PFS What's new bulletin - October II

TAXATION AND TRUSTS

A successful claim for the lower non-residential rate of stamp duty land tax to apply (AF1, RO3)

A case where HMRC tried, and failed, to persuade the First-tier Tribunal (FTT) that the nature of the venture pursued by the previous owners was insufficient in terms of commercial enterprise to represent use as a hotel and so was purely residential for stamp duty land tax purposes

The case was TC09203, in which the taxpayer, Anne-Marie Hurst, purchased, in August 2021, a 16th-century manor house for £1.8m.

On 12 August 2021, a stamp duty land tax (SDLT) return was submitted, with the payment due based on the property being a mixed-use property, subject to considerably lower rates of SDLT. The taxpayer considered that the non-residential rate under was appropriate because the property did not meet the definition of a residential property because either: a) the property had been used as a hotel or inn or similar establishment; or b) by reason of an agricultural agreement pursuant to which a farmer used part of the grounds for grazing and hay harvesting and to provide ready access to other land tenanted/used by the farmer.

HMRC enquired into the return on 26 April 2022 and issued a closure notice in August 2022, concluding that the property was in fact purely residential and assessing additional SDLT of £47,750. Following a HMRC review, the taxpayer appealed to the First-tier tribunal (FTT).

In considering the correspondence between the taxpayer and HMRC, the FTT noted that much of Ms Hurst’s evidence focused on the business she operated/intended to operate following her acquisition. Given this was largely irrelevant, with the use at the effective date of the transaction being the crucial consideration, the FTT’s focus was therefore on the previous owners’ activities. These activities were not overwhelmingly commercial. Therefore, the FTT adopted a multi-factorial approach when considering whether the property had been used as a hotel or inn or similar establishment at the effective date of the transaction.

With regard to the property being used as a hotel or inn or similar establishment, HMRC’s principal submission was that, viewed objectively, the property was a dwelling and had been used as a dwelling and, as such, should therefore be subject to SDLT on that basis. HMRC contended that the nature of the venture pursued by the previous owners was insufficient in terms of commercial enterprise to represent use as a hotel or inn or similar establishment. the taxpayer contended:

(1) The previous owners had provided temporary accommodation to travellers/those away from home. This was, she said, demonstrated by the listings on accommodation booking websites including booking.com.

(2) The only commercial exploitation of the property was the provision of bed and breakfast accommodation and the previous owners intended to make a profit from the services they offered albeit in the early stages and heavily impacted by Covid-19. Such use was consistent with the permitted use of the property. She pointed to the company business classification and its VAT registration to demonstrate that there was a business carried on. By reference to the parts of the building shown as for private use on the fire detection quotation she contended that the main use of the building was, or at least was intended to be, a commercial one; this conclusion was supported by reference to the heating and water capacity. Given the level of service provided to guests it was also contended that it could be argued that the entire property was devoted to the business as the previous owners needed to live on site to offer the full service provided, a level of service evidenced by the reviews. The absence of registration for business rates was entirely explicable as the business was within the tolerance not requiring such registration but that did not diminish the commerciality of the operations.

(3) The accommodation was provided on a non-selective basis as it was advertised across a range of websites and anyone willing to pay could do so.

(4) Whilst the guidance did not require the provision of breakfast to be considered to meet the VAT test of hotel, inn, boarding house or similar establishment the previous owners demonstrably did provide breakfast on an inclusive basis.

(5) There were a range of services provided alongside the sleeping accommodation including Wi-Fi, in room TVs, free parking, and cleaning (which was cancellable during Covid-19). Further, and going above and beyond, produce was grown in the garden to enhance the food options.

(6) Bedrooms all had individual locks.

(7) The previous owners lived on site ensuring the quality of service of the stay as recognised in the reviews.

(8) The previous owners used accommodation booking websites but also had their own advanced booking system which interfaced with the booking websites. Supporting the taxpayer’s position was that the property had been actively marketed as serviced accommodation, rather than as an Airbnb-type property. Also, the services actually offered, including daily room cleaning and meals, were indicative of a hotel or inn or similar establishment. Customer reviews praised the level of service received by guests and were consistent with reviews received by a small hotel. Alterations had also been made that would be unnecessary or excessive for a dwelling, such as a commercial kitchen and a fire detection system.

However, the property had not been sold with the benefit of business operations or infrastructure, which were found to be minimal regardless. No evidence of actual lettings around the effective date of the transaction could be provided, although lettings had taken place prior to that. With regard to the alterations, these could be seen to be indicative of an intention for commercial use, but were not evidence that such commercial use actually occurred. Finally, business rates were not paid on the property, although this only proved that less than 50% of the building was used for the business and that a maximum of six guests stayed at any one time.

The FTT ultimately found that, on balance, commercial use with sufficient permanence and continuity existed at the effective date of the transaction, particularly considering Covid-19 restrictions in place at the relevant times and so its suitability for use as a dwelling could be disregarded, and the appeal was allowed.

The FTT also went on to consider the remaining disputed point, meadow use. The taxpayer had argued that the meadow which was transferred as part of the property had been used by a farmer under a commercial lease at the effective date of the transaction and therefore did not fall within the definition of grounds in the legislation, making the overall supply mixed use.

HMRC argued that there was no evidence of any such commercial use and that the arrangement was instead a “barter of convenience” and, having considered the lack of a formal agreement between the previous owners and the farmer, the FTT agreed with HMRC that no commercial activity existed – the farmer was merely able to use the field for grazing in exchange for maintaining it. The field therefore remained within the definition of grounds.

Had the taxpayer not already succeeded on the hotel or inn or similar establishment argument, her appeal would therefore have been dismissed.

In addition, the FTT commented that they had allowed this appeal on the “finest of margins” and that the facts of this case were “almost unique”, limiting the benefit of the decision to other taxpayers in similar situations.

Comment

Changes were expected to be announced to the mixed-use rules in the March 2024 Budget. However, whilst the scrapping of multiple dwellings relief (MDR) was announced, it was confirmed that the mixed-use rules would remain unchanged.  It will be interesting to see if the new Government takes a different view of the mixed-use rules.

Recent court ruling allows an express trust to be superseded by an unwritten constructive trust (AF1, JO2, RO3)

A recent court ruling by the England and Wales High Court (EWHC) has resulted in ambiguity around the possibility of unwritten constructive trusts overriding express trusts.

For clarity, an express trust is created when a settlor or testator establishes a trust with the express or inferred intention of creating a trust. Whilst trusts are usually created in writing, there is generally no requirement that a trust must be in written format to be valid (with the exception of land settlements, which must be in writing). However, the “three certainties” of the trust must be met, i.e. certainty as to whom the beneficiaries are, what property is subject to the trust and a clear intention to set up a trust. If any of these certainties are not met, the trust will fail.

A constructive trust is an equitable remedy imposed by a court to benefit a party who has been wrongfully deprived of their rights, either due to a person wrongfully obtaining or holding a legal property which they should not possess, or due to a breach of fiduciary duty (which refers to the fact that someone who manages someone else’s property or money should act in that person’s best interests and not their own).

In this specific case a married couple, the Cynbergs, bought their main residence in 2001 in joint names as joint tenants. Eight years later the couple separated and the husband verbally confirmed that he would give up his full interest in the property, on the proviso that his wife promised to leave the property to their children in the event of her passing away. The wife continued to pay all costs associated with the running of the property until the point where the couple divorced in 2018.

Later in 2018, the husband was declared bankrupt by HMRC, who claimed that he continued to possess a 50% interest in the property, which now vested in his trustees in bankruptcy. The wife believed she was the 100% beneficial owner due to the agreement made with her former husband, either as a result of this being deemed a common intention constructive trust, or due to proprietary estoppel.

For reference, “proprietary estoppel” is a legal claim which may arise in relation to rights to use the property of the owner and can potentially even be effective in connection with disputed transfers of ownership. Proprietary estoppel provides rights where:

• An individual is given clear assurance that they will secure a right over a property;
• That individual reasonably relies on that assurance;
• They act to their detriment on the basis that they have a right over the property;
• It would be inconceivable for the assurance to be revoked.

Having taken the case to court in 2023, the wife’s claim was initially successful. However, HMRC appealed the decision on the basis that an express trust could not be superseded by a common intention constructive trust.

The England and Wales Court of Appeal has maintained in previous cases that, where there is an express declaration of trust, constructive trusts cannot override that expressly declared trust. The legal principle of constructive trusts only applies in scenarios where no trust has been declared, as held in the Pink v Lawrance case in 1978. A further ruling in the Stack v Dowden case in 2007 appeared to further demonstrate than an express declaration of trust is irrefutable unless it is rectified, rescinded, varied by later agreement or affected by proprietary estoppel, as stated by the Financial Remedies Journal.

However, consideration was then given to what kind of later agreement would be sufficient to override a previously made express declaration of trust. In addition, this led to uncertainty around whether a later agreement capable of giving rise to a common intention constructive trust would actually achieve this. The rulings of a number of judges indicate their opinion is that an express declaration can only be overridden by another express declaration.

Fortunately for Mrs Cynberg, the judge in the appeal case was not of the same opinion. His ruling was that a signed agreement in writing is not required to supersede a previously made express declaration of trust in respect of the beneficial ownership of property, if there is an indication that a common intention constructive trust was created to overrule the original beneficial ownership agreement. The judge held that Mrs Cynberg had effectively obtained Mr Cynberg’s beneficial interest in the former marital home, even though the agreement did not meet the statutory requirements (i.e. it wasn’t in written form) and deemed that a common intention constructive trust had arisen. HMRC’s appeal was dismissed on this and other grounds.

Comment

In summary, the ruling in this case indicates that a verbal agreement does not satisfy the requirement for an express declaration of trust to be in writing when it relates to land, but it does give rise to a properly constituted constructive trust. It will be interesting to see how this develops in future cases.

 

 

INVESTMENT PLANNING

 

ISAs and fractional shares - new policy paper from HMRC (FA5)

Bottom of Form

HMRC has published a Policy Paper, setting out more information on the new measures, that will:

• allow certain ‘fractional interests’ in shares (also known as ‘fractional shares) to be held in a stocks and shares ISA and Child Trust Fund (CTF);
• require ISA managers to get a National Insurance number on new ISA applications from all investors who are eligible to have one;
• update the rules about the transfer of current year subscriptions from one ISA manager to another.

Extending the Stocks and Shares ISA and CTF to accommodate certain fractional interests will allow investors at all income levels to save and invest in ways which best meet their needs. Requiring a National Insurance number to be provided where an individual is eligible for one will:

• help to identify individuals opening an ISA;
• enable improved HMRC compliance activity around ISA subscription limits;
• ensure consistency with the requirement for Lifetime ISAs.

Those elements of the measure which relate to fractional interests and transfers between managers will have effect from 5 November 2024. The element which relates to National Insurance numbers will have effect from 6 April 2025.

More detail on the proposed revisions

Fractional interests (also referred to as ‘fractional shares’) entitle investors to an interest in a portion of a share that is owned by a firm (usually a stockbroker), rather than a full share owned by themselves. Voting and other shareholder rights are not guaranteed for the fraction of the share. The ISA and CTF Regulations will be amended to allow fractional interests in otherwise qualifying shares that are listed or traded on a recognised stock exchange (including listed or traded shares in funds) to be held in an ISA or CTF. The Regulations will require ISA and CTF managers offering fractional interests to have contractual arrangements with their investors and will disapply the requirement relating to voting rights and shareholder meeting attendance. The Regulations will also be amended to require ISA and CTF managers to:

 

• transact fractional interests proportionately to the open market price of the whole share;
• retain custody of the relevant whole share in the same manner as they would retain custody of other ISA or CTF investments.

The ISA Regulations will also be amended so that, where there is a partial transfer of a current year ISA subscription from one ISA manager to another, there is no obligation for the transferring manager to provide subscription information to the receiving manager where, in relation to an account, a current year’s subscription remains with the transferring manager after the transfer. This removes complexity for ISA managers who would otherwise need to identify and record specific funds relating to part of a subscription and ensures that HMRC continues to receive accurate reporting of ISA subscriptions.

The ISA Regulations will be amended to provide that where a new ISA application is made by an investor, the ISA manager must obtain a National Insurance number from the investor or confirm that the investor is not eligible to have a National Insurance number, before an account can be opened.

Help to Save scheme - latest guidance (AF4, FA7, LP2, RO2)

Launched in 2018, Help to Save is a Government scheme, delivered by NS&I for HMRC, that aims to specifically incentivise working people with low incomes to support them to save and kickstart a lifelong savings habit. It allows certain people entitled to Working Tax Credit or receiving Universal Credit to get a bonus of 50p for every £1 they save over four years. Help to Save is backed by the Government so all savings in the scheme are secure.

Individuals can save between £1 and £50 each calendar month. They do not have to pay money in every month. They can pay money into their Help to Save account by debit card, standing order or bank transfer. Individuals can pay in as many times as they like, but the most they can pay in each calendar month is £50. For example, if an individual has saved £50 by 8 January, they will not be able to pay in again until 1 February. Individuals can only withdraw money from their Help to Save account to Individuals their bank account.

Individuals get bonuses at the end of the second and fourth years. They’re based on how much they’ve saved.

An individual’s Help to Save account will close four years after they open it. They will not be able to reopen it or open another Help to Save account. Individuals will be able to keep the money from their account. They can close their account at any time. If an individual closes their account early they’ll miss their next bonus and they will not be able to open another one.

Individuals can earn two tax-free bonuses over four years. They’ll get any bonuses they’ve earned even if you withdraw money. After their first two years, they’ll get a first bonus if they’ve been using their account to save. This bonus will be 50% of the highest balance they’ve saved. After four years, they’ll get a final bonus if Individuals they continue to save. This bonus will be 50% of the difference between two amounts:

• the highest balance saved in the first two years (years one and two);
• the highest balance saved in the last two years (years three and four).

If the individual’s highest balance does not increase, they will not earn a final bonus.

The most an individual can pay into their account each calendar month is £50, which is £2,400 over four years. The most they can earn from their savings in four years is £1,200 in bonus money. Their bonus is paid into their bank account, not their Help to Save account.

Example

Alex pays in £25 every calendar month for two years. They do not withdraw any money. Their highest balance will be £600. Their first bonus is £300, which is 50% of £600.

In years three and four Alex saves an extra £200 to grow their highest balance from £600 to £800. Their final bonus is £100, which is 50% of £200. Even though they withdrew some money after their balance was £800, this does not affect their bonus.

HMRC warns that, if an individual withdraws money, it will be harder for them to:

• grow their highest balance;
• earn the largest possible bonuses.

Withdrawing money could mean they are not able to earn a final bonus - depending on how much they withdraw and when.

Individuals can open a Help to Save account if they’re receiving:

• Working Tax Credit
• Child Tax Credit – and they’re entitled to Working Tax Credit;
• Universal Credit and the individual (with their partner if it’s a joint claim) had take-home pay (i.e, after deductions such as tax or National Insurance) of £793.17 or more in their last monthly assessment period.

If they get payments as a couple, the individual and their partner can apply for their own Help to Save accounts. They need to apply separately. Individuals also need to be living in the UK. If they live overseas, they can apply for an account if they’re either a:

• Crown servant or their spouse or civil partner;
• member of the British armed forces or their spouse or civil partner.

Individuals only need to meet the eligibility criteria when opening their Help to Save account. Once the account has been opened, there is no requirement for ongoing eligibility, and they can continue to use it even if their circumstances change. If an individual stops claiming benefits, they can keep using their Help to Save account.

However, saving money though a Help to Save account could affect an individual’s eligibility for certain benefits and how much they get:

• Universal Credit. If an individual or their partner have £6,000 or less in personal savings this will not affect how much Universal Credit they get. This includes any savings in their Help to Save account. An individual’s Help to Save bonuses will not affect their Universal Credit payments.
• Working Tax Credit. Any savings or bonuses an individual earns through Help to Save will not affect how much Working Tax Credit they get.

• Housing Benefit. If an individual or their partner have £6,000 or less in personal savings this will not affect how much Housing Benefit they get. This includes any savings in their Help to Save account. An individual’s Help to Save bonuses will not affect their Housing Benefit payments.

Please see the full guidance, including how to apply, here.

In the March 2023 Budget, the previous Government announced that it would extend the Help to Save scheme by 18 months, on its current terms, until April 2025 and promised a consultation would be launched in the interim to seek views on longer term options to support low-income savers. The Treasury subsequently issued that consultation on the scheme’s design aiming for simplification and greater take up by those with low income. This consultation ran until 22 June 2023.

 

PENSIONS

 

FCA: Retirement income market data 2023/24

(AF8, FA2, JO5, RO4)

The Financial Conduct Authority (FCA) has published its latest Retirement income market data 2023/24. Firms report these using 2 regulatory returns:

 

• REP015 - retirement income flow data, collected twice a year for each 6-month period from the period 1 April to 30 September 2018 onwards
• REP016 - retirement income stock and withdrawals flow data, collected annually at the end of each financial year from the period 1 April 2018 to 31 March 2019 onwards:

 

Some of the main points arising out of this data includes:

 

• The total number of pension plans accessed for the first time also spiked by almost 20% to 885,455 in 2023/24, with around a third choosing to take financial advice.
• Savers withdrew over £52 billion from their retirement pots in 2023/24 – 20% higher than the previous year.
• Income Drawdowns: Remains the most popular income option, accounting for a significant portion of the market with almost 280,000 entering drawdown in 2023/24, up 28% year-on-year.
• Rising interest rates have also led to a surge in annuity sales, up almost 40% to 82,061 compared to last year.
• Many consumers, especially those with smaller pots, opted for full withdrawals. This trend reflects the increased use of pensions for immediate financial needs rather than long-term income planning.
• Nearly half of all full withdrawals were from pots of less than £10,000, indicating a preference to cash in smaller sums entirely rather than keeping them invested.
• There is a growing use of hybrid products that combine elements of both annuities and drawdown, allowing retirees to balance guaranteed income with flexibility.
• The report highlights the challenges facing consumers, particularly in terms of understanding complex products and making sustainable financial decisions. Many are not seeking financial advice, which increases the risk of poor outcomes.
• The current economic climate has pushed more retirees to access their pension savings earlier or withdraw larger amounts to cope with increased living expenses.

 

The FCA emphasises the need for improved financial guidance and support for consumers, particularly in navigating the complexities of retirement income options. They advocate for enhanced communication and clearer information from pension providers to help retirees make informed decisions.

 

 

DWP: Applying Behavioural Insights to Green Pensions

(AF8, FA2, JO5, RO4)

The DWP has published a report on DC pension members’ engagement with environmentally sustainable pension entitled: Applying Behavioural Insights to Green Pensions.

The report examines the potential for leveraging behavioural insights to increase the uptake of environmentally sustainable investment options within Defined Contribution (DC) pension schemes in the UK. The report, produced by the Behavioural Insights Team, addresses the urgent need for more sustainable investment strategies to support the global climate goals. Pensions, representing a significant portion of individual wealth and long-term investments, have the potential to play a pivotal role in transitioning to a green economy. However, the challenge lies in encouraging pension holders to switch their investments into greener options.

 

Key Findings and Behavioural Barriers

The report highlights several key behavioural barriers that inhibit individuals from shifting to green pension funds:

 

• Lack of Awareness: Most pension holders are unaware of how their pension investments impact the environment. The report shows that individuals generally do not consider the environmental consequences of their pensions because this information is rarely communicated clearly.
• Inertia and Status Quo Bias: Pension holders often demonstrate strong inertia, opting to stay with default options due to a reluctance to actively engage with or change their pension choices. The complexity of understanding pension investment options further contributes to this reluctance.
• Perceived Trade-offs: Some pension holders fear that greener investments may result in lower financial returns. This perception, whether accurate or not, reduces the willingness of individuals to switch to sustainable options, even if they are inclined to support environmental causes.

 

Behavioural Interventions Tested

Several behavioural interventions were tested to see if they could increase engagement with green pensions:

 

• Simplified Messaging: Providing clear and concise information about the benefits of green investments had some impact, but the overall engagement remained low.
• Personalised Feedback: Giving individuals personalised information about the potential positive impact of their pension choices on the environment also had a modest effect.
• Framing Techniques: Presenting green pensions as a default option did not significantly shift behaviour, likely due to the strong inertia associated with existing pension choices.

 

The report concludes that while these interventions show promise, they are insufficient in isolation to drive large-scale behavioural change.

 

Recommendations

The report calls for more upstream interventions, where pension providers, employers, and regulators play a larger role in fostering green investment behaviours:

 

• Regulatory Changes: Introducing policies that require pension providers to offer greener default options could be effective. Government action to standardise sustainability labelling for pensions would also make it easier for consumers to understand and choose environmentally friendly options.
• Increased Employer Engagement: Employers, who often play a central role in facilitating workplace pensions, should be more proactive in offering green pension options and educating employees about their environmental impact.
• Transparent Communication: Pension providers should improve how they communicate the environmental consequences of investment choices, focusing on making this information accessible and actionable.
• Long-Term Shifts in Default Options: Rather than relying on individual actions, shifting the default pension options to green investments would likely have a greater impact on achieving sustainability goals.

 

Conclusion

The report highlights that while individual behavioural nudges may help in encouraging more sustainable pension investments, systemic changes involving regulation, clearer communication, and a shift in default options are needed to truly harness the potential of pensions in promoting a greener economy. The alignment of financial systems with climate goals is critical, and pensions represent a key lever in achieving this transformation.

 

 

PPI: The DC Future Book 2024

(AF8, FA2, JO5, RO4)

The Pensions Policy Institute (PPI) in collaboration with Columbia Threadneedle Investments have published: The DC Future Book 2024. This provides an in-depth analysis of the current state and future projections for Defined Contribution (DC) pension schemes in the UK. Marking its tenth anniversary, the report highlights the evolving landscape of DC pensions, the challenges facing savers, and potential strategies to improve retirement outcomes.

 

Some of the key findings include:

 

• Growth of DC Pension Schemes: The total assets in DC pension schemes have continued to grow steadily, reflecting increased participation rates and contributions. By 2044, the aggregate assets in DC schemes are projected to reach £1.3 trillion, up from £650 billion in 2024. This growth is attributed to factors such as the introduction of auto-enrolment, increased employer contributions, and heightened awareness of retirement savings.
• Shift to Individual Responsibility: As more people move into DC schemes, the responsibility for managing retirement savings has shifted from employers and defined benefit schemes to individual members. This has led to increased complexity for savers, who must now make informed decisions on investments, contribution levels, and retirement planning.
• Investment Risks and Volatility: The report discusses the heightened risks that savers face, especially with ongoing market volatility and economic uncertainties. It underscores the need for improved financial education and advice to help members navigate these challenges and make better-informed choices.
• Charges and Value for Money: The PPI's annual DC Asset Allocation Survey, one of the largest of its kind, revealed variations in the charges and fees associated with different DC schemes. The report advocates for greater transparency and consistency to ensure that members receive good value for money from their pensions.
• Future Policy Considerations: The DC Future Book 2024 highlights the potential impact of policy changes, such as modifications to auto-enrolment rules and the implementation of the Pension Dashboard, which aims to provide individuals with a comprehensive view of their pension savings.

Challenges and Recommendations

The report points out several ongoing challenges, including the need to address inequalities in pension savings across different demographics, such as gender and income levels. It suggests potential reforms to help bridge these gaps, such as increasing contribution rates, offering more flexible retirement options, and enhancing employer engagement in promoting pension schemes.

Conclusion

Overall, the DC Future Book 2024 offers a comprehensive overview of the UK’s DC pension landscape, along with insights into future trends and necessary reforms. As the DC market continues to grow, ensuring that savers are equipped to make informed decisions and achieve adequate retirement outcomes remains a priority.

 

TPR: Compliance and Enforcement Bulletin (January to June 2024)

(AF8, FA2, JO5, RO4)

The Compliance and Enforcement Bulletin (January to June 2024) from The Pensions Regulator (TPR) provides an overview of enforcement activities and regulatory measures implemented to ensure compliance across pension schemes in the UK. Some of the main points include:

• Automatic Enrolment Enforcement: TPR closed over 55,000 automatic enrolment (AE) cases and issued 77,800 enforcement actions during this period, including compliance notices, unpaid contribution notices, and penalty notices. These figures show a consistent use of AE powers compared to the previous period, ensuring that millions of workers have the pensions they are entitled to.
• Defined Contribution (DC) Scheme Wind-Ups: Approximately 17% of the DC schemes engaged in TPR’s value-for-members (VFM) assessments have opted to wind up, as they did not offer sufficient value to members. If these results reflect the entire DC landscape, over 200 schemes could potentially close or transfer members’ benefits to better-value schemes. This proactive drive aims to ensure that all schemes provide good value for their members.
• Climate Change Reporting: TPR issued fines to two schemes for failing to meet annual climate change reporting requirements. This highlights TPR’s commitment to enforcing climate-related disclosures and ensuring that schemes consider climate risks in their investment decisions.
• Trustee Standards and Appointments: TPR made 133 trustee appointments during this period to maintain proper scheme administration and protect member benefits. This is part of their ongoing effort to enhance governance standards across schemes.

Some of TPR’s main proposals and recommendations include:

• Encouraging Better Value: TPR’s enforcement actions and penalties aim to push DC schemes towards delivering better value for members. Schemes that do not meet value standards should consider merging with better-performing schemes or winding up to safeguard member benefits.
• Reforming DC Scheme Landscape: The increase in scheme wind-ups is partly due to dVFM regulations, indicating that schemes unable to provide adequate value should transfer members to higher-quality schemes. This initiative aims to reduce the number of underperforming schemes and promote consolidation in the market.
• Focus on Climate Change: With stricter enforcement of climate-related disclosures, TPR is encouraging schemes to integrate environmental considerations into their investment strategies and reporting practices.

Overall, the bulletin showcases TPR’s continued efforts to improve scheme governance, ensure compliance, and promote value for pension savers across the UK.

 

DWP: The Occupational Pension Schemes (Collective Money Purchase Schemes) (Extension to Unconnected Multiple Employer Schemes and Miscellaneous Provisions) Regulations 2025

(AF8, FA2, JO5, RO4)

The DWP has published a consultation on draft legislation to extend collective defined contribution (CDC) provision to whole-life unconnected multiple employer schemes and other related provisions. The consultation seeks views on draft legislation which removes the exclusion of unconnected multiple employer CDC schemes from operating under the existing CDC provisions, and sets out what CDC schemes that are whole-life unconnected multiple employer schemes must do to become authorised and to operate effectively under regulatory oversight.

The consultation closes at 11:59pm on 19 November 2024.

The intention is to build upon the Pension Schemes Act 2021, allowing for unconnected multiple employer CDC schemes, such as Master Trusts, to operate under the same principles as single-employer schemes. The DWP outlines proposed regulations for authorisation, governance, communication, and benefit adjustments. It emphasises member protection, financial sustainability, and the need for well-defined promotion and marketing standards to ensure the schemes’ effectiveness.

Key aspects include:

• Extension of CDC Schemes: The consultation builds on the success of single-employer CDC schemes by proposing frameworks for unconnected multiple employer schemes, allowing businesses from different sectors to participate in a single CDC pension fund.
• Financial Sustainability and Authorisation: The document proposes that unconnected multiple employer CDC schemes should demonstrate financial sustainability and have a single scheme proprietor to oversee the scheme’s operations. It also introduces a business plan requirement similar to Master Trust schemes, ensuring comprehensive financial oversight.
• Governance Requirements: The proposed regulations stress the importance of appointing fit and proper persons to key roles such as the Chief Investment Officer (CIO) and scheme proprietor. The scheme trustees must not be involved in promotional activities to avoid conflicts of interest.
• Promotional and Marketing Regulations: To protect members from unclear or misleading marketing practices, the consultation document introduces authorisation criteria for how CDC schemes are marketed. The regulatory framework aims to ensure transparency and accuracy in promoting the schemes.
• Valuation and Benefit Adjustments: Regular benefit adjustments, based on actuarial valuations, are proposed to maintain financial balance within the scheme. The regulations include provisions for dealing with both benefit increases during periods of overfunding and benefit cuts during underfunding.
• Risk Management and Reporting: The document outlines enhanced reporting and supervisory requirements for CDC schemes to ensure continuous compliance. A range of risk notices, significant event reporting, and business plan requirements are introduced to help the Pensions Regulator monitor ongoing scheme performance.
• Continuity Options and Winding-Up: The regulations provide a detailed framework for managing triggering events, including winding-up procedures or converting a scheme into a closed arrangement. Trustees are required to prepare implementation strategies and report to the Regulator to protect members' interests.
• Equality and Protected Groups: The document seeks feedback on the potential impacts of these regulations on protected groups, particularly in relation to age and disability, and outlines ways to mitigate any adverse effects.

 

Overall, the consultation document sets a comprehensive framework aimed at broadening the use of CDC schemes, ensuring robust governance, and protecting members’ interests through stringent financial and operational oversight. The feedback from stakeholders will help shape the final regulations before they are introduced in 2025.