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Speaker
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Transcript
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Helen Norman, Associate – Burges Salmon
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[Music] Hi everyone, my name is Helen Norman and I'm an associate in Burges Salmon's Pensions and Lifetime Savings team. I'm joined, as usual by Chris Brown, a partner in our team. Hi Chris.
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Chris Brown, Partner – Burges Salmon
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Hello everyone.
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Helen
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Welcome everyone to the fourth episode of season five of the Burges Salmon Pensions Pod.
So in today's episode the trainees in our team are going to give us a news update. So welcome to Lui, Anousha and Fraser, we also have Charlotte and Ryan in the team couldn't make today's episode.
So there are a number of Hot Topics going on in pensions at the moment, as always. We're actually, as we're recording this expecting the Mansion House speech to land tomorrow. It's also been DB funding code of practice brought into force, very interesting rectification case Ballard versus Buzzard and Radley College, and also various regulatory intervention reports, quite often about a number of auto-enrolment compliance cases. But today we've just picked a few hot topics for discussion.
So Fraser, I'll be turning to you first, can you tell our listeners first a bit about yourself?
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Fraser Campbell, Trainee
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Of course Helen. I'm a first seat trainee in the Pensions and Lifetime Savings team at Burges Salmon, and recently I've been helping out a lot with benefit specifications for schemes looking towards buy-in and buy-outs.
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Chris
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[Music] Right, our regular listeners will notice that we don't normally have the three second jingle in the middle of an episode, but Helen and I are back here with Fraser to talk about the Mansion House speech which was on Thursday the 14th of November, because we recorded our news podcast before the Mansion House speech and Fraser you spoke about updates from the Budget, but now we've had the Mansion House speech.
Fraser over to you please to update our listeners on pensions updates from the Chancellor's Mansion House speech.
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Fraser
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Of course, thank you Chris. So the real central message from the speech is that the government are aligning itself with this idea that bigger is better. So it mainly focused on the consolidation of the UK pension system. The background to this is that we've had the phase one of the pensions review and an interim report that came out of this found that funds are more willing to invest in a wider range of productive assets once they reach the 25 billion to about 50 billion scale. So really the idea here is that the government wants to unlock billions of pounds of new investment for the UK economy, but crucially also boost return for savers and so -
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Chris
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And what sort of schemes that 25 billion to 50 billion you're talking about, what sort of schemes there was the chance of they're thinking about?
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Fraser
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Yes, so this really covers multi-employer DC schemes and LGPS assets. So crucially it's not actually referring at all to private DB schemes. So it'll be looking to consolidate both these types of schemes, but also within an ambitious time scale. So it might, I think, it's a potential target date of 2030 for the consolidation of DC funds, and it's March 2026 for LGPS funds.
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Chris
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Yeah, yeah, thank you Fraser that's really helpful, and you know sort of from the Chancellor's point of view trying to unlock investment and maximize investment by this consolidation, you know, you can understand the chancellors aim for it, but of course what does that mean for members?
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Fraser
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Of course, so yeah, it's easy to get distracted looking at the macroeconomic effects of things like this but of course we got to remember what the primary purpose of a pension is, and it's of course to ensure best value for the members themselves and provide for their savings. So I think this is something we really need to look forward to how this actually translates into returns to those members and the key changes that have come out of this speech really need to be communicated effectively towards them as well.
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Helen
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And do you think the time scales are realistic, Fraser?
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Fraser
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I think they're certainly ambitious, it's difficult to say without a lot more of the detail behind how they're going to do this, but yeah, I would say again that's something definitely that needs to be considered in the near future.
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Chris
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Yeah that's brilliant and Fraser, what we will do in a minute is jump back to you from a week and a half ago when we recorded the episode, but before we do that if our listeners wanted to read more about the Mansion House speech and, you know, its impact on pensions where could they do that?
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Fraser
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Of course, yes so we've got a blog on the Burges Salmon website titled 'Mansion House pensions reforms - big is beautiful', so definitely check that out for some more in-depth coverage of the speech.
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Chris
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Perfect Fraser, thanks for joining us again for the update. Thank you. [Music]
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Helen
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Fraser you're going to cover the most hotly anticipated hot topic, the Autumn budget. So there were lots of changes to pensions tax rumoured to be under consideration before this was released and lots of rumours in general, so can you tell our listeners exactly what the pensions implications are of what came out?
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Fraser
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Of course, there are lots of changes to pensions tax that were rumoured to be under consideration but the actual changes that have emerged from the Autumn Budget are less extensive than many expected.
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Helen
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Yeah.
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Fraser
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In fact the drawn out pre-Budget process and the various leaks and rumours of potential policy changes often never materialized and so this has potentially damaged member trust in UK pension system. So the past three months really emphasizes how easily tax and legal changes, whether the rumoured or otherwise, can shape financial decisions relating to pension schemes.
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Helen
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So you mean because people would have been reacting before it was actually in force?
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Fraser
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Of course, yes. So the headline pension announcement that did actually materialize from the Budget is that the government are closing a loophole and bringing unused pension pots and death benefits within the IHT regime, so this is how happening from the 6th of April 2027. There's not much detail on what this specifically involves yet so this is something to watch out for, but we have got a technical consultation released alongside the speech which suggests changes will be more fundamental than anticipated. So this will harmonize the tax position for death benefits across UK pension schemes.
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Helen
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So is that all types of schemes, sorry?
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Fraser
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Yes, so this will be both DB and DC schemes, as well as discretionary and non-discretionary ones.
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Helen
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Okay.
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Fraser
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In terms of the impact it might have, it's estimated to impact about 8% of estates per year, so while this might appear to leave most people unaffected due to these thresholds, we have actually seen industry commentary that suggests it might affect more people than the government realized. So this affects the use of DC pots for tax efficient estate planning, and it affects the distinction between discretionary and non-discretionary lump sums. By removing these it's possible that all lump sums become non-discretionary, which allows members to direct who gets lump sums on their death.
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Chris
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So Fraser, it's early days, and perhaps you can't tell at the moment, but it might be that there's a change coming for trustees to change rules of their scheme, as you say, to make discretionary lumpsum benefits non-discretionary and then members will be able to direct exactly who receives lumpsum benefits on their death. So that's one to look out for.
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Fraser
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Exactly.
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Chris
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Yeah, okay great. So Fraser, just tell us a bit about some of the sort of non-immediately pensions tax changes that were announced that will, you know, have a bearing on pensions, will impact pensions in some way.
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Fraser
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Sure. So of course the Budget is much more than what I've just discussed. So there's also widely anticipated increases to National Insurance contributions, which are rising from 13.8% to 15% in April 2025, and then you've also so got increases to the National Minimum Wage. So both of these will likely have broader impacts on the pension schemes.
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Helen
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Definitely worth listeners, particularly trustees, being aware of those. And lastly Fraser, were there some points, as we hinted at earlier, that were expected to be covered in the Budget and then they didn't materialize?
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Fraser
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Of course, there's quite a few of these. So there were a number of rumoured measures that didn't happen in the end. So this includes a flat rate tax relief, the capping of pension commencement lump sums to 100K, and one particular area that it didn't address was surpluses in pension arrangements, despite many defined benefit schemes being in surplus. So there was no relaxing of the rules to allow for return of surplus more easily to employers, as many people expected.
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Helen
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No definitely.
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Chris
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But watch out, Helen as you said at the top, for the Mansion House speech which at the time of recording is due tomorrow. So Fraser, we might be getting more information on changes for the DB world at that speech tomorrow.
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Fraser
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Course, we'll be looking out for that.
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Helen
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Thanks Fraser.
Chris, there was more that happened in the pensions industry about surplus recently though, wasn't there?
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Chris
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Yeah, just while we're talking about surplus, so one point that we just wanted to make listeners aware of is that; so if you've got a surplus payment, Helen as you and all our listeners will know, when you make that surplus payment there is a tax charge that needs to be paid on it and the trustees need to pay an authorized surplus payments charge to HMRC. Now that's in section 207 of the Finance Act.
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Helen
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Yeah.
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Chris
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And I suppose there was a question around, well you know, how much is that tax charge? So, say you've got £100 surplus and the rate of tax, as we know, has recently dropped from 35% to 25%. So you got a 25% tax charge, so say you've got £100 surplus, is that £75 back to the company and £25 to HMRC? Or, when you look at the legislation, section 2074 says, that the charge is 25% in respect of the authorized surplus payment, so 25% in respect of the payment back to the employer. So instead of 75/25 does that mean is actually 25% on the bit going back to the employer? So to give the monetary example, if you've got £100 surplus the amount back to the employer is £80 and 25% of the amount going back to the employer is £20, so it's only £20 to HMRC.
Now, we're aware of there being discussion and different views in the industry on that, but -
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Helen
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I have had clients asking this as well, just because there was so much uncertainty in the legislation and HMRC hadn't seemed to clarify it.
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Chris
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Yeah absolutely, and for clients looking to make surplus payments around now over the last few weeks and in the immediate future, it's a very live point. The bit that we wanted to flag now Helen, was that HMRC have issued a newsletter which has provided some clarity as to HMRC's view and what they say is the charge arises on the gross value of the authorized surplus payment and not the amount that the employer actually receives. So, and HMRC are going to update their tax manual to give some examples of that. So what we've got is clarity that it is the 75/25 interpretation.
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Helen
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Yeah.
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Chris
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So that's helpful, but I suppose there are still arguments that the actual legislation points the other way and, you know, who knows will we, you know, will we see a case, will an employer with a surplus where it's big enough to make a material difference take that point and, you know, will we get further development of that integration? I don't know, but the point to flag for the news flash podcast today is, HMRC have given their view in their latest news letter.
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Helen
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Yeah, really helpful for listeners to know that.
Anousha, now turning to you for your hot topic, although first could you just tell our listeners a bit about yourself?
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Anousha Al-Masud, Trainee
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Of course, hi everyone, I'm Anousha. I'm a trainee in my fourth seat of my training contract, currently in the Pensions team and recently I've been working on Section 37 reviews, following the outcome of the Virgin Media case.
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Helen
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Yeah lots of those going around the team at the moment, very hot topic. But today, so you're going to cover CDC schemes and the related consultation on the new draft regulations, aren't you? Just remind our listeners of when that consultation came out.
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Anousha
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Yeah of course, so that consultation came out earlier in October, and October was a really big month actually for Collective Defined Contribution Schemes. We saw the launch of the Royal Mail Collective Pension Plan, which was the UK's very first CDC scheme.
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Helen
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Yeah lots of excitement around that.
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Anousha
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Yeah exactly, and that kind of coincided with DWP's consultation which I'm just about to speak about, and that was really seeking feedback on the draft regulations which are coming into the fore to extend CDC schemes to unconnected multiple employers.
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Helen
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So what's the key purpose of those draft regulations, can you explain that a bit further?
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Anousha
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Well so far, CDC schemes have only been a viable option for a handful of the largest employers, however this consultation on the draft regulations for unconnected multiple employer CDC schemes aims to allow greater accessibility for the wider market to participate in CDC schemes and the draft regulations essentially outline the requirements for these schemes to become authorized and operate effectively, ensuring that they are well designed and well run to protect members.
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Helen
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That sounds quite similar to like the master trust regulations, getting a very set requirements so that these can be brought into force.
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Anousha
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That’s right.
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Helen
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What kind of next steps can we expect from this?
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Anousha
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Well, the consultation is due to close on the 19th of November this year and the DWP will review feedback and publish a response, and the government is aiming to lay the regulations in Parliament in 2025 next year. The Pensions Minister, Emma Reynolds, has confirmed that the government intends to then bring these regulations into force as soon as they can, and an updated code of practice on CDC schemes by the Pensions Regulator is also in the works, and hot off the press today the tPR has just published a Collective Defined Contribution schemes supervision and enforcement policy, so do look out for that.
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Helen
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Lots, yeah lots for people to be aware of definitely.
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Anousha
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Yeah, that's right.
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Helen
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Thanks Anousha.
Now lastly, Lui, can you tell our listeners a bit about yourself as well? So you're a bit different, you're not based in Bristol like the rest of us.
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Lui Henderson, Trainee
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No, different to everyone else, I'm based up here in Scotland in the Edinburgh Pensions team, but also slightly uniquely I'm in a split seat, so also working within the Incentives team and the wider corporate team. And as such, a lot of the work I've been doing lately has been helping Corporate and just helping them with deals required to complete pre-Budget.
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Helen
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Yeah, it must have been a big flurry of those and I understand you're going to cover ESG and sustainability and pensions. So can give us a bit of a update about that?
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Lui
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Yeah, sure no problem. So with changes to local and international regulations, sustainability is now evolved into one of the largest priorities for pension schemes, with increasing public scrutiny, regulatory pressure around climate reporting, and wider ESG topics generally, coupled with the fast evolving frameworks for nature and social factors, pension schemes nowadays really have a lot to stay on top of.
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Helen
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It's definitely a big buzz word in the industry, can you tell us about few of the recent updates in this space?
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Lui
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Yeah, so the second year of the task force on climate related financial disclosures has just closed.
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Chris
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So Lui, you're absolutely right, just tell us about that, so what is that, the task force on climate related financial disclosures?
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Lui
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Yeah, so I'm sure many listening to this podcast will no doubt be familiar with what it is, but for the benefit of those that aren't this is basically where the Pensions Regulators reviewed the selection of pension schemes and they draw out their own conclusions, observations of the schemes, and environmental performance, and then additionally they, the regulator also provides feedback within the report which many schemes find to be extremely beneficial.
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Chris
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Okay, that's brilliant thank you. So this is the second year of the regulator doing that, is that right?
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Lui
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Yes.
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Chris
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Yeah, understood. Okay, so what can you tell our listeners about the Regulator's approach in this second report?
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Lui
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The Pensions Regulators review is largely built upon their previous year, so the Pensions Regulator re-examines 30 climate related reports which roughly represents approximately 10% of the total number of TCFD reports and in the review they also focus on four key areas. So firstly, this is the high level of quality and consistency displayed within reports, how well the trustees addressed tPR's key considerations in 2023 is the 2nd, thirdly the level of understanding demonstrated by trustees on the risks and opportunities is also considered, and fourthly and finally the trustees proposed approach in responding to the above risks and opportunities.
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Chris
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So the regulator looks at those four areas and what sort of key headline findings has the regulator made?
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Lui
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Well I think the first and maybe the most important one from this year's report is that context is key. The Pensions Regulator concluded that it would be beneficial for schemes to contextualize the report, this could be done by either referencing the size or the funding level of the scheme, secondly materiality was another thing that was concluded to be an important factor in determining the success of the reports, enabling the reader to better comprehend the significance of the mandate was was proven to be extremely beneficial, and then finally the pensions regulator also reiterated that the risks faced by each scheme are dependent on numerous factors and therefore the more material the climate related risks faced by a scheme, the more time and resource should be spent by trustees in managing those risks.
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Chris
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Yeah okay, that's really helpful thank you. So what are expecting next steps, to do with the report, but for trustees of schemes?
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Lui
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I think it's firstly important to note that while not all schemes are governed by TCFD reporting requirements, all schemes can benefit from the Pensions Regulators reports findings, as they can serve as a sort of guide or road map to improving the climate related management of their own scheme.
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Chris
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Yeah good point, so this is relevant to all schemes even if you're not formally having to do the reporting because of the size of your scheme?
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Lui
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Yeah exactly.
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Chris
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Good point.
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Lui
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And therefore in respect of next steps all trustees should ensure that any TCFD reports produced continue to meet the climate and governance regulations and additionally as a best practice, sort of thing, they must demonstrate that they have taken account of the recommendations in the previous year's report.
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Helen
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It's good to have a framework if you're a trustee looking to approach this for the first time, just getting a sense of what the Regulator is actually expecting it to look like.
Thanks so much Lui for coming on the podcast, and Fraser and Anousha as well. I hope our listeners, it's given you a very high level overview of some of the major hot topics and pensions at the moment. [Music]
Thanks everyone for listening to the Burges Salmon Pensions Pod. If you'd like to know more about our Pensions and Lifetime Savings team and how our experts can work with you, you can contact myself, Chris, or any of our team via our website. All of the previous episodes are available on Apple, Spotify, or wherever you listen to your podcasts. Don't forget to subscribe and thanks for listening. [Music]
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