21 September 2023
- Royal Assent for the Auto-enrolment Extension Bill
- PPF compensation – Hampshire and Hughes cases enshrined in UK law
- Equal treatment - Allonby and Walker discrimination cases enshrined in UK law
- Review of the Pensions Regulator published
- New global framework published on reporting nature-related risks
- Insurers in financial distress – pensions tax law modified
- Regulator looks to build relationships with pensions administrators
- Actuarial profession looks into pensions on divorce advice
- Pension sharing on divorce – PLSA updates its charges guidance
The Bill to enable the DWP to implement the upshot of the 2017 auto-enrolment review received Royal Assent on 18 September 2023. The Pensions (Extension of Automatic Enrolment) Act 2023 sets out:
- A reduction from 22 in the lower age limit from which the employer duty to auto-enrol applies – but with regulations now able to set this lower age. The policy intent is to reduce the lower age limit to 18
- The potential removal of the lower limit of the qualifying earnings band (currently £6,240 pa) from which minimum contributions are determined, so that contributions can be calculated on all earnings up to the upper limit of the band (currently £50,270 pa). Regulations can now deliver on the detail which could allow for the lower limit to be reduced for a period of time ahead of its potential removal
The Act also enables regulations to modify the requirements of the annual review of the qualifying earnings band and for any changes to be introduced following a period of consultation with interested parties.
The DWP marked Royal Assent by highlighting the pension saving boost that can now be delivered once the regulations are in place.
The DWP can now turn to consulting on these regulations, with Viscount Younger for the Government at Third Reading in the Lords saying that this will happen “at the earliest opportunity … we hope that it could be later this year”.
Draft regulations have been laid before Parliament to ensure that compensation payable by the Pension Protection Fund when it takes over responsibility for an underfunded scheme following employer insolvency is not less than 50% of the value of the benefits the person would have been entitled to under the rules of the scheme.
This 50% minimum had been decided on by the courts, including the European Court of Justice in the Hampshire actions (see Pensions Bulletin 2018/36) and had been implemented by the PPF. Until now it was not strictly necessary to reflect this 50% minimum in UK pension legislation because European Court judgements that were handed down whilst the UK was in the EU remained binding. This all changed with the passage of the Retained EU Law (Revocation and Reform) Act 2023 in June 2023 (see Pensions Bulletin 2023/26), leaving the DWP a narrow window, closing on 31 December 2023, to reflect this minimum in UK law, as from this date the binding effect of EU case law falls away.
The draft Pensions Act 2004 (Amendment) (Pension Protection Fund Compensation) Regulations 2023 (and their Northern Ireland equivalent) provide that where the PPF assessment date is on or after 1 January 2024, a 50% minimum is determined as a value at the beginning of the PPF assessment period, having regard to guidance to be issued by the PPF Board. Separately, the PPF Board has published this guidance.
The regulations also, in such situations, remove the PPF compensation cap and its service-related extension, and in so doing, implement into UK law for assessment dates on or after 1 January 2024, the result of the separate Hughes case (see Pensions Bulletin 2020/26).
The draft regulations do not cover the Bauer case (see Pensions Bulletin 2020/01). We understand that the DWP has taken the decision to let the binding effect of this ECJ decision fall away from the end of the year and so no Bauer entitlements will arise where the PPF assessment date is on or after 1 January 2024. The Government is still considering options for fully addressing the effects of the Bauer judgment for assessment dates prior to this.
These ‘no change’ regulations are an example of what may be a number of urgent law changes across Whitehall that are necessary as a result of Brexit and the desire by the Government to no longer rely on EU case law in existence when the UK completed its withdrawal from the EU. This particular set of regulations should have little impact on how PPF compensation is calculated.
Draft regulations have been laid before Parliament to codify in UK law the upshot of two significant equal treatment cases, the motivation being the same as in the PPF compensation regulations above – ie because from the end of the year the binding effect of these judgements will fall away as a result of the Retained EU Law (Revocation and Reform) Act 2023.
The draft Pensions Act 2004 and the Equality Act 2010 (Amendment) (Equal Treatment by Occupational Pension Schemes) Regulations 2023 (and their Northern Ireland equivalent) reflect the 2004 Allonby case, by allowing a notional (rather than actual) opposite sex comparator to be used to establish the existence of discrimination caused by legislation. However, the regulations provide that this notional comparator approach can only be used in respect of the rules of occupational pension schemes and that for PPF compensation, in relation to pensionable service on and after 17 May 1990, to test whether there is sex-based discrimination as a result of the GMP legislation.
The draft regulations also codify the upshot of the Walker case (see Pensions Bulletin 2017/30), by removing the ability to discriminate, on grounds of sexual orientation, in respect of a surviving spouse or civil partner’s pension, that part of the pension that relates to pensionable service before 5 December 2005.
Removing the pre-5 December 2005 pensionable service exemption set out in the Equality Act 2010 has long been promised by the Government following the Walker case, with the 2023 Act giving an opportunity for this removal to be effected through regulations. The change is not controversial and is overdue. By contrast, the codification of the Allonby case, but only in relation to post 17 May 1990 GMPs appears unnecessary, in the light of the Lloyds Bank judgements.
The DWP has published the results of an independent review of the Pensions Regulator undertaken in the early part of 2023, whose purpose was to establish whether the Regulator remains fit for purpose and is still required as a public body. Reviews of non-departmental bodies are a regular occurrence and the results of the previous review of the Regulator was published in May 2019 (see Pensions Bulletin 2019/20).
The 2023 report concludes that the Regulator is broadly well-run and well-regarded and makes 17 recommendations centred around the following themes:
- Risk and growth – following the LDI event last autumn the question of how UK pension funds are invested has come under the spotlight. It is important that the Regulator plays an authoritative part in these policy discussions
- Compliance and enforcement – the Regulator has a thoughtful approach to driving compliance by both employers and pension schemes, but it is important that it is known for taking tougher action when necessary
- Digital transformation and value for money – the Regulator has grown significantly in recent years reflecting the additional workload it has taken on. It must find ways to discharge existing functions more efficiently
One interesting recommendation is for proper consideration to be given to allowing the Regulator to have rule-making powers in specific circumstances. The report says that while core pensions policy should sit clearly with the DWP, there is a case for delegating day-to-day regulatory rulemaking to the Regulator within constraints.
The same suggestion was made four years ago and it seems that nothing has happened. Recently, the Regulator reported that it had not met some of its performance targets, such as delivering the General Code. Would it have met them had it not had to rely on others?
The Taskforce on Nature-related Financial Disclosures (TNFD) has published recommendations, together with supporting guidance, on how organisations can assess, disclose and manage their nature-related risks and impacts. This TNFD framework is voluntary, aligned with existing standards for climate-related reporting, such as those produced by the TCFD and the International Sustainability Standards Board, with the intention of supporting global efforts to conserve and restore biodiversity.
Nature-related risks are broader than those relating to climate change and include physical risks, such as habitat destruction, invasive species and habitat decline, transition risks from the changing regulatory, policy or societal landscape and systemic risks arising from the breakdown of natural and economic systems.
The recommendations, set out in a 14-point disclosure framework, intended to be provided alongside an entity’s financial statements, are applicable to both financial institutions and corporates, regardless of their sector or country.
The framework is organised into the following four pillars:
- Governance: disclosures showing how the organisation’s governance structures and processes oversee the management of nature-related risks and opportunities, as well as the roles and responsibilities of the board and senior management
- Strategy: disclosures showing how the organisation’s strategy, objectives and financial planning are influenced by nature-related risks and opportunities, as well as the potential impacts of different future scenarios on the organisation’s business model and value creation
- Risk management: disclosures showing how the organisation identifies, assesses, prioritises and manages nature-related risks, as well as how it integrates them into its overall risk management processes
- Metrics and targets: disclosures showing how the organisation measures and monitors its nature-related risks, impacts and dependencies, as well as how it sets and tracks progress against its nature-related targets
The supporting guidance is intended to assist the application of these disclosures and also contains examples of qualitative and quantitative indicators that can be used to measure and report on nature-related risks, impacts and dependencies. The focus on impacts and dependencies is a key difference between this framework and that of the TCFD.
Having now produced this material the TNFD is turning its attention to encouraging market adoption, supporting knowledge and capacity building efforts across the market, and working with standard-setting partners as they look to develop nature-related disclosure standards that draw from the TNFD recommendations.
From the UK perspective, the next step in the sustainability agenda is the production of sustainability disclosure standards (SDS – see Pensions Bulletin 2023/32). It is not clear at this stage to what extent these standards will be influenced by the TNFD’s completed materials and while no specific guidance on the TNFD recommendations has been released in relation to pension schemes we may yet see something as part of the SDS package.
Due to the broad and complex nature of nature-related risks, there remain challenges around obtaining data and metrics, with many metrics still in early stages of development and varying across specific exposures – although this is a rapidly developing area.
Regulations have been laid before Parliament to ensure that certain adjustments to insurance policies relating to pension benefits, permissible when an insurer is in financial distress, don’t attract unauthorised payment charges under pensions tax law.
The Financial Services and Markets Act 2023 has made some changes to existing processes for managing insurers in financial distress. These include a revised power for the courts, through a “write-down order” to reduce the value of an insurer’s liabilities, including liabilities to policyholders, to avoid insolvency proceedings. The Act also provides for protected policyholders whose entitlements have been subject to a write-down order to be provided with “top up” payments from the Financial Services Compensation Scheme, made via the insurer, to ensure that the value of their policy is not reduced as a result.
Unfortunately, from a pensions tax perspective and where life insurance companies with annuity business are involved, both the write-down and the top up could be classed as unauthorised payments and through this result in tax charges being imposed on a pension scheme member.
The Registered Pension Schemes (Authorised Member Payments) Regulations 2023 (SI 2023/1012) provide that any reduction of a policyholder’s entitlement following a write-down order will not be considered a surrender of rights and therefore will not be subject to the unauthorised payment tax charges. They also add the top up payments to the list of authorised payments and ensure that any such payments will be treated as pension income for income tax purposes and as pension accruing in the tax year in which they were paid. The regulations come into force on 31 October 2023.
Pensions tax law is highly codified, setting out, amongst other things, a long list of authorised payments, with penal tax charges applying in relation to any payments that don’t fall under the list. Inevitably, there are situations, like this, where unauthorised payment charges will arise unless the law is modified.
The Pensions Regulator has announced, via a blog, that it is seeking to work more closely with pension scheme administrators, as new policy initiatives and unforeseen challenges put the importance of good administration back in the spotlight.
The blog says that in January 2022, the Regulator established a new team dedicated to engaging directly with third party pension administrators to extend the Regulator’s reach and influence. Activity was initially through a pilot exercise, which the Regulator says was beneficial for both the administrator and the Regulator, and this is now being extended.
Areas of current focus comprise systems and processes; data quality; trustee focus, understanding and willingness to pay; member engagement and communication; and pensions dashboard readiness.
This initiative has been mentioned before by the Regulator, such as in its 2021-24 Corporate Plan (see Pensions Bulletin 2021/22), which said that its supervision team would start an outreach programme with administrators, maintaining a focus on effective governance, administration and scheme funding.
Such engagement is voluntary, the Regulator having little direct power over administrators except if things go wrong when improvement notices and the like can be imposed. However, the initiative has to be beneficial to both sides, with administrators finding out about the Regulator’s concerns and adjusting their processes as necessary, and the Regulator obtaining an insight into how pension scheme administration works.
The Institute and Faculty of Actuaries has announced that it is undertaking a review of work where actuaries provide advice and calculations on pension sharing in divorce cases. This may include expert witness activity for court cases.
The review will look at current actuarial practice in this area. It will also cover the way actuaries provide their advice to customers.
Organisations working in this area are asked to submit examples of advice by 31 October 2023. A review of this advice will then take place with a report likely to be published in spring 2024.
This review continues a recent theme of the IFoA, looking at narrower, or less typical, fields of expertise and/or actuaries providing advice directly to individual clients or consumers. There have been a number of disciplinary cases in recent years relating to pensions on divorce work. Hopefully, the report will provide some useful pointers as to where there can be improvements.
The PLSA has updated its guidance whose aim is to support private sector occupational pension schemes when providing information for pension sharing on divorce orders. As before, the guidance includes a recommended range of charges as well as a flowchart outlining the circumstances when charges can be made. The PLSA says that its new guidance, informed by the results of a survey carried out earlier in the year, will apply from 2 January 2024.
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.
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