Pensions Essentials - November 2023

A policy paper issued after the Chancellor’s Autumn Statement summarises the proposed changes to the pensions tax legislation, building on draft legislation published in July.  Key points to note include:

• There will be a new personal allowance of £1,073,100 (the current LTA) for tax free lump sums and lump sum death benefits. Lump sums paid above this level will be taxed at the recipient’s marginal rate of tax.
• There will be an additional limit for tax free lump sums paid in life of £268,275 (25% of the current LTA). Only pension commencement lump sums (PCLS) and the tax free element of uncrystallised funds pension lump sums (UFPLS) will be tested against this. 
• In a welcome change from the July proposals, the tax free element of trivial commutation lump sums, small lump sums and winding up lump sums will not be deducted from either allowance, but an individual will need to have available capacity within these allowances to be paid these lump sums.
• The lifetime allowance excess lump sum (LTAELS) will be replaced by a “pension commencement excess lump sum” which will be taxed at the marginal rate. This is expected to address the defect in the July drafting, which gave scope for members of DB schemes to take most of their benefit as a (taxable) lump sum.
• Individuals with valid lump sum protections and valid LTA protections will retain their rights to higher levels of tax-free lump sums and lump sum death benefits. The deadline for applying for fixed protection 2016 and individual protection 2016 will be 6 April 2025.
• There will be changes to the annual Event Report, removing the existing LTA events and adding a new event relating to relevant lump sum and lump sum death benefits paid in excess of the new allowances, marginal tax paid and reliance on valid protections.
• Trustees will need to provide statements to individuals telling them “how much” of their allowances are used up when relevant lump sums and lump sum death benefits are paid. It is unclear whether this will operate on a £ basis or a percentage basis.
• Where benefits have been taken before 6 April 2024, without using all of an individual’s LTA, there will be a transitional calculation mechanism to work out how much of the new allowances these use up. It appears that the default calculation method will be based on the pension that has crystallised, addressing the concern that there is no requirement in the current LTA reporting system to separately identify tax free cash. Members will be able to request an alternative transitional calculation where they have full accurate records of their previous tax free amounts. 

• In a welcome move, the Treasury will have a two-year power to make any necessary changes to the primary legislation via secondary legislation.

Whilst this update is welcome, we will need to wait for the Finance Bill for the finer detail, and for confirmation of how the changes are expected to work in practice. This will leave pension schemes with very little time to prepare for the changes. 

The Government has acknowledged that whilst the introduction of the pension freedoms allowed members more choice and control in relation to their DC savings, it also placed more responsibility on them.  Government research shows that only 29% of 55–59-year-olds had a clear plan about what they intend to do with their DC pots and 17% did not know they had any choices to make.  In addition, 22% said that they planned to take all of their pension as a lump sum which presents a risk to the adequacy of their future pension income. 

In June 2022, the Government issued a call for evidence to explore what support members need to help them make informed decisions about how to use their pension savings. It also invited views on what support and decumulation products are currently on offer to members, and what may be offered to them in the future. This was followed in July 2023 by a consultation paper which sought views on imposing a broad duty on trustees to provide decumulation services for their members.  To achieve this sooner rather than later, the Government also considered whether it was possible to do this via guidance from the Pensions Regulator (TPR), supported by messaging from DWP. 

A response to this consultation has now been issued, concluding that there is a role for trustees in decumulation but that the only real way to achieve this is through legislation. Therefore, DWP is proposing measures that:

• Place duties on all DC occupational pension scheme trustees to offer a decumulation service with products to members at the point of access at an appropriate quality and price.
• Require schemes to devise a backstop default decumulation solution, based on the general profile of their members, that a member would be placed into if they access their pension assets without making any active choices about how to do so. This could be achieved either directly or in partnership with another organisation.

In the meantime, the Government says that it will encourage schemes voluntarily to develop a decumulation offer or enhance their current services and to support this.  TPR will issue interim guidance to show how the objectives of these policies can be met without legislation.

In July 2023, the Government issued a call for evidence around trustee capability and other barriers to trustees doing their job in a way which is effective and results in the best outcomes for savers. It focused on three areas:

• Trustee skills and capability.
• The role of advice.
• Other barriers to effectiveness.

The Government particularly wanted to determine whether trustees have the right knowledge and skills to consider investment in the full breadth of investment opportunities.

In its response published in November, the Government says: “We are pleased to see responses… [that] confirm that the majority of trustees are well-supported, knowledgeable, and hard-working…  However, it is clear there is space for action to ensure that all trustees are able to work effectively”.

The Government is therefore proposing to move forward with fairly minimal proposals, including:

• Supporting the Pensions Regulator (TPR) to set up a trustee register which will help it to regulate trustees more effectively and improve the communication of information and guidance to them.
• Encouraging professional trustees to seek accreditation through one of the existing frameworks, although this will not be a requirement for the moment.
• Working with TPR to produce additional information for employers on the factors they should consider when selecting their workplace pension scheme, focussing not just on costs but on best value and long-term outcomes for members.

The Economic Crime and Corporate Transparency Act 2023 which received Royal Assent on 26 October 2023, is designed to stop the use of complex corporate structures to conceal economic crime and to improve corporate transparency. The Government has issued a collection of Factsheets on the Act and has said that although many aspects of the Act will require further secondary legislation, as well as system development at Companies House, some measures will be implemented by early 2024.

Key aspects for corporate trustees are:

• Identity verification: all new and existing company directors and “persons with significant control” will be required to verify their identity. If this requirement is breached, both the individual and the company will have committed an offence. The details of identity verification are to be set out in regulations, but the Factsheet says that there will be two types: direct photographic verification via Companies House, and an indirect route through an “Authorised Corporate Service Provider” (ACSP). 

To become an ACSP, an entity must apply to Companies House for registration. They must also be a “relevant person” as defined in the Money Laundering Regulations 2017 (which includes solicitors and accountants) and registered with a supervisory body for anti-money laundering purposes. 

The Government expects identity verification to be a one-off requirement. Once a person is verified, they obtain a verified status. 

However, there may be instances where re-verification is required, for example if the Registrar has reason to doubt the validity of the identity verification, such as a suspicion of fraud. Companies already on the register will have a transition period in which to verify identities.

• Filing: anyone filing documents on behalf of a company will need to verify their identity before they do so unless they are an employee or officer of an ACSP or subject to an exception in regulations. This is a significant departure from the current regime where anyone can file documents on a company’s behalf.

• Registered office: a company’s registered office will need to be “an appropriate address". This means that if something is delivered there, it would be expected to come to the attention of the company and that if acknowledgement of delivery is required, there will be someone there capable of giving it. Failure to comply will be a criminal offence. Companies cannot use a PO box as a registered office address.

Companies will also be required to have a registered email address where “in the ordinary course of events, emails sent to it by the registrar would be expected to come to the attention of a person acting on behalf of the company”. 

• Corporate directors: in parallel with the provisions on identity verification, the Government will implement existing powers to restrict the use of corporate directors. It will be made explicit that only corporate entities with “legal personality” will be properly appointable as corporate directors. All directors of any corporate director will have to be natural persons and those natural person directors must, prior to the corporate director appointment, have been subject to the identity verification process described above. Companies with corporate directors will be given 12 months to comply and either ensure any corporate directors are compliant with the conditions or remove them.
• Limited Partnerships (LPs): the LP will need to have a registered office in the part of the UK where it is registered and somewhere that if something is delivered there, it would be expected to come to the attention of the LP. The address will also need to be the main place of business of the partnership, the residential address or registered office of the general partner (a partner who has responsibility for the management of the business) or an address of an ACSP. These requirements may in practice require many non-Scottish schemes with asset-backed funding arrangements to engage the services of an ACSP based in Scotland. 

As with companies, an LP will also need a registered email address and there will need to be a registered officer whose identity has been verified. The general partner will need to issue a confirmation statement within six months of the Act coming into force, and annually thereafter, confirming compliance with various requirements. More details on the reforms to LPs are set out in our briefing.

The new legislation will apply to all LPs, both new and existing, including Scottish Limited Partnerships. There will be a transitional period for existing LPs to meet the new requirements of six months from the commencement of the legislation. LPs will have to submit update statements on newly required information on partners, their registered office address (which must be in the original jurisdiction of registration) and an email address. LPs which are registered after the Act is commenced will also have to submit a confirmation statement within one year of their original date of registration. The provisions will not apply to Limited Liability Partnerships (LLPs) but there will be secondary legislation to adapt parts of the Act (such as on identity verification) to LLPs.

The background to the case was a High Court decision, in CMG Pension Trustees Ltd v CGI IT UK Ltd, that a scheme rule on unclaimed benefits should be interpreted as meaning that any benefit which had not been claimed within six years was forfeited. This allowed the trustees to recoup payments they had made to members to compensate for historic underpayments of benefits. The High Court went on to consider what would happen if the member disputed the amount of recoupment. Under Section 91(6) of the Pensions Act 1995, trustees cannot exercise the right of recoupment where the amount is disputed unless the obligation to repay has become enforceable under an order of a “competent court”. The Court decided that the Ombudsman is not a “competent court” for these purposes. The Ombudsman appealed but the Court of Appeal has now confirmed the High Court’s decision. 

However, the Court of Appeal went on to explain that enforcement in the county court is an administrative matter; there is no requirement to bring an action or for the county court to consider the merits (in fact, the court cannot do so). The Ombudsman’s determinations and directions in relation to the overpayment and recoupment of benefits are enforceable in the county court as if they were an order of that court. 

The latest Update from the Pensions Dashboards Programme (PDP) says that engagement with industry on DWP guidance on the staged connection timetable will take place in Autumn 2023, with an aim of publishing it with at least 12 months’ notice before the first connection date in the guidance. This suggests that the first connection date is unlikely to be before 2025. PDP reiterates the message from the Pensions Regulator (in its initial guidance, updated following the removal of the staging timeline from the Dashboards Regulations), that schemes must have regard to the guidance on connection when preparing to connect to the dashboards ecosystem, or “they may face action from regulators”. Schemes are expected to demonstrate they have taken the guidance into account when making decisions and to provide a record of having done so.

The PDP also gives an update on the progress of the dashboards standards, which set out requirements on the technical and operational detail that pension providers and schemes, and potential dashboard providers, will need to follow. Compliance is mandatory. For schemes, the standards are relevant to the content and presentation of the data, technical requirements for connection and compliance reporting. Final versions of the mandatory standards on data, reporting, technical and code of connection were published in November 2022 but there has been further consultation on the design standards, which are of particular relevance to employers and trustees because they cover the requirements for presentation of data on dashboards.  Please see our Pensions Bulletin December 2022 for more details. 

The PDP reports that there will be further refinements to the dashboard standards “over winter 2023/24”, before final publication and approval by the DWP. The aim is for publication of the first set of standards, on data, to coincide with publication of the DWP guidance on the staged connection timetable.