UK Public Service Pensions Update | July 2024

This month, we consider four developments following the UK general election and other changes and decisions of which funds should be aware.

If you would like to discuss any of the items in this newsletter, please contact one of the experts listed at the end of the update.

New government | New appointments and a change of name

Following the UK general election, Emma Reynolds MP has been appointed pensions minister – the parliamentary secretary at HM Treasury and the Department for Work and Pensions.

The Department for Levelling Up, Housing & Communities has been renamed the Ministry of Housing, Communities and Local Government. The deputy prime minister, Angela Rayner, has been appointed secretary of state for housing, communities and local government and Jim McMahon has been appointed minister of state for housing, communities and local government.

The Local Government Pension Scheme (LGPS) Scheme Advisory Board has shared its welcome letter to Mr McMahon. The letter asks for an early meeting to discuss the LGPS. Suggested topics for discussion include the gender pensions gap, measures to reflect recent case law on survivor benefits and to implement best governance practice, climate risk reporting, pooling and investment.

New government | King's Speech

The King's Speech, delivered at the State Opening of Parliament on 17 July 2024, brought news of three bills likely to be of interest to anyone involved in the running of a UK pension scheme, but no immediate suggestion of a new bill to replace The Economic Activity of Public Bodies (Overseas Matters) bill.

The background briefing notes for the King's Speech reveal plans for a new Pension Schemes Bill. It is possible that this bill will be expanded to include additional items, including any proposals coming out of the new government's pensions review that need primary legislation. At the very least, the bill looks set to continue work started by or under the previous government by:

• changing the law to remove the need to take a Pensions Ombudsman decision to the county court before starting recovery where a member disputes the recovery of past overpayments through deduction from future pensions payments;
• introducing the long-awaited legislative framework for commercial defined benefit (DB) superfunds;
• legislating for consolidator funds for small deferred defined contribution (DC) pots;
• introducing new value for money requirements for occupational DC schemes, with the message that if a scheme cannot provide value for money, it should consolidate with a scheme which can;
• placing duties on the trustees of occupational DC schemes to offer a retirement income solution or range of solutions, including default investment options, to their members; and
• extending the definition of "terminal illness" in Pension Protection Fund and Financial Assistance Scheme legislation to allow eligible members to receive a lump sum payment at an earlier stage.

Many of these proposals support the new and previous government's plans to move to a pensions landscape where there is a smaller number of larger schemes that could provide better outcomes for members through the highest levels of governance, the benefit of economies of scale and increased scope to invest in the UK economy (potentially higher-performing productive assets).

The Pensions Ombudsman has welcomed the proposal to reaffirm it as a "competent court" in overpayment recovery cases.

Funds will also be interested in plans for an audit reform bill and employment bill, both discussed in our Insight.

Most notable for LGPS funds was the absence of any immediate plan to introduce a new bill to replace The Economic Activity of Public Bodies (Overseas Matters) Bill, which fell away when Parliament was prorogued and then dissolved at the end of May.

New government | 'Fiscal lock' and date of the Budget

The King's Speech also confirmed plans to introduce a Budget Responsibility Bill to deliver on the Labour Party "manifesto commitment to introduce a ‘fiscal lock’, requiring every fiscal event which makes significant and permanent changes to taxation or spending to be subject to an independent assessment by the Office for Budget Responsibility …[to] ensure there will always be scrutiny of the Government’s fiscal plans."  The bill has started its passage through Parliament. (Press release here.)

We are expecting the date of the new government's first fiscal event – a Budget this autumn – to be announced before the start of the parliamentary recess (1 August 2024).

New government | Launch of pensions review

Building on the announcements made in the King's Speech, the new government launched its planned pensions review on 20 July 2024. The review includes a specific focus on the LGPS.

The Labour Party promised a pensions review in its election manifesto and its plan for financial services.

The launch statement suggests that the first phase of the review will focus on how to unlock investment in the UK economy from DC schemes, "including through further consolidation [of schemes] and encouraging [already] at-scale schemes to increase returns through broader investment strategies". The aim is "to grow the economy and build vital infrastructure by the end of the decade" and "help savers using these schemes build up better retirement pots as productive assets are more likely to provide higher returns".

The statement also notes that the LGPS "in England and Wales is the seventh largest pension fund in the world, managing £360 billion worth of assets". It says that "[p]ooling this money would enable the funds to invest in a wider range of UK assets and the government will consider legislating to mandate pooling if insufficient progress is made by March 2025." It also says that "[t]o cut down on fragmentation and waste in the LGPS, which spends around £2 billion each year on fees and costs and is split across 87 funds – an increase in fees of 70% since 2017, the Review will also consider the benefits of further consolidation."

The first phase of the review will report "in the next few months and consider further measures to support the Pensions Bill".

The second phase of the review will start "later this year" and "will consider further steps to improve pension outcomes and increase investment in UK markets, including assessing retirement adequacy."

The new pensions minister, Emma Reynolds, is quoted as saying: "Over the next few months the review will focus on identifying any further actions to drive investment that could be taken forward in the Pension Schemes Bill before then exploring long-term challenges to ensure our pensions system is fit for the future."

McCloud | Update from HMRC

HMRC has published a July newsletter in which it explains that the "calculate your public service pension adjustment service" will not reopen, as originally planned, in July 2024. It confirms that the service will instead reopen in September 2024, explains the reason for the slight delay and sets out the improvements which will be in place by then. The newsletter also calls for volunteers to help HMRC to develop these changes and sets out what members should do if they need to make a submission to HMRC before the service reopens.

Fair Deal | Updated actuarial assumptions

The Government Actuary's Department (GAD) has updated its guidance on staff transfers by adding the actuarial assumptions that will be used, until further notice, for broad comparability assessments for staff transferring between public service pension schemes carried out by GAD under the Fair Deal 2013 policy or the Fair Deal 2004 policy. The updated assumptions will be used for all cases signed by GAD on or after 1 June 2024.

Pensions Ombudsman | Recovery of overpayments

In a recent decision, the Pensions Ombudsman has set out what it will consider when deciding whether it is "equitable" to allow trustees to recover past overpayments by recoupment (reduction of future pension payments) and whether any delay by the trustees should prevent them from recovering all or part of an overpayment. The decision suggests several takeaway points which could also be relevant to public service pension schemes.

Public service schemes who discover that benefits have been overpaid in the past should consider taking legal advice.

Pensions Ombudsman | Time to update your signposting

The Pensions Ombudsman has released a factsheet in which it suggests up-to-date wording for schemes to use to "signpost" members.

In line with the Pensions Ombudsman's announcement (reported in the June edition of this newsletter) that it plans to change its operating model so as to require all complainants to exhaust a scheme's internal dispute resolution procedure (IDRP) before asking the resolution team or the adjudication team to investigate, the template wording in the factsheet makes it clear that complaints should be raised with a scheme first. It also includes up-to-date contact details for the Pensions Ombudsman.

Funds should arrange for the updated signpost wording in the factsheet (or wording similar to it) to be included in IDRP decision letters and posted on any scheme website. As the contact details given for the Pensions Ombudsman in any scheme leaflet or booklet are likely to be out of date (and references to use of the early resolution service may need adjusting), funds might also like to consider including an appropriate update entry in the next scheme newsletter.

Investment | Stewardship code and listing rules

The Financial Reporting Council (FRC) has announced significant changes to the UK Stewardship Code application process and committed to "five priority areas of review" as it continues its review of the code. "The FRC will launch a formal public consultation on the Code later this year, but given the significance of these changes, the FRC will be hosting a further phase of focussed engagement with our stakeholders throughout August and September on the five topics".

The same news item also describes five "immediate changes to significantly reduce the reporting burden on existing signatories to the UK Stewardship Code". Those changes "will apply for the next application window (31 October 2024) and the FRC will be writing to signatories individually to inform them of how these changes impact them."

Separately, the Financial Conduct Authority has published its final reforms to the UK Listing Rules, marking a significant shift towards a more streamlined and disclosure-based regime. These changes, which will come into force on 29 July 2024, aim to enhance the attractiveness of the UK as a destination for public listings while maintaining high standards of market integrity and investor protection. You can read more in our Insight.

Fixed protection 2012 | Decision on loss of protection

The First-Tier Tribunal Tax Chamber has dismissed the appeal of a member of the NHS Pension Scheme against HMRC's decision to revoke his Fixed Protection (FP) 2012 certificate.

The member obtained his FP 2012 certificate on 30 January 2012. He opted out of the scheme with effect from 1 February 2013, rejoined the scheme with effect from 1 March 2013 and then opted out for a final time with effect from 1 September 2013.

Under the fixed protection 2012 legislation as it stood at the time, one of the things triggering loss of protection was "benefit accrual" at any time on or after 6 April 2012. There would be "benefit accrual" if there was an increase in the value of a member's rights under the scheme. There will be an increase in the value of a member's rights if there is an increase in the “benefits amount” in any tax year which exceeds the “relevant percentage” for that tax year. 'The "relevant percentage" in the 2013-14 tax year was 2.2%. To measure the increase in "benefits amount", you compare the value of the member's pension arrangement at the start of each tax year with the value of the arrangement from time to time in the tax year.

The question in this case was what would count as the member's "final year’s pensionable pay" for the purposes of calculating his benefits under the 1995 scheme regulations. If (as the member argued) "year" in the relevant regulation meant 12 consecutive months, then his last year of pensionable employment would have ended on 31 January 2013, there would have been no "benefit accrual" and he would keep his fixed protection. If (as HMRC argued) it meant any combination of days, weeks or months that add up, in aggregate, to the equivalent of 12 months or 365 days, then it would be necessary to work backwards from 31 August 2013, there would have been "benefit accrual" and the member would have lost his protection.

The tribunal preferred HMRC's interpretation. “Final year’s pensionable pay” was defined in the regulations as “pensionable pay in respect of the member’s last year of pensionable employment, ending on the date the member ceases to be in such employment.” In that context, "year" must mean "a combination of periods totalling 12 months", working back from 31 August 2013.

For some (but not all) people, the rules around loss of fixed protection have recently been relaxed. However, this decision could still be relevant to other people who lost fixed protection before the rules were relaxed, or are in the group of people still at risk of losing protection now.

Part-time workers | Judicial pensions

The Employment Appeal Tribunal has dismissed an appeal by three circuit judges who were former fee-paid part-time recorders. Following the O'Brien litigation, the judges had been granted a pension in relation to their sittings as recorders. Their complaint related to the pension options available when they were appointed as circuit judges.

The claimants argued that, because of their part-time status they had been, and would in future be, treated less favourably in respect of their pension rights than their comparators, who were full-time circuit judges appointed to that office at the time the claimants were appointed assistant recorders.

When a new judicial pension scheme was introduced from 31 March 1995, the comparators were given a choice between joining the new scheme or remaining in their existing (and potentially more favourable) scheme. When the claimants were appointed circuit judges in 2004, 2006 and 2007 respectively, they only had the option of joining the new scheme.

The Employment Appeal Tribunal dismissed the judges' appeal. Among other things, the treatment the claimants "received in respect of their pension entitlement was, other than the discrimination that has already been remedied, not caused by their part-time working as recorders before becoming circuit judges".  Rather, they"were part of a group of circuit judges [appointed after 31 March 1995] whose misfortune was that their pensions were less favourable than those of their predecessors".

The Pensions Regulator | Corporate Plan for 2024-27

The Pensions Regulator has published its Corporate Plan for 2024 to 2027. Funds should note that priorities identified for the three-year period include "wider promotion of the general code", "high-quality delivery of administration services and … compliance with … pensions dashboards duties" and protecting savers from scams. The plan also lists priority actions and outcomes for 2024-25.