Overview of pensions – April 2022

Insight

Extension of the notifiable events framework postponed

The proposed extension to the notifiable events framework was due to come into force on April 6, 2022, but that did not happen. This has been delayed, with some expecting the extension to now come into effect in October 2022.

GMP EQ Updates

HMRC has provided clarification on the tax treatment and impact of GMP equalization in relation to:

  • Complete payments for previous transfers;
  • GMP conversion; and
  • Interest payments on arrears for past underpayments.

The Pension Administration Standards Association (PASA) has also posted answers to GMP Equalization FAQs.

A new era of pension regulator (TRP) powers?

TPR recently issued a notice of contribution (NC) in the Meghraj case for just over £3m. This suggests an increased desire on the part of TPR to protect UK pension schemes, whatever their size.

Consulting on investing in illiquid assets

The government has published a joint consultation on the facilitation of investments in illiquid assets by defined contribution pension schemes. The consultation brings together a number of issues, some new and some arising from previous consultations.

More information

Extension of the notifiable events framework postponed

In our Pensions Act 2021 briefingwe discussed the proposals for extending the framework of notifiable events in terms of:

  • Corporate events that must be notified to TPR;
  • The time limits within which the notification must be made; and
  • The amount of information that will need to be provided. This will include communication with the trustees about the proposals and an explanation of the steps being taken to mitigate any adverse effect the proposals will have on the pension plan.

These amendments were scheduled to come into force on April 6, 2022. However, neither the response to the consultation nor the final regulations have been published. It therefore appears that this proposal has been delayed, with some expecting that the extension of the framework will not occur again until October 2022. We will keep you informed of developments in this area.

GMP EQ Updates

HMRC provides advice on the tax implications of previous transfers and conversion

HMRC has published a newsletter regarding tax issues that arise as a result of the correction of past transfer payments for GMP equalization and also for GMP conversion.

HMRC has confirmed that a transfer top-up payment is likely to qualify as a ‘recognized transfer’ and therefore be an authorized payment. Any top-up payments relating to prior transfers made as a lump sum rather than a top-up transfer payment will need to meet the conditions of an authorized lump-sum payment at the time the payment is made (eg, a small lump-sum payment). Where a lump sum is paid directly to a member to extinguish the right to a top-up transfer payment, tax will be payable on 75% of the lump sum. If the capital is paid to someone after the participant’s death, the capital will be fully taxable.

HMRC also mentions the BPF conversion in its newsletter, although it acknowledges that work on the tax implications of the BPF conversion is ongoing and more will follow. The bulletin appears to confirm that converting deferred members is likely to impact their annual allowance from the tax year of conversion and may also result in the loss of fixed coverage. There may also be lifetime allowance issues for retired members who are subject to conversion.

Tax treatment of late interest payments

Retirees who have not received their benefits due to unequal PMGs may receive arrears of pensions due, with interest on arrears, under the equalization exercise. There has been some confusion about the tax treatment of these interest payments (as opposed to the arrears payments themselves).

HMRC has now clarified the matter, as follows:

  • The interest payment should be treated as an interest payment made due to late payment of pension installments; and
  • The interest is likely to be ‘annual interest’ for tax purposes and therefore schemes should not deduct tax at source.

Members should be told when they receive interest payments that they must account to HMRC for any tax due on those payments.

PASA publishes a FAQ related to GMP equalization

On March 28, 2022, the working group on the equalization of the guaranteed minimum (GMPEWG), which is operated by PASA, has published a list of Frequently Asked Questions (FAQs) as part of the GMP equalization process.

The answers provided in the list of FAQs represent the collective view of the GMP Equalization Administration subgroup of the GMPEWG, which includes representatives from a number of third-party administration vendors, as well as some internal programs and other advisors. . The answers are designed to provide pragmatic guidance to help administrators implement GMP equalization solutions for their clients’ pension plans. Topics currently covered include (i) PAYE tax considerations for payment of arrears and interest, and (ii) practical aspects that should be considered when equalizing death benefits with respect to deceased members.

The list of FAQs will be updated and added to over time as GMP equalization projects progress and different approaches and solutions emerge.

A new era of TPR powers?

The Pensions Act 2021 expanded the circumstances in which TPR can use its moral hazard powers (primarily CNs and financial support guidelines) and granted TPR greater powers to investigate and sanction wrongdoing. The power of the new powers and the high-level guidelines issued led to uncertainty as to how TPR would wield these new powers. TPR has always preferred to lead by example, however, and over time we will likely see case reports released by TPR giving a glimpse of what the new era will look like. One such case is that of Meghraj Financial Services Limited (MFSL).

MFSL sponsored a UK pension scheme employer – Meghraj Group Pension Scheme. MFSL was the sole legal owner of Meghraj Properties Limited (MPL) which held shares in a joint venture in India (Indian JV). MFSL went into liquidation in 2014, when the scheme’s debt was estimated at £5.85m.

In 2014, proceeds from the sale of the Indian joint venture were paid directly to a nominee company, Paramount Properties Limited (BVG). This was a departure from the previous course of business, under which MPL received the funds and paid most of them to MFSL. However, an agreement was reached in 2012 stating that the proceeds from the sale of the Indian joint venture would go to PPL and that MFSL had no rights to the proceeds. TPR argued that this effectively deprived MFSL of the proceeds of the sale and put them beyond the reach of the pension plan. It therefore met the “material harm” test under TPR’s moral hazard powers.

The panel determined that the 2012 agreement should not be considered legally binding and an AD was issued for over £3 million (the proceeds from the sale of the Indian joint venture paid to PPL).

The case potentially highlights TPR’s desire to protect UK pension schemes, whatever their size. While not high-profile lawsuits or penalties, the case suggests that TPR is increasingly confident in pursuing lesser cases. It will therefore be important for schemes of all sizes to take note of TPR’s new powers and put in place effective internal governance to avoid TPR’s scrutiny and sanctions. TPR has a history of getting bogged down in large-scale cases prone to ‘scorched earth’ litigation – so targeting smaller projects where the behavior has been inappropriate, getting a settlement and moving on, could be the way to go. new approach. The case also illustrates TPR’s growing willingness to act against corporate groups with overseas interests. The fact that TPR sued the Indian joint venture shows that the foreign protagonists are not an obstacle for TPR (see also the Silentnight case). This trend seems likely to continue.

Consulting on investing in illiquid assets

The government has published a joint consultation on facilitating investment in illiquid assets through defined contributions (CC) pension plans. The consultation brings together a number of questions, some new and some arising from previous consultations:

  • In response to the November 2021 consultation on the removal of performance fees from the scope of the default agreement charge cap, the government intends to “take the time to fully understand all the concerns raised, engage further and explore how these concerns could be addressed in the design of the policy.” So no decision has yet been made.
  • The government is consulting on proposals to amend the requirements of the Statement of Investment Principles to ensure that relevant DC schemes “disclose and explain” their illiquid investment policies. In addition, DC schemes with total assets exceeding £100m would be required to publicly “disclose and explain” the default asset class allocation in the annual chairman’s statement.
  • An update is proposed regarding the halt of certain employer-related investments (ERI) restrictions for permitted master trusts with more than 500 participating employers. The ERI restrictions were implemented before Master Trusts were widely used and the government considers the current ERI regulations to present some barriers to the expansion of Master Trusts.
  • A response to the DWP’s call for evidence in July 2021 on the case for further DC market consolidation. The government has concluded that no new regulatory requirements will be introduced with the sole aim of consolidating the market in 2022. However, it will work closely with TPR to monitor the impact of the value assessment for members, including some regimes will have to start producing. This year.

The consultation runs until May 11, 2022.

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