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: PASA: DC transfers guidance; High Court guidance on protected pension age ‘actual or prospective right’ requirement; TPR/DWP prosecution of PSA21 criminal offences; Date for your diary: virtual seminar – The end-game: options, strategy and tactics for defined benefit pension schemes.
PASA: DC transfers guidance
The Pensions Administration Standards Association (PASA) has released the second edition of its ‘DC governance watch’ publication, focusing on DC transfers. It discusses industry-wide issues following the introduction of the red and amber flag system in November 2021 (read more).
PASA recommends that schemes establish policies for assessing where flags are triggered; streamline policies and procedures where possible; and clearly set out which transfers can be dealt with by administrators, which need to be raised with advisers (such as lawyers), and when matters need to be raised with trustees. It also discusses the use of clean lists (a list of verified schemes to which transfers are made with reduced due diligence). PASA flags the need to balance streamlined administration through the use of clean lists with protecting pension savings, reminding schemes and administrators in particular of the need to maintain the lists.
In relation to using a scheme’s discretionary transfer powers to work around issues caused by the current flag requirements (which is suggested as an option in TPR guidance), PASA highlights that there are potential risks to trustees using discretionary transfers and that they should seek legal advice on how to mitigate these.
Read the publication.
High Court guidance on protected pension age ‘actual or prospective right’ requirement
The High Court has given helpful guidance on what constitutes an ‘actual or prospective right’ to a benefit, in the context of protected pension ages: Devon and Somerset Fire & Rescue Authority v Howell.
Under the Finance Act 2004, members of registered pension schemes can normally only take their pensions on or after their ‘normal minimum pension age’ (NMPA) without incurring tax penalties. The NMPA was increased from 50 to 55 in 2010 but in some circumstances members retained the right to take their pension before 55, at their ‘protected pension age’ (PPA). One of the requirements for a PPA is that ‘on 5th April 2006 the member had an actual or prospective right… to any benefit from an age of less than 55’. Similar wording is used in relation to the PPA being introduced when the NMPA increases in 2028.
HMRC guidance interprets an actual or prospective right as meaning an ‘unqualified right’, and states that ‘an individual has an unqualified right to take benefits if they do not need the consent of anybody before they can take their benefits’. The judge upheld this interpretation, rejecting the counter-argument based on dictionary definitions of the words ‘actual’ and ‘prospective’. The judgment set out the following guidance:
- to be an ‘actual right to a benefit’, the right must be immediate and subject to no contingencies;
- where there is no immediate right to a benefit but a contingent future right subject to future contingencies, the right will be a prospective right (subject to 3 below); and
- future contingences such as the occurrence of natural events (e.g. attaining a certain age) or contingencies wholly within the control of the member (such as not taking certain specified types of employment on retirement) do not prevent a right from being prospective. However, a condition that requires consent or permission of a third party before there is any right to a pension means that there is not a prospective right.
In this case, the member was not entitled to retire earlier than 50 unless his notice of retirement was given with the ‘permission’ of his employer. The judge held that a requirement for ‘permission’ was the same as consent, and therefore the member did not have a prospective right to retire earlier than 55. The ruling is consistent with HMRC guidance and industry understanding, and provides useful confirmation on this issue.
Read the case.
TPR/DWP prosecution of PSA21 criminal offences
The Pensions Regulator (TPR) and Department for Work and Pensions (DWP) have published a non-binding memorandum of understanding setting out their intended respective roles and how they will co-ordinate in relation to prosecuting criminal offences introduced by the Pension Schemes Act 2021 (PSA21) – avoidance of employer debt and conduct risking accrued scheme benefits – while avoiding duplication of roles.
The memorandum establishes that, except in exceptional circumstances, TPR will decide whether to prosecute a person for the PSA21 offences, and will pursue that prosecution, rather than the Secretary of State (who also has a statutory power to prosecute). If the Secretary of State did bring a prosecution, they would consider TPR’s relevant policies and guidance at the time. The memorandum also includes information on how TPR and the DWP will share information in relation to prosecutions.
Read the memorandum of understanding.
Date for your diary: virtual seminar – The end-game: options, strategy and tactics for defined benefit pension schemes
We will be running a virtual seminar on defined benefit schemes’ end-games on 28 February 2023, 9am–10am.
Sponsors of private sector defined benefit pension schemes are continuing to look for end-game solutions, especially in light of ever-increasing regulatory scrutiny. Buy out, run on or consolidate – what are the pros and cons of the options available? How do you balance strengthened funding expectations against the risk of trapped surplus and secure good outcomes in a volatile world? Join us for a discussion of all these questions.
See more details and register to attend.
