Pensions: what’s new this week 20 December 2021
20 December 2021
Welcome to your weekly update from the Allen & Overy Pensions team, covering all the latest legal and regulatory developments in the world of occupational pensions.
This week we cover topics including: new climate change governance and reporting guidance from the Pensions Regulator; the PPF’s final levy rules and the government response to its consultation on CDC schemes.
- TPR: climate change governance and reporting guidance published
- TPR: delay to next DB Code consultation
- PPF: final levy rules for 2022/23
- CDC schemes: government response to consultation
- TPR: annual report on DB and hybrid schemes
- UURBS arrangement was not ‘wholly and exclusively’ for the purpose of trade
TPR has finalised its guidance on governance and reporting of climate-related risks and opportunities, together with a consultation response. The guidance is primarily aimed at schemes that are legally required to report (currently ‘first wave’ schemes under the regulations that came into effect on 1 October 2021), but will also be significant for ‘second wave’ schemes to whom the duties apply from 1 October 2022. It is intended to provide examples of how to apply the regulations and guidance, rather than adding further duties.
Points to note include:
- Case studies have been added relating to scenario analysis (including qualitative analysis) and target selection. A step-by-step example covering the whole process will be provided in the new year.
- TPR has also provided examples of changes that might cause trustees to decide to update their scenario analysis mid-cycle, such as a change in investment strategy; evolution of modelling techniques/capabilities or increased data availability; or a change to a DB scheme’s liability profile.
- TPR has underlined that trustees are responsible for ensuring that those providing advice and support in relation to scheme governance activities have the necessary knowledge and expertise to carry out that role. The responsibility for decisions rests with the trustees: they, not their advisers, are making the final decision. The guidance now cross-refers to separate industry guidance on climate competency.
- TPR has expanded the example of using a metric in risk management to include updating existing investment beliefs and responsible investment policy as an output, based on trustees’ selection and calculation of specific metrics.
- In relation to reporting, TPR does not propose to produce an example report as different schemes will have different requirements, and reporting will evolve over time. However, TPR plans to signpost examples of best practice in future.
TPR has also published an updated appendix to its monetary penalty policy, setting out its enforcement approach in relation to breaches:
- Failure to comply with the requirement to publish a report on a publicly accessible website, available free of charge, will result in a mandatory penalty notice with a penalty of at least GBP2,500. Where a professional trustee is in place, the minimum penalty will generally be higher. The penalty relates to publication of the report, not to its content (it differs in this respect from the chair’s statement penalty).
- All other penalties/enforcement options are discretionary; breaches of underlying governance requirements that will affect member outcomes or make it more difficult for members to understand the report are likely to be treated more seriously than simple errors in reporting. Examples are given of the penalty bands and levels for different types of breach.
The Pensions Regulator (TPR) has announced that its second consultation on the revised DB funding code has been pushed back to late summer 2022. Draft regulations on funding and investment are due for consultation in spring 2022 and feedback from that will be taken into account in publishing a new draft Code for consultation.
Once introduced, the new DB Code will affect scheme valuations with effective dates on or after the Code’s commencement date. TPR’s blog post includes a comment that ‘It’s also important that we recognise the economic backdrop to our second consultation and the balance between security for members and affordability for employers’, which suggests that TPR expects employer costs to go up under the new approach.
The Pension Protection Fund has confirmed its final levy rules for 2022/23, with a reduced levy estimate of £390 million. It estimates that around 80% of schemes paying the risk-based levy will see a reduction in their levy bill; for other schemes, a cap for 2022/23 will ensure the risk-based levy for any scheme does not increase by more than 25% compared to 2021/22. The Levy Policy Statement confirms the continuation of easements to help schemes and employers with the cost of the levy (apparently fewer than ten schemes requested to use the payment easement introduced last year). The PPF’s levy page includes links to all relevant documents.
The government has published a response to its consultation on draft regulations setting out the framework for collective DC schemes, including draft regulations setting out the new framework.
For the moment, CDC schemes (also labelled CMP or collective money purchase schemes) will only be an option for single or connected employers, although discussions are ongoing about extending the framework to include unconnected multi-employer schemes. The consultation response covers areas including criteria for authorisation; the supervision framework; valuation and benefit adjustments; disclosure requirements and member protection and transfers. The regulations are expected to come into force on 1 August 2022.
TPR has published its annual statistical report on DB and hybrid schemes. In line with previous trends, only around 10% of private sector DB and hybrid schemes remain fully open in respect of defined benefits; a further 38% are closed to new DB members. These schemes represent 21% and 46% of memberships respectively.
Schemes with more than 5,000 members make up around 7% of the total number of schemes, but account for around 75% of the total of each of assets, liabilities and members. For small schemes with fewer than 1,000 members, the comparable percentages are 80% and 10% respectively.
The First-tier Tax Tribunal has ruled that HMRC was entitled to disallow tax deductions by two companies that had set up unfunded unapproved retirement benefit schemes (UURBS) where the arrangements were made to avoid tax rather than ‘wholly and exclusively’ for the purposes of providing pension income: AD Bly Groundworks and another v HMRC.
The ruling related to two companies in entirely different sectors, each of which used the same accountancy adviser. Both companies implemented an UURBS that promised pensions for certain employees set at 80% or 100% of estimated gross profits. Both companies made provisions in their accounts in respect of future liability to make pension payments and claimed a deduction in calculating their profits, based on that provision.
The Tribunal found it ‘inherently unlikely’ that two very different companies would have adopted identical structures, and that either would have sought advice on remuneration and pensions from an adviser that did not purport to advise on either topic. In fact, neither company had sought advice on the most appropriate way to provide pensions for the relevant employees and the level of pension provision was set as a percentage of profits before tax, regardless of the level of profits, meaning that pension provision was merely an incidental aim. The Tribunal found that the UURBS proposal was brought to the companies as a tax planning scheme and that the primary purpose of both companies in entering into the UURBS agreements was to reduce their liability to tax without incurring any actual expenditure. This liability was not therefore incurred wholly and exclusively for the purposes of the companies’ trades in accordance with section 54 of the Corporation Tax Act 2009.