recommendations of three independent reviews and implemented many without legislative backing”. As to the Bill, the FRC says that it continues “to work with Government on preparing the legislation for when parliamentary time allows”.
The FRC continues to recruit in anticipation of its new role, with headcount growing to 443 and a further 90 new roles to be added in 2023/24. Expenditure grew from £45.5m to £51.1m.
Comment
Only in March 2023, the FRC was saying that it was planning on the basis that ARGA would be in place by April 2024 (see Pensions Bulletin 2023/13). Even if the Bill is laid this autumn and fast-tracked through Parliament, this now seems highly unlikely.
Work and Pensions Committee examines the Norton collapse
The House of Commons Work and Pensions Committee has launched an inquiry into the lessons that can be learned from the collapse of the Norton pension schemes (see Pensions Bulletin 2022/13). The schemes, set up in 2011/12, attracted over £10m by way of transfer payments from individuals, but these payments were invested in Norton Motorcycles Holdings Ltd which went into administration in 2020. The Pensions Ombudsman found, also in 2020, that the sole trustee of the schemes had acted dishonestly (amongst other things).
The Fraud Compensation Fund exists to make compensation payments to most occupational pension schemes where an employer is insolvent and scheme assets have been reduced as a result of dishonesty, including the intent to defraud. Eligibility has not been established in the Norton case and so no payments have yet been made.
The inquiry will consider the Pensions Regulator’s approach to preventing loss of pension assets where fraud or dishonesty are involved, the role of other concerned bodies and whether there is scope to speed up the process of assessing eligibility for compensation from the Fraud Compensation Fund.
The inquiry begins with a Call for Evidence containing six questions, closing on 27 October 2023.
Comment
This may be a worthwhile exercise. Although Norton style frauds are comparatively rare, they cause a lot of damage, recent successful prosecutions by the Regulator notwithstanding. We hope the Committee produces workable recommendations, particularly on scheme establishment and the tests needed to establish eligibility for compensation.