UPDATE from 2 December 2022 to 15 December 2022

TAXATION AND TRUSTS 

Consequences of a wrong appointment from a pre-22 March 2006 flexible trust

(AF1, JO2, RO3) 

In Hopes v Burton [2022] EWHC 2770 (Ch) the Court agreed to set aside two deeds of appointment thus saving the trustees a potential tax liability of over £400,000.

Court cases involving life policy trusts are not that common, and since the best learning method is to learn from (preferably someone else’s) mistakes, this recent decision is most welcome.

The case concerned two deeds of appointment made in 2013 and in 2014 by the trustees of a trust ("the trust") made by Hilary Marsden (formerly known as Hilary Burton – "the settlor") in 1992 in respect of a policy held by her with Skandia Life.

The trust in question was a “typical” trust offered by life offices until 2006: a flexible power of appointment interest in possession trust, with Box A “Possible Beneficiaries” and Box B “Immediate Beneficiaries”. Four Immediate Beneficiaries were named. The settlor appointed her then accountant and solicitor as additional trustees. The settlor died in 2004, but it was only in 2012 that the Skandia policy came to light. The value of the policy was then £2.15 million. The original trustees agreed to step down and new ones were appointed.

In 2013, the new trustees met with a solicitor to discuss the trust and a deed of appointment was drafted in favour of several beneficiaries. The intention was to keep some of the beneficiaries’ interests intact, remove one of the immediate beneficiaries and create a discretionary trust in respect of another part of the trust fund. It was apparently understood that the appointment of one share would create a discretionary trust and would have inheritance tax (IHT) consequences, the tax to be paid from that share. In 2014, another deed of appointment was executed to appoint one part of the trust fund also on discretionary trust.

In 2017, the trustees took advice from specialist tax counsel, Emma Chamberlain. Her advice in summary was that:

(1) the 2013 appointment did not leave the interests of the three existing beneficiaries as they were (as had been intended), but instead revoked the previously qualifying interests in possession for all four funds, and, HMRC were likely to argue, created new non-qualifying interests in possession; and

(2) because both the appointments were revocable, the Immediate Beneficiaries retained the possibility of benefitting from the trust fund in the future, and the appointments were likely to be treated as gifts with reservation of benefit.

As to the amount of tax payable in consequence of the appointments, the trustees were advised that there was an immediate charge of £365,000, plus interest of over £68,000. In addition, ten-yearly IHT charges would apply and appointments out of the trust fund would be subject to exit charges.

The application (claim) to set aside the two “offending” deeds was made by the trustees in 2021. The main ground was that the trustees made an operative mistake as to the substance or effect of the deeds. In particular, the 2013 appointment was said to have mistakenly (and unnecessarily) included provisions which terminated existing interests in possession and appointed new ones in their place, when there was no intention to do so.

After considering the evidence, in particular the subsequent actions of the trustees (who made capital distributions which they could make under the original trust but not under the deed of appointment) and the relevant case law, the judge decided that the 2013 appointment indeed created radically different interests held by the immediate beneficiaries, and that the trustees were mistaken in doing so.

This mistaken belief was in his judgment “sufficiently serious as to make it unconscionable not to set aside both appointments”.

Comment

This case perfectly illustrates the dangers of making changes to beneficiaries under pre-22 March 2006 flexible interest in possession trusts (*). And as can be seen from the above, even the involvement of solicitors does not necessarily save you from getting it wrong (compounded in this case by different members of the firm dealing with different aspects of the case and clearly not communicating sufficiently well). Thankfully, the trustees in this case managed to avoid the eye watering tax bill, but bringing such an application to Court must have cost a substantial sum as well.

Remember that in the case of a mistake, there are two possibilities of a remedy – either to rectify the deed or to rescind (set aside) the transaction. In both cases, a Court application will be needed. Obviously, the Court will examine any evidence and decide on the facts of the case. But nothing is ever guaranteed, so it’s best not to get it wrong in the first place.

 

 
Capacity to make a Will

(AF1, AF2, LP2, JO2, RO3, RO5) 

In a recent case in Northern Ireland the Court decided that “intermittent confusion” did not equate with the lack of capacity to make a Will and that the so-called “golden rule” does not always need to be followed.

Although Northern Ireland (NI) has its own legal system, it is based on common law and very similar to English law. It is also the case that, in legal practice, the case law of England and Wales is prominent in both the legal submissions and in the rulings of the NI courts. And, of course, most of UK legislation applies in both jurisdictions and the Supreme Court of the United Kingdom in both civil and criminal matters is the highest court in both as well. Equally, any decision of a NI Court will likely reflect judicial thinking in England and Wales.

The case in questions was McQuaid v McQuaid, [2022] NICh 18. The son of the testator challenged his father’s Will as invalid on the grounds that (i) his father lacked the necessary capacity at the time of execution; and (ii) his father was subject to undue influence in the said execution.

The testator executed his Will whilst in hospital, suffering from terminal cancer, and his medical notes showed him to be having ‘intermittent’ bouts of confusion.

The Will was drafted by the testator’s long time solicitor friend and executed in the hospital with the solicitor and another friend being the witnesses. According to the Will the sole beneficiary was the testator’s wife. The son raised the point that the solicitor had not asked the hospital's clinical staff for an opinion on the deceased’s testamentary capacity.

The judge had to consider the legal principles on having testamentary capacity and then whether the so-called “golden rule” was/should have been followed.

The key question in these cases is how the mental capacity is to be established.

In England and Wales the traditional test for such a case is that laid down in Banks v Goodfellow [1870] LR 5 QB 549. In the present case the judge referred to a more recent NI decision in McGarry v Murphy [2020] NICh 15, although the principles and conclusions reached were very similar. Broadly, to have testamentary capacity a testator must be able to comprehend the following matters:

(i)          The effect of his wishes being carried out at his death, though it is not necessary that he should view his Will with the eye of a lawyer.

(ii)        The extent of the property of which he is disposing, e.g. its approximate value and the relative worth.

(iii)      The nature of the claims on him. “He must be able to recall the several persons who may be fitting objects of his bounty and understand their relationship to himself and their claims upon him so he can decide whether or not to give each of them any part of his estate by his Will.”

The Court heard expert reports from two consultant psychiatrists who had carried out a review of the deceased’s medical notes and records, alongside other documentation. It appeared that the bouts of confusion were the result of treatment for severe infection and ceased once the medication was changed. There was no suggestion in the medical records that he had any signs of dementia.

The solicitor had dictated an attendance note on the evening the Will was executed. The testator had been adamant that no inheritance tax (IHT) should be paid on this death and believed that leaving everything to his wife was the best way to guarantee this. The solicitor testified that he had no reason to doubt the deceased's testamentary capacity, having known him for many years, and did not consider that he ought to contact medical staff for an opinion.

The next question was whether the so-called golden rule should have been followed.

The golden rule was coined by Lord Templeman in Kenward v Adams [1975], and in re Simpson [1977], thus:

'In the case of an aged testator or a testator who has suffered a serious illness, there is one golden rule which should always be observed…: the making of a will by such a testator ought to be witnessed or approved by a medical practitioner who satisfies himself with the capacity and understanding of the testator, and records and preserves his explanation and finding'.

Whilst the golden rule is a 'rule of solicitors' good practice' rather than of law, it is accepted that, if observed, it has the benefit of making it more difficult for the Will to be challenged in due course on grounds of lack of testamentary capacity. The rule is also generally followed by Will writers.

It is interesting to read the reasoning on this by the judge in the present case:

“I consider … that this so called “golden rule” is not a rule of universal application and therefore need not be slavishly followed in all cases for the following reasons.  Firstly, the rule is not a rule, it is merely guidance. Secondly, failure to follow the rule does not automatically invalidate the will; nor does compliance guarantee validity. Thirdly, the golden rule does not define “aged.” We live in an age when there are many nonagenarians who continue to act as leaders, mentors and advisors. Most solicitors would find it very tricky if not downright insulting to require such a client to undertake a medical examination when it is clear that they have capacity. I consider that the duty of a solicitor instructed to make a will is not to follow a “golden rule”; rather, his duty is to take reasonable steps to satisfy himself that the testatrix has testamentary capacity”.  

The judge accepted that the solicitor in the present case had taken all reasonable steps to satisfy himself that the deceased had testamentary capacity. The son’s claim on the grounds of undue influence also failed as “not one shred of evidence which could conceivably have supported this proposition was adduced”.

Comment

The number of Will challenges is on the rise. The latest data from the Ministry of Justice shows 188 Will-challenging cases made it to the High Court in 2019, 47% up on 2018.

Last April, IBB Law [lexology.com] published its UK Inheritance Disputes Report 2022, according to which three in four people are likely to experience a Will, inheritance, or probate dispute in their lifetime. Disputes are more common amongst siblings and in relation to a father's Will.

Generally, there are five grounds for challenging a Will:

(i) the lack of proper execution.

(ii) the lack of mental capacity.

(ii) the lack of proper understanding and approval of the content of the Will.

(iii) undue influence.

(iv) forgery and fraud.

Any decision to challenge a Will should only be made after taking proper legal advice. The case discussed above shows that proving any of these grounds is not an easy task. Needless to say, all Court decisions in cases involving a challenge to a Will are made after very thorough examination of all the evidence and after hearing from often a multitude of witnesses, some more reliable than others.

Judgments often run to tens of pages and read like a script of a soap opera, with families’ dirty washing set out for all to see. This is something to be aware of when contemplating a challenge to a Will, in addition to the fact that these Court proceedings can get very expensive, and more than once an entire inheritance has been lost to the lawyers. 

INVESTMENT PLANNING 

The gilt markets is almost back to pre-Kwarteng yield curve

(AF4, FA7, LP2, RO2) 

UK Government bond yields have just about recovered from the trauma that was Trussonomics 

The last time we looked at the UK yield curve was shortly after Kwasi Kwarteng’s ill-fated ‘fiscal event’ of 17 September. At the time longer-dated gilt yields had leapt to around 5.0% (the red line), creating turmoil for defined benefit (DB) pension schemes using liability driven investment (LDI). Since that instant crisis Mr Kwarteng has been replaced by Mr Hunt and plans to borrow £45bn in 2026/27 to fund tax cuts have been overtaken by an Autumn Statement seeking £55bn of tax rises and expenditure cuts by 2027/28 (£41.4bn in 2026/27).

Look at the UK yield curve at the start of December (the yellow line) and for all but the shortest of maturity dates, the curve is virtually back to where it was on the day before Mr Kwarteng’s self-immolating announcement (the black line). You could say it is almost back to normal, give or take the uptick for ultra-short terms, which is driven by the 1.25% increase in the Bank of England Bank Rate (Base Rate) since September.

However, that ‘normal’ is a long way from the near zero era in which we started the year (the green line). Whereas gilt interest rates averaged just under 1% in 2021/22, the Office for Budget Responsibility (OBR) in its latest Economic and Fiscal Outlook sees average gilt yields staying above 3.6% for the next four tax years. The higher yields are the reason why the OBR has forecast a largely ignored quirk of quantitative easing (QE). After providing a net profit of £120bn for the Exchequer between March 2009 and March 2022, the OBR projects that in the following six years QE will cost the Exchequer a net £61bn.

For good measure, we have added the current USA yield curve (dotted blue line) to the graph. The three-month (4.32%) and two-year (4.25%) rates are both well above the ten-year rate (3.53%), which as we have said before, is widely seen as a predictor of recession.

Comment

The UK yield curve speaks to investors’ relief at the change of Downing Street residents, but the jump in all yields at all terms since the start of 2022 will still impact on Government borrowing costs for years to come. 

NS&I raises rates again

(AF4, FA7, LP2, RO2)

National Savings & Investments (NS&I) last announced an interest rate increase on most of its variable rate investments in late October at a time when the Bank (Base) Rate was 2.25%. One month earlier, it had pushed up the prize rate on Premium Bonds to 2.20%. Now, just before the Bank of England is expected to raise the Bank Rate to 3.5%, NS&I has announced another round of rate rises, covering both some of its variable rate products and Premium Bonds:

Product	Old rate	Rate from 13/12/22
Direct Saver	1.80% gross/AER	2.30% gross/AER
Income Bonds	1.80% gross/1.81% AER	2.30% gross/2.32% AER
Investment Account	0.40% gross/AER	0.60% gross/AER

For Premium Bonds, the prize rate will rise to 3.0% from 1 January 2023. The odds of winning will remain at 24,000:1, meaning that, from next month, the once ubiquitous £25 will only be just over half of all prizes:

	December 2022	January 2023
Odds of monthly win:	1:24,000	1:24,000
Prize rate	2.20%	3.00%
£1,000,000	0.000040%	0.000040%
£100,000	0.000363%	0.001122%
£50,000	0.000706%	0.002243%
£25,000	0.001452%	0.004466%
£10,000	0.003588%	0.011196%
£5,000	0.007197%	0.022392%
£1,000	0.087978%	0.240002%
£500	0.263935%	0.720005%
£100	14.691366%	23.250769%
£50	14.691366%	23.250769%
£25	70.252009%	52.496996%

 

Comment

The Premium Bond increases mean the product remains an attractive near instant access option, particularly for the ever-growing band of higher rate taxpayers. As usual, NS&I’s moves on its other variable rate products leave them behind the market, where the top rates on instant access money are about 0.5% higher. Surprisingly, NS&I kept rates on both their ISA products unchanged, which leaves their Direct ISA paying less (1.75%) than their Direct Saver pays net to a basic rate taxpayer (1.84%). 

November inflation numbers

(AF4, FA7, LP2, RO2)

The UK CPI inflation rate for the November 2022 was 10.7%, down from 11.1% in October 

The CPI annual rate for November dropped by 0.4% to 10.7%. That was a 0.2% more than market expectations, according to Reuters, but still leaves the rate at around a four decade high according to back-calculations by the Office for National Statistics (ONS). A year ago, the November CPI reading was 5.1%. November 2022’s monthly CPI rise was 0.4%, about a fifth of the October level, which was boosted by the new utility price cap.           

The CPI/RPI gap widened to 3.3% with the RPI annual rate down 0.2% at 14.0%. Over the month, the RPI index was up 0.6%.

The ONS’s favoured CPIH index fell by 0.3% to an annual 9.3%. Remember, Tuesday’s news coverage of the 2.7% shrinkage of real wages reported by the ONS used CPIH data for August-October, not the higher CPI.

The ONS notes that the decrease in CPIH inflation was mainly due to the following factors:

Downward drivers

Transport The annual inflation rate for transport was 7.6% in November 2022, down for a fifth consecutive month from a peak of 15.2% in June 2022, and the lowest rate since June 2021. The main drivers behind the easing in the rate between October and November 2022 came from motor fuels and second-hand cars.

Clothing and Footwear Overall prices rose by 7.5% in the year to November 2022, down from 8.5% in October. On a monthly basis, prices rose by 0.1% between October and November 2022, compared with a larger rise of 1.1% between the same two months a year ago. Prices usually rise into November each year, but the increase in 2022 was less than in most recent years. The downward effect in 2022 was principally from women's clothing, where prices rose by less this year than a year ago.

Recreation and Culture The annual rate for this category was 5.3% in November 2022, down from 5.9% in October. The easing in the rate came almost entirely from games, toys and hobbies, where prices were down by 0.5% in the year to November, compared with a rise of 1.5% in the year to October. As ever, the ONS notes that the movements in this category largely reflect price changes for computer games, which can sometimes be large, in part depending on the composition of bestseller charts.

Upward drivers

Restaurants and hotels The annual rate for this category was 10.2% in November 2022, up from 9.6% in October and the highest rate since the constructed historical estimate of 10.5% in December 1991.

Five of the twelve broad CPI divisions saw annual inflation increase, while five saw a fall. Housing, water, electricity, gas and other fuels was predictably the category with the highest annual inflation rate at 26.6% (unchanged from last month). Next highest was food and non-alcoholic beverages at 16.4%, up 0.2% over the month. Three minor divisions (Health, Communication and Education), accounting in total for just 7.9% of the CPI basket, posted an annual inflation rate below 5%.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) was down 0.2% at 6.3%. Goods inflation in the UK fell 0.8% to 14.0%, while services inflation was flat at 6.3%.

No Producer Price Inflation data was issued following a discovery of errors within the calculation process which are currently subject to ‘further investigation’.

Comment

The fall in the CPI rate means the UK joins the USA and Eurozone in seeing a drop in inflation. The USA CPI figure of 7.1%, out yesterday, is now 2.0% below its June peak, while the flash Eurozone figure of 10.0% is 0.6% below its October peak. The 2023 outlook for the UK, USA and Eurozone is that CPI inflation will continue to decline. This has two main, inter-related, drivers:

• Base effects 2022 saw some months of sharp price increases – April and October were perfect examples in the UK (please see the above graph), with 2.5% and 2.0% rises respectively over the month, thanks to upward jumps in the utility price cap. There will be another cap rise in April 2023 (from £2,500 to £3,000 under the Electricity Price Guarantee) but, even allowing for additional loss of the £400 rebate, it will not be as big a jump as the 54% in April 2022. In October 2023, there will be no cap change because of the EPG.

• Falling commodity and service costs As today’s UK transport figures highlight, the oil price has dropped sharply in recent months – Brent crude is now around $80 a barrel against a peak earlier this year of $130. Similarly, wheat prices – like oil, impacted by the Ukraine war – are almost half their 2022 peak. Shipping costs have also dropped sharply – by up to 90% on routes out of China – as supply chain issues have started to unwind.

The Bank of England will be relieved to see the dip in inflation, but it will also be concerned by the 6.1% average annual pay increase reported by the ONS yesterday, the fastest pace seen outside the pandemic. That helps explain why services inflation was unchanged in November.

 
PENSIONS

Public Services Pension Schemes (Rectification of Unlawful Discrimination) (Tax) Regulations 2023
(AF8, AF7, FA2, JO5, RO4)

HMRC has published drafts of the regulations necessary to implement the legislative changes to facilitate the “McCloud remedy”. The draft document published are: 

• The Public Services Pension Schemes (Rectification of Unlawful Discrimination) (Tax) Regulations 2023
• Explanatory memorandum on the Public Services Pension Schemes (Rectification of Unlawful Discrimination) (Tax) draft regulations
• Guidance on the Public Services Pension Schemes (Rectification of Unlawful Discrimination) (Tax) Regulations 2023 

The draft guidance explains the steps to be taken by both the New Scheme (normally a CARE scheme) and the legacy (generally a final salary scheme) in respect of both the Annual Allowance, Tapered Annual Allowance and Lifetime Allowance as well as other aspects. HMRC is seeking views from pension scheme administrators on draft regulations which set out changes to how the pensions tax rules will apply to pension scheme administrators and members of public service pension schemes, as a result of the Public Service Pensions Remedy. The regulations will make changes to how pensions tax legislation operates in certain circumstances, including changes to how schemes will need to report and pay extra tax charges or reclaim overpaid tax and ensure that schemes can pay pension benefits as authorised payments. This legislation is intended to take effect from 6 April 2023, but some provisions will have a retrospective effect. 

The draft regulations are exceptionally complex and wide-ranging, reflecting many of the potentially adverse tax consequences that can arise when a retrospective adjustment to benefits is necessary.  However, they don’t cover all the issues that have been identified and it seems that further regulations will be needed. 

The consultation closes on 6 January 2022.

FCA confirms plans to introduce defaults and cash warnings for non-workplace pensions
(AF8, AF7, FA2, RO4, JO5)

The FCA has issued Policy Statement (PS22/15) Improving outcomes in non‑workplace pensions – feedback on CP21/32 and our final rules and guidance. Some of the highlights include: 

• Non-advised savers in non-workplace pensions, such as SIPPs, will be offered a single default investment option.
• The FCA has not included a requirement for the default fund to include lifestyling.
• Cash warnings will also need to be issued to pension customers with “significant and sustained” cash holdings in their portfolio.
• Regular cash warnings will need to be given where:
• More than 25% of the person’s pension is held in cash or cash-like investments,
• The amount of the cash holding is greater than £1,000, and
• The saver is more than five years away from being able to access their pension pot 

TPR and FCA publish update to joint regulatory strategy
(AF8, FA2, RO4, JO5)

Both TPR and the FCA have published an update to their 2018 joint regulatory strategy. 

• TPR: Outcome-focused regulation right across pensions
• FCA: Regulating pensions and retirement income: FCA/TPR regulatory strategy update

 

The update outlines how the two regulators will continue to work together to “deliver good outcomes for pension savers regardless of their pension type”. It also includes eight “joint workstreams”, which are broad strategic areas drawing TPR and the FCA's current and future focus. These workstreams are: 

• productive finance — a focus on long-term value;
• value for money;
• a regulatory framework for effective stewardship;
• a pension scams strategy;
• DB transfer advice;
• DB schemes and transfer activity;
• pensions dashboards; and
• supporting consumer decision-making throughout the pensions consumer journey. 

In a blog written by Sarah Smart, Non-executive Chair at TPR, to announce the update, Ms Smart highlighted that the FCA and TPR have marked differences but a common goal. Ms Smart wrote: “Yes, we have very different markets. One commercialised and relatively concentrated. The other made up of thousands of schemes of varying sizes. Yes, the kinds of savers we may protect can sometimes be different. And yes, those differences may mean that the approaches we take as regulators vary in scope or application. But both of us always seek to put the pension saver at the heart of what we do. That means being conscious of working together where possible to ensure the right protection for savers, schemes and providers.” 

HMRC updates guidance on unauthorised payments to explain when they are deemed to be tax avoidance.
(AF8, AF7, FA2, JO5, RO4)

HMRC has published two recent GAAR Advisory Panel opinions on unauthorised payment from registered pension scheme involving debt arrangement, to help practitioners recognise when arrangements may be abusive tax arrangements. The two opinions are: 

• Unauthorised payment from registered pension scheme involving debt arrangement — Member
• Unauthorised payment from registered pension scheme involving debt arrangement — Administrator 

In the opinions, the GAAR Advisory Panel has explained why an unauthorised payment from a registered pension scheme, was in fact “tax avoidance”. 

The money was moved from the pension scheme to a member using a purchased investment product and a debt agreement, and then was cashed out. 

On 23 May 2016 the value of the pension fund stood at £263,000, derived from two contributions of £25,000 each made on 23 March 2016 and 24 March 2016 by UK companies controlled by the sole pension scheme holder and a transfer on 18 May 2016 of around £213,000 from another pension scheme. 

A few months later in June 2016, the pension scheme invested cash of £100,000 in a P Class 2 Cash Fund. Then a debt agreement was arranged between the pension holder and the fund. He agreed to pay 10 annual instalments of £10,002.54 plus interest at 3% above the base lending rate.

The substance of the pension company’s argument is that the arrangements entered into do not give rise to an ‘unauthorised payment’ as the payment by instalments (plus interest) to purchase the investment from the pension fund is not a loan. They claimed that the parties are entitled to exercise a legitimate choice to structure their affairs such that the arrangements do not give rise to a loan. It said that this distinction is detailed in HMRC’s own guidance. 

The GAAR panel opinion stated: ‘The purchase by the pension scheme of the financial investment is an entirely normal transaction, but it is not apparent that it was acquired with the intention that it would be held as an investment by the pension scheme. Rather, it appears to have been acquired with an intention that it would be sold to the member shortly afterwards.’ 

The member’s surrender of the investment for cash shortly after having acquired it means that the role of the financial investment was to facilitate an outflow of cash from the pension scheme (to purchase the investment) where an equivalent amount of cash ends up in the member’s hands subject to his undertaking to pay such amounts to the pension scheme (with interest) over a period of 10 years, thereby producing the economic effect of a loan. 

When the arrangement was cancelled the value of the investment was paid back to the scheme member but no tax was charged on the transaction.

‘As such, we consider the arrangements to be contrived,’ the GAAR panel said. 

This was illustrated by the fact that the member was a sole member of the pension and as a result any cost to the member produces a tax-free return in the pension scheme, which accrues for his benefit, ‘which is commercially self-cancelling’.

 ‘We accordingly consider the means of achieving the results to be both abnormal and contrived.’

This was patently the case according to the GAAR decision, which stated that under paragraph 11(3) Schedule 43 Finance Act 2013 ‘the arrangements involve abnormal and contrived steps designed to produce a non-taxable transaction that, economically speaking, is to all intents and purposes identical to a taxable transaction (a loan), each of which are indicators that the arrangements are abusive’. 

FCA: Consumer redress scheme for unsuitable advice to transfer out of the British Steel Pension Scheme

(AF8, AF7 FA2, JO5, RO4) 

The Financial Conduct Authority (FCA) has published:

• Policy Statement PS22/13 Calculating redress for non-compliant pension transfer advice. The FCA has set out the changes to their methodology for calculating redress for consumers who suffered financial loss from transferring from a defined benefit to a defined contribution pension scheme following non-compliant advice. This includes former members of the British Steel Pension Scheme (BSPS).  
• Policy Statement PS22/14 Consumer redress scheme for unsuitable advice given to former members of the BSPS who received the advice to transfer out between 26 May 2016 and 29 March 2018.
• Consultation Paper, CP22/22: Proposed extended asset retention requirement for firms under the British Steel Pension Scheme consumer redress scheme. This is proposing an extension of its temporary BSPS asset retention rules so that the rules apply until firms have resolved all relevant cases.  Consultation on this closes on 23 December 2022 and should this extension go ahead the FCA intends to publish a policy statement in January 2023, before the temporary asset retention rules expire on 31 January 2023.
• A “Dear CEO” letter to those involved in the Professional Indemnity Insurance market, both insurers and intermediaries setting out their expectations relating to the handling of claims. 

The FCA have estimated that 1,100 British Steel pension scheme members who were misadvised to transfer out will receive £49 million in redress payments. The size of the total redress pot is substantially lower than the £71.2 million outlined by the regulator in March, with the average payment expected to be £45,000. This reflects a 300 drop in the number of members the regulator expects will receive redress and an improvement in annuity rates used to calculate redress.

All members who are due redress should receive their calculation by February 2024. Where the advice firm involved has gone out of business, members who have a claim are being urged to contact the Financial Services Compensation Scheme (FSCS).

The FCA are building the calculator (an excel spreadsheet) and it is on schedule to be delivered in April 2023, to coincide with the updated quarterly assumptions. The spreadsheet format of the calculator will enable firms to report the calculator inputs and outputs to the FCA, similar to the way they will be able to report on their completed DBAATs. The FCA have decided that any tax implications for augmented offers should be calculated by firms outside the calculator.

Advisers will have to provide details of all cases rated as 'suitable' to the FCA so it can check if former BSPS members would like the Financial Ombudsman Service to independently review their advice.

Advisers should contact former BSPS members between 28 February 2023 and 28 March 2023, to explain whether they are within scope of the scheme, and if so that their transfer advice will be reviewed unless they opt out, with advice being reviewed by the end of September 2023.

Advisers should provide the redress calculation by the end of December 2023 if former members opt to receive it as a lump sum, and by February 2024 if they opt to receive a payment into their pension scheme.

Those whose advisers have gone out of business should make a claim with the Financial Services Compensation Scheme.

It is a shame that whilst the FCA acknowledge there are tax implication in respect of the compensation payments, they have simply stated that these should “be calculated by firms outside the calculator”, no guidance was given as to the different tax implications.

TPR publishes guidance statement on expectations for the use of LDI funds

(AF8, AF7 FA2, JO5, RO4) 

The Pensions Regulator (TPR) has published a guidance statement urging scheme trustees who use liability-driven investment (LDI) to maintain an appropriate level of resilience in leveraged arrangements to better withstand a fast and significant rise in bond yields. TPR has also welcomed a statement regarding the resilience of LDI funds made by the Central Bank of Ireland (CBI — Ireland) and the Commission de Surveillance du Secteur Financier (CSSF — Luxembourg), known collectively as National Competent Authorities (NCAs). 

TPR Chief Executive Charles Counsell said in their Press Release that: “LDI funds are regulated in the country their provider is based and in most cases, these are EEA countries. We are very pleased therefore to see these joint statements from regulators in Ireland and Luxembourg setting clear expectations for the resilience of LDI portfolios. Accordingly, we have now issued a guidance statement for trustees and advisers confirming our expectations for the use of LDI funds. I urge trustees to read the statement and consider how they can meet the steps it outlines to ensure their scheme buffer is sufficient to cover a swift and substantial increase in yields at the level set by the NCAs.”