Pensions Essentials - March 2024

The Dashboard Regulations originally set out mandatory staging dates for schemes, depending on size and type which would have required the first schemes to connect to the dashboards in late 2023. The staging dates were removed in 2023 when it became apparent that the dashboard infrastructure might not be ready. They were replaced with a long-stop connection deadline of 31 October 2026 for all in-scope schemes. 

Trustees are also required to have regard to dashboard guidance issued by DWP. DWP has just issued guidance setting out a staged timetable for schemes to connect to the dashboard ecosystem and be able to process ‘find’ and ‘view’ requests. Whilst the timetable is not mandatory, DWP encourages trustees to follow it “unless there are exceptional circumstances which prevent them from doing so”. It explains that schemes connecting too close to the 31 October 2026 deadline could place undue strain on the infrastructure and face a greater risk of not being connected by the deadline. 

The Pensions Regulator has updated its guidance on the dashboards to refer to DWP’s staging guidance and says: “We expect schemes to adhere to the dates set out in [the] guidance.”

The connection timetable has different deadlines for schemes depending on size and type:

• Master trusts with 20,000 or more members and personal pension schemes should connect by 30 April 2025.
• DC schemes used for auto-enrolment with 5000 or more members and hybrid and DB schemes with 20,000 or more members should connect by 31 May 2025.
• All schemes with over 1000 members should have connected by 30 November 2025 (the exact deadline again varying by scheme size and type).
• Deadlines for schemes with between 999 and 100 members run between 31 January 2026 and 30 September 2026 (schemes with fewer than 100 members are exempt under the Dashboard Regulations).

The number of scheme members is to be determined at the scheme year end date falling between 1st April 2023 and 31st March 2024 and does not include pensioners.

Further guidance will be issued in due course on the process of connecting to the dashboard ecosystem including when to contact the Pensions Dashboard Programme and the onboarding process.

The Budget sets out the Government’s intention to:

• Introduce requirements for DC schemes to publicly disclose asset allocations, including UK equities. Once this data is available, the Government will consider whether further action should be taken if UK equity allocations do not increase beyond the current level of around 6%. 
• Continue to work with the Pensions Regulator and the FCA on a Value for Money framework. The FCA is due to issue a consultation in the spring which will require contract-based schemes to compare their performance, costs and other metrics against at least two other schemes managing over £10 billion in assets (this level may rise over time).  Legislation will follow to apply this to occupational DC schemes.  Where schemes persistently provide poor outcomes, the FCA and the Pensions Regulator will have powers to close a scheme to new employers and, where necessary, wind it up.
• Continue to explore a lifetime provider model for DC schemes and whether this could improve outcomes for members.

Some of the key changes made by the Pensions (Abolition of Lifetime Allowance Charge etc) Regulations 2024 are:

Statutory help with LTA limit provisions:  The Regulations include a new provision, effective up until 6 April 2029, modifying scheme rules which limit benefits by reference to the lifetime allowance or the lifetime allowance charge. An interpretative approach is adopted that disregards the changes made to these concepts by Finance Act 2024. Whilst the provisions are not straightforward, they do appear to result in benefit limits being retained by statutory override, up until 6 April 2029, where the rule in question refers to the lifetime allowance. However, there are some areas where the provisions may not provide a complete solution:

• Where a limiting rule refers to the lifetime allowance charge the position is not clear cut as changes have already been made under Finance (No. 2) Act 2023, removing the lifetime allowance charge in 2023/24. Depending on drafting and construction, these limits may no longer apply from 6 April 2024.
• The provisions do not address the scenario where scheme rules actively limit benefit accrual by reference to the loss of enhanced or fixed protection, so such rules may cease to have limiting effect.
• As yet, no statutory modification powers have been provided to enable schemes with restrictive amendment powers to hard code the effect of these provisions into their rules before 6 April 2029. The expectation is that there will be lobbying for such powers to be legislated for in good time before the expiry of the new provisions.

Pension commencement excess lump sum (PCELS):  As trailed in the February LTA newsletter, the “permitted maximum” for a PCELS is removed by the Regulations. The conditions for receiving a PCELS will therefore be very similar to those that currently apply for the lifetime allowance excess lump sum (LTAELS). There is an additional requirement for the PCELS to link to a pension, which wasn’t the case for the LTAELS, but this requirement is typically met. The forfeiture regulations are also amended to permit payment of PCELS. These changes mean that typically it should be possible to offer the same options around pension commutation to members with significant pensions savings before and after 6 April 2024. However, in relation to money purchase benefits, it may be that commutation of funds over the lump sum allowance would result in an UFPLS. This is because if a lump sum can be paid in another authorised form it is not a PCELS, and it will be possible to pay money purchase funds over the lump sum allowance as a (taxable) UFPLS from 6 April 2024. An UFPLS would trigger the money purchase annual allowance, but a PCELS does not. 

References in rules to LTAELS: The Regulations provide that rules referring to the payment of an LTAELS will be read as referring to the PCELS, expanding the existing provision which referred only to a member’s entitlement to an LTAELS. 

Continuity of the law: The Regulations provide for continuity of the law where statutory provisions are repealed but then re-enacted. For example, any certificates for enhancement factors which have already been issued will apply as they do now, once the relevant provisions have been re-enacted.

Transitional provision for lump sums: The Regulations include a transitional provision so that where a member became entitled to a LTAELS before 6 April 2024 but it is paid on or after that date, the pre 6 April 2024 tax rules apply. 

Event reporting: As announced in the December LTA Newsletter and Newsletter 155, the Regulations amend Event 24: 

• Lump sums paid to a member (such as pension commencement lump sum (PCLS) or a serious ill-health lump sum) will only have to be included on the Event Report where the lump sum exceeds either of the member’s available lump sum allowances or would have exceeded them if the member had not had an enhanced allowance due to “any enactment”. Schemes should be checking the available allowances when paying benefits in order to operate PAYE properly in any event, so this is a sensible landing place. Enhancement of allowances might be due to enhanced, primary, fixed or individual protections or enhancement factors but also covers protection of greater than 25% lump sums (scheme specific lump sum protection) – a protection that schemes have not previously been required to report on in relation to PCLS.
• Lump sum death benefits that are “relevant benefit crystallisation events” (RBCEs) will only have to be reported where the aggregate of lump sums paid on the member’s death exceeds the standard lump sum and death benefit allowance (LSDBA) (£1,073,100). This ties in with the approach that the personal representatives (PRs) will continue to provide information on death benefit lump sum payments to HMRC, and HMRC will continue to calculate and assess income tax due from beneficiaries where the allowance has been exceeded, so schemes will not have to check available LSDBA on a death. Schemes will be required to report on all these RBCEs to PRs - all death lump sums are RBCEs except charity lump sum and trivial commutation lump sum death benefits. 

Other changes: The Regulations make detailed changes relating to trivial commutation and winding-up lump sums, the operation of the overseas transfer charge and allowance, enhanced and primary protection and transitional tax-free allowances, with the aim of making them work as intended under the new regime. Amendments are also made to the calculations for scheme specific lump sum protection, but HMRC acknowledges that the calculations still do not work as intended and further changes are expected.

Newsletters: The March LTA Newsletter includes a raft of detailed frequently asked questions both on the topics subsequently covered in the Regulations, and on matters such as the transitional arrangements where benefits have already been crystallised under the LTA regime. A further newsletter with further FAQs is expected this week.

More amending regulations: HMRC is expecting to publish further information on amending regulations shortly which are expected to have retrospective effect to that 6 April 2024.

Public sector consolidator: The Government confirmed in its recent consultation on options for DB schemes that it intends to establish a public sector consolidator administered by the PPF by 2026 which would provide an alternative end-game for schemes that are “unattractive to commercial consolidation providers” and enable “greater investment in high growth UK assets”. More information about the consultation is set out in our February edition of Pensions Essentials.

The PPF has now published its preliminary view on how a consolidator operated by it could be structured. It envisages that key design features would include:

• Legal separation from other funds operated by the PPF with no cross-subsidy;
• Operating on a non-sectionalised basis to maximise efficiencies and economies of scale;
• An aim to run-on and pay all benefits out (rather than acting as a bridge to buy out);
• A requirement to accept transfers from all schemes that can meet its terms;
• Providing members with the actuarial equivalent of their full scheme benefits through a number of standardised benefit structures;
• Providing at least the level of security expected of commercial consolidators. The PPF believes the Government would be the most appropriate provider of that buffer and could, in return, have some input into the investment strategy; and
• Allowing entry from schemes with a deficit if the sponsoring employer enters into a payment schedule to fund any deficit over time. If the employer becomes insolvent before completing scheduled payments, member benefits would be reduced to reflect this.

Debenhams Pension Scheme transfers to Clara: The DB consolidator, Clara has announced its second transaction.  

10,400 members of the £600million Debenhams scheme will be transferred to Clara. Members will receive their full benefits along with £4million in back-payments to make up for reductions in benefits during the PPF assessment period. Clara will provide £34million of new capital to increase the security of benefits. It is anticipated that benefits will be bought out in 5 to 10 years. The trustee said it chose Clara because insurers were not able to deliver full benefits to members. 

The Debenhams scheme has been in PPF assessment period since 2019. As the scheme funding level is above the level required to provide PPF benefits (broadly 90% or 100% of scheme benefits depending on whether or not a member was at normal pension age at the beginning of the assessment period), the scheme will not enter the PPF. Legislation now requires it to wind-up.   

The trustee of the Debenhams scheme was supported by the PPF in considering which options outside of the PPF would provide the best possible outcome for members. The PPF recently confirmed that the PPF+ Advisory Panel will support overfunded schemes in assessment and provide transaction advice. It also said that because the PPF completes rigorous checks on schemes during an assessment period, including identifying and cleansing data issues, insurers and commercial consolidators can treat the information they receive about the scheme with a high degree of confidence, which should lead to a more efficient transfer of the scheme.