Top of the agenda
UK pension schemes that invest in French companies may be entitled to a tax refund following a recent European Court of Justice ruling
The European Court of Justice has given its decision in two linked cases in relation to French withholding tax provisions levied on dividend payments to foreign investment funds in Santander Asset Management SGIIC SA v Directeur des résidents à l'étranger et des services généraux and others (C-338/11 to C-347/11).
Under French tax law, dividends that are paid to investment funds which invest in French companies have a 15% to 25% withholding tax applied to them. However, the withholding tax is not applied to French funds.
The European Court of Justice has held that the withholding tax breaches European Union Law rules under the Treaty on the Functioning of the European Union ("TFEU") on the free movement of capital between member states. The ECJ ruled that the rules of the TFEU precluded member states from putting in place such withholding tax provisions and that those provisions could discourage non-residents from investing in companies established in France as well as discourage French investors from investing in overseas companies. The cases will now be returned to the French Courts to implement the ECJ's ruling.
The result of the ruling is that UK pension schemes will no longer have to pay more tax on dividends from investments in French companies than their French counterparts. Pension funds that have invested in French companies may also be able to claim a refund of tax paid. The press has suggested that UK pension funds could gain anything between £400-£500 million by way of refunds. However, it is likely that the French Courts will take some time to decide exactly how that compensation is to be paid.
Auto-enrolment – regulations finalised in relation to self-certification for DC schemes
More auto-enrolment regulations due to come into force on 1 July 2012 have now been issued. These include regulations in relation to the self-certification regime for defined contribution (DC) schemes.
The minimum contributions which must be made under a DC scheme in order for the scheme to meet the auto-enrolment "quality requirements" are based on a percentage of "Qualifying Earnings". Qualifying Earnings is widely defined and includes salary, commission, bonuses and overtime. This means that for a DC scheme automatically to satisfy the requirements, its contributions must be based on Qualifying Earnings, whereas under most DC schemes, employer contributions are based on basic pay. In recognition of this, the Government has introduced provisions allowing employers to self certify that their DC scheme meets the qualifying requirements.
Under the regulations issued, the qualifying requirements will be met if an employer satisfies one of three different sets (or tiers) of requirements based on the levels of employer contributions to its scheme – details of the tiers are set out in the regulations.
Employers wishing to use their existing DC schemes for auto-enrolment purposes will welcome the clarification around the self-certification requirements. For further information on self-certifiying your DC arrangement or any other aspect of the auto-enrolment requirements, please speak to your usual contact in the pensions team.
High Court clarifies the extent to which liabilities for early retirement benefits transfer to a buyer of a business under TUPE
In The Proctor & Gamble Company v Svenska Cellulosa Aktiebolaget and another  EWHC 1257 (Ch), the High Court has ruled on certain issues concerning the extent to which liability to provide early retirement benefits may transfer under TUPE to a buyer of the business or on a change of service provider. For our earlier e-alert on the decision, click here.
High Court confirms approach to adopting pensionable pay caps through contractual agreements with employees
In Bradbury v British Broadcasting Corporation  EWHC 1369 (Ch), the High Court has confirmed that the BBC's introduction of a cap on increases to pensionable pay through contractual agreement with its employees was effective. Whilst the decision does not tell us much that is new, it upholds the approach adopted by many employers and as such provides welcome support in this area. For our earlier e-alert on the decision, click here.
Member's appeal against HMRC on late registration for enhanced protection granted
In Irby v Revenue & Customs  UKFTT 291 (TC), the First-Tier tribunal (Tax Chamber) has found that a retired corporate financier had a reasonable excuse for delaying registering for enhanced protection against the lifetime allowance.
The Lifetime Allowance (LTA) was introduced by the Finance Act 2004 and relates to the total amount of pension savings that an individual can make within a registered pension scheme during their lifetime. If the LTA is exceeded, the excess is subject to a tax charge. Enhanced protection allowed a member to protect all the benefits he had built up before 6 April 2006 so that the LTA is disapplied in relation to him and there is then no limit on the total value of accrued benefits that the member can take.
The deadline for registering for enhanced protection was 6 April 2009. However, under regulations, HMRC could accept late registration if an individual had a "reasonable excuse" for doing so and gave the notification "without unreasonable delay".
In this case, HMRC refused to accept Mr Irby's notification for enhanced protection 17 months after the April 2009 deadline for claiming enhanced protection.
Mr Irby had set up a self-invested personal pension after retirement and had discussed enhanced protection with his financial advisor from UBS AG Wealth. He had understood that UBS would take care of his application for enhanced protection. In January 2009, there was a further meeting where the advisor agreed to check whether UBS had made the application. Mr Irby's understanding of the situation was that the advisor would only get in touch if there was a problem.
In May 2010, the trustee of Mr Irby's plan contacted Mr Irby to advise him to obtain a certificate in relation to fixed protection and after contacting UBS and then HMRC it became apparent that no certificate had been issued.
The Tribunal acknowledged that a 'more prudent' person could have made himself aware of the enhanced protection deadline and chased their financial advisors in relation to this. However, it also said that "the categories of reasonable conduct encompass more than one course of action" and concluded that the actions that Mr Irby took were still the actions of a reasonable person. As a result, Mr Irby had a reasonable excuse for late notification. The Tribunal ordered HMRC to consider the information provided in Mr Irby's late notification for enhanced protection. The deadline for claiming fixed protection against the LTA was 5 April 2012. However, unlike with enhanced protection, there appears to be no legislative easement for making late applications for fixed protection and so the case has limited relevance for late applications for fixed protection.
Court of Appeal to hear bankruptcy case
In Raithatha v Williamson  EWHC 909, the High Court had determined that the pension, under a personal pension arrangement of a bankrupt, which the bankrupt is entitled to, but has not yet drawn, can be the subject of an income payments order (IPO) under the Insolvency Act 1986. Mr Williamson had opposed the application on the basis that his as yet undrawn pension was not income for the purposes of the Insolvency Act 1986 provisions and so could not be the subject of an IPO. He argued that at this stage all that he had was a right to elect to take his pension and that the Court did not have the power to compel him to draw his pension under the relevant Insolvency Act provisions. The Court held that the income from the undrawn pension could be made the subject of an IPO.
An appeal against this High Court decision is due to be heard between 3 September 2012 and 2 November 2012.
Pensions Ombudsman's determinations
Member receives £1,500 compensation for distress and inconvenience suffered as a result of being underpaid her pension
In Mckinney (84793), the Deputy Pensions Ombudsman has partially upheld a complaint by a beneficiary in relation to underpayments of her spouse's pension that had lasted 17 years.
The scheme administrators first informed Mrs McKinney of the underpayment totalling nearly £50,000 in April 2008. The trustees paid these arrears, along with interest of nearly £23,000, and also offered £300 for Mrs McKinney's distress and inconvenience. Mrs McKinney refused this later amount describing it as "insulting", claiming instead that her life would have been different if the error had not occurred. She claimed that she had to sell her apartment in Spain, downsize her home, cancel her tennis club membership and reduce her level of medical insurance due to the underpayments. Being over 70 now, she claimed that she could not use the arrears as she might have done when she was younger. She also claimed that having to negotiate with HMRC about the tax implications of this large payment had been a stressful experience.
The Ombudsman found that there was no direct financial injustice (the arrears and interest payments having been made) and also that the underpayments would not have made any difference to the sale of Mrs McKinney's properties in Spain or the UK. However, the Ombudsman did find that a person will suffer a significant degree of loss of enjoyment and of lifestyle if they are paid in later years amounts to which they were entitled when they were younger and more active – Mrs McKinney's cessation of her tennis club membership was an example of this – and that this amounted to non-financial injustice at the higher end of the scale. The £300 offered as compensation by the trustees, whilst not insulting, was at the lower end of the scale. The Ombudsman awarded £1,000 in relation to the loss of enjoyment of her pension and £500 as redress for the inconvenience and distress suffered for having to settle her tax liability.
An employer may withhold an ill-health early retirement pension because the member has not exhausted all treatment possibilities providing supporting evidence is obtained
In Colclough (84795), the Pensions Ombudsman has held that a local authority was incorrect to withhold paying an ill-health early retirement pension to a member of the Local Government Pension scheme ("LGPS") on the grounds that the member had not exhausted all treatment possibilities.
The Council, in order to determine whether the employee was entitled to an incapacity pension had, under the rules of the LGPS, to determine whether the member could be considered "Permanently Incapacitated". A certificate from a suitably qualified independent registered medical practitioner had to be obtained before the Council could make this decision.
The Council had provided no satisfactory evidence to show that they had adequately investigated possible future treatments before making their decision, which was particularly flawed in light of the opinion of the member's rheumatologist that none of the available treatment options were likely to cure her.
The Ombudsman remitted the decision back to the local authority, with directions to obtain any further reports and evidence it might need. The Pensions Ombudsman also confirmed that a medical practitioner does not have to personally examine a member before giving their opinion in relation to a member's qualification for an ill-heath pension; it is enough for the practitioner to review the member's medical history.
The Pensions Regulator
Pensions Regulator's corporate plan for 2012-2015
The Pensions Regulator has issued its sixth corporate plan, identifying three strategic priorities for the period 2012 to 2015 around which the Regulator will focus its operations. We cover the key points below.
Reducing risks to DB scheme members
The Regulator has identified the economy as the biggest challenge to defined benefit ("DB") schemes with a number of factors coming together to deepen scheme deficits. The Regulator intends to develop a more segmented approach to the DB market, focussing on schemes that fall into more risky segments e.g. schemes with a very weak employer covenant.
The Regulator is keen to help employers and trustees work through issues in this difficult economic climate. The Regulator welcomes innovative solutions in this area, such as new de-risking products and sophisticated funding solutions. Trustees and advisors are reminded that they should be mindful of arrangements that seek to remove the covenant from the scheme, and guard against scheme abandonment and trustees are also reminded that they need to be aware of the moral hazard risk. The Regulator has also indicated that it is likely to revise its code of practice on scheme funding.
The Regulator intends to work with the European Insurance and Occupational Pensions Authority ("EIOPA") to ensure the right outcome is achieved in Europe for UK pension schemes and also intends to be fully involved in the impact assessment being undertaken on the funding proposals contained in the review of the IORP Directive. For more about the review of the IORP Directive, click here and for EIOPA's response to the consultation, click here.
Reducing risks to DC scheme members
The DWP estimates that as a result of automatic enrolment, the number of individuals saving more or saving for the first time will increase by 5-8 million. Additionally, the closure of DB schemes will result in an increase of DC membership. The Regulator re-iterates its "six principles of design and management of a good DC scheme" published in December 2011 and states that for large employer sponsored schemes with over 1,000 members it will be focusing on self-regulation in relation to these principles. The Regulator will work with the industry to agree the criteria and standards for administration and governance that underpin the principles.
The Regulator's aim in this area is to "establish a pro-compliance culture by supporting employers and making it as straight forward as possible to comply, but also making it clear that wilful or persistence non-compliance will result in Regulatory action being taken". The Regulator also emphasises that employers should have good systems of administration in place to enable the timely payment of contributions and information so that it is clear what contributions are due and paid to schemes. The Regulator is due to publish guidance on maintaining contributions this year.
The Regulator's corporate plan may be viewed here.
Pension Protection Fund
New leaflet issued for certifying block transfers for the 2012/13 levy year
The deadline for notifying the Pension Protection Fund of block transfers of liabilities to other schemes that took place before 1 April 2012 is 5 pm on 29 June 2012. The main purpose behind requiring block transfers to be certified is that schemes that had transferred all their liabilities are not charged a PPF levy, and that the liabilities are correctly recorded in the receiving scheme so that their levy takes account of them.
The PPF has issued a step-by-step leaflet that illustrates the steps schemes need to take when reporting block transfers using the Regulator's Exchange system, the online system for notifying the Regulator of details about pension schemes. Broadly, the transferring scheme is responsible for initiating the process by entering details of the receiving scheme and the value of the liabilities being transferred. The exchange system will then email the receiving scheme, which can accept, reject or modify the transfer. If any modification occurs, Exchange will e-mail the transferring scheme which will also be given the option to accept, reject or modify, and this process will continue until the transfer has either been accepted or rejected. The leaflet may be found here.
QROPS: HMRC delists more than 300 Guernsey QROPS
On 6 April 2012, regulations came into force that tightened up the Qualifying Recognised Overseas Pension Schemes (QROPS) regime. The regulations were intended to strengthen the conditions that a scheme has to meet to be a QROPS and the information and reporting requirements for a QROPS. Further measures were announced in the Budget this year for changes in legislation to strengthen reporting requirements and powers of exclusion relating to QROPS to support the changes introduced under the recent regulations. For more about these changes, click here. Following the recent regulations, changes were made by Guernsey authorities to its tax legislation which HMRC regard as attempts to "sidestep" the regulations. In response, HMRC has delisted more than 300 Guernsey QROPS by introducing regulations that broadly require that for a Guernsey based pension arrangement to qualify as a QROPS, it must be closed to non-residents of Guernsey. Any scheme based in Guernsey that is open to non-residents, therefore, has now lost its QROPS status.
HMRC has given guidance to the effect that any transfers made into a Guernsey scheme before it lost its QROPS status will continue to be a recognised transfer and so will not give rise to an unauthorised payment charge. Once the scheme has lost its QROPs status, however, any transfer from a UK pension arrangement will attract an unauthorised payment charge of 55%.
Minor amendments added to the Finance Bill 2012 in relation to tax regime for asset-backed funding
As discussed in our January e-bulletin (click here), the Finance Bill 2012 contains measures amending the regime for tax relief available to employers that enter into asset-backed funding (ABF) arrangements. The changes are designed to ensure that the tax relief received by employers who put ABF arrangements in place reflects accurately the payments received by the scheme. The Government has recently announced two minor amendments to the provisions to clarify how transitional provisions in relation to how the new rules will work.
Where a contribution to an asset-backed contribution arrangement was paid before 22 February 2012, the time allowed for the first payment to the scheme will be extended from one year to 18 months after the day on which the advance was paid. Where a contribution is paid after 22 February 2012, upfront relief will only be available if payments are paid within one year to the next working day.
HMRC may change its approach to salary sacrifice in light of auto-enrolement
The possible incompatibility of salary sacrifice arrangements and the auto-enrolment provisions has been a concern in the industry for some time now. In particular, HMRC rules impose financial penalties on employees who terminate their salary sacrifice arrangements unless the termination takes place on a permitted date. This means that employees automatically enrolled in a salary sacrifice arrangement who invoke their statutory right to opt-out within a month could fall foul of HMRC rules, and therefore face financial penalties, if their opt-out period does not coincide with HMRC's permitted dates. Following industry pressure, we understand that HMRC may review and amend their salary sacrifice guidance to address these issues.
TPR publishes report on the regulated apportionment arrangement agreed with British Midland Airways
The TPR has published its report on a regulated apportionment agreement agreed with the British Midland Airways Limited Pension and Life Assurance Scheme. The scheme, which had approximately 3,700 members and an estimated funding deficit of £450 million on a buy-out basis, had a single employer, British Midland Airways Limited, which was part of the BMI Group wholly owned by Deutsche Lufthansa AG. Under the terms of the regulated apportionment agreement, the scheme will enter the PPF with a final payment of £16 million, and an additional voluntary payment from Lufthansa AG of £84 million. This voluntary payment will be used to provide members with additional benefits in light of their reduced benefit entitlement following the scheme's entry to the PPF. We will produce a more detailed update on the report shortly.