TPR guidance on private market investments
Following on from the government’s announcement of the Mansion House reforms, the Pensions Regulator (TPR) has issued new guidance on private market investments, designed to help trustees who are considering investing in assets such as private equity/debt, private real estate or infrastructure and natural resources. TPR notes that ‘with the right governance in place, they can play a part in a diversified investment portfolio that aims to deliver improved outcomes and value for money. However, you should take appropriate advice’.
The guidance provides a high-level overview of structures providing access to private market assets; the differences between public and private market investments; the opportunities and risks of investing in private markets, and issues around valuation, volatility, disclosure and costs. It also discusses legal duties (including the requirement to ensure that scheme assets are predominantly invested in investments that are traded on regulated markets and are properly diversified, and restrictions on employer-related investment), knowledge and understanding requirements, governance considerations and risk management issues. Finally, it sets out some DB- and DC-specific issues for trustees of relevant schemes to consider, and links to additional resources.
Read the guidance.
HMRC: Pension Schemes Newsletter no. 155
HMRC has published its latest Pension Schemes Newsletter, which includes an update on the legislation providing for the abolition of the lifetime allowance. In particular, it notes that concerns have been raised about the operation of the new pension commencement excess lump sum (PCELS), which was designed to allow individuals to commute pension to a lump sum even where their lump sum allowance has been exhausted: HMRC is considering whether the link between the proposed permitted maximum for the PCELS and the lump sum and death benefit allowance should be amended.
The newsletter includes a set of FAQs on the mechanics of the new framework, including on transitional tax-free certificates, with further details to follow in newsletters or workshops. A link is available in the newsletter to sign up for working group sessions on reporting requirements and on transitional arrangements (on 8 and 14 February respectively). Further communications and guidance will be published on a fortnightly basis.
The newsletter also covers a number of non-LTA-related issues, including changes to the arrangements for filing a pension scheme return for the tax year ending 5 April 2024, which will be via Pension Schemes Online rather than via the new Managing pension schemes service.
Read the newsletter.
High Court upholds DB to DC conversion and considers underpin issue: Newell
The High Court has upheld the validity of converting member benefits from a final salary (FS) to a money purchase (MP) basis following their transfer to a new defined contribution section, and the nature of the final salary underpin that should be applied: Newell Trustees Ltd v Newell Rubbermaid UK Services Ltd.
Mr Justice Green’s judgment covers a range of issues around the transfer and conversion process and alleged age discrimination issues relating to the way members were selected for that process: members under the age of 40 were automatically transferred; members aged 40-44 were given the option to stay or to transfer and members over the age of 45 stayed in the final salary section. The amendments were made by the combination of a 1992 Deed and booklets pending the execution of a definitive amending deed in 1993. The court ruled that the 1992 Deed was effective to set up the new section and transfer relevant members into it (and that, had it not been effective, the 1993 Deed would have achieved the same effect retrospectively, subject to issues about the restrictive amendment power).
The scheme’s amendment power provided that no alteration could be made ‘such as would prejudice or impair the benefits accrued in respect of membership up to that time’. After detailed consideration, Green J did not consider that it prevented the conversion of final salary benefits to MP benefits, but held that it did not permit the final pensionable salary link to be broken for members transferring to the MP section. The next question, on that basis, was to identify the consequences of breaching the restriction on the amendment power. Green J did not consider that the Court could impose an underpin by way of remedy, ‘effectively guaranteeing the receipt of FS benefits, and eliminating any investment risk from the MP benefits. That would amount to the same as reinstatement in the FS section even though I have found the conversion to MP benefits to be valid. The focus… should be on whether the conversion of the FS accrued benefits to cash was in the appropriate amount’.
The Court considered different possible approaches to working out whether the conversion to cash had been calculated correctly, concluding that the trustee should take a retrospective approach. This would mean calculating ‘whether the transfer sum was lower or higher than the accrued FS benefits as at 1 January 1992, valued by taking into account the actual salary increases and final pensionable salary. If it was lower, then the amount of the shortfall should have been included in the transfer sum and it should be accumulated with the investment returns it would have earned had it been invested in the MP section's default strategy. That amount therefore would need to be added to each member's MP pot, together with interest for the period until payment.’
The judgment also includes consideration of a number of other issues, including questions around member consent and the validity of extrinsic contracts in relation to pension scheme amendments. Finally, Green J considered claims relating to age discrimination and how the membership had been divided into age groups that were subjected to different treatment. Given that the amendments were made in 1992, and that there was nothing in the current rules that contravened the non-discrimination rule, he dismissed these claims, but set out his conclusions in some detail (including on whether there had been unfavourable treatment, on objective justification, and on the temporal limitation of any discrimination) in case of later challenge.
Read the decision.
