This article considers recent developments in relation to the new pensions freedoms, determinations and guidance from the Pensions Ombudsman and the Pensions Regulator, and HMRC’s latest newsletter.
Chancellor consults on aspects of the new pensions freedoms
The consultation was announced during Prime Minister’s Questions on 17 June 2015 by George Osborne, Chancellor of the Exchequer, in reaction to concerns that some insurance companies ‘are not doing their part to make those freedoms available’. HM Treasury shortly followed up with a press release, stating that the consultation will be launched in July 2015 and will consider:
- options to address any excessive early exit penalties, for example legislation imposing a cap on these charges for those aged over 55; and
- how to make the process for transferring pensions from one scheme to another quicker, easier and cheaper.
In support of this consultation, the Financial Conduct Authority (FCA) will gather evidence of prevalence and level of exit fees and charges across the industry with a view introducing a means of proportionate intervention. It will also consider if there are any unfair barriers facing those who wish to transfer. The FCA begun this process in June 2015 and it will conclude in August 2015.
However, the Association of British Insurers (ABI) hit back at these concerns in a press release, instead attributing the lack of clarity and process to the ‘rushed timetable’ imposed by the government. The ABI further stated that the ‘vast majority’ of those eligible to use the new freedoms will face no early exit fees.
Baroness Ros Altmann delivers maiden speech
On 18 June 2015 the new Minister for Pensions delivered her maiden speech in the House of Lords. Baroness Altmann used this opportunity to set out her priorities, which she summarised as an aim to ‘improve people’s understanding of and engagement with pensions’ and ’ensure they are fairer and sustainable’. Her goal is to turn Britain into a nation of savers, addressing head on the funding crisis that increasing life expectancy is causing. She noted the positive steps that had already been made in terms of the new state pension, automatic enrolment and the new pension flexibilities, while acknowledging that ’there is much to do’ and that they cannot afford to be ‘complacent’ as the 'hardest work is just starting'.
The full speech can be read here.
Industry reacts to consultation on second annuity market
Following on from the Government’s consultation, which focused on how this new market could be launched and encouraged, both the National Association of Pension Funds (NAPF) and the ABI have published their reactions. Despite Ros Altmann’s enthusiasm for the initiative, those in the industry have expressed some concern. Former Pensions Minister Steve Webb, who is responsible for the idea, acknowledged himself that a ‘good regime’ of consumer protection is required.
NAPF has acknowledged that for a small amount of people this option would be appropriate, but has expressed concerns that creating the market as the government envisages will be ‘so expensive so as to greatly reduce the value available to most annuitants.’ Further, it is also dubious as to who the buyers of annuities will be. Having conducted a survey of its members the results revealed a very limited appetite, with 67% of defined benefit schemes stating that they were ‘not interested’.
The ABI is largely supportive of the proposals and the added flexibility this will provide to consumers, but has highlighted the importance of an ‘appropriate framework’ being put in place ‘that allows a market to develop’ and the challenges and risks that this poses. A key concern is that this process is not rushed. This is no surprise given the views they have expressed regarding the pension flexibilities.
Ombudsman determination delivered on pension liberation (Hughes (PO-6375))
The Pensions Ombudsman has dismissed Mr Hughes' complaint against Aviva, and stated that it is reasonable to allow a pension provider time to update its procedures and prepare new literature to reflect guidance issued. Mr Hughes submitted that Aviva failed to make adequate checks on the scheme that he had requested to transfer his benefits to, resulting in him being unable to locate £37,893.24, despite the fact that, at the relevant time, the scheme had satisfied the requirements in place in order for the transfer to be approved. Shortly after his request to transfer, The Pensions Regulator (TPR) had published guidance regarding pension liberation. The transfer was completed after the guidance had been published.
However, the Ombudsman has determined that the fact Aviva did not follow the guidance was not maladministration, largely due to the timing of his request and Aviva’s response. He stated that he could not ‘apply current levels of knowledge and understanding of pension liberation or present standards of practice to a past situation’. Further, Mr Hughes' statutory right to transfer overrode any duty of care that Aviva owed to him. Although the Ombudsman expressed his ‘great sympathy’ for Mr Hughes, he came to the conclusion that there had been no administrative failure by Aviva in complying with his transfer request, either in relation to its legal obligations or good industry practice.
Ombudsman publishes guidance on damages for non-financial injustice
Anthony Arter, the new Pensions Ombudsman, has published a factsheet setting out when and why remedies will be awarded to complainants who have suffered non-financial injustice due to maladministration. Non-financial injustice is defined as ‘inconvenience’ or ‘time and trouble’ or ‘time and bother’ which was both avoidable and identifiable at an earlier stage of their complaint, and ‘distress’, for example concern, anxiety, anger, disappointment etc. and this can vary from mild irritation, to anxiety that requires medical treatment. However, the injustice must be significant for an award to be made and the Ombudsman states that though it will ‘take into account the particular circumstances of the individual’ the distress claimed for must be 'justifiable or foreseeable or credible'. It is hoped that this guidance will produce consistent and broadly comparable rewards for similar complaints. Significantly, the starting point for a monetary award (rather than just an apology) has been set at £500, and can range up to £1,000 or more. In cases where there was ill-health or lifestyle choices were affected there has been a recognised shift towards awarding higher damages.
This is something that trustees of schemes should be aware of when dealing with complaints, particularly, for example, if they are aware that the complainant is prone to mental health problems (on the basis that it is foreseeable and credible that they would suffer a high level of distress and may be awarded a higher reward). However, it should be noted that awards are not to be calculated in direct proportion to time spent or based on fees that a professional may have charged. Further, the factsheet states that the Ombudsman will not ‘rob Peter to pay Paul’ and as a result, where the compensation will be paid from scheme resources but the scheme is in wind-up or in the process of entering the Pension Protection Fund (PPF) this will be taken into account when setting the level of damages.
Carrington Wire Limited: contribution notice issued against an individual
The Pensions Regulator (TPR) has published a report under section 89 of the Pensions Act 2004 (the Act), detailing its investigation into the Carrington Wire Defined Benefit Pension Scheme (the Scheme) and explaining the Determination Panel’s decision to issue a Contribution Notice (CN) against the sole director of a UK based company. Mr Richard Williams bought Carrington Wire Limited (CWL) for a nominal sum from its Russian owners, the Severstal Group, in 2010. As a result, he is required to pay £382,136 into the Scheme as the transaction was deemed by the Panel to fall foul of the ‘main purpose’ and ‘material detriment’ tests contained in sections 38 and 38A of the act. Under these tests, if the main purpose or one of the main purposes of the act or omission was to reduce or avoid a statutory employer debt under s75 Pension Act 1995, or the act or omission is materially detrimental to the likelihood of any member receiving their full benefits, then TPR may issue a CN against a company or individual. Emails between the parties made it clear that the deal struck was constructed in order to circumvent a guarantee made by Severstal to the Scheme upon its acquisition of CWL in 2006 which safeguarded members’ benefits. The determination provides a useful analysis of the CN regime and the scope of the ‘main purpose’ test.
This is the latest example of TPR flexing its muscles in terms of its anti-avoidance powers – but questions have been raised as to how powerful it really is. TPR acknowledged earlier this year that they were left with little choice but to accept an offer from Severstal for £8.5 million, due to the difficulty in enforcing a debt order in Russia and the costs involved. As this is less than a third of the amount required to satisfy the Scheme’s £27 million deficit, this has resulted in the Scheme still entering the PPF and members receiving compensation rather than their full pension entitlement. It is clear that in this case a pragmatic decision was required, though disappointment on behalf of the members and trustee is understandable given the size of Severstal.
HMRC temporarily suspends ROPS list
On 17 June 2015, HMRC suspended the recognised overseas pension schemes (ROPS) notifications list in order for it to be reformatted. Today, (1 July 2015) it has been republished. The tax treatment of a transfer from a registered pension scheme to an overseas pension scheme depends on whether the transfer qualifies as a ‘recognised transfer’ (section 169, Finance Act 2004). A transfer will be a recognised transfer if the overseas pension scheme fulfils all the conditions necessary for it to be a qualifying recognised overseas pension scheme (QROPS). If it does, the transfer will be an authorised member payment and avoid the punitive tax repercussions of an unauthorised payment.
The need to reformat the list was as a result of the new Pension Age Test which has applied since 6 April 2015 and provides that pension funds transferred from a registered scheme to a QROPS (to the extent that they have received UK tax relief) must be paid no earlier than normal minimum pension age (age 55) unless the 'ill-health condition' is met (regulation 3(6A) The Pension Scheme (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Scheme) regulations 2006 (SI 2006/206)).
Any schemes that were previously on the list that do not satisfy this test have been removed. Transfers to such schemes will not be tax-free. However, any individuals who have already transferred to a scheme that has now ceased to be a QROPS will be subject to UK tax on the same basis as if the scheme had remained a QROPS. The latest edition of the HMRC pensions newsletter states that the updated list contains more detailed and accurate information. The newsletter also clarifies that the ROPS notifications list is not a list of QROPS, but rather it is a list of overseas entities that have notified HMRC that they are a ROPS and made certain reporting commitments. Members and schemes should seek to satisfy themselves that a scheme they are considering transferring into is a QROPS through the various resources available, this list being only one of them.