2016 Budget Announcement: impact for pensions

Earlier this month, the Chancellor delivered the Budget. Key pensions related announcements were:

  • from April 2017, individuals under the age of 40 will be able to contribute GBP4,000 a year to a "Lifetime ISA". The government will contribute an additional 25 percent of contributions made before the individual reaches age 50.The Lifetime ISA is intended to help younger people save more flexibly by allowing funds to be drawn tax-free in certain circumstances (e.g. to help with a first time property purchase up to a value of GBP450,000).Funds drawn for other purposes will be subject to a 5 percent charge and will forfeit the additional contributions made by the government along with any interest;
  • legislation will be introduced to increase the tax and NICs relief available for employer-arranged pensions advice from GBP150 to GBP500. The new exemption will ensure that the first GBP500 of any advice received is eligible for the relief. It will be available from April 2017;
  • the government is considering limiting the range of benefits that attract income tax and NICs advantages when provided as part of salary sacrifice schemes. However, the government’s intention is that pension saving, childcare, and health-related benefits such as Cycle to Work should continue to benefit from income tax and NICs relief when provided through salary sacrifice arrangements;
  • the government will consolidate pension flexibilities to ensure that these are working as intended. This will include:
    • re-aligning the tax treatment of serious ill-health lump sums with lump sum death benefits, so that they can be paid tax-free (when the provider is content to do so) when someone aged under 75 has less than a year to live but has already accessed their pension;
    • making serious ill health lump sums taxable at an individual’s marginal rate when paid in respect of individuals aged 75 and over;
    • legislating to convert dependants’ flexi-access drawdown accounts to nominees’ accounts when dependants turn 23, so they do not have to take their funds as a lump sum taxed at 45 percent;
    • legislating to allow defined contribution pensions already in payment to be paid as a trivial commutation lump sum, where total pension savings would be under GBP30,000;
  • the government has said that it will ensure the industry designs, funds and launches a pensions dashboard by 2019 to allow individuals to view all their retirement savings in one place; and
  • there will be a consultation on introducing a Pensions Advice Allowance over summer 2016, which will allow people to withdraw GBP500 tax free before the age of 55 from their defined contribution pension to redeem against the cost of financial advice.

The full Budget can be read here: Full budget.

 Information requirements regarding the tapered Annual Allowance have been finalised

The Registered Pension Schemes (Provision of Information) Regulations 2016 require scheme administrators to provide a pension savings statement automatically each year.The Regulations have now been amended to reflect the introduction of the new tapered reduction in the amount of the Annual Allowance for individuals from 6 April 2016.

A key point to note is that a scheme administrator will only be required to provide a pension savings statement in respect of the 2015/16 tax year if the member's pension input amount exceeds GBP80,000 for that year or exceeds GBP40,000 for the post-alignment tax year.

Representative Beneficiary successful in equalisation claim with an estimated value in excess of £100 million

On 29 February 2016, judgment was handed down in Safeway Ltd v Newton in which the High Court has held that European Union law prevents the retrospective levelling down of pensions (by increasing the Normal Pension Age ("NPA") of women to 65).

In this case, an announcement was issued in December 1991 introducing an NPA of 65 for all members.  The amendment power permitted amendment by Supplemental Deed, with such changes taking effect from "the date of such Deed or the date of any prior written announcement".  A Supplemental Deed recording the equalisation changes was entered into in May 1996.

It was decided that, although a retrospective amendment was permitted by the rules of the scheme, the 1991 announcement did not, of itself, constitute an effective change for equalisation purposes.  The 1996 Supplemental Deed was “part and parcel of a set of arrangements introduced because of, and designed to give effect to, the equal treatment requirement under article 119” and so, from an EU equalisation perspective, could not apply from a retrospective date.  As a result, the 1996 Supplemental Deed was not effective to equalise NPAs at 65 prior to the date on which it was made.

This reflects earlier decisions in this area and demonstrates that the retrospective levelling down of benefits will be viewed as incompatible with EU (and UK) equality law.  

We understand that this case is being appealed.

Government publishes response to consultation on valuation of pensions with a guaranteed annuity rate                                                                        

The consultation (issued last November) sought views on certain technical changes to pensions legislation and on the valuation of pensions with a guaranteed annuity rate.

A number of the proposed changes will come into force from 6 April 2016.  The changes include the introduction of a requirement for occupational pension schemes to issue members with a generic "retirement risk warning" when they decide to take their benefits and also clarify the eligibility of schemes to enter the Pension Protection Fund if a sponsoring employer cannot have a qualifying insolvency event.

The response to the consultation made clear that the current system of valuations in respect of defined contribution or cash balance benefits with a guaranteed annuity rate needs to be simplified.  The government will consult on draft regulations to achieve this, one option being that, for the purposes of determining whether the GBP30,000 advice requirement threshold has been reached, the value of the benefits is treated as equal to the transfer payment that would be available if the member decided to transfer.

Click here to read the full response.

Government publishes response to the consultation on regulations to simplify automatic enrolment processes and reduce burdens on employers 

We reported in the February Update that the DWP has consulted on several minor changes to the auto-enrolment requirements.  The response to the consultation has now been published.  The final regulations will include the following changes:

  • company directors and members of a Limited Liability Partnership (LLP) who are not treated for income tax purposes as being employed by the LLP will be excluded from the employer's duty to auto-enrol categories of workers;
  • the exemption for workers who have received a winding-up lump sum (WULS) will apply to those who have received a WULS and who, within the 12 months following payment, cease to be employed but are re-employed by the same employer and are eligible for auto-enrolment;
  • the process for bringing forward staging dates will be simplified; and
  • for a transitional period, an easement will allow formerly contracted-out salary-related schemes to satisfy the quality requirements for auto-enrolment by using a scheme level cost of accruals test.

Click here for the full response.

Holiday Pay: Lock decision on commission payments

The Employment Appeal Tribunal (EAT) has upheld the Employment Tribunal's decision in the leading holiday pay case of Lock v British Gas.  The EAT confirmed that Mr Lock's commission should be included in the calculation of a portion of his holiday pay.  More detail on the case can be read in our Employment special alert, click here.

This could have a potential knock-on effect on a number of areas relevant to pensions, including the calculation of pension contributions and benefits (depending on the scheme's definition of "pensionable salary") and the question of what is an appropriate reference period for averaging pay (which is particularly relevant in respect of auto-enrolment calculations).

However, this is not a settled area as there is likely to be an appeal by British Gas.  Affected employers will need to consider whether to amend their holiday pay calculations now or to wait and see whether any appeal is lodged.

ESMA publishes list of pension schemes exempted from EMIR clearing requirement

In our March 2015 Update, we published a link to an alert prepared by our Derivatives practice on the European Commission's recommendation to extend the pensions exemption from the Clearing Obligation under EMIR.  The alert can be accessed here.

Last month, ESMA published a list of pension schemes which benefit from a temporary exemption from the EMIR clearing obligation for their over-the-counter derivative contracts.  This list can be viewed here.

Abolition of DB contracting-out update

Various pieces of secondary legislation have been laid before Parliament in relation to abolition of DB contracting-out from 6 April 2016.The government has also issued its response to the October 2015 consultation on The Pensions Act 2014 (Abolition of Contracting-Out for Salary Related Schemes)(Consequential Amendments) Order 2016 (the "Response").

No further secondary legislation is expected before 6 April 2016.The government has, however, indicated that there may be subsequent changes to address particular issues after 6 April 2016.This includes the following areas:

  • Bulk transfers without member consent:  the government has recognised that there is an issue in relation to making bulk transfers without consent to new vehicles which have been set up to receive contracted-out rights arrangements (e.g. as part of a merger) and "will therefore be considering this under a further package of changes that we expect to make to legislation in 2017".
  • Alteration of scheme rules where there are section 9(2B) rights:  the government has said that it is intending to consult on further changes to the legislation to address concerns that the Regulations (the Schemes that were Contracted-out Regulations) are too restrictive.    
  • Trivial commutation:  the government has previously acknowledged that there is an issue with how commutation in relation to contracted-out rights work with the HMRC Rules.  The government has said that it will revisit this issue at a later date and consult on any possible legislative solution.

The Response can be viewed by clicking here.

GMP revaluation issue

In our February Update we noted a potential issue in relation to GMP revaluation, which could affect contracted-out schemes with active members.It relates to the potential automatic triggering of fixed rate revaluation on the cessation of contracted-out employment on 6 April 2016.

Legislation has now been laid which permits rule amendments to be made with retrospective effect in order to address this issue. 6 April 2016 does not, therefore, need to be treated as a hard deadline, although affected schemes will still need to make amendments at some point before 6 April 2017 if they are to address the issue.

Indexation of GMPs

Currently, the way in which state benefits are calculated for a member who has an entitlement to a GMP under an occupational scheme means that, if a shortfall arises between the statutory increases which the scheme is required to provide on the GMP (increases of three per cent LPI on GMPs accrued between 6 April 1988 and 5 April 1997 once in payment) and the annual increase in CPI, the state will make up this up.This will change from 6 April 2016.The way the calculations will be made going forwards is complex but, broadly, the effect of the changes are that the state will no longer fully inflation proof GMPs for members reaching State Pension Age from 6 April 2016.

No changes are being made to the current statutory requirements on occupational schemes in relation to GMP increases as a result of abolition of contracting-out.Trustees should, however, be aware of the change under the new State Pension and check whether this has any knock-on effects on their scheme. This may be the case if the scheme contains a requirement to provide increases on GMPs over and above the statutory requirements (for example, this may be the case in some schemes which were set up to mirror certain public sector schemes).  

Even where there are no knock-on effects in terms of the level of GMP increases which the scheme is required to provide, trustees should consider whether they are required, or otherwise wish, to notify members of the change in approach under the new State Pension from 6 April 2016.