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TAXATION AND TRUSTS 

TRS latest - the Money Laundering (Amendment) Regulations 2022 approved by Parliament

(AF1, JO2, RO3)

The Statutory Instrument (SI) amending the 2017 Money Laundering Regulations has been approved without changes and will come into force on 9 March 2022. This new SI was necessary to implement changes made in order to extend the deadlines imposed on trustees for registering and updating information on the register.

While no changes have been made to the draft laid before Parliament on 6 January, there was some interesting debate in the House of Lords.

We are all aware that the purpose of the Regulations is anti-money laundering, but many people will not be aware that crime enabled by money laundering costs the UK at least £37 billion per year (data from the Explanatory Memorandum to the SI). Costs for the financial services sector are also significant. Research published last summer put the annual cost of anti-money laundering compliance at almost £30 billion. Given the sums involved it is not surprising that the Government attached such importance to these matters.

There was a question about the extension of the limit for registration of a trust from 30 days to 90 days. The Minister responsible acknowledged that the expansion of the register of beneficial owners of trusts has brought a “significant number of additional trusts” into the scope of this work. (We don’t know how many exactly, but estimates were ranging from several hundreds of thousands to over a million).

The reason for the extension, according to the minister, was that the Government recognise that a very large number of trustees are private individuals with no professional expertise in managing trusts and, many changes will be triggered by life events such as bereavement, where it is not necessarily realistic to expect individuals to update the register within 30 days.  

So far so sensible. Six months from the TRS going live, it is unfortunate that several areas have not yet been clarified, HMRC TRS Manual is still incomplete and, in addition, there appear to be some matters where the Manual and the HMRC Guidance for trustees are inconsistent.

Comment

According to the minister, the aim of the Regulations was to “strike the appropriate balance between providing an effective anti-money laundering tool for law enforcement and minimising the administrative burden on those who use trusts for legitimate purposes”. So far, we are witnessing a considerable increase in the admin burden for trustees, especially those with no professional expertise, as well as considerable costs in some cases, not made any easier by the lack of clarity in some areas.

Recent case serves as reminder of restrictions on attorney's ability to make gifts

(AF1, JO2, RO3)

The recent case of Chandler v Lombardi [2022] EWHC 22 (Ch) serves as a reminder of the very strict limits imposed on attorneys when it comes to making gifts of the donor’s property.

The case concerned an individual who, prior to losing capacity, executed a Lasting Power of Attorney (LPA) in favour of her daughter. Two years after the LPA was executed and registered, and after the donor had lost capacity, the attorney transferred her mother’s home into the joint names of herself and the mother. Subsequently, the gift was challenged by her son on the grounds that his sister (the attorney) had no authority to make the gift on their mother’s behalf.

The rules on gifting – a reminder

Unsurprisingly, the Court held that the transfer of the property was void as it was outside the scope of the attorney’s authority to make gifts as set out in section 12 of the Mental Capacity Act 2005. The capacity of the donor at the time of the transfer (which was also in dispute) was not considered, as the attorney had signed the paperwork and made the gift. As a result, the ownership of the property at the Land Registry was rectified so as to reinstate the donor as the sole legal owner of the property.

Section 12 of the Mental Capacity Act 2005 sets out the very limited scope of an attorney to make gifts of a donor’s property under a LPA. Broadly, the attorney may make gifts:

• on customary occasions to persons (including the attorney themselves) who are related to or connected with the donor, or

• to any charity to whom the donor made or might have been expected to make gifts, if the value of each such gift is not unreasonable having regard to all the circumstances and, in particular, the size of the donor's estate.

A "customary occasion" includes the “occasion or anniversary of a birth, a marriage or the formation of a civil partnership, or any other occasion on which presents are customarily given within families or among friends or associates”.

If an attorney wishes to make a more extensive gift than is permitted by s12, then an application must be made to the Court of Protection for authorisation. Similar rules apply to attorneys acting under Enduring Powers.

The Court of Protection has, however, more recently accepted that there can be occasions where the attorney may wish to make a gift which is, strictly, outside their authority but in such a minor way that it doesn’t justify a Court application. These exceptions are often called ‘de minimis exceptions.

In the case of MJ and JM and the Public Guardian [2013] EWCOP 2966, Senior Judge Lush said the de minimis exceptions can be taken as covering the annual inheritance tax (IHT) exemption of £3,000 and the annual small gifts exemption of £250 per person, to up to a maximum of, say, ten people when:

1. the person has a life expectancy of less than five years;
2. their estate is worth more than the nil rate band for IHT purposes (currently £325,000);
3. the gifts are affordable, taking into account the person’s care costs, and won’t adversely (negatively) affect their standard of care and quality of life; and
4. there is no evidence that the person would be opposed to gifts of this value being made on their behalf

It is important to note that being able to gift small amounts up to the IHT exemption without the permission of the Court doesn’t mean that the attorney can carry out any form of IHT planning without the Court’s permission – in most cases, a Court of Protection application will be necessary. Note also that the de minimis exceptions do not apply to the following:

• loans to the attorney or to members of their family;
• investments in the attorney’s own business;
• sales or purchases below value;
• any other transactions where there is a conflict between the interests of the person and the attorney’s own interests.

It should also be borne in mind that a gift can include:

• making an interest free loan from the donor’s funds, as the interest forgone counts as a gift;
• creating a trust of the donor’s property;
• selling a property for less than its market value;
• changing the Will of someone who’s died by using a deed of variation to redirect or redistribute an inheritance received by the donor.

For more information on LPAs please see: Lasting Powers of Attorney and Can you make gifts if you are an Attorney or a Deputy?

Continuing Powers of Attorney (CPAs) – the position in Scotland

The law governing powers of attorney in Scotland changed with effect from 2 April 2001 when the Adults with Incapacity (Scotland) Act 2000 came into force. Under the 2000 Act, it is possible to execute a welfare power of attorney in respect of personal welfare decisions and/or a CPA in respect of financial matters. These can be combined in one document and one attorney can act under both; or they can be two separate powers with different individuals being appointed under each.

To be effective, the power must be registered with the Public Guardian (the equivalent of the English Court of Protection).

In contrast with the English Law position, where the powers that can be granted to an attorney are subject to statutory limitation, a granter who makes a CPA can specify exactly what powers the attorney is to have, without restriction. Often, there will be a general power that authorises the attorney to deal with all financial affairs, or there may be a list detailing the specific powers conferred.

Unless specifically authorised to do so, a continuing attorney cannot make a Will for the granter and cannot make gifts to himself or herself or to anyone else. However, there is no outright prohibition on gift-making by the attorney, so if the granter wishes to give the attorney the power to make gifts (including to trusts) or to enter into tax planning arrangements on their behalf, they may include such authority in the power.

If an attorney in Scotland wishes to make a gift or do anything else that he or she is not expressly authorised to do so, they must make an application to the Public Guardian.

Comment

When dealing with attorneys it will be important to remember that they have an overriding obligation to ensure that any action taken in respect of the incapacitated person’s property and financial affairs must be in that person’s best interests. This is not the same as being able to do anything that the incapacitated person could have done themselves if they still had capacity. Particular restrictions apply when it comes to making gifts, creating trusts and carrying out inheritance tax planning – in England & Wales IHT planning is generally prohibited unless pre-approval has been obtained from the Court of Protection; while in Scottish cases, the terms of the instrument creating the power will need to be consulted before advising.

FCA protections for new funeral plan customers - an update re applications

(AF2, LP2, RO5)

In November 2021, the FCA published the rules that funeral plan providers will have to follow when they come under regulation from 29 July 2022.

Ahead of that, the FCA is assessing applications from funeral plan providers for authorisation. This process is to ensure:  

• firms sell products which offer fair value, meet consumer needs and are sold fairly;  
• firms are well run, adhere to high conduct standards and have sufficient resources and risk transfer arrangements so they can deliver funeral services; 
• consumers have time and all the information they need to make better informed decisions when choosing between different products and whether a funeral plan is right for them at all.

The FCA says that it will not authorise firms that cannot demonstrate they meet these standards. This process is intended to ensure that only well-run funeral plan providers that are able to provide a valuable service to their customers can continue to operate. Firms need to plan for the new regulatory regime or prepare to leave the market in an orderly manner.

A number of risks arising from the practices of some firms in the market have been identified by the FCA and by HM Treasury, which legislated to bring funeral plan providers under regulation. These include:

• Plans that do not meet consumers’ needs or expectations, for example those paid by instalment that do not guarantee a funeral service.   
• The use of high-pressure sales tactics by some intermediaries, including cold calling of potentially vulnerable consumers, resulting in consumers taking out plans unsuitable for their needs. 
• Consumers paying high prices relative to product benefits, driven by high rates of commission and fees.  
• Poor governance and controls within plan providers, including oversight of intermediaries and potential conflicts of interest where an intermediary gets a high commission.
• Plans going unclaimed because the consumers’ families do not know about them, which increases the risk of harm as families cannot use plans they discover at a later date.  
• Poor financial management of trusts, meaning that there may not be sufficient funds available to cover funeral costs, with unclear and potentially poor outcomes for consumers if firms fail.

In addition to assessing firms for authorisation, the FCA is imposing new rules to make sure consumers are properly protected, including banning cold calling and all commission payments to intermediaries to make sure products offer fair value.

Until funeral plan providers are regulated by the FCA, consumers will not be able to make a complaint to the Financial Ombudsman Service, nor will they have protection from the Financial Services Compensation Scheme (FSCS) should their provider go out of business.

For more information, please see the FCA’s pages for consumers and firms.

Register of Overseas Entities

(AF2, JO3)

The Register of Overseas Entities, included in the Economic Crime (Transparency and Enforcement) Bill, was first suggested in 2016 and a public consultation on a draft Bill was held in July 2018.

Various amendments have now been made to the draft legislation in accordance with the public response to the consultation. Under this latest draft legislation, owners who do not comply with the registration requirement will have restrictions placed on the deeds to make it more difficult to sell the property. The law will apply retrospectively to property bought by overseas owners up to 20 years ago in England and Wales and since December 2014 in Scotland. Breaches of obligations can result in criminal sanctions, including daily fines of up to £500 or prison sentences of up to five years for the most serious breaches.

The Government says that the register will require anonymous foreign owners of UK property to reveal their real identities to ensure criminals cannot hide behind secretive chains of shell companies, setting a new global standard for transparency.

The new Bill will also increase the National Crime Agency's (NCA’s) powers to seek unexplained wealth orders (UWOs) through civil enforcement action. Law enforcement agencies will be given more time to review material provided in response to a UWO. They will also have statutory protection from the substantial legal costs that can result from bringing an unsuccessful UWO application: a factor that is said to have deterred applications for orders. Also, those who hold property in the UK in a trust will be brought within scope and the definition of an assets holder will also be expanded. The Government says that this is to ensure individuals can’t hide behind opaque shell companies and foundations.

The Government has also published a detailed White Paper setting out its plans to upgrade Companies House, which will mean:

• anyone setting up, running, owning or controlling a company in the UK will need to verify their identity with Companies House;
• Companies House will be given the power to challenge the information that appears dubious, and will be empowered to inform security agencies of potential wrongdoing;
• company agents from overseas will no longer be able to create companies in the UK on behalf of foreign criminals or secretive oligarchs;
• the quality of information provided by companies to Companies House will be improved, so that the thousands of small companies who rely on it to make business decisions can trust who they are doing business with;
• filing processes for small businesses will be streamlined and digitalised;
• company directors will be better able to protect personal information published by Companies House which might put them at risk of fraud or other harm.

Annual Tax on Enveloped Dwellings (ATED)

(AF2, JO3)

The annual tax on enveloped dwellings (ATED) is payable mainly by companies that own UK residential property valued at more than £500,000. The dwelling is said to be 'enveloped' because the ownership sits within a corporate wrapper or envelope. The ATED is charged in respect of chargeable periods running from 1 April to 31 March each year.

The ATED charges increase automatically each year in line with inflation (based on the previous September’s CPI).

This table shows the property band and what the revised charges will be for the 2022/23 chargeable period:

Property value	Annual tax 2017/18	Annual tax 2018/19	Annual tax 2019/20	Annual tax 2020/21	Annual tax 2021/22	Annual tax 2022/23
£500,000 to £1,000,000	£3,500	£3,600	£3,650	£3,700	£3,700	£3,800
£1,000,001 to £2,000,000	£7,050	£7,250	£7,400	£7,500	£7,500	£7,700
£2,000,001 to £5,000,000	£23,550	£24,250	£24,800	£25,200	£25,300	£26,050
£5,000,001 to £10,000,000	£54,950	£56,550	£57,900	£58,850	£59,100	£60,900
£10,000,001 to £20,000,000	£110,100	£113,400	£116,100	£118,050	£118,600	£122,250
£20,000,001 and over	£220,350	£226,950	£232,350	£236,250	£237,400	£244,750

Fixed revaluation dates

Note that there are fixed revaluation dates for all properties regardless of when the property was acquired. These are every five years after 1 April 2012, so, for example, at 1 April 2017, 1 April 2022 and so on.

A valuation is necessary when the property is purchased, and this value will normally apply until the next fixed valuation date. This means that:

• For those properties owned on or before 1 April 2012, they will have had an initial value at 1 April 2012 and the property will have had to be revalued on 1 April 2017;
• For those properties acquired after 1 April 2012, but on or before 1 April 2017, they will have had an initial value at the date the property was acquired, and the property will have had to be revalued on 1 April 2017;
• For those properties acquired after 1 April 2017, but on or before 1 April 2022, they will have had an initial value at the date the property was acquired, and the property will have to be revalued on 1 April 2022.

Note that the 1 April valuation applies for the following ATED year and the next four ATED years. So, for example, the 1 April 2017 valuation will apply for the 2018/19 ATED year and all ATED years up to and including the 2022/23 ATED year.

Other events that require a revaluation to be made:

• Part disposals - if part of a property is disposed of (for example, a small parcel of land, or by granting a lease) the property must be revalued based on the property’s market value on the date of disposal. This valuation applies until a revaluation date of 1 April is reached.

• New builds or reconstructed properties -if a property is newly constructed or has been altered to become a new dwelling it should be valued on the earlier of the date:

• it was first occupied;
• it was treated as coming into existence for Council Tax or, in Northern Ireland, domestic rating purposes.

Note that it is only an acquisition of a right in or over land which is relevant and so millions could be spent developing a property without triggering a new valuation at that point. However, obviously the expenditure could result in the property moving into a higher ATED band on the next 1 April valuation (or earlier valuation event, such as a part disposal.)

For the ATED period 1 April 2022 to 31 March 2023, where your client owns a property on 1 April 2022, returns for that period must be filed by 30 April 2022.

Please see here for more information about the ATED.

Comment:

Clearly, care needs to be taken to ensure that the correct valuation date is used when assessing if the ATED applies and, if so, at what level.

In addition, many buy-to-let investors will now be buying buy-to-let properties via companies in order to obtain full tax relief for interest paid on loans used to purchase the property. And there is a particular exemption which means that no tax charge will arise if the property is let on market terms to a person who is not connected with the company. Please see here.

However, if the value of the property for ATED returns purposes is £500,000 or more, an ATED (Relief Declaration) tax return must be made and the exemption claimed. Otherwise penalties may be incurred. More information on ATED returns can be found here.

INVESTMENT PLANNING

Help to Buy ISAs - quarterly statistics released

(FA5)

HMRC’s latest quarterly statistics on Help to Buy ISAs have been released. These cover the period from 1 December 2015 to 30 September 2021.

The statistics show that since the launch of the Help to Buy ISA, 460,567 property completions have been supported by the scheme and 604,720 bonuses have been paid through the scheme (totalling £674 million) with an average bonus value of £1,115.

The table below shows the number of property completions supported by the scheme broken down by property value:

Previous statistics have shown that the highest number of property completions with the support of the scheme tends to be in the North West and the lowest in the North East and Northern Ireland – this continues to be the case.

The figures also show:

• The mean value of a property purchased through the scheme is £175,680 compared to an average first-time buyer house price of £225,607 and a national average house price of £269,945.
• The median age of a first-time buyer in the scheme is 28 compared to a national first-time buyer median age of 30.

NS&I raises Green Savings Bond rates

(AF4, FA7, LP2, RO2)

In last year’s Spring Budget, Rishi Sunak announced that NS&I would be launching a green bond. Details emerged from NS&I in July 2021, but with one vital ingredient missing: the interest rate. When this key information was revealed in October, the reception was less than lukewarm: 0.65% fixed for three years was little more than a third of the then market-leading rates.

On 15 February 2022, NS&I tried again, with the launch of a new issue of the Green Savings Bonds offering 1.3% fixed for three years.

While an improvement on its predecessor, the return is still about 0.55% off the best market rates for three year fixed term deposits, according to Moneyfacts. Following the rise in short term gilt yields this month, the Green Savings Bond yield is also less than on offer from a three-year Government bond. For example, 0.25% Treasury 2025 currently has a redemption yield of 1.50%, largely in the form of tax-free capital gain rather than the Green Savings Bond’s taxable interest.

Comment

NS&I are going to have to try harder if they want to reach their £6bn ±£3bn capital raising target for 2021/22.  

Latest property statistics

(AF4, FA7, LP2, RO2)

The latest property statistics are now available.

However, the Government warns that temporary increases to the stamp duty thresholds and the pandemic have produced uncertainty on underlying seasonal trends since April 2020. For this reason, seasonally adjusted statistics should be treated with caution. The figures show that:

• the provisional non-seasonally adjusted estimate of UK residential transactions and UK non-residential transaction in January 2022 is 85,520 and 9,070 respectively, which is 22.2% and 18.1% lower than December 2021;

• the provisional seasonally adjusted estimate of UK residential transactions in January 2022 is 106,990, which is 5.1% higher than December 2021;

• the provisional seasonally adjusted estimate of UK non-residential transactions in January 2022 is 10,000, which is 2.5% lower than December 2021.

The provisional estimate of 85,520 for non-seasonally adjusted UK residential transactions in January 2022 is similar to levels reported before the coronavirus pandemic, such as January 2020 when transactions were 83,840.

UK residential transactions have gradually increased following substantial coronavirus related decreases during the spring of 2020, including large peaks in March, June, and September 2021, which would appear to be as a result of the stamp duty holiday.

PENSIONS

Pension Schemes Newsletter 137 – February 2022

(AF3, FA2, JO5, RO4, RO8)

Pensions Schemes Newsletter 137 covers the following:

• public service scheme members with fixed or enhanced protection
• loss of Lifetime Allowance protection
• relief at source
• digitisation of relief at source
• Scheme Pays reporting
• Managing pension schemes service

Areas of interest

Public service scheme members with fixed or enhanced protection

Members of public service schemes with fixed or enhanced protection may need to take action before 1 April 2022 to avoid losing their protection.

As part of the McCloud discriminatory case form 1 April 2022 all active members of public sector schemes will accrue benefits in the reformed career average pension schemes.

The government will return individuals to their legacy scheme for the seven-year period 1 April 2015 to 31 March 2022. This will mean that individuals who originally lost their enhanced or fixed protection due to joining the reformed scheme (and not due to a subsequent benefit accrual) will not have lost their protection. However, they will lose their protection if they accrue benefits under the reformed scheme from 1 April 2022.

To keep fixed or enhanced protection:

• individuals who have not yet joined the reformed scheme will need to opt out of joining that scheme by 1 April 2022.
• individuals already in the reformed scheme will need to stop accruing benefits from 1 April 2022

Loss of Lifetime Allowance protection

HMRC want to remind schemes to encourage their members to report any loss of Lifetime Allowance protection as soon as possible. 

Members can lose their enhanced protection of fixed protection if

• they make new savings in a pension scheme
• they’re enrolled in a new workplace pension scheme
• they transfer money between pension schemes in a way that does not meet the transfer rules
• they have enhanced protection and, when they take their pension benefits, their value has increased more than the amount allowed in the enhanced protection tax rules – this is called ‘relevant benefit accrual’
• they have fixed protection and the value of their pension pot in any tax year grows at a higher rate than is allowed by the tax rules – this is called ‘benefit accrual’.

Members must tell HMRC in writing if they think they’ve lost the Lifetime Allowance protection.  They will need to provide

• their full name, address and National Insurance number
• the exact date that they lost protection
• the reason why they lost protection (for example benefit accrual, auto enrolment)
• the type of pension arrangement (defined contribution or defined benefit)
• their original certificate (if you still have it), these were not issued for Individual Protection 2016 or Fixed Protection 2016

Scheme pays reporting

A further change as a result of the McCloud judgement is the extension of scheme pays reporting and payment deadlines.  This will allow members to use scheme pays for earlier tax years where there are retrospective changes to the pension inputs.

The draft regulations were published for technical consultation on 18 February 202 and the consultation closes on Tuesday the 15  March.

Government confirms GMP revaluation rate to be 3.25 percent from 6 April 2022

(AF3, FA2, JO5, RO4, RO8)

The DWP has announced the outcome of its consultation on the GMP fixed revaluation rate. The consultation sought views on the Government’s proposal to set the rate at 3.25% per annum for those leaving their scheme between 6 April 2022 and 5 April 2027. This is a small decrease from the current rate of 3.5%. The rate is reviewed every five years.

The consultation received just two responses. The Government viewed the low response rate to mean that the industry was largely content with the proposals and so they will go ahead and introduce legislation to make the change. 

SMF: Pensions guidance gap fuels £132bn savings shortfall

(AF3, FA2, JO5, RO4, RO8)

The Social Market Foundation (SMF) has produced a report looking at the lack of take-up of either advice or guidance amongst those individual’s aged 50 to 64. The report entitled A Guiding Hand has found:

• More than two thirds of UK 50–64-year-olds don’t know how much they'll need for retirement.
• Only a fifth of 50–64-year-olds have spoken to a financial adviser about their pension.
• Only 14% of people accessing a defined contribution pension pot for the first time seek free guidance from Pension Wise.
• On average 50–64-year-olds people approaching retirement age are almost £250,000 short of the pension pot they would need to deliver the pension income they want in later life.

In the report, the SMF makes a number of recommendations, including:

1. Pension Wise needs to be expanded, with a broader scope and new digital tools. Policymakers should explore the case for expanding the scope of Pension Wise in two key ways. Firstly, providing tailored guidance on the level of pension savings likely to be needed to achieve a given retirement income. Secondly, allowing all of those over the age of 40 or 45 with a defined contribution pension to book a Pension Wise appointment, rather than just those over the age of 50, as at present. This would give individuals more time to correct for any inadequacies in their current retirement planning – for example by ramping up contributions into their pension pot or changing any non-pension investments.
2. Pension Wise’s online offer needs to be improved, including through the provision of “robo guidance” and “robo modelling” that provides individuals with highly relevant information and a clear visualisation of the potential impact of different options on their financial position in retirement.
3. At a minimum, the FCA should provide clearer information on its current definitions, including more concrete examples of what constitutes “guidance” and “advice”. This should include through provision of “gold standard” examples of guidance that is highly informative and actionable, without straying into advice territory.
4. Ideally, the FCA should go further and adopt new definitions along the lines of those suggested by the Independent Review of Retirement Income. This would see two categories of information, guidance and advice: “personal recommendation” and “financial help”, with the latter replacing everything that is not full regulated fee-based advice where the adviser takes responsibility for a recommendation. Such an approach would give organisations more confidence to offer enhanced forms of guidance without falling foul of regulation.
5. Using guidance or advice before accessing a pension should be made the default. Before accessing their pension pot, individuals should be requested by their pension provider to use some form of guidance and advice, and signpost individuals to a range of options, including online tools. As well as services offered by the pension provider, there should be signposting to Pension Wise and non-provider services, in order to build trust and give consumers choice. Individuals would have to explicitly say that they do not want support in order to access their pot without advice or guidance.
6. The Government needs to invest significant resource into a nationwide pensions awareness campaign which brings home the need for individuals to prepare for retirement, makes them aware of the complexity of the decisions they face when accessing their pension pot and signposts them to support. It should be delivered through a partnership between Government, industry and the third sector, ensuring common messaging.

PLSA calls for companies to disclose their climate impact as part of its 2022 Stewardship and Voting Guidelines

(AF3, FA2, JO5, RO4, RO8)

The Pensions and Lifetime Savings Association (PLSA) has published its Stewardship and Voting Guidelines report for 2022, which provides practical guidance for pension scheme trustees considering how to exercise their vote at annual general meetings. The PLSA stated that it has focused on ensuring the guidelines remain relevant amid the challenges posed by a post-COVID-19 world, a fast-moving regulatory environment and increases in savers' everyday bills. The three key areas that the new guidelines cover are climate change, executive remuneration and diversity.

Nigel Peaple, Director of Policy and Advocacy at the PLSA, said in their Press Release that: “Investors recognise how incredibly tough the past two years have been for companies to navigate. While being empathetic to these issues, AGM season is an opportunity for pension scheme trustees and their asset managers to engage with company directors, to revisit [ESG] policies and seize the chance to build back better than before. As part of this, we have strengthened the language on expectations on TCFD disclosures, to which all companies should be held accountable. And while climate change matters remain vital to address, it's also important to not forget the other aspects of ESG investing. This is not only the right thing to do but also... numerous studies have shown that companies that uphold the highest ESG standards tend to financially outperform as well, adding value to the millions of pension savers they count among their shareholders.”

FRC consults on proposed changes to Actuarial Standard Technical Memorandum 1

(AF3, FA2, JO5, RO4, RO8)

Financial Reporting Council set out proposed changes to its technical memorandum that governs how statutory money purchase illustrations (SMPIs) are undertaken. To this end, they have published:

• A consultation paper on proposed changes to the Actuarial Standard Technical Memorandum 1 (AS TM1), and
• An Annex: Exposure Draft of version 5.0 of TM1.

This consultation has been driven by the ‘estimated retirement income’ needs of money purchase benefits that will be returned on pensions dashboards.

In particular, the proposals standardise the accumulation rate assumptions and the form of annuitisation at retirement in order to ensure consistency between illustrations from different providers and between different types of pension. Looking at the proposals in more detail some key points are set out below.

Accumulation rate assumptions

A fund’s accumulation rate is to be taken from one of four volatility groups the fund could potentially be placed in, with its actual placement being determined according to the volatility of the fund’s monthly returns over a five-year period (as measured by the standard deviation of these returns).

The greater the volatility on this measure, the greater the assumed accumulation rate.  A Group 1 designation results in an assumed accumulation rate of 1% pa (likely to be used for cash funds), whilst 7% pa is the rate used for a Group 4 designation (likely to be used for most equity funds).

A fund’s volatility will be recalculated each 31 December and its group designation moved as necessary, but only if the fund falls within the new group by more than a 0.5% corridor.

The accumulation rate selected will be reduced as the plan approaches retirement, in line with the anticipated de-risking (e.g. “lifestyle” strategies), but only where these changes are programmatic, or where there is an established practice of switching having been made.

With profits funds will have their volatility measured by reference to their unsmoothed asset returns, with a potential adjustment if the accumulation rate is lower than the level of any guaranteed return.  Unquoted assets will be assumed to have a 2.5% pa accumulation rate (ie in effect the CPI assumption).  Pooled funds will have their volatilities measured by reference to the overall fund and not take account of volatilities exhibited by any sub-funds.

If a member is invested in more than one fund, the projection works by reference to potentially a number of accumulation rates.

Annuitisation assumptions

None of the projected fund at retirement will be assumed to be taken as tax-free cash and so all the projected fund will be annuitised – on the basis of a level annuity without attaching spouse or partner benefits. The discount rate for the annuity will be taken from fixed interest gilt yields on the previous 15 February. Mortality will remain unisex, continue to reference core values in CMI mortality projection models but the base table will be updated to reference the experience of pensioners in the period 2015 to 2018.

However, where the illustration date is less than two years from the retirement date an annuity rate must be used which is consistent with that available in the market (with no lifestyle or health adjustments), provided that it is no more generous than the provider’s own annuity rates (where applicable).

Other considerations

Illustrated pensions will need to be expressed as annual amounts. The 2.5% pa inflation assumption is to remain unchanged.

Consultation closes on 6 May 2022 and the intention is that the new version 5.0 of AS TM1 will apply, from 1 October 2023, to all future SMPIs and money purchase estimated retirement income illustrations on pensions dashboards.

Comment

The big idea in this consultation package is that of setting future accumulation rates by reference to past volatility of returns and so removing any judgment in rate setting. It will be interesting to see to what extent this suggestion is supported. The annuitisation approach is also a change from current practice.

The proposals, once finalised, will require some work to be undertaken by SMPI providers in relatively short order. However, this is not the radical overhaul that it could have been, with for example the volatility work likely to be undertaken outside any projection engine.

As to the bigger picture, these reforms were expected as the current regime could have given rise to potential confusion and the possibility of inappropriate outcomes when a number of estimated retirement income projections for the same individual, from different pension pots, are lined up together on the dashboard.  As such, the reforms are welcome and, some may say, are long overdue.