Authorised surplus payments to employers: HMRC sets out its view of the tax calculation

In its Newsletter 163 HMRC has set out its interpretation of how the tax should be calculated when an authorised surplus payment is made to a scheme's sponsoring employer.  The Finance Act 2004 says that, "The rate of the charge is 25% in respect of the authorised surplus payment."  There are two possible interpretations of what this means. One effectively treats the amount received by the employer as the gross amount, so if the employer receives £1,200,000 the amount of tax due is 25% x £1,200,000 = £300,000.  The alternative calculation treats the amount received by the employer as a payment net of tax at 25%.  So if the employer receives £1,200,000, that amount must be grossed up to arrive at the total surplus payment on which 25% tax is due, giving a gross surplus payment of £1,600,000, attracting a 25% tax charge of £400,000.  

Perhaps unsurprisingly, HMRC's view is that the second approach set out above is the correct one.  We consider that there are strong arguments for challenging the HMRC view, but that would require someone to bring a test case.  That will only happen if there's enough money at stake to make such a course of action worthwhile.

Pension scheme death benefits to be subject to IHT from April 2027

In the Budget on 30 October 2024 the Chancellor announced that from 6 April 2027 most death benefits from pension funds will be included in the value of a person's estate for inheritance tax (IHT) purposes. Some benefits from an employer-provided scheme will not be caught, but the precise scope of this important exemption is currently unclear.  Scheme administrators will be liable for paying any IHT due in respect of pension funds/benefits. The Government says the policy intention is to remove the incentive to use pensions as a tax-planning vehicle for wealth transfer after death. However, it appears that the impact of the measure will be much broader than this.  For more detail, see our e-bulletin.

All administrators of registered pension schemes required to be UK resident from 6 April 2026

It was announced in the Budget that from 6 April 2026 all administrators of registered pension schemes must be resident in the UK.  Currently the law allows for scheme administrators to be resident outside the UK, but within the EEA.

Rules for transfers to EEA/Gibraltar schemes brought into line with rest of world

As part of the Budget, it was announced that with effect from 30 October 2024, the exclusion from the overseas transfer charge (OTC) that applied to members transferring to a QROPS ("qualifying recognised overseas pension scheme")  in the EEA or Gibraltar has been removed.  The transfer will now be subject to an OTC unless the member has sufficient overseas transfer allowance and one of the other exclusions applies (eg the member is resident in the country that the QROPS is based in).  Where before 30 October 2024 the member had already requested a transfer to a QROPS in the EEA or Gibraltar, the exclusion of the OTC will apply provided the transfer is completed before 30 April 2025.

The Government also announced in the Budget that from 6 April 2025 the conditions for a scheme to be a recognised overseas pension scheme (ROPS) established in the EEA will be brought into line with those applicable to the rest of the world.  This will mean that additional requirements regarding the regulation of such schemes may apply, and for a scheme to be a ROPS established in the EEA, it must be established in a country with which the UK either has a double taxation agreement or a Tax Information Exchange Agreement.

New regulations deal with points arising from abolition of the lifetime allowance

Two new sets of regulations addressing points of detail relating to abolition of the lifetime allowance (LTA) took effect on 18 November 2024 with retrospective effect from 6 April 2024 onwards.

The Pensions (Abolition of Lifetime Allowance Charge etc) (No. 2) Regulations 2024 deal with a number of points relating to lump sums and death benefits.  These include a requirement for an individual who is issued with a "transitional tax free amount certificate" (TTFAC) to send a copy of that certificate to each other scheme of which the individual is a member, and to notify the other schemes if the certificate is subsequently cancelled.  The regulations also make amendments relating to individuals who benefited from LTA protections.  These include an amendment so that when an individual has pension rights of more than £1.5 million and is relying on primary protection, the applicable lump sum allowance is £375,000 and the individual's protected lump sum and death benefit allowance is £1.8 million.

The Pensions (Abolition of Lifetime Allowance Charge etc) (No. 3) Regulations 2024 also make a number of technical amendments regarding the detail of how the legislation relating to abolition of the LTA will operate.  These include an amendment to ensure that a lump sum paid in reliance on an erroneous TTFAC remains an authorised payment, with any excess above the amount which should have been authorised taxed at the member's marginal rate.

For more information on both sets of regulations, see HMRC's Newsletter 163.

Court considers dependency test for cohabiting partners

In the case of Thomas v Southwark Council the High Court has given guidance on the test to be applied for the purposes of considering whether two individuals are "financially interdependent" where that is one of the conditions to be satisfied in order for a survivor's pension to be payable under the scheme rules.  For more detail, click here.

Court orders rectification of signature block in amending documentation

In the recent High Court case of Ballard v Buzzard, a judge has ordered rectification of a signature block in a scheme amendment document where an individual who needed to sign as trustee in order for the amendment to be valid had signed in a signature block which said he was signing on behalf of the scheme's principal employer.  The court also found as a fact that the amending document had been executed by all trustees notwithstanding that no copy signed by all trustees could be found.  For more detail, click here.  

Interim response to consultation on statement of strategy

The Pensions Regulator (TPR) has published its interim response to its consultation regarding the statement of strategy (SoS) that trustees of defined benefit schemes will be required to submit as part of the new funding regime.  This consultation, which ran from 5 March 2024 to 16 April 2024, has led to several changes in TPR's approach. Key adjustments include a reduction in the amount of information required from schemes, and guidance on the digital submission process expected to launch in spring 2025.  TPR has published four illustrative SoS templates: Fast Track before the relevant date; Fast Track on or after the relevant date; Bespoke before the relevant date and Bespoke on or after the relevant date.

Next steps

TPR plans to publish a fuller response to the consultation in the winter and the interim response published in September says that TPR expects to provide covenant guidance "in the next few months".  TPR expects that digital submission of the SoS will be enabled in spring 2025.

Regulator calls on scheme to go beyond minimum on ESG

The Pensions Regulator (TPR) has published a blog calling on scheme trustees to go beyond minimum compliance in relation to environmental, social and governance (ESG) issues.  TPR's research has found that the vast majority of trustees meet their ESG duties, but that many only do the minimum to do so.  TPR says that ESG and climate disclosures which schemes publish should be the product of the strategic decisions and actions trustees have taken to protect savers’ outcomes from risk, and that trustees should also demonstrate what they have done to take advantage of the opportunities presented by the UK’s ambition to transition to a net zero economy by 2050.  TPR says that it will "constructively challenge" trustees' decision-making so that it can be assured scheme members' interests are being met.  To help trustees find the material they need, TPR is bringing all of its ESG and climate material into one place.

Our thoughts

The terms of the blog expressly acknowledge that TPR wants trustees to go beyond the minimum legal requirements in relation to ESG issues.  We think this does raise issues about the extent to which it is appropriate for TPR to use blog posts as a means of pressuring trustees to go further than the law requires in relation to ESG issues.  For example, there is no specific legal requirement for trustees to demonstrate how they have "[taken] advantage of "the UK's ambition to transition to a net zero economy by 2050".  Ultimately trustees need to be clear where the boundary lies between their legal duties and TPR's aspirations in relation to ESG issues.

Ombudsman explains expedited decision-making and Resolution process

The Pensions Ombudsman (TPO) has published a blog on his plans to speed up decision-making through the use of "Expedited Determinations" in appropriate cases.  Expedited decision-making will be used in cases TPO has assessed as having a clear outcome, for example where the member wants a scheme to honour a cash equivalent transfer value but the member did not meet the statutory time limit for requesting a transfer value.

TPO has also published a factsheet on the role of the Resolution team. The Resolution team will generally be used for complaints which TPO considers can be resolved informally through the parties reaching an agreement.  If a case progresses to formal adjudication, any attempt to resolve a complaint during the Resolution process (eg one party making an offer to the other) will not be treated as an admission of wrongdoing or weakness by the relevant party.

No obligation to amend scheme rules to allow member to take lump sum

An adjudicator at the Pensions Ombudsman's office has concluded that a scheme's trustees and employer were not obliged to amend the scheme's rules to allow the member's pension commencement lump sum to be paid from the funds in the DC section of the scheme when the relevant pension entitlement was payable under the scheme's defined benefit section (Mr S CAS-52110-D6V8).  The member's preferred approach would have been permissible under pensions tax legislation, but was not permitted by the scheme rules as they stood.  The scheme's employer declined to make the amendment requested by the member, Mr S.  It acknowledged that the proposed amendment would be advantageous for Mr S and a small number of other members.  However, it would also result in an additional funding cost for the scheme, thus reducing the security/funding level of the scheme for the wider membership.

Following a complaint by Mr S, the adjudicator at the Pensions Ombudsman's office concluded that there was no requirement for the scheme's trustee or employer to amend the scheme rules to accommodate the request of an individual/group of members even if (as in this case) such an amendment would have been permissible under the tax legislation.  

Our thoughts

Where a scheme provides both defined benefits and money purchase benefits, it is not uncommon for scheme rules to contain provisions dealing with the issue of which fund any pension commencement lump sum is paid from.  This is therefore a helpful determination from the point of view of trustees and employers. As Mr S ultimately accepted the adjudicator's opinion on this point, this issue was not the subject of a formal Ombudsman determination.  (A formal determination was issued because Mr S did not accept the adjudicator's opinion in relation to other aspects of his complaint.)  However, we consider it highly unlikely that the Ombudsman would have taken a different view from the adjudicator on this point.

Consultation on Levy rules

The PPF has consulted on the Levy rules for the 2025/26 Levy year.  The PPF is proposing to charge a levy of £100 million as it did last year.  

The PPF is proposing a change to its rules in relation to deficit reduction contributions (DRCs) to make it easier for more schemes to have the effect of DRCs recognised in their levy calculations.

The PPF also says that it has updated its webpage and application form to make it clearer that it is open to considering waiver applications in relation to buy-ins.  It explains that in the context of a buy-in, the two key statutory requirements for a waiver of the risk-based levy are that all defined benefit liabilities must be covered and there must be no further contributions to the scheme in respect of defined benefit liabilities.  This means that the PPF is unable to recognise partial buy-ins.  The PPF is making it clearer that it is open to schemes explaining/evidencing that employer-made contributions to cover winding-up or other expenses are not contributions in respect of defined benefit liabilities.

Pensions Regulator publishes dashboards compliance and enforcement policy

In September the Pensions Regulator (TPR) published its pensions dashboards compliance and enforcement policy.  The policy says that TPR will take a risk-based and proportionate approach to enforcement.  TPR says it will take a pragmatic approach to compliance, but will take a robust enforcement approach where it sees wilful or reckless non-compliance. It acknowledges that schemes will be highly dependent on third parties to comply with their duties and says that it will use its powers against third parties where necessary. TPR says it expects schemes to keep clear audit trails of how they took steps to comply with their duties. The policy includes an appendix setting out illustrative scenarios to indicate the approach TPR might take to different types of breaches.

Government confirms commitment to existing published dashboards timetable

In a parliamentary statement made on 22 October 2024 the Minister for Pensions confirmed the Government's commitment to the existing published timetable for schemes to connect to the pensions dashboard ecosystem including the overall connection deadline of 31 October 2026.  The statement says that it is essential that the pensions industry continues to prepare for connection, having regard to the timetable set out in the DWP's guidance.

PASA releases "Dashboards Toolkit"

In October the Pensions Administration Standards Association (PASA) published the first content in its "Dashboards Toolkit".  The content focuses on AVCs and notes that there are two approaches to a scheme achieving dashboards connection in respect of its AVCs.  One is the "Single Source" approach where a single party will connect both main scheme benefits and AVCs.  The main scheme administrator will usually lead on this.  The other approach is the "Multiple Source" approach where the AVC provider connects the scheme's AVCs directly to the pensions dashboards ecosystem separately to the main scheme benefits.

The material published by PASA comprises:

• a questionnaire that trustees can ask their AVC provider to complete regarding the provider's approach towards compliance with pensions dashboards connection;
• a summary of AVC providers' approaches to dashboards connection (ie whether Single Source, Multiple Source or both); and
• a checklist for scheme administrators where the Single Source approach is being followed.

Pensions Investment Review: Government proposes minimum size and maximum number for default funds

On 14 November the Government published an interim report on its Pensions Investment Review and launched a consultation "Pensions Investment Review: Unlocking the UK pensions market for growth".  The consultation proposes radical changes to the statutory regime applicable to multi-employer DC pension schemes (including both master trusts and group personal pension schemes). The Government plans to introduce a minimum size for "default funds" (broadly, the funds into which contributions are invested where a member does not make an active investment choice) and a limit on the number of default funds.  The minimum size and maximum number will be set following consultation and the Government proposes that the new requirements will apply from 2030 at the earliest.  

The consultation says that schemes serving only a single employer are outside the scope of the measures.  It does not specifically address the issue of multi-employer schemes where all employers are part of the same group.  However, there is no obvious reason to treat such schemes differently to single employer schemes.  We understand the proposals to be aimed at multi-employer schemes serving multiple unconnected employers.  

The consultation closes on 16 January 2025.  The Government has not yet decided whether to include the proposed measures in the forthcoming Pension Schemes Bill or subsequent legislation.

Our thoughts

The Government is keen to see UK pension funds invest a greater proportion of their assets in UK investments, particularly "productive assets" such as UK infrastructure.  An underlying driver for the consolidation proposals is that only large funds have the necessary scale to consider investing in large infrastructure projects.  However, at this stage the Government is not seeking to restrict the freedom of investment currently enjoyed by private sector UK pension funds.

Reports of bitcoin investment by pension scheme spark controversy

Recent press reports highlighting that an unnamed DB scheme has invested 3% of its assets in bitcoin has sparked a lot of industry debate about whether such an investment is lawful, in particular whether this is consistent with a number of pension trustee investment duties, including the duty to invest prudently, and to avoid investments which are (in the language of the courts) unduly speculative or hazardous. Some investment advisers and wealth managers have published house views cautioning against investment in bitcoin and other cryptocurrencies because of the risks. That in turn raises the question as to whether investment in bitcoin can be said to be consistent with "modern portfolio theory", another lens through which the courts assess pension trustee investment duties. Currently crypto-currency is largely unregulated in the UK, but the FCA plans to introduce greater regulation of crypto-assets. It remains to be seen whether TPR will adopt a public position on this.