Pensions legislation and case law update: the latest developments week ended 8th January 2021

In this week’s update, we consider the impact on pension schemes of the UK’s withdrawal from the European Union and look forward to what’s on the agenda for the first few months of 2021.

Pension Schemes Bill

Development:

Although the Pensions Minister had hoped that the Pension Schemes Bill would receive Royal Assent before Parliament adjourned on 20 December 2020 for the Christmas recess this did not happen. It seems that the combined effect of Brexit and COVID-19 prevented finalisation of the Bill in 2020. 

Key point:

Parliament returns on 7 January 2020. Quite when the Bill will complete its final stages is not yet known although we expect that it is likely to be in early 2021. What is clear is that when it does come into force trustees, employers and advisers will have a period of adjustment while the new provisions bed in, particular those relating to scheme funding and the enhanced powers of the Pensions Regulator (the Regulator). 

Pensions minister sets out 'path for pensions' in 2021

Development:

Minister for Pensions and Financial Inclusion, Mr Guy Opperman, has set out the 'path for pensions' in 2021.

There will be a focus on delivering on the "essential measures included in the Pension Schemes Bill to create a safer, better and greener pensions system in the United Kingdom" and to provide greater protection for members from pension scams. 

Mr Opperman has also outlined his determination to resolve the issue of deferred small pots which have proliferated since the introduction of auto-enrolment noting that the creation of the pension dashboards will assist not only in increasing transparency and improving retirement planning generally but in reducing the number of small pots.

In keeping with recent Governmental focus on climate change, Mr Opperman also references the draft regulations which will be published for consultation 'in the new year' on the proposals to require schemes to assess and manage climate risks and opportunities by reference to the recommendations of the Taskforce on Climate-related Financial Disclosures and to publish an annual report explaining how they have done so. 

The DWP's August 2020 consultation explained that these proposed changes will target larger schemes, to begin with as from October 2021, schemes with assets of £5bn or more, authorised master trusts and authorised collective money purchase schemes, and be rolled out to other schemes with assets of £1bn or more the following year.

Key point:

The Pensions Minister is keen to build on the pensions initiatives which have been very much the focus of the Government in the lead up to the new year. In particular, it there is a desire to be able to 'showcase' the Government's 'progressive agenda' on pensions policy and climate change in preparation for the UN Climate Change COP26 summit which the UK is hosting in Glasgow in November 2021.

CJRS extended to the end of April 2021: NI and employer pension contributions remain payable on furlough pay

Development: 

The CJRS has been extended for all of the UK to the end of April 2021. It had been intended that the scheme would be reviewed this month but this was brought forward so that businesses could plan ahead for the New Year. The eligibility criteria remain the same. 

Key point: 

Employers can still claim 80% of employees' wages up to a maximum of £2,500 for hours not worked (the cap being reduced proportionately according to hours not worked). Employers will pay wages, National Insurance contributions and pension contributions for hours worked, and National Insurance and pension contributions for hours not worked. HMRC's guidance has been updated to reflect the extension. 

Extended suspension of the use of statutory demands and winding-up petitions

Development:

The Government has announced plans to once again extend the suspension of the use of statutory demands and winding-up petitions until 31 March 2021. 

As a recap, this means that no winding-up petition can be presented on the basis of a statutory demand served between 1 March 2020 to 31 March 2021. In addition, all winding-up petitions presented before 31 March 2021 will be void unless it can be proven that coronavirus has not had a financial effect on the debtor company.

Key point: 

These restrictions effectively ensure that businesses will now be able to make use of an additional three months’ worth of breathing space, free from creditor petitions. The temporary restrictions were previously due to expire at the end of 2020. However, it does mean that the trustees' leverage with the employer in terms of any deficit is reduced and trustees will need to factor the restrictions into their considerations around any sponsor distress scenarios. 

PPF confirmation on the 2021/22 levy rules

Development: 

The Pension Protection Fund (the PPF) has set out its 'direction of travel' for the levy policy changes that will be adopted in the final rules. This follows the September 2020 consultation on the 2021/22 levy rules; see Gateley's update for further details.

The statement confirms that:

• both the small scheme adjustment (halving the levy for schemes with liabilities less than £20m and tapering it for those with liabilities between £20m and £50m) and the reduction in the risk-based levy cap from 0.5% to 0.25% of liabilities will be implemented; 
• insolvency risk will continue to be measured on the basis used since April 2020 using credit ratings and the PPF specific insolvency risk model operated by Dun & Bradstreet; and that
• the levy collected will be £520m and the levy scaling factor of 0.48 will be retained.

Key point: 

This will help schemes plan relevant risk reduction measures ahead of the March 2021 deadlines. The final binding rules will be published in January 2021 together with a policy statement summarising the responses received and conclusions. The PPF will continue to monitor the impacts of COVID-19 on schemes and sponsors and will respond flexibly to any issues arising.

Scheme returns on the horizon

Development:

The Regulator has confirmed that it will begin issuing scheme return notices from the end of January 2021. It has also asked defined benefit (DB) schemes to be prepared to answer two further questions which will require schemes to provide:

• a website link to their published statement of investment principles; and 
• the assessment of the employer covenant grade – and where it would fall in the Regulator's grading system.

These questions may be added if the Regulator streamlining of its systems is updated in time and the position will be confirmed in early January 2021. 

Key point: 

Schemes will have longer this year, until 31 March 2021, to complete and submit the return. An example DB and hybrid 2021 scheme return has been published.

Arcadia schemes expected to enter PPF assessment shortly: Regulator correspondence on Arcadia pension schemes published by the Work and Pensions Committee

The Regulator has responded to Mr Stephen Timms, the chair of the Work and Pensions Committee, 30 November 2020 queries regarding the Arcadia Group Limited's defined benefit pension schemes. 

The 18 December 2020 letter from the Regulator confirms that it expects the Arcadia schemes to enter a PPF assessment period 'shortly', subject to validation from the PPF. 

It also explains that the assets of the Arcadia Group which were subject to security arrangements would be realised by the administrators and monies paid out to creditors including the schemes rather than being transferred directly to the schemes. Timings will depend on when the assets can be sold. 

HMRC guidance on in-specie contributions updated following the Sippchoice case

Development:

HMRC's in-specie contributions guidance has been updated following the HMRC v Sippchoice Ltd [2020] UKUT 0149 (TCC) case in which the Upper Tribunal ruled that, in relation to tax relief on contributions to a SIPP, 'contributions paid' under Section 188 of the Finance Act 2004 did not include a transfer of non-monetary assets such as shares and was limited to monetary contributions.

Key point: 

Sippchoice had referred to an earlier version of HMRC's Pensions Tax Manual during the case in support of its argument that non-monetary assets could be transferred in satisfaction of a pre-existing monetary obligation which said that "…contributions to a registered pension scheme must be a monetary amount. However, it is possible for a member to pay a monetary contribution and then give effect to the case contribution by way of a transfer of an asset or assets."

However, the Upper Tribunal concluded that the legislation had a different meaning to that found in the manual and the contrary view set out in the guidance was found to be incorrect.

PTM042100 now 'clarifies' that member or employer contributions to a registered pension scheme must be a monetary amount and where an asset is transferred in satisfaction of an earlier obligation to contribute money, the resulting contribution is not a monetary amount which would attract tax relief.

However, a contractual offset agreement, whereby the scheme agrees to purchase an asset in consideration of the contribution obligation, can qualify for tax relief under certain circumstances.

DWP consultation on the general levy proposes increases from April 2021

Development: 

The DWP has launched a consultation on proposals to change the structure of the general levy which is paid by pension schemes to recover funding provided by the DWP to the Pensions Regulator, the Pensions Ombudsman and part of the Money and Pensions Service, and to increase rates from April 2021 for the following three years. The consultation will close on 27 January 2021. 

The rates have not been increased since 2008/09, in fact reducing by 13% in 2012/13. However, the levy deficit is expected to reach approximately £80m by March 2021 and the Pensions Minister, Guy Opperman, has said that action is needed to align the rates with expenditure.

Key point: 

The 2020 levy charges run from £29 for occupational schemes with fewer than 12 members to £430,000 for those with over 500,000. These could increase to £64 and £945,000 respectively for DB and hybrid schemes by 2023/24 under the proposals. Therefore, very large schemes could see a big hike in the levy rates by the third year.

ICO code of practice on responsible data sharing methods

The ICO has published a new Data Sharing Code of Practice with resources to provide practical assistance to businesses and organisations on carrying out responsible data sharing in compliance with data protection legislation. The code will be laid before Parliament for approval as soon as reasonably practicable and will come into force 40 sitting days after being laid. 

It has also launched a data sharing information hub which contains targeted support and resources including case studies, FAQs and checklists. 

Regulator investigation into the Merchant Navy Ratings Pension Fund (MNRPF) leads to governance and trustee board changes but no independent trustee appointment

Development: 

The Regulator has issued a regulatory intervention report in relation to the MNRPF following commencement of an investigation in November 2018 into a wide range of governance issues including failure to implement recommendations from two independent review reports commissioned in 2016 and 2018, improper consideration of conflicts of interest, failure to take account of professional advice, breaches of confidence, failure to reach consensual decisions and a 'lack of trust' issues.

The MNRPF is a multi-employer defined benefit scheme with approximately 25,000 members, over £1bn in assets (as at 31.3.2017) and more than £1m of additional costs resulting from the governance issues. 

The Regulator issued a warning notice recommending the appointment of an independent trustee in May 2019. Ultimately, the appointment was not made as the nominated bodies made 'material and effective changes to restructure its board and to improve its governance' including wholesale changes to the trustee board personnel, imposition of maximum terms of office for trustee directors, changes to trustee voting arrangements and TKU and performance review improvements.

Key point: 

Some of the issues identified in the MNRPF were specific to the circumstances of the scheme but on a more general level, the report illustrates the governance standards expected of trustees and the steps which the Regulator will take where issues are identified.