Abolition of Lifetime Allowance: Finance Bill sets out the detail

The Finance Bill containing the provisions to abolish the lifetime allowance (LTA) with effect from 6 April 2024 was published on 29 November 2023.  Two new lump sum allowances will be introduced limiting the tax free cash that can be paid to or in respect of an individual.  Any lump sum paid in excess of the limits will generally be taxed at the recipient's marginal rate of income tax.  The two new allowances are:

• the individual's lump sum allowance (LSA) of £268,275 (ie 25% of the LTA before abolition) which, broadly, will limit how much tax free cash an individual can draw in total from registered pension schemes; and
• the individual's lump sum and death benefit allowance (LSDBA) of £1,073,100 (ie the same as the LTA before abolition).  Broadly, this is used when an individual becomes entitled to a tax free lump sum benefit (including one which also counts against the individual lump sum allowance), and also when a tax free lump sum death benefit is paid in respect of that individual.

Changes from the draft legislation as originally published

There have been some changes since the draft legislation was originally published.  In particular:

• HMRC had originally proposed that all dependants' or nominees' income withdrawal would be subject to income tax from 6 April 2024.  Currently such benefits are not taxable if the member died aged under 75 and the relevant funds were designated for drawdown within the required timeframe.  HMRC has now confirmed that such benefits will not be brought within the scope of income tax from 6 April 2024.
• Only a pension commencement lump sum or the tax free portion of an UFPLS will use up the LSA.  Under the first draft of the legislation, a trivial commutation lump sum or winding-up lump sum could also have used up LSA.
• A charity lump sum death benefit or trivial commutation lump sum death benefit will not use up the LSDBA.
• A new type of lump sum called a pension commencement excess lump sum will replace the lifetime allowance excess lump sum.  A rule of a registered pension scheme relating to a member's entitlement to a lifetime allowance excess lump sum will have effect, in relation to entitlements arising on or after 6 April 2024, and so far as possible, as a rule relating to the member's entitlement to a pension commencement excess lump sum.
• The Bill includes detailed transitional provisions dealing with individuals who benefit from statutory protections against the LTA or who have already taken some benefits before 6 April 2024.

HMRC's Lifetime allowance guidance newsletter - December 2023 says that for the tax year 2024 to 2025 onwards a new event, "Event 24" will be added to the Event Report on the managing pension schemes service.  Event 24 will apply where an event has caused a member to exceed the member's available allowance, or where the allowance would have been exceeded but for the member relying on a protection or enhancement factor.  The newsletter says that the legislation as currently drafted provided for Event 24 to apply every time a lump sum is paid, but that this is an error and will be amended at the earliest opportunity.

On 25 January HMRC published its Pension schemes newsletter 155 which has a section on LTA abolition.  This identifies areas where HMRC believes the Finance Bill will require further amendment and also includes an FAQ section.  HMRC published a further set of FAQs on 13 February in its Lifetime allowance guidance newsletter. 

Economic Crime and Corporate Transparency Act makes it easier to hold companies liable for criminal offences

The Economic Crime and Corporate Transparency Act 2023 received Royal Assent on 26 October 2023.  Two key economic crime changes introduced by the Act are:

• that it will be easier to hold companies liable for criminal offences.  A company will be liable for a criminal offence where a senior manager (which may include someone below board level) acting within the actual or apparent scope of their authority commits an offence in the UK.  This change came into force on 26 December 2023; and
• it creates a new strict liability economic crime offence, which builds on the existing failure to prevent bribery offence and failure to prevent criminal facilitation of tax evasion offence.  Large bodies corporate, partnerships and group undertakings could be liable for specified fraud and false accounting offences committed by their associates for the corporate’s benefit or for the benefit of their customers unless they were intended to be the victim of the offence or had in place such measures as it was reasonable to expect them to have, to prevent their associates from committing these offences.  This offence will come into force once the Government has published guidance on what reasonable measures for those organisations in scope look like.  We do not yet know when that will be.  HMRC published a further set of FAQs on 13 February in its Lifetime allowance guidance newsletter.

Multiple law breaches re fund through which pension investors lost millions

A High Court judgment has largely upheld multiple claims brought by the liquidators of Trafalgar Multi Asset Trading Company Limited (Trafalgar), a Cayman Islands company, against various individuals and companies (Trafalgar Multi Asset Trading Company Limited v Hadley).  Trafalgar was the company responsible for holding the assets of an investment fund in which substantial pension funds held within QROPS were invested.  Many of the members of such QROPS had been persuaded to transfer funds from low risk pension schemes and had lost substantial sums as a result of investing in the fund operated by Trafalgar.  The judgment records that Mr Hadley, the first defendant, had also been publicly implicated in another pension scheme which had been investigated by the Serious Fraud Office after promised returns from investment in store pods failed to materialise.

The crux of Trafalgar's case against the first defendant, Mr Hadley, was that Trafalgar's board was deceived into believing that Mr Hadley was an honest investment manager making genuine investments in Trafalgar's commercial interests whilst in reality each of the major "investments" were uncommercial transactions which no honest investment manager would ever have contemplated.  Trafalgar argued that the relevant "investments" were designed as the vehicle for extracting and misappropriating pension funds.  In many cases the members who had transferred their funds had done so following advice from Mr Hadley. 

The judge found Trafalgar had made a series of investments on terms that "no professional investment manager would consider for more than a moment".  This happened because the investments had been structured on uncommercial terms in order to generate commissions for a number of individuals involved with the investments.  The judge found that the arrangements entered into had been "so rife with illegality and other types of unlawfulness, that one hardly knows where to begin".

Outcome of the case

Trafalgar's claim was a complex one because it was based on multiple different legal grounds and brought against multiple defendants (albeit that not all claims applied to all defendants).  Although Trafalgar was not successful on every single ground, the outcome of the case was that Trafalgar established a number of claims against the defendants.  The judge noted that this might enable Trafalgar to claw back some of its losses.  The judge expressed the hope that, having established the principles of liability, it might be possible for Trafalgar to reach a settlement with some of the defendants, though the judge suspected that the liquidators would struggle to obtain a full recovery.

Ombudsman finds professional trustee of SSAS in breach of investment duty

The Pensions Ombudsman has upheld a complaint against a professional trustee of a SSAS for its failure to consider whether an investment in Cape Verde hotel accommodation was appropriate (Mr N PO-25984).  For more detail, click here. 

Ombudsman orders administrator to compensate member where payment made to fraudster's bank account

The Pensions Ombudsman has ordered a scheme administrator to compensate a member after the administrator was tricked into paying £20,000 from the member's fund to a fraudster who had infiltrated the member's e-mail.  The case shows that a series of warning signs that could individually have had innocent explanations may, when looked at together, raise an obvious red flag that someone is trying to commit fraud.  In this article we consider what lessons scheme trustees and administrators can learn from the case.

Pensions Ombudsman decision on transfer value regulations and overseas investments

The Pensions Ombudsman has given his first determination on the overseas investments "amber flag"  in the regulations governing pension transfer values.  Since the regulations were amended in 2021, there has been no industry consensus on the correct interpretation of this provision, so this is an important development for pension scheme trustees, providers and administrators.  In this article we take a look at how the Ombudsman reached his decision and consider its implications.

Ombudsman dismisses complaints where receiving scheme turned out to be a scam

The Pensions Ombudsman has dismissed two complaints by the same member against providers who made transfers to a receiving scheme where the member lost the entire value of the funds transferred (Mr S CAS-50392-S0T8 and CAS-50391-H3V6).  For more detail, click here. 

Call for evidence on move towards "lifetime provider" model for UK pension system 

One of the pensions measures announced as part of the Chancellor's Autumn Statement on 22 November was a call for evidence on whether the government should make fundamental changes to the UK pensions regime in the long-term by moving to a "lifetime provider" model. Broadly, this would aim to achieve a situation where a member has a single pension fund to which contributions will be made regardless of how many times the member moves from one job to another during the member's working life.  The call for evidence cites the regime in Australia where (broadly) an employer will make contributions to an employee's existing "stapled" fund arising from previous employment. The employer will only start to contribute to a new fund for an employee if the employee has no existing pension fund or actively chooses the new employer's scheme.

The call for evidence says that the lifetime provider model would require a form of "central architecture" to allow employers to identify which scheme an employee is using as the "lifetime provider" without having to rely on the employee to provide details. As a transitional step towards a full lifetime provider model, the call for evidence suggests looking to implement a form of voluntary member-led lifetime provider model by allowing employees to insist on the employer making contributions to a scheme into which the employee has previously been enrolled.

Our thoughts

If implemented, the measures considered in the call for evidence would amount to a fundamental change to the UK pensions regime.  However, the call for evidence itself recognises that most of the measures could only be implemented over the longer term, as they rely on the creation of major new systems that do not currently exist, eg the means for an employer to identify a member's lifetime provider without input from the member.

Government to force occupational DC schemes to offer decumulation option

The Government has announced that it will place duties on trustees of DC schemes to:

• offer a "decumulation service with products" to members at the point of access at an appropriate quality and price; and 
• offer a "backstop default decumulation solution" that a member will be placed into if the member accesses pension assets (eg through taking tax free cash) without making an active choice in relation to the remainder of the fund.

Currently there is no statutory requirement on occupational DC schemes to offer any kind of product or facility via which a member may receive their benefits (eg an annuity or drawdown). Although the Government says it intends to legislate "at the earliest opportunity", it does not commit to a specific timescale. 

"Dear CEO" letter re retention of interest earned on customers' cash balances

In December 2023 the FCA issued a "Dear CEO" letter to investment platforms and SIPP operators. regarding the retention of interest earned on customers' cash balances.  The FCA is concerned that some firms' treatment of the interest earned on their customers' cash balances may not be in line with the Consumer Duty.

The FCA says it expects firms to:

• review their approach to the retention of interest on customers’ cash balances under the Consumer Duty and take action to address the FCA's concerns;
• ensure their approach to retention of interest represents fair value for customers.  Where firms tell customers that retention is to cover the cost of the cash management service, the FCA expects the amount retained to be reasonable in light of the actual costs of providing the service;
• cease the practice of "double dipping", ie retaining interest and also taking an account charge or fee on customers' cash;
• review and update their T&Cs as necessary to ensure the approach to retention of interest on customers' cash balances is fair value to the customer, clearly reflected in product documentation and related communications, and likely to be understood by customers;
• ensure communications enable customers to easily locate the information they need to make informed decisions about their cash balances, and that the firm's policy for retaining interest is explained in a clear and fair way that is likely to be understood by customers;
• ensure that products and services are designed in a way that meets the needs of customers in the relevant target market; and 
• consider what communications may be appropriate to discourage customers from holding large cash balances on a platform in the longer term.

Next steps

The FCA's letter gave a deadline of close of business on 31 January 2024 for firms to provide the following information to the FCA:

• confirmation that the firm has ceased or will cease "double dipping" (where this practice has previously taken place);
• confirmation of any changes the firm has made or intends to make to the rate of retention of interest on customers' cash balances;
• confirmation that the firm has revisited its Fair Value Assessment and is prepared to provide this to the FCA on request;
• evidence of any improvements to disclosures regarding retention of interest, including website and customer literature, which the firm has implemented as a response to the FCA's letter;
• a copy of the section of the firm’s T&Cs that outlines the treatment of interest on customer cash balances. Where these terms assert that the interest retained is designed to cover operational costs, the firm should provide an explanation of how they have calculated interest to reasonably reflect those costs;
• if a firm believes its practices are already compliant with the Consumer Duty and therefore does not intend to make any changes further to the Dear CEO letter, confirmation of the reasons why not, with supporting evidence demonstrating compliance with the relevant Consumer Duty requirements.

Where changes are made to reflect the FCA's requirements, the FCA expects these to have been made by close of business of 29 February 2024.

FCA and PRA consultation on diversity and inclusion and non-financial misconduct in the financial sector 

Alongside the PRA, the FCA has consulted on proposals designed to promote diversity and inclusion and also to toughen up conduct rules in the area of non-financial misconduct.  For more detail, see our briefing.

FCA rules on default options and cash warnings now in force

We have previously reported on the introduction of rules requiring providers of non-workplace pension schemes to:

• offer a default investment option to new non-advised customers; and
• issue warnings to members holding more than 25% of their fund in cash for a sustained period regarding the risk of the fund value being eroded by inflation.

The relevant rules came into force on 1 December 2023.

FCA consults on technical changes to "stronger nudge" rules

In its Quarterly Consultation Paper No 42 published in December, the FCA set out proposals to make technical changes to the "stronger nudge" rules to ensure they operate as intended.  

The stronger nudge rules require pension scheme providers to offer to book a Pension Wise guidance appointment for members in certain circumstances – broadly where it appears likely that a member will start to receive benefits soon.  The FCA explains that it did not intend to limit the type of pension provider or scheme to which the rules apply.  However, it has been brought to the FCA's attention that the FCA Handbook definition of "pension scheme" could be interpreted in a more limited way than intended because the definition contains reference to contributions being made to a long-term insurer or regulated collective investment scheme only.  The FCA is therefore proposing to amend its rules to make clear that the stronger nudge  triggers in COBS 19.7(5) (withdrawal of funds in full from pension savings) and 19.7(6) (taking a transfer for the purpose of drawing benefits) apply whenever "flexible benefits" as defined in the FCA Handbook are involved.

FCA and HM Treasury Advice Guidance Boundary Review 

In December the FCA and HM Treasury published a Policy Paper "Advice Guidance Boundary Review – proposals for closing the advice gap".  The Policy Paper defines the "advice gap" as consumers missing out on the value that financial advice and guidance could provide.  The Policy Paper puts forward three main proposals for addressing this:

• Further clarifying the boundary between making a "personal recommendation", thus triggering the demanding regulatory requirements that apply to that, and providing support that does not amount to a personal recommendation;
• "Targeted support" where firms use limited personal information about a customer to suggest action appropriate to the target market within which the customer falls; and
• "Simplified advice" where a customer receives one-off advice focused on one specific need that does not involve analysis of a customer's circumstances that are not directly relevant to that need.

Examples where the Policy Paper suggests the FCA could clarify where the boundary lies between a personal recommendation and support that does not involve a personal recommendation include:

• a pension provider warning a consumer that the consumer's current withdrawal rate will exhaust the consumer's pension pot; and
• a pension provider warning a consumer about the potential tax implications of withdrawing a large lump sum in a single tax year.

Suggested examples of "targeted support" include:

• suggesting that a customer increases contributions to a specific rate where the suggestion is based on limited data such as age, contribution rate and size of individual pot;
• suggesting possible alternative funds to a consumer who is approaching his or her planned retirement date, but has a pension pot invested 80% in equity-based funds.

A suggested example of "simplified advice includes providing a personal recommendation to invest a one-off lump sum arising from an inheritance without taking into account the customer's existing savings or wider financial situation.  The Policy Paper proposes that all pension decumulation decisions are excluded from simplified advice.

The deadline for responses to the Policy Paper is 28 February 2024.

Sustainability disclosure and labelling regime

The FCA is introducing a package of measures to improve the trust and transparency of "sustainable" investment products and reduce "greenwashing".  These include an "anti-greenwashing rule" which will come into force on 31 May 2024.  The anti-greenwashing rule will require all authorised firms to ensure their references to sustainability are fair, clear and not misleading and proportionate to the sustainability profile of the product or service.  The FCA has recently consulted on guidance on the anti-greenwashing rule.  The FCA is also introducing investment labels, and disclosure and naming and marketing rules that apply to UK asset managers.

More information to be required for scheme returns

In its Pension schemes newsletter 153, HMRC flagged that pension scheme returns for the tax year ending 5 April 2024 will need to be submitted on the Managing Pension Schemes service rather than the Pension schemes online service.  HMRC says that it will be asking for more information than it did for previous pension scheme returns.  HMRC says that for SIPP returns, at member level, schemes will need to include more details relating to:

• land or property held or disposed of, leaseholds and property transaction particulars;
• arms-length land or property transactions;
• assets acquired and disposed of from or to a connected party;
• tangible moveable property transactions;
• loans made or outstanding and repayment arrangements; and
• unquoted shares acquisitions and disposals.

On 12 February 2024 HMRC published guidance which refers to the 2024 to 2025 tax year and details the information that pension scheme providers will need to know to complete the Standard Return and the SIPP Return.

General Code laid before Parliament

On 10 January 2024 the Pensions Regulator (TPR) laid its General Code before Parliament.  The Code is expected to come into force on 27 March 2024.  The General Code brings together ten of TPR's existing codes of practice into a single code and in some cases updates the content.  The Code applies to the governing bodies of occupational and personal pension schemes though not all sections of the Code are applicable to SIPPs and SSASs, either because (in the case of SIPPs) much of the Code deals with requirements that apply only to occupational schemes or because (in the case of SSASs) some of the requirements covered by the Code are not applicable to SSASs.

For SSASs, a key requirement covered by the code is the requirement for trustees of occupational scheme to operate an "effective system of governance" (ESOG).  This requirement does apply to SSASs, though TPR acknowledges that the nature of the ESOG will vary according to what is proportionate for the nature of the scheme.  Some key elements of the ESOG are:

• meetings and decision-making: in most cases TPR expects trustees to meet at least quarterly;
• ensuring that trustees have sufficient knowledge and understanding to operate the scheme;
• understanding how conflicts of interest may arise and managing them effectively; and
• investment decision-making.  Although SSASs are exempt from some of the statutory requirements that apply to larger occupational schemes, SSAS trustees are still under a statutory duty to ensure that investments are appropriately diversified.

Our thoughts

The nature of SSASs means that they are often operated with minimal formality, and member trustees may have limited understanding of their obligations as trustees, whether under pensions legislation or general trusts law.  However, a lack of attention to legal obligations can come back to haunt SSAS trustees when things go wrong. The Pensions Ombudsman's determination in the case of Mr N PO-25984 covered in the Pensions Ombudsman section of this Update illustrates, for example, that the fact that a member trustee has acquiesced in an investment does not absolve a professional trustee from the obligation to comply with its trusts law and statutory duties in relation to investment decision-making.  Where there is no professional trustee, it remains to be seen how TPR and the Pensions Ombudsman will view the ESOG requirements as impacting the governance approach that member trustees should adopt.

TPR calls on schemes to report significant cyber-related incidents

In December 2023 the Pensions Regulator (TPR) issued revised cyber-security guidance.  TPR asks schemes, their advisers and providers to report significant cyber incidents to TPR on a voluntary basis.  TPR classes incidents as significant if they are likely to result in a significant loss of member data, a major disruption to member services, or negative impact on a number of other pension schemes or pension service providers.

TPR has recently published a report detailing learning points following a recent high profile cyber-security incident involving a major pensions administrator.  These include:

• ensuring that contingency plans don't underestimate the amount of work involved in identifying data affected by cyber-security incidents and matching that data to individuals;
• that trustees should contact members promptly if there is a reasonable chance their data is at risk.  It may be appropriate to do this before investigations into the cyber-security incident have been completed;
• trustees should be mindful that data may continue to be stored by other parties even when that party is no longer actively involved with the scheme; and
• the importance of ensuring that contact details are kept up to date.

FRC consultation on accumulation rates for AS TM1

ON 9 February 2024 the FRC published a revised version of AS TM1, the Actuarial Standards Technical Memorandum which specifies the methods and assumptions to be used in statutory money purchase illustrations (SMPIs).

The FRC has made the following changes to accumulation rate assumptions:

• Volatility Group 1 (primarily short-dated cash instruments): increased from 1% to 2%;
• Volatility Group 2 (primarily lower volatility multi-asset funds and corporate bond funds): increased from 3% to 4%;
• Volatility Group 3 (primarily lower volatility equity funds): increased from 5% to 6%.

There is no change to Volatility Group 4.

The revised version of AS TM1 is effective from 6 April 2024.

PASA Pensions Dashboards Connection Readiness Guidance 

In December PASA published its Pensions Dashboards Connection Readiness Guidance.  The guidance is divided into five key "pillars":

• Governance Readiness: ensuring a project is in place to deliver connection and that the right stakeholders are engaged;
• Matching Data Readiness: preparing for find requests at scale; 
• Pension Values Readiness: Preparing to handle view requests at scale, which involves improving the quality and coverage of view data, including pension values;
• Technology Readiness: ensuring the scheme is tested and running on its 'Provider Connection Technology';
• Administration Readiness: Establishing business processes are in place to handle queries, ongoing changes, and impacts on business as usual resulting from dashboard connection.

The guidance provides information on what each pillar entails, the steps required to achieve readiness, and how success can be evidenced. It also includes a timeline suggesting it may take 18 months or longer to achieve all elements of connection readiness for one scheme.