Pensions snapshot - November 2020
This edition of snapshot looks at the latest legal developments in pensions.
This edition of snapshot looks at the latest legal developments in pensions. The topics covered in this edition are:
- Defined benefit superfunds – guidance from the Pensions Regulator
- DC Schemes: When does temporary closure of funds create a default arrangement?
- Additional governance and reporting requirements for large occupational schemes?
- Pension fund management services provided to defined benefit schemes not exempt from VAT
- TPR reversion to 90-day payment failure reporting deadline
Defined benefit superfunds – guidance from the Pensions Regulator
In the continued absence of a statutory framework, the Pensions Regulator (TPR) has published guidance to employers and trustees who, in the interim, wish to consider a transfer to a defined benefit consolidator or superfund. There has been growing interest in superfunds which potentially provide a middle course between the Pension Protection Fund and buying-out liabilities with an insurance company. This guidance will aid and fuel that interest.
Superfunds provide an opportunity for employers, with trustee agreement, to transfer legacy defined benefit pension schemes to a third party provider. Those providers currently consist of two different models: a segregated fund acting as a bridge to buy-out (Clara) and a single with-profit type fund (the Pension Superfund). TPR is in the process of assessing their suitability following earlier regulatory guidance. One aspect of the new guidance is that trustees should take some comfort from the fact that a superfund has gone through the assessment process. Trustees will still need to assess whether the relevant superfund is an appropriate replacement to their current arrangements and covenant but, arguably, more generic questions as to suitability may be less of an issue.
The guidance provides a lot of helpful content to trustees and employers. It is easy to read and follow. Broadly, trustees will need to ensure that any transfer to a superfund is in members’ best interests. In addition, any transfer must meet three gateway principles:
- It should only be considered if a scheme cannot afford to buy-out now.
- It should only be considered if a scheme has no realistic prospect of buy-out in the foreseeable future (i.e. within the next five years) given potential employer cash contributions and the insolvency risk of the employer.
- A transfer should improve the likelihood of members receiving full benefits.
The guidance further breaks down those principles and provides details of what TPR expects the trustees to consider.
TPR expects any scheme sponsor to apply for clearance and that the trustees will be interested parties in any such application. TPR will also expect the trustees, having considered all the relevant factors, to be supportive of the application or to provide reasons why they are not. In practice, if the trustees are not supportive it is unlikely that the sponsor could proceed with an application. TPR indicates that any such application will take at least three months to process.
We will provide a more detailed note on superfunds in due course. If you would like a copy, please contact our Professional Support Lawyer Julia Ward.
DC Schemes: When does temporary closure of funds create a default arrangement?
As part of its guidance for trustees of defined contribution (DC) schemes to follow during the Covid-19 crisis, TPR has considered the situation where DC scheme trustees are redirecting scheme contributions from self-selected funds into alternative funds where the original arrangement has been temporarily frozen. This could lead to these alternative funds actually becoming default arrangements and therefore subject to the charge cap and the requirement to have a statement of investment principles that meets the requirements for a default arrangement. TPR notes that legal advice may need to be taken to assess whether this has occurred in a DC scheme. The TPR guidance further notes that the only circumstances where a default arrangement would not be created are as follows:
- members were made aware, before they selected the original fund, that contributions could be diverted to another fund in certain situations and agreed to this when choosing the original fund; and
- the trustees contacted the members before diverting contributions and obtained their consent (TPR notes that advice should be taken by trustees on the implications of doing this).
Where contributions are to be re-directed back to the original fund, consideration needs to be given to whether a pre-existing expression of choice still applies or whether a further consent from the member is needed. Where contributions are directed back to the original fund without the consent of the member, the original fund will become the default fund. Care should therefore be taken that a default arrangement is not created inadvertently particularly as, whilst TPR notes it will take a pragmatic approach in deciding whether to take action in certain circumstances, in the case of chair’s statements it has no discretion in using its powers and will continue to impose fines for non-compliance.
Additional governance and reporting requirements for large occupational schemes?
The DWP has published a consultation on climate change governance and reporting requirements for large pension schemes. The proposed new requirements, if implemented, would apply from 1 October 2021 to authorised master trusts, authorised collective money purchase schemes and occupational pension schemes with £5bn or more in assets, and would be extended to occupational schemes with at least £1bn of assets by 1 October 2022. The proposals could be extended more widely from 2024.
The consultation follows recommendations on disclosure of climate change risks and opportunities issued in 2017 by the Taskforce on Climate-related Financial Disclosures (TCFD). This included recommendations for pension schemes to assess how their investments would perform under a range of climate scenarios.
Schemes initially caught by the requirements would need to put in place effective governance strategies and targets to manage climate change risk. This would involve calculating the carbon footprint of the scheme and assessing how the value of the scheme’s assets and liabilities would be affected by different global temperature rises. Schemes would need to publish climate risk disclosures in line with TCFD recommendations before 31 December 2022 and report the greenhouse gas emissions of their investment portfolios.
TPR would enforce the new requirements through penalties of up to £5,000 for breaches by individual trustees and £50,000 for breaches by corporate trustees. The consultation closed on 7 October 2020. If the proposals are implemented, they will be enacted in the Pension Schemes Bill 2019-2021.
Pension fund management services provided to defined benefit schemes not exempt from VAT
In the case of United Biscuits (Pensions Trustees) Ltd v Commissioners for HMRC, the Court of Justice of the European Union (CJEU) has put an end to any suggestion that pension fund management services provided to occupational pension schemes are VAT exempt on the basis of an insurance exemption.
Under EU law “insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents” are exempt from VAT.
HMRC had historically applied this exemption to pension fund management services that were provided by insurance companies, but not where the same or similar services were provided by non-insurers. From 1 April 2019, HMRC ceased to apply the insurance VAT exemption to the provision of pension fund management services.
In the United Biscuits case, the trustees and former trustees of the United Biscuits Pension Fund sought to reclaim the VAT they had paid to non-insurers who had provided them with pension fund management services from HMRC on the grounds that:
- the pension fund management services provided by non-insurers constituted “insurance transactions” and therefore fell within the VAT exemption under EU law; or
- the principle of fiscal neutrality (which requires supplies of goods or services that are identical or similar to be taxed in the same way) meant that, if the insurance exemption was available to insurers providing fund management services, it should also be available to non-insurers when providing the same services.
The Court of Appeal referred the question of whether investment fund management services provided to a pension scheme could be regarded as an “insurance transaction” to the CJEU.
The CJEU concluded that the insurance exemption from VAT should be interpreted strictly. One of the essentials of an “insurance transaction” was that the insurer must provide some indemnity from risk. In light of that, supplies of pension fund management services could not be regarded as “insurance” and not, therefore, entitled to benefit from the insurance VAT exemption.
This decision validate HMRC’s approach that no provision of pension fund management services will now benefit from the insurance VAT exemption. It also suggests that those who benefitted from the insurance exemption before the change in approach benefitted from a windfall.
The result is that the VAT treatment of pension fund management services is likely to be different depending on whether the scheme to which the services are being provided is defined benefit (DB) or DC in nature. European case law has established that DC pension schemes which meet the requisite conditions are special investment funds (SIFs). There is a VAT exemption for the management of SIFs. Pension fund management services provided to a DC scheme that meets the conditions for a SIF will, therefore, be exempt from VAT. In contrast, the CJEU has ruled that DB schemes fall outside this exemption. DC schemes are therefore likely to be able to rely on this additional VAT exemption, whereas DB schemes are not.
For further detail on this case, please see our briefing on the topic.
TPR reversion to 90-day payment failure reporting deadline
In April 2020, as a result of the Covid-19 pandemic, TPR relaxed the requirement that pension scheme providers of DC schemes report late payments once they are 90 days late, by extending the time period to 150 days.
On 16 September 2020, TPR announced an intention to return to the previous 90-day rule. From 1 January 2021, pension scheme providers are expected to report late payment of contributions once they are 90 days late, although TPR acknowledges that some schemes may need extra time to make necessary adjustments and work with employers to bring outstanding contributions up to date. As a result, the 90-day reporting requirement will become mandatory for all employers on 1 April 2021.