Pensions: What's new this week 20 July 2020

GMP equalisation: new HMRC guidance

HMRC has published further guidance on payment of lump sums in the context of GMP equalisation adjustments – this follows earlier guidance in February on annual allowance and lifetime allowance issues (see GMP equalisation: HMRC guidance on (some) tax aspects). The most recent guidance covers issues for past and future payments including the following:

• Payment conditions for some lump sums include a requirement to extinguish rights under the scheme or arrangement (for example, a trivial commutation lump sum). The guidance lists lump sums that will not cease to be an authorised payment on this ground purely because, due to GMP equalisation, a further entitlement is later identified that the scheme administrator could not reasonably have known about at the time of the lump sum payment. Once schemes have chosen their method of equalising GMP, this will need to be taken into account in calculating and paying future lump sums.
• The tax conditions for some lump sums include a limit on the amount of the payment, so an additional payment reflecting GMP equalisation could cause the total amount to breach the relevant threshold. In most cases, this will not cause the original payment to become retrospectively unauthorised. However, the guidance adopts a different position for trivial commutation lump sum payments. In these cases, the limit is based on the value of the member’s pension rights on a nominated date, and an uplift for GMP equalisation of benefits accrued in the past could mean that the member’s rights on the nominated date in fact exceeded the relevant limit. If so, the original lump sum payment would be unauthorised (unless it qualifies as a different type of lump sum).
• ‘Top-up payments’ (future GMP equalisation adjustments) are governed by the payment conditions in force at the time the ‘top-up’ payment is made, not the date of the original lump sum payment. The guidance suggests that some top-up payments could be paid under the small lump sum rule, if the conditions are met; and notes that certain types of payment can only be paid to the member (not after the member’s death), and/or must comply with timing requirements.

The latest guidance document does not cover GMP conversion – HMRC has stated that more detailed work needs to be done on wider issues associated with the methodology. HMRC has not confirmed whether it is planning to issue any further guidance, or is considering any future changes to the existing legal framework.

This guidance, while helpful in some respects, confirms that some inconvenient hurdles still remain – not least, in relation to past trivial commutation lump sums. For further advice please contact your usual Allen & Overy adviser.

Pension Schemes Bill update

The Pension Schemes Bill has passed the House of Lords (press release available here) – there were no amendments to the Bill at the final stage in the Lords. The Bill will now be considered by the House of Commons – it has had its first reading in the Commons but the date for second reading has not yet been announced. We will provide a further update in due course.

GMP equalisation: new guidance on data

The PASA GMP equalisation working group has published new guidance on data required for GMP equalisation – the guidance is aimed at helping schemes identify the data required, and to find solutions to some issues that may arise. It includes an appendix summarising data requirements and identifying essential minimum data. The guidance also covers different approaches to obtaining an opposite sex GMP.

CJEU rules on international data transfers

The Court of Justice of the European Union (CJEU) has handed down its decision in the ‘Schrems II’ litigation (press release here) on international transfers of personal data. The CJEU ruled that the EU-US Privacy Shield is invalid but upheld the general validity of the EC standard contractual clauses for cross-border data transfers.

The Information Commissioner’s Office is considering the implications of the decision. Entities relying on standard contractual clauses or the Privacy Shield for cross-border transfers of personal data should seek legal advice. You can read more about the decision in this update by our data protection experts.

5MLD: consultation response, draft regulations

The government has published its consultation response and proposed regulations, following a technical consultation on draft legislation to transpose the requirements of the Fifth Money Laundering Directive (5MLD) in relation to registering trusts.

There have been some changes to the proposed legislation since the consultation draft, but the consultation response confirms the intention for a number of trusts to be exempt from registration on the Trust Registration Service, including: UK registered pension schemes and pure protection life insurance policies and those paying out on critical illness or disablement, including group policies. Guidance will also be published on the exemptions.

We will report further once the regulations have been made and the new guidance is published.

Statutory ‘equal treatment rule’ closed Barber window

The Court of Appeal has handed down a further decision in the Safeway v Newton equalisation dispute, finding that the introduction of the equal treatment rule in section 62 of the Pensions Act 1995 closed the Barber window from 1 January 1996: Safeway v Newton.

Following the Barber decision in 1990, pension benefits for men had to be ‘levelled up’ to those enjoyed by women, in the period from the judgment until effective measures were taken to achieve equalisation (this period is known as the ‘Barber window’). Safeway had argued that the scheme’s Normal Pension Age (NPA) had been equalised at 65 for men and women in December 1991, based on notices to members (a formal deed of amendment was executed in May 1996). Both the High Court and the Court of Appeal concluded that the scheme’s amendment power could only be exercised by deed and not by announcement, meaning that the amendment to the rules did not occur until May 1996. Following the CJEU’s decision in the case last year (see WNTW, 15 October 2019), Safeway no longer argued that the amendment to the Scheme validly equalised the NPAs at 65 from the date of the announcement in 1991. The latest decision therefore deals only with the section 62 issue (which the Court of Appeal had deferred until after the CJEU decision).

Safeway argued that, when the equal treatment rule in section 62 of the Pensions Act 1995 came into force on 1 January 1996, it closed the Barber window by levelling up benefits – it was argued that the domestic law effect of the May 1996 Deed had been nullified by European law between December 1991 and 31 December 1995, but that the Deed was effective to ‘level down’ the NPAs of men and women (at age 65) with effect from 1 January 1996. The Court of Appeal unanimously ruled that section 62 closed the Barber window with effect from 1 January 1996.

The case will be of interest to schemes that sought to retrospectively equalise retirement ages between 1 January 1996 and 6 April 1997 (when section 67 of the Pensions Act 1995 came into force, preventing certain retrospective amendments).

Discrimination: McCloud update

The government has published long-awaited consultations on proposed changes to public service pensions following the 2018 Court of Appeal decision in McCloud. We cover two of these below.

One consultation covers a number of schemes and closes on 11 October 2020 (a written statement to Parliament is available here). The government is proposing to provide eligible members with the option to choose between receiving legacy or reformed scheme benefits in respect of service during the period between 1 April 2015 and 31 March 2022. From 1 April 2022, all active members would be moved into the reformed schemes (introduced in 2015) and the legacy schemes would be closed to future accrual. If the government decides to adopt the proposals, it has identified the scheme year starting on 1 April 2022 as the earliest date for the relevant legislation and administrative arrangements to be in place. The current cost estimate (ie for additional future pension payments to in-scope members) is approximately £17 billion for the 2015-2022 period.

A separate consultation on the Local Government Pension Scheme has also been published – this closes on 8 October 2020. The consultation proposes changes to the underpin, and that the underpin period should end in March 2022. The proposals are estimated to cost LGPS employers £2.5bn.

FCA: Financial Services Register update

The Financial Conduct Authority has announced that it will be replacing its existing Financial Services Register with an enhanced Financial Services Register on 27 July (further details will be available on launch). It will add a directory of certified and assessed persons to the Register later this year.