Pensions updates | November 2024

A hot topic that hit the front pages in November was the Chancellor’s Mansion House Speech, announcing bold action to take the fragmented pensions landscape, deliver investment and drive economic growth. Two of the plans announced are:

• onsolidate defined contribution pension schemes into a handful of megafunds; and
• pool the assets of the 86 separate Local Government Pension Schemes.

The reforms are radical and we go into more detail about them in [here -hyperlink to Mansion House 2.0 article].

The most significant change for occupational schemes announced by the Chancellor is that most unused pension funds and death benefits payable from a pension scheme will be brought within a person’s estate for inheritance tax purposes from 6 April 2027. At the moment, most lump sum death benefits do not fall within a person’s estate and are therefore not subject to inheritance tax.

The technical consultation also raises the possibility that any lump sum paid from an HMRC registered lump sum death in service scheme (e.g. a lump sum of four times salary on death in service) will form part of the employee’s estate and therefore attract inheritance tax.

An important procedural point to note is that trustees and providers are likely to be have a responsibility for liaising with the deceased’s personal representatives and then have a legal obligation to calculate and pay over to HMRC the part of the member’s inheritance tax liability relating to the pension arrangement, increasing the administrative burden.

Other changes announced include reduction of tax-free overseas pensions transfers, a requirement for scheme administrators to be UK resident and of course the rise in NICs from 13.8% to 15% together with a lowering on the threshold on which they are paid.

Considerations for trustees and employers

• Anticipate increased administrative duties in relation to reporting and direct payment of inheritance tax.
• Consider the structure of death benefit arrangements and how these will be affected by the changes.
• Weigh up the advantages and disadvantages of discretionary death benefit arrangements where the inheritance tax advantages no longer apply.
• If employers don’t already operate a salary sacrifice arrangement they may wish to consider doing so in the light of the increasing NIC liabilities.
• Keep on top of developments in this area and further proposals as they come out of the Review.

TPR has published its new compliance and enforcement policy for CDC pension schemes on 13 November 2024, outlining its risk-based regulatory approach and setting out how providers involved in running CDC schemes can expect to be supervised. The policy aims to establish general principles for the entire CDC market, emphasising TPR’s commitment to supporting innovation while ensuring saver protection. This development coincides with the recent authorisation of the Royal Mail CDC scheme but is intended to apply broadly to the evolving CDC landscape.

CDC schemes must obtain TPR authorisation in order to operate and once up and running will be supervised by TPR’s five key operating principles, as outlined in the published guidance under ‘our expectations’. TPR can issue information requests to those responsible for running CDC schemes, including the supervisory return once a year, as well as information required under section 72 of the Pensions Act 2004.

Regulatory interventions applying specifically to authorised CDC schemes include TPR’s use of a pause order on a scheme during a triggering event period under section 44 of the Pensions Act 2004 to limit the range of activity it can undertake during the period. TPR can also use risk notices where it wants to see trustees planning corrective action, which can be issued, for example, when it has concerns that a scheme is likely to breach its authorisation criteria. Civil penalties under section 10 of the Pensions Act 1995 can be imposed on a trustee who fails to comply with TPR notices.

TPR aims to “supervise CDC schemes in a collaborative and proportionate way” including “expert-to-expert conversations to support its understanding of a scheme”. Supervision will include periodic scheme evaluations, including assessment of whether the authorisation criteria continue to be met.

TPR expects those responsible for running CDC schemes to interact with its team, including direct engagement with its team which may require presenting plans for rectification of any issues that affect the scheme’s ability to meet the authorisation criteria or its other obligations. Frequency and detail of TPR supervision will be kept under review and is determined primarily by TPR’s assessment of the specific scheme’s level of risk. As noted above, TPR can decide to use its powers including, for example information requests, risk notices and improvement notices. TPR can issue risk notices when concerns arise about a CDC scheme’s management, governance, or funding and where it wants to see trustees planning corrective action, which it is expected to deliver. A risk notice can be used instead of—or in advance of—more serious powers, including de-authorisation.

While a CDC scheme is operating, TPR will need to be satisfied that, among other things:

• the individuals involved in running the scheme continue to meet the standards of honesty, integrity, financial soundness, competence and conduct appropriate to their role
• the systems and processes for running the scheme are efficient and robust, and contribute to the effective running and governance of the scheme
• there are adequate systems and processes and governance for communicating effectively with members, in particular about how the rate or level of benefits may change
• there is sufficient continuity planning to protect members where the risk of a scheme’s failure is increased, for example in the case of a triggering event
• there are sufficient financial resources to operate at set-up and after a triggering event without increasing the cost to members

TPR will provide annual evaluation reports to the CDC scheme trustees and indicates that the trustees should consider sharing this information with the scheme’s auditors. The evaluation reports will summarise:

• TPR’s evaluation of the scheme
• TPR’s intended supervisory intensity
• the key risks observed and the actions it expects the scheme to take
• TPR’s planned engagement timetable

We have had to wait a while but TPR’s new funding code of practice for defined benefit (DB) pension schemes has finally come into effect on 12 November 2024, introducing what Pensions Minister, Emma Reynolds, describes as a “stronger set of standards” for the sector.

The new code applies to DB pension schemes with actuarial valuation dates on or after 22 September 2024. Alongside the coming into force of the new code, TPR issued a press release confirming that its new DB funding code had come into effect and explaining that it plans to launch a digital service in spring 2025 to facilitate the submission of strategy statements and valuation documents, with interim support available for schemes needing to submit valuations before the service launch. To ensure this service is right for all users, TPR is working with several trustees in user research to pilot the new system. In the meantime, TPR is planning to host a webinar about the implementation of the new code on Tuesday 3 December 2024 and invites trustees and scheme staff to attend. TPR also said it planned to issue employer covenant guidance later this year.

The new DB funding code aims to improve regulatory oversight and ensure pension savers receive expected benefits by focusing on long-term objectives, risk management, and appropriate funding strategies. It provides guidance on setting funding plans in line with sponsor support and moving maturing schemes towards low dependency. It also sets out guidance for trustees, sponsoring employers and advisers on how to comply with legislation on funding and investment strategies, and outlines what is expected of them. The new DB funding code also forms part of the funding and investment module to TPR’s general code of practice.

The Department for Education launched a consultation on 14 November 2024 seeking views on proposed changes to the Teachers’ Pension Scheme (TPS) regulations. The amendments aim to adjust member contribution rates following the most recent valuation and update existing Fair Deal provisions to include further education colleges. Additionally, minor modifications are proposed to ensure the regulations remain current and accurately reflect the Department for Education policy. The consultation closes on 23 January 2025.

The consultation proposals include:

• adjusting member contribution tiers; and
• updating the provisions on Fair Deal on TUPE transfers to include further education establishments.

Ballard v Buzzard [2024] EWHC 2765 (Ch)

A recent High Court case provides a useful insight on situations where essential documents that form part of scheme’s historical record cannot be located or where they have not been executed properly. The trustees of the Radley College Pension and Assurance Scheme (the Scheme) and the Scheme’s Principal Employer sought rulings from the court as to the validity of amendments purportedly made to the Scheme’s provisions regarding pension increases.

The Scheme’s amendment power set out a three-stage process for alterations:

• the Principal Employer would provide written authorisation of the proposed amendment (the Authorisation Requirement).
• the Trustees would then decide if they would implement the proposed amendment.
• Once the Trustees had decided to make a proposed amendment that was within the scope of their authority, they were required to “forthwith declare any such alteration or addition to the Rules in writing under their hands…” (Declaration Requirement). The rule amendment would take effect when all the Trustees had signed such a Scheme Amendment Authority (SAA).

The court was asked to consider the validity of several amendments made between 2001 and 2005 intended to make reductions to annual increase provisions and the scheme’s definition of pensionable earnings.

The parties were unable to find a copy of the 2001 SAA that had been signed by all five of the then trustees. There was also an issue concerning the execution of all three SAAs arising from the way in which they had been drafted. This is because, the SAA included signature blocks allowing for a signature “For and on behalf of the Principal Employer” and for four signatures to be provided against the word “Trustee”. Copies of the fully signed 2005 SAAs were available, but one trustee (B) had signed on the signature block labelled “For and on behalf of the Principal Employer”.

The court was additionally asked to consider the validity of rules adopted in 2006 (the 2006 Deed) to consolidate earlier rule changes and to reflect changes in the law. The parties submitted that the 2006 Deed did not reflect the intention of the Trustees and the Principal Employer since it did not include the changes to the pension increase provisions adopted by the 2005 Pension Increase SAA.

On the issue of the missing fully signed 2001 SAA, Mr Justice Thompsell said that it is clear that it is permissible to rely on secondary evidence of the contents of a lost document. In this case, two part signed documents were located and witness evidence of execution was submitted. On that basis and in consideration of the fact that it was not unreasonable for a document to have been lost after 23 years, the court made a finding of fact that the SAA had been fully signed and represented the contents of the versions located.

The court then went on to consider the issue surrounding one trustee signing in the “For and on behalf of the Principal Employer” block and entering their employment role. Could a signature expressly stated to have been given in one capacity be treated as also being given in a different capacity?

This was dealt with as an issue of rectification. The court granted rectification of the documents on the basis of “overwhelming” evidence that both the individual trustee in question and all of the other trustees intended that the signature of the individual trustee in question would be effective in both his employer and his trustee capacities. On the basis that the SAAs were now valid, the court also ordered the rectification of the consolidating rules that failed to properly reflect the changes made by one of the earlier SAAs.

What does this decision mean for trustees and employers?

The High Court’s use of secondary evidence to resolve problems with missing documents is of particular interest especially in the light of topical concerns about the potential implications of the Virgin Media case and instances of being unable to locate actuarial confirmations provided for historic amending deeds.

Read the decision in full here.

The Pensions Ombudsman has recently dismissed a complaint from a member who withdrew from active membership of his pension scheme in order to preserve his lifetime allowance protection, unfortunately without realising that this would cancel his eligibility to have a late retirement factor (LRF) applied to his benefits. The member complained that the scheme trustee had breached a duty of care to him by failing to inform him that withdrawing from the scheme whilst continuing in employment was going to result in the loss of the LRF.  The member relied upon a quotation issued in connection with his divorce proceedings. This quotation did include an LFR enhancement but did not explain that it would be cancelled if the member withdrew from active membership before employment retirement. The Pensions Ombudsman held that the trustee had to ensure that the quotation complied with legal requirements and was not under a separate duty based on a reasonable expectation that the member would rely on it for a totally different purpose. It was also determined that the member would have made the decision to withdraw anyway, so even if a duty was owed, it could not be held that the loss was caused by any reliance on the quotation.

With the aim of speeding up the resolution of complaints, the Early Resolution Service, which could previously be used as an alternative to going through a scheme’s internal dispute resolution process (IDRP) is no longer available. New incoming complaints must now have gone through the scheme’s IDRP in all cases. They will then be assessed and allocated to one of the following tracks:

• If it appears that the complaint can be resolved informally by the parties reaching agreement, the resolution team will investigate the complaint and issue the parties with an informal view and suggested solution (which could include compensation). If the parties agree, the case is closed; otherwise, the matter can be escalated.
• If the case is regarded as having a clear outcome it may follow an expedited decision-making process in which a caseworker issues an initial decision. In a recent blog post, the Pensions Ombudsman suggested that suitable cases might include:
  • cases where a pension provider supplied an incorrect benefit statement, but no loss was caused by the error;
  • complaints about automatic fund switches in a lifestyling investment strategy, where the nature of the strategy was adequately communicated; and
  • cases where a member wants a scheme to honour a cash equivalent transfer value even though the member caused delay that meant statutory time limits were not. Decisions on these cases will not normally be published. If the parties are not happy, the case will be referred to the Pensions Ombudsman for a determination.

• The third alternative is the formal adjudication process. Both parties can submit further information and arguments; any attempt to resolve a complaint during an earlier resolution process (such as an offer made by one party) will not be treated as an admission by the party making the offer. An adjudicator will issue an initial decision (with the possibility of referral to the Pensions Ombudsman for a formal determination if the parties disagree with the adjudicator’s view).

Important action points for trustees and employers

Trustees need to be aware of these changes in order to be able to respond appropriately to complaints as required. Standard employee communications and scheme booklets that refer to the Pensions Ombudsman processes for disputes should be checked now and updated as necessary. Any references to the Early Resolution Service will need to be removed. For support and information about the new processes, please do get in touch with our pensions team.