Pensions Essentials - June 2024

The Pensions Regulator has wide powers to obtain the information it needs to carry out its functions. In particular, it can:

• Issue information notices: Section 72 Pensions Act 2004 allows the Regulator to give notice in writing requiring anyone to provide documents or information relevant to the exercise of its functions. The notice must specify the time limits for producing the information and the method for supplying it. The Regulator says that if an individual requires more time, they should contact it as soon as possible.
• Call people for interviews: Section 72A Pensions Act 2004 (a fairly new provision introduced in 2021) allows the Regulator to issue a written notice requiring anyone to attend an interview at a specified time and place “to answer questions and provide explanations” on specified matters. The Regulator will also need to provide information including an explanation of why it is carrying out the interview and the interview process.
• Carry out inspections: Sections 73 to 75 Pensions Act 2004 allow the Regulator to enter premises and carry out an inspection to check that an occupational pension scheme is being operated in compliance with legislation or in connection with an investigation into the use of the Regulator’s moral hazard powers. The premises that can be inspected include: the members’ place of employment; where administrative documents relating to the scheme are kept or scheme administration is carried out; or where administrative documents relating to the employer’s business are kept or the administration of that business is carried out. The Regulator says that although it will usually give reasonable notice, there may be occasions where no notice is appropriate.

The Regulator has issued an enforcement policy setting out how it will use these powers and what it will do with the information it collects. In particular, it says that:

• It may seek information, documents and explanations from trustees, employers or anyone else (including scheme members and advisers) that it reasonably believes could have relevant information. It is not limited in who it asks for information or the number of requests or notices it may issue.  
• It will give a reasonable period of time or notice for providing information. The assessment as to what is a reasonable amount of time takes into account the anticipated volume, complexity, and accessibility of information or the preparation time reasonably required before attending an interview or being inspected.
• Examples of the type of information the Regulator may ask for include: scheme constitution documents, trustee minutes, scheme policies and procedures, risk registers, bank statements, investment reports, correspondence and advice.

Under section 77 Pensions Act 2004, there are criminal sanctions for failing to comply with the Regulator’s information gathering powers. Failure to comply with an information notice or interview request or preventing or obstructing an inspection are offences which render an individual liable to fines or imprisonment. In addition, anyone who intentionally alters, suppresses, conceals or destroys a document is guilty of an offence. The Regulator can also issue fixed penalties of up to £50,000 as well as daily escalating penalties for non-compliance with these powers.

A recent case illustrated the importance of being aware of the Regulator’s powers and acting promptly on information requests.  The Regulator had formally requested information on 10 June 2020 as part of an investigation into allegations of fraudulent evasion relating to employee pension contributions. The individual intentionally failed to provide the information by the deadline of 8 July 2020. As a result, the Regulator brought a prosecution and the individual pleaded guilty to intentionally and without reasonable excuse suppressing documents he was required to produce under section 72 of the Pensions Act 2004 and has been fined £7,500 and ordered to pay costs of £7,500. Although this was not the maximum fine that could have been imposed, both the court and the Regulator took the failure to provide information seriously and this is consistent with the approach that has been taken previously.

As we have explained in previous bulletins, the lifetime allowance was replaced from 6 April 2024 by two new allowances which restrict the amount of tax free lump sums that can be paid to or in respect of an individual. In very broad terms, the tax free lump sums that an individual can take tax free during their lifetime as part of their normal benefits (which would include a pension commencement lump sum, 25% of any uncrystallised funds pension lump sum and standalone lump sums) will count towards a new lump sum allowance of £268,275. These amounts will also count towards the new lump sum and death benefit allowance of £1,073,100 which relates to all tax free lump sums paid to or in respect of an individual and will also apply to certain lump sum death benefits and the tax free element of serious ill health lump sums. There are tax consequences for exceeding these allowances.

Part of the new allowances will be used up every time a relevant lump is paid to or in respect of a member and this includes where a lump sum was paid before the new regime came into force. To calculate how much of the new allowances has been used up by past payments, it will generally  be assumed that 25% of a member’s lifetime allowance used prior to 6 April 2024 was in the form of tax free lump sums. Where a member thinks that this will not reflect the benefits they actually took (for example they did not take maximum tax free cash), they can apply to a scheme for a “transitional tax-free amount certificate” which shows the amount of lump sum allowances actually used. The newsletter reports that HMRC have created a tool for members (and personal representatives in the case of death benefits) to check if they are entitled to a transitional certificate.

There is also a reminder for schemes of the information that a transitional certificate should contain, including:

• The individual’s name, address and National Insurance number;
• The lifetime allowance previously used amount, expressed as a percentage of the standard lifetime allowance; and
• The individual’s lump sum and lump sum and death benefit transitional tax-free amount.

The certificate can be in any form but if any of this information is missing, any document would not qualify as a certificate.

Where lump sums exceed the new allowances, HMRC issued guidance in December on how the resulting tax should be reported and deducted via payroll for some types of lump sums. This newsletter provides further guidance on lump sum death benefits for members under 75, serious ill health lump sums and stand alone lump sums.

This determination shows the importance of carefully considering the meaning of words used in a trust deed.

R was a member of a scheme which provided unreduced early retirement benefits from age 60. In addition, where an active member left service “at the request of the employer”, they could receive unreduced early retirement benefits from minimum pension age (which was 50 for some members and 55 for others). In 2010, as part of a benefit restructuring exercise, the employer agreed that the unreduced early retirement benefit would also apply where a deferred member was made redundant although this was never reflected in the scheme rules.

In 2016, R (who was over his minimum pension age of 50) was told that his employment would be transferred to a new employer but that an unreduced early retirement pension would not be available from the transferring employer’s scheme. The new employer subsequently went into administration in 2019 and R was made redundant. R complained that he should have been entitled to an unreduced early retirement pension from the transferring employer’s scheme from 2016, or failing that, from 2019.  

The Ombudsman determined that R was not entitled to an unreduced early retirement pension. He referred to a decision of the Court of Appeal in AGCO v Massey Ferguson Works Pension Trust Ltd which considered when an entitlement to an unreduced early retirement pension arose where the rules provided for it where a member “retires from Service at the request of the Employer”. The Court said that “it is requiring too much of this phrase to suppose that it is intended to include cases where the employer not merely requests but successfully enforces retirement. The natural meaning of “request” suggests that the employee can choose whether or not to comply with the request.” The majority of the Court concluded that the rule could not therefore apply to a compulsory redundancy situation.

Although the rule in AGCO was not on all fours with the rule in this case, both rules referred to “the request of the employer”. The Ombudsman concluded that in this case, R left employment as a result of the operation of TUPE rather than at the request of the employer. The TUPE transfer could not be said to be voluntary as there was no option for R to remain in employment with his original employer, he could either transfer to the new employer or employment would be terminated on the transfer date. 

The Ombudsman also considered the contractual promise from the employer to provide unreduced early retirement benefits on redundancy to deferred members but concluded that it was clear that this only applied where a deferred member was made redundant by the original employer and R was not – he was made redundant by his new employer after the TUPE transfer.