Welcome to your weekly update from the Allen & Overy Pensions team, covering all the latest legal and regulatory developments in the world of workplace pensions.

This week we cover topics including: Spring Budget tax changes: Finance (No.2) Bill published; PSIG interim scams guidance; TPR climate reporting review; TPR blog posts on value for money; Pensions Academy Online – 28, 29 and 30 March 2023; The Gender Pensions Gap: what it is and how to fix it – 23 May 2023.

Spring Budget tax changes: Finance (No.2) Bill published

The Finance (No.2) Bill, implementing the measures announced in the Spring Budget, has been published and had its first reading in Parliament. The Bill sets out that, from 6 April 2023:

• no lifetime allowance (LTA) charge (the tax penalty for exceeding the LTA – the limit on tax-efficient pension savings over a person’s lifetime) will arise. However, legislative provisions on the LTA that do not relate to liability for the LTA charge will continue in force; these provisions will be removed by April 2024 through a future Finance Bill;
• by retaining LTA provisions in the calculation of Pension Commencement Lump Sums (PCLS), a cap is effectively applied to those lump sums, set at the current maximum (GBP268,275); the Chancellor announced in the Budget that this cap will be frozen going forward;
• the following lump sums, which are currently subject to the LTA charge in certain circumstances, will be charged at the recipient’s marginal rate: serious ill-health lump sums, lifetime allowance excess lump sums, defined benefits lump sum death benefits, and uncrystallised funds lump sum death benefits;
• the annual allowance (AA) (the amount that can be tax efficiently saved into a pension each year) will be increased from GBP40,000 to GBP60,000;
• the money purchase annual allowance (MPAA) – the amount of money purchase pension saving that can be made after accessing pension savings flexibly – will be increased from GBP4,000 to GBP10,000. Alongside this, the alternative AA – the cap on defined benefit pension saving after flexible access – will increase from GBP36,000 to GBP50,000 (calculated as the increased AA of GBP60,000 less the increased MPAA of GBP10,000);
• the adjusted income threshold for the tapered AA (a reduction in the AA for high earners) will be increased from GBP240,000 to GBP260,000 and the minimum tapered AA will be increased from GBP4,000 to GBP10,000; and
• provisions are included aimed at allowing people who have enhanced fixed protection (which give a higher individual LTA) to accrue new pension savings or transfer their benefits without losing those protections and to retain any existing entitlement to a higher PCLS.

The Bill also includes changes in relation to collective money purchase arrangements and to address the ‘net pay anomaly’ (where low earners who contribute to an occupational pension scheme through a net pay arrangement lose out on tax relief).

Read the Bill.

PSIG interim scams guidance

The Pension Scams Industry Group (PSIG) has published an interim practitioner guide to combating pension scams. The guide sets out the legislative requirements introduced in 2019, including the requirements to check for red and amber flags, and gives suggestions and practical tips on the process and due diligence needed. The guide notes that the intention had been to update the full PSIG Code of Good Practice and related documents to coincide with the regulations introducing the flags system, but ‘the mismatch between the DWP stated policy intent and certain clause wording has made it impossible for [PSIG] to issue definitive good practice at this time’.

The guide includes discussion of two well-known issues with the 2019 regulations. On the ‘overseas investment issue’ (that there is an amber flag where there are any overseas investments included in the receiving scheme, which, if applied broadly, would include most pension schemes), it refers to guidance from the Pensions Regulator (TPR) which suggests this is intended to capture funds where there is a lax, or non-existent, regulatory environment or in jurisdictions which allow opaque corporate structures. However, it notes that this is not reflected in the regulations and there is therefore some risk in interpreting the regulations in that way. On ‘the incentives issue’ (that a red flag arises where a member has been offered an incentive to make a transfer, causing uncertainty over what constitutes an ‘incentive’) it suggests that discretionary transfers may be appropriate where potential incentives arise, and that schemes should seek legal advice.

There is guidance on the use of clean lists (a list of pension schemes that have been identified as being safe to transfer to without additional due diligence). It notes that the policy intention is clearly to allow clean lists to be used, but they should be carefully compiled and regularly reviewed. The guide includes sections on both the risks of using and not using a clean list, and ways of mitigating those risks. It also suggests that any review of lists could include referral to the scheme or provider’s indemnity insurer to ascertain that cover remains, and that schemes should consider whether they will always permit transfers to the schemes on the list or whether the involvement of any advisers or introducers of concern would require further due diligence checks.

The guide discusses the use of discretionary transfers, which can be used (depending on a scheme’s rules) to make transfers without following the statutory process and flag checks. It notes that TPR has expressed support for the use of discretionary transfers with appropriate due diligence where a low-risk transfer might not be possible through the statutory route. It sets out the risks of using discretionary transfers and possible mitigations, including due diligence steps and how clean lists could be used in this context. The guide also discusses the use of automated transfers through electronic platforms, noting that this does not replace a transferring scheme’s due diligence.

The guide also includes sections on trustee engagement with administrators, setting out suggested issues trustees may wish to discuss with their administrators, and on additional good practice such as raising awareness of scams and reporting suspicious requests.

Read the interim guide.

TPR climate reporting review

TPR has completed a review of 71 pension schemes’ annual climate reports (‘TCFD reports’, required from 1 October 2021 for schemes with relevant assets of at least GBP5 billion and from 1 October 2022 for those with relevant assets of at least GBP1 billion). Its review gives guidance on TPR’s expectations of these reports going forward.

TPR has identified some general common areas for improvement:

• a lack of sufficient background information on the scheme, making disclosures difficult to interpret. TPR suggests that reports should explain: for DB schemes, whether there are different sections and if so, whether the trustees considered they have similar characteristics and so could be grouped for reporting; for DC schemes, which arrangements the trustees consider to be popular arrangements; and for hybrid schemes, both points;
• disclosures of strategy, scenario analysis and metrics activities were not always provided at the appropriate level as described in the DWP’s statutory guidance; some reports omitted required disclosures or failed to follow a required approach (or explain deviation from that approach); and
• accessibility issues, which could make it difficult for savers and others to find and access reports online, including being difficult to locate using search engines; using long or complicated web addresses; and lack of compatibility with reader accessibility requirements.

TPR identified general areas of good practice, such as the inclusion of non-technical summaries, but also noted points for improvement in each part of the requirements. For example, in relation to the description of governance arrangements, it noted that some schemes failed to include in-house pensions teams as ‘undertaking governance activities’ or to describe how climate credentials and competence are assessed for in-house teams or non-investment advisers. In relation to scenario analysis, there are a number of detailed points of criticism, including failure to disclose any assessment of how climate change could impact the employer covenant, and failure to cover DB liabilities as well as assets.

TPR acknowledges that there continue to be issues with data quality and coverage and notes that trustees should explain limitations in their data and any subsequent changes resulting from improved data coverage. It also suggests that schemes consider collecting member feedback on their first reports, to see how they can be made more useful. TPR expects trustees and their advisers to ensure that any gaps in required disclosures are addressed in future reports and that its other findings and comments are taken into account.

Read the review.

TPR blog posts on value for money

TPR has published two blog posts this week related to value for money (VFM) and value for members. The first discusses the approach taken in TPR’s January consultation on establishing a new VFM framework (read more). It discusses TPR’s focus on default funds and data disclosures and its overall goal: that savers receive real value for money, meaning schemes don’t just focus purely on cost but look to deliver real value, and to drive improvements across the whole market.

The second blog post is a review of a range of issues by Charles Counsell, as he approaches the end of his term as CEO of TPR. It includes a statement that TPR expects its new General Code of Practice (formerly known as the Single Code of Practice) to be launched ‘later this spring’. It also notes that TPR is designing a new value for members regulatory initiative for later this year, which will challenge schemes that are not completing, or acting on, their value for members assessments.

Read the VFM blog.

Read Charles Counsell’s blog.

Pensions Academy Online – 28, 29 and 30 March 2023

Pensions Academy is back this week. Over three days we will be holding a series of webinars on topical issues for pension schemes and the people who run them:

The new DB Funding Code – outstanding questions and upcoming challenges for pension schemes –Tuesday 28 March, 9:30 – 10:30

Jon Forsyth of LCP will join Andy Cork to discuss practical actuarial and legal issues for defined benefit schemes preparing for the introduction of the new DB funding Code.

They will identify key areas of uncertainty and concern and give practical tips on what schemes should be doing to prepare for its arrival.

Pensions in dispute – lessons from the courts and the Pensions Ombudsman –Wednesday 29 March, 9:30 – 10:30

Jason Shaw and Angela Stafford will draw out the most interesting cases and themes from recent pensions decisions, with a focus on those with a practical impact for schemes and lessons that trustees can carry over.

Legal update – what’s changing, now and next – Thursday 30 March, 9:30 – 10:30

With new Codes of Practice, ever-changing reporting requirements and a value for money framework on the horizon, the trustee agenda is full and keeping up to date is a formidable task. Helen Powell and Joan Whybray will help you navigate recent and upcoming developments, highlighting the key things to be aware of and action points to be taking.

If you would like to attend any of the sessions, please sign up here.

The Gender Pensions Gap: what it is and how to fix it – 23 May 2023

The Gender Pensions Gap – the difference between the pension incomes that men and women can expect at retirement – is estimated to be twice the size of the Gender Pay Gap. Why is that, and how can we close the gap? Join us at our offices on Tuesday 23 May 2023 when we will be welcoming Legal & General Investment Management’s (LGIM) Stuart Murphy, Co-Head of DC, and Alexandra Miles, Senior DC strategist, to discuss the gap and what can be done to address it.

Sign up here.