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“AI and sustainability - cure or curse?”
While AI can help resolve data issues in sustainable investing, it can create problems such as information breaches and inherent bias in data.
Global | Publication | October 2017
Essential Pensions News covers the latest pensions developments each month.
In a development which will principally affect defined benefit (DB) schemes, on October 5, 2017, HMRC published an unexpected Revenue and Customs Brief 3 which announced that, with effect from January 1, 2018, there will be a change to the policy relating to the VAT treatment of services provided by insurers to pension funds without special investment fund (SIF) status. This means that insurers will no longer be able to treat as VAT exempt pension fund management services provided to pension schemes which do not have SIF status – effectively, those provided to DB schemes.
By way of a brief reminder of the relevant European case law, in Wheels Common Investment Fund Trustees Ltd v HMRC, the ECJ held that a DB scheme would not normally qualify as a SIF and, therefore, pension fund management services supplied to such a scheme would not be VAT exempt. However, in the subsequent case of ATP Pension Service A/S v Skatteministeriet, the ECJ held that a defined contribution (DC) pension scheme could qualify as a SIF which meant that VAT exemption could apply to pension fund management services supplied to DC schemes. This prompted fresh litigation to determine whether the difference in treatment between DB and DC schemes breached the principle of fiscal neutrality. This is to be addressed in United Biscuits (Pension Trustees) Ltd v HMRC which was listed for a 5-day hearing in mid-October 2017,and in which a decision is awaited. The same issue is due to be considered in further proceedings in Wheels which have been stayed pending the outcome in United Biscuits.
HMRC's position is that the provision of services of managing and administering pension funds with the characteristics of a SIF will attract VAT exemption while the provision of such services to non-SIFs will not. However, HMRC states that the majority of pension fund management services provided by insurers are supplied to SIFs, that is, DC schemes.
The current position means that the expected increased costs for insurance companies may be passed onto DB schemes, and the record keeping requirements for these schemes may also become more complex. HMRC has previously stated that it will provide updated guidance to the pensions industry on its position on the application of VAT to services provided to pension schemes as a whole and this is still awaited.
View the Revenue and Customs Brief.
In our update for September 2017, we reported that the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the New Regulations) came into force on June 26, 2017, the deadline for transposition into UK law of the EU Fourth Money Laundering Directive (the Directive).
The Money Laundering Regulations 2007 (the 2007 Regulations) require trust or company service providers to register with HMRC if they are not authorised by the FCA (or certain other specified professional bodies) and where they are in the business of offering services as a trustee or director of a trustee company.
The New Regulations define trust or company service providers in the same way as the 2007 Regulations, and thus registration will continue to apply to those acting as trustees by way of a business. However, the classification of occupational pension schemes as low risk trusts under HMRC’s existing guidance, meant professional trustees of those schemes were not required to register with HMRC, and this had caused some confusion.
On October 9, 2017, HMRC published detailed guidance relating to the new online Trusts Registration Service, in the form of Frequently Asked Questions (FAQs). The guidance (which is not, however, pensions-specific) aims to clarify the registration deadlines, the issue which had caused some confusion. This is because HMRC's Trusts Register acts as both:
This second point means that deadlines imposed by relevant UK tax legislation are relevant in addition to the registration dates under the New Regulations. The guidance clarifies that the registration deadline depends on whether a trust is already registered for self-assessment for income tax or capital gains tax as follows:
The registration requirement will not affect the majority of schemes. However, trustees should ensure that they maintain up to date and accurate records in relation to all scheme beneficiaries.
Given the possibility of criminal liability and civil fines, we recommend that trustees act as soon as reasonably practicable to determine which of the above duties apply to them. In particular, trustees should review their records to verify whether they contain the necessary information and check whether their schemes have incurred any of the taxes that would require the schemes to be registered with HMRC.
If trustees have any concerns in relation to this issue, their usual Norton Rose contact will be able to offer scheme-specific advice.
View the guidance.
The Pensions Regulator (TPR) has launched a new campaign as part of its “21st century trusteeship” initiative aimed at improving the standards of governance across pension schemes. The campaign is particularly aimed at trustees of small and medium schemes, as many of these have “failed to act on TPR’s codes and guidance to meet standards of good governance”.
TPR will be sending targeted emails to trustees, employers and scheme managers, directing them to a dedicated page on the TPR website that will act as a landing page for the campaign as it develops. The first stage of the new initiative will be to outline what TPR considers to be good governance and its importance to schemes. However, as well as encouraging compliance, TPR will also set out the steps that schemes should be taking to meet the expected standards and the sanctions that TPR will impose on those who fail to comply.
As we reported in our August 2017 update, TPR has published details of its revised monetary penalties policy setting out how it will use powers to impose monetary penalties under pensions legislation.
As the 21st century trusteeship campaign develops, it will cover additional core areas such as setting clear roles and responsibilities, clear purpose and strategy, competence and integrity, managing advisers and providers, and managing conflicts of interest. TPR has launched a new blog on what it means to be a trustee now and in the future.
We will be publishing a briefing on the 21st century trusteeship initiative in due course.
View TPR’s announcement.
TPR has confirmed that the duty for start-up businesses to automatically enrol workers into a workplace pension scheme came into effect on October 1, 2017. New businesses employing staff for the first time from October 1, 2017, will have a legal duty to enrol eligible jobholders into a pension scheme on the day that the member of staff starts work.
In order to help smaller businesses adhere to their automatic enrolment duties, TPR has launched a new online resource page Setting up a business? What to do for automatic enrolment, providing information on employers’ duties under the auto-enrolment regime, and when these duties apply.
The commencement of the new instant pension duties coincides with the fifth anniversary of auto-enrolment. Since 2012 when the staging process began, more than 8.5 million people have started saving into a workplace pension and almost 800,000 employers have met their automatic enrolment duties.
Following the Government’s decision to delay from October 1, 2017, to April 6, 2018, the application of an extra 2 per cent workers’ contribution, a potential consultation issue may arise for employers with 50 or more employees (which includes all employees, not just affected employees).
The consultation requirements of the Pensions Act 2004 (the 2004 Act) and the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendments) Regulations 2006 (the Regulations) require employers to consult with their workers for 60 days before, among other things, making an increase in a worker contribution rate to a pension scheme. There is an exception under the Regulations where the change is made for the purposes of complying with a statutory provision. Any consultation must be conducted in a spirit of co-operation, taking into account the interests of both sides.
It is unclear whether or not there is a requirement to consult where worker contributions are increasing to meet the auto-enrolment requirements. The question is whether the increase is being made for the purposes of complying with a statutory provision: if it is not, then consultation is required. For example:
In addition, some employers may have made specific mention in the scheme rules of the planned dates and levels of contribution increases to comply with their auto-enrolment duties and these may no longer reflect the Government’s amended timetable.
In this context, TPR’s detailed guidance note 4, which was published in April 2014 and updated in April 2016, says that consultation will be required where the proposed increase does not explicitly match the statutory increases; for example, the increase in contribution rates may be different, or the date that the increase takes effect may be different. While TPR cannot definitively determine what the legislation means, and there are alternative arguments, TPR can initiate proceedings to fine employers that breach the consultation requirements. The 2004 Act says that failure to consult in accordance with regulations does not invalidate a change to a scheme. Workers may, however, be able to claim damages for breach of the employer’s duty of trust and confidence in some circumstances where there has been a failure to consult, or if a consultation was not genuine.
Although we think it unlikely that TPR would impose penalties in these circumstances, many employers will wish to consult on any worker contribution increases in order to reduce a potential risk of regulatory action and the likelihood of worker complaints.
Of interest to all schemes with defined contribution (DC) investments is the policy statement published by the Financial Conduct Authority (FCA) on September 20, 2017. The FCA intends to publish Handbook rules that require firms managing money on behalf of DC workplace pension schemes to disclose administration charges and transaction costs to the governance bodies of those schemes, using a standard approach.
With effect from January 3, 2018, in response to a request from the governance body of a relevant pension scheme, firms must provide:
Where firms do not have the relevant information themselves, they must seek it from other firms, and those other firms, where they are FCA authorised, must provide the information.
By setting out a methodology for calculating transaction costs in a consistent way, and by placing obligations on firms to respond to requests for information about costs, the FCA seeks to build the foundations that will enable the governance bodies of these schemes to meet their obligations to review and consider the value for money of transaction costs and administration charges.
View the policy statement.
On September 28, 2017, the FCA and TPR published a joint factsheet guide for employers and trustees. The factsheet guide (which is only 4 pages long) provides a non-exhaustive explanation of the type of assistance that employers and pension trustees may provide to help employees, without needing to be authorised by the FCA under the Financial Services and Markets Act 2000 (FSMA). It also signposts other publicly available guidance.
The factsheet:
The factsheet was developed to address Recommendation 11 of the final report of the FCA's Financial Advice and Markets Review (FAMR). The FCA consulted, in April 2017, on a draft version of the factsheet in its guidance consultation on part 1 of its implementation of the FAMR.
The FCA has separately published a summary of feedback received to that consultation, which includes its response to feedback provided on the draft factsheet. The FCA confirms that it intends to retain its existing guide, “Promoting pensions to employees – a guide to employers”, on the grounds that its content remains of value.
On October 3, 2017, the FCA published an update on its work relating to defined benefit (DB) pension transfers.
There has been significant growth in individual transfers being sought from DB schemes to personal pensions in order to take advantage of the pensions freedoms introduced in April 2015. The FCA has focused on how advisory firms have adapted their business models and processes, and the risk of harm to consumers transferring out of DB schemes.
The FCA's key findings relate to:
The FCA also found that advisers had failed to make appropriate comparisons between the DB scheme and the intended receiving scheme. As a result, advice was based on incorrect or inaccurate comparisons.
The FCA's work on scams has resulted in 32 firms no longer providing advice, or limiting their pension transfers activity, and its wider work on DB transfers has led to four firms deciding to no longer advise on DB transfers.
The findings from this supervisory work has informed the FCA's consultation on proposed changes to its rules and guidance as set out in a June 2017 consultation paper on advising on pension transfers and will be taken into account when the FCA responds to the feedback to the consultation.
We will report further once the FCA responds to the feedback it has received.
The Pension Protection Fund (PPF) has published for consultation its draft levy determination for 2018/19 alongside a policy statement for the third triennium running from 2018/19 to 2020/21. Consultation on the draft determination closes on November 1, 2017.
The draft levy determination reveals that the overall amount the PPF plans to collect under its levy estimate will fall by more than 10 per cent from £615 million in 2017/18 to £550 million in 2018/19. The drop reflects the PPF's view that its funding position is “strong”, and a reduction is therefore “appropriate” despite the ongoing significant risks to schemes within the PPF-eligible universe.
The PPF confirms it will implement (with only limited changes) the proposals regarding assessment of insolvency risk contained in its March 2017 consultation paper. We reported on the proposed changes in detail in our April 2017 update, including the PPF’s suggested changes to the scorecard system and the proposal to use alternative bases for assessing insolvency risk for different types of sponsors. The PPF is to proceed with these changes.
The PPF confirms it will consult separately on changes to its contingent asset certification documents, in line with plans outlined in the March 2017 paper. The March consultation proposals included a requirement for a “guarantor strength report” where a Type A contingent asset was of a “very high value”. The intention is that new standard forms will be consulted on “during October” and published in December 2017 alongside the finalised levy rules for 2018/19.
The PPF’s combined Policy Statement and Consultation Document states that new contingent asset agreements entered into for the 2018/19 levy year will be required to be on the new forms. For existing Type A (parent company guarantee) and Type B (usually security over property) agreements, the PPF is likely to require action to be taken for 2019/20, but not for 2018/19.
The imminent consultation will set out the PPF’s proposals as to how caps should operate and will also provide draft Type A and Type B contingent asset standard form agreements for comment.
We will report in detail on the final determination and on the new forms once they are available.
Sponsoring employers should now take the opportunity to:
Of interest to formerly contracted-out DB schemes is the publication on September 29, 2017 of HMRC’s latest edition of its Countdown Bulletin.
The Bulletin provides further detail for administrators of such schemes about the end of contracting-out and is available here.
Of general interest is the latest edition of HMRC’s Pension Schemes Newsletter, which was published on September 29, 2017.
The topics relating to pensions include:
View the Newsletter.
Of interest to all formerly contracted-out DB schemes is the publication on October 12, 2017, of the latest edition of HMRC’s Countdown Bulletin.
In the principal news item related to termination and transfer notices, HMRC notes that although contracting-out on a DB basis came to an end in April 2016, schemes continue to submit notices with end dates on or after 6 April 2016.
HMRC reminds scheme administrators that it stopped tracking contracted-out rights after 5 April 2016, after which date such tracking became the responsibility of the scheme administrator. However, schemes are reminded that HMRC must be advised of any movement or method of preservation occurring prior to 6 April 2016 by December 2018 at the latest.
View the Countdown Bulletin.
We reported in our August 2017 update that major reform is due in data protection legislation. The General Data Protection Regulation (GDPR) is an EU regulation which will take effect on May 25, 2018. This major reform will affect all organisations that hold personal data, including pension schemes. Although the UK intends to leave the EU, the provisions of the GDPR will be implemented by way of a new Data Protection Act to ensure legal continuity post-Brexit.
The Data Protection Bill was given a first reading in the House of Lords on September 13, 2017. This formality signals the start of the Bill's passage through the Lords. A second reading including general debate on all aspects of the Bill took place on 10 October 2017.
The Bill will replace the Data Protection Act 1998 (DPA) to provide a comprehensive legal framework for data protection in the UK supplemented by the GDPR until the UK leaves the EU. When the UK leaves the EU, the GDPR will be incorporated into UK domestic law under the European Union (Withdrawal) Bill currently before Parliament. Strong data protection laws enable UK businesses to operate across international borders and unrestricted data flows are essential to the UK post-Brexit.
The Bill will:
The Information Commissioner’s Office (ICO) will be given more power to defend consumer interests and issue higher fines of up to £18 million or 4 per cent of global turnover in case of the most serious data breaches.
Also in relation to data protection reform, the ICO is consulting on draft guidance on contracts and liabilities between controllers and processors under the GDPR, with comments being sought up to October 10, 2017.
The draft guidance contains practical guidance for UK organisations including examples and checklists. It frequently refers to further guidance which is in the pipeline.
The ICO has set out what must be included in the contract to ensure GDPR compliance including compulsory details about the processing, minimum contractual terms and what should be included as good practice. Although not required by the GDPR, the ICO suggests that the processor's direct responsibilities and liabilities under the GDPR are covered in the contract explicitly and the extent of any indemnity specified.
Any processing contracts in place on May 25, 2018 (when the GDPR takes effect) need to meet the new requirements. The ICO recommends businesses review existing and template contracts to ensure compliance. The ICO also advises ensuring that data processors understand the reasons for the contract changes and are aware of their new responsibilities and liabilities, and the consequences and penalties for non-compliance.
The ICO has issued an Overview of the GDPR, which includes a “What's new” section at the beginning. This is updated monthly to highlight new content and to indicate where specific guidance is forthcoming either from the ICO or from the Article 29 Working Party. Links will be published in the Overview to the guidance as it is available.
Section 44 of the Pensions Act 2014 came into force on September 18, 2017. This requires the Secretary of State to publish regulations that mandate the disclosure of information about the transaction costs in certain occupational and personal pension schemes.
The Pensions Act 2014 (Commencement No.11) and the Pension Schemes Act 2015 (Commencement No. 2) Regulations 2017 are the relevant regulations and are intended to clarify the transaction costs in such work-based money purchase schemes.
The regulations require details of transaction costs to be disclosed to workers who are auto-enrolled, or contractually enrolled, in their employer's pension scheme. Certain schemes will remain outside these compliance requirements, including public service schemes, executive schemes and those whose only money purchase benefits come from AVCs.
Also with effect from September 18, 2017, a similar duty is imposed on the FCA to make rules in relation to certain personal pension schemes, by inserting a new section 137FA into the Financial Services and Markets Act 2000.
On October 5, 2017, the Court of Appeal (CA) dismissed an appeal by Safeway Limited, against a decision by the High Court in February 2016, that normal pension age (NPA) in its defined benefit scheme was equalised at 65 for men and women by virtue of announcements to members made in September and December 1991. A formal rule amendment was not made until a new definitive deed was executed on May 2, 1996, but equalisation was expressed to have taken effect from December 1, 1991.
The High Court refused to grant a declaration to Safeway Limited confirming that NPA had been equalised at 65 with effect from December 1991. While announcements to members had been issued in 1991, the scheme’s trust deed was not amended formally to reflect equalisation until May 1996. Warren J found that the announcements were not effective to equalise NPA in December 1991. Following his previous decision in Harland & Wolff, Warren J held that the equalised NPA of 65 could not take effect retrospectively and therefore only applied from May 1996.
The issues in the High Court case were explored in depth in our March 2016 briefing.
In a decision which emphasises the need for pension schemes to follow the exact terms of the power of amendment in order to effect rule changes, the CA dismissed the employer’s first ground of appeal. It concluded that the High Court had been correct to hold that the scheme's power of amendment required rule changes to be implemented by deed, not by written announcement.
The second issue considered by the CA was whether the equal treatment requirements of Article 119 should override a clear power under the Safeway scheme rules to “level down” NPAs. Under EU law, following the Barber decision on May 17, 1990, scheme benefits are required to be “levelled up” so that the disadvantaged male members are granted a retirement age of 60 (rather than 65) during the “Barber window” which applies before equalisation is achieved by a formal rule amendment. In the Safeway scheme, the rules permitted retrospective levelling down, meaning female members’ NPA would be raised to 65 during the Barber window, and the CA decided that this was a question on which the ECJ should rule.
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