End of contracting-out on 6 April
From 6 April this year, it will no longer be possible for schemes to contract out of the State Second Pension due to the state pension system moving to a "single tier" pension. Legislation will largely preserve existing legal requirements relating to benefits which accrued under the contracting-out regime. However, if they have not already done so trustees of open schemes should consider whether any provisions of their rules may need amending, for example provisions which hard wire in Reference Scheme provisions in a way that will not automatically fall away, or to allow fixed rate revaluation of GMPs to continue. 6 April 2016 is also the deadline by which schemes must register for HMRC's GMP reconciliation service if they wish to use it. For more information about the latest developments in relation to the end of contracting-out, click here.
Landmark High Court case clarifies rules on pension transfers
In the case of Hughes v The Royal London Mutual Insurance Society Limited, the High Court has overruled the Pension Ombudsman and held that a member does not have to have earnings with the employer of the receiving scheme in order to have a statutory right to a transfer value. The scope of the right to transfer pension rights has come to the fore as a result of schemes blocking transfer values where they suspect that a receiving scheme is a vehicle for pensions liberation. Where a member validly exercises a statutory right to take a transfer value, schemes have no right to block the transfer due to pensions liberation concerns. For more information, click here.
The Pensions Ombudsman has taken the rare step of issuing a statement following the judgment.
Ban on member-borne commission: Government publishes consultation response and draft regulations
Response to consultation on pension transfers and early exit charges
On 11 February 2016 the Government published its response to its consultation on pension transfers and early exit charges. The consultation was prompted by concerns that early exit charges and issues with transfers are preventing individuals from taking advantage of the new pension freedoms introduced in April 2015. In relation to group personal pension schemes, the Government is going to give the FCA the power to make rules limiting early exit charges. The Pensions Regulator will work alongside the FCA with a view to ensuring a comparable regime is in place to protect members of occupational schemes.
Regarding the speed with which transfer values are processed, Government research has found that transfers from occupational schemes tend to take much longer than from personal pension schemes, with an average transfer time of 39 days, compared to 16 days for personal pension schemes. The Government intends to introduce new measures in summer 2016 requiring occupational schemes to report on an ongoing basis how they are performing in processing transfers, including against possible benchmarks and new transfer targets.
Revised Code of Practice on Incentive Exercises published
A revised version of the code of practice on incentive exercises was published on 1 February. The code, which is voluntary, was originally launched in June 2012 in response to concerns that exercises were being carried out which encouraged members to transfer or give up defined benefit pension rights in circumstances that were against their long-term interests. A key change in the revised code is that the requirement for the member to be provided with advice is relaxed where the transfer value or full commutation lump sum on offer is £10,000 or less, or the pension which can be modified under the offer is £500pa or less. The revised version of the code applies where the offer to the member is made after 1 February 2016.
New requirement to provide pensions savings statement if pensionable earnings exceed £110,000
The Government has published draft regulations which will require a scheme administrator to provide a member with a pensions saving statement if his pensionable earnings exceed £110,000. This measure is being introduced as a result of the introduction of the tapered annual allowance which may affect people earning over this amount from April 2016.
Pensions Tax Manual published by HMRC
In December HMRC officially published its Pensions Tax Manual, the replacement to the Registered Pension Schemes Manual. The Pensions Tax Manual had previously been published in draft.
PPF Levy Determination
The PPF published its 2016/17 Levy Determination on 17 December. The determination is largely unchanged from the draft levy estimate which we covered in our 1 December 2015 Update. The deadline for certifying/re-certifying contingent assets and asset-backed funding arrangements is 31 March 2016.
Lifetime allowance changes and other taxation measures
On 9 December the Government published the detail of various tax measures: the draft legislation dealing with the reduction of the lifetime allowance to £1m from tax year 2016/17; draft regulations requiring pension providers to report certain types of benefit payment in their real time information PAYE returns; and measures to reduce the number of calculations scheme administrators are required to do to check that a dependant's scheme pension will be an authorised payment. For more information, click here.
Pensions Regulator publishes Integrated Risk Management Guidance
In December the Pensions Regulator published guidance for defined benefit schemes on integrated risk management (IRM). According to the guidance, IRM is a method that brings together the identified risks the scheme and the employer face to see what relationships there are between them. It helps prioritise them and to assess their materiality. It can take many forms but should involve an examination of the interaction between the risks and a consideration of 'what if' scenarios to test the scheme's and employer's risk capacities.
The Regulator identifies the three key risks as employer covenant, investment and funding risks. It says that IRM considers what could be done should risks materialise (especially those which impact across more than one area). The guidance contains a number of examples of steps which might be taken as part of an IRM strategy.
The Regulator says that trustees should document the agreed IRM strategy. This can be done by reference to other documents (e.g. contingency plans contained within the scheme recovery plan) where appropriate.
Transfers of data to the US: UK Information Commissioner publishes blog
We have previously reported on the decision made by the Court of Justice of the European Union (CJEU) that a European Commission decision on the "safe harbor" regime, which many businesses had relied on as allowing them to transfer data to the US, was invalid. In a blog post on 11 February 2016, the UK Information Commissioner (ICO) reported that the European Commission and the US authorities are working on a replacement for Safe Harbor known as the EU-US Privacy Shield, but it is "too early to say" whether the ICO and its equivalents in other EU member states will regard that as adequate protection.
The ICO blog appears to signal that the ICO will not be rushing to sanction businesses that entered into agreements in reliance on safe harbor before the CJEU's ruling. It states, "Our position remains the same as in October – whilst complaints can be considered the usual ICO regulatory policy will be applied. We will be guided by the risk posed to individuals and steps that can be reasonably expected of data controllers. We will not be seeking to expedite complaints about Safe Harbor while the process to finalise its replacement remains ongoing and businesses await the outcome."
Automatic Enrolment: Government proposes discretion over whether to enrol company directors and "genuine partners" in LLPs
The Government has consulted on whether an employer's current obligation to auto-enrol company directors and "genuine partners" of LLPs should be converted to a discretion. The Government uses the term "genuine partner" to mean a member of an LLP who is not treated as an employee of that LLP for income tax purposes. The draft regulations published alongside the consultation have a coming into force date of 6 April 2016.
Auto-enrolment Earnings Trigger and Qualifying Earnings Thresholds for 2016/17
For the tax year 2016/17, the earnings trigger for auto-enrolment is to remain at £10,000pa. The lower limit for the qualifying earnings band is to remain at £5,824pa (in line with the National Insurance Lower Earnings Limit). The upper limit for the qualifying earnings band is to be increased to £43,000 pa (in line with the National Insurance Upper Earnings Limit.)
Government clarifies which schemes will be subject to additional governance requirements for master trust and industry-wide schemes
The Government has published the final form wording which will be used to establish exactly which multi-employer schemes will be subject to the additional governance requirements being introduced for master trusts and industry-wide schemes from April 2016. The definition has been amended following concerns that the first draft of the definition could potentially catch multi-employer schemes that essentially related to a single group of companies but nevertheless had a participating employer that was not part of the group (for example a joint venture company or a company sold out of the group but allowed to continue to participate in the scheme for a temporary period).
Government publishes response to call for evidence on creating a secondary annuity market
In December the Government published its response to its call for evidence on creating a secondary annuity market, i.e. allowing people who are already receiving income from an annuity to sell that income to a third party, subject to agreement from their annuity provider. It intends that this will be in place by April 2017. The Government has decided that the right will not apply to an annuity held in the name of the trustees of a pension scheme rather than the member's own name.
Purchasing an annuity income stream from an individual will be a regulated activity, meaning that it can only be carried out by a person with the requisite FCA authorisation. As a consumer protection measure, insurers will generally only be permitted to buy back their own annuities via an intermediary. However, insurers will be allowed to buy back directly from the member in the case of "low value" annuities. The Government has not yet decided what the low value threshold should be and what safeguards should be in place. The Government intends to require those wishing to sell an income stream above a certain value (yet to be decided) to seek advice before proceeding with the sale.
Court holds announcement re Normal Retirement Dates did not close Barber window
In the High Court case of Safeway v Newton, the court has held that an announcement to members was not sufficient to equalise normal retirement dates (NRDs). Execution of a deed of amendment was required even though the scheme's amendment power expressly provided that amendments could be effected retrospectively to the date of an announcement. For more information, click here.
New People with Significant Control regime: Action Required by Corporate Trustees
From 6 April this year, non-listed UK companies will be required to maintain a register of "people with significant control" (PSC) over the company. The legislation sets out a detailed definition of PSC. Broadly, a person will be a PSC if he directly or indirectly holds more than 25% of the shares or voting rights in a company, directly or indirectly holds the right to appoint or remove a majority of directors or otherwise has the right to exercise or does exercise significant influence or control over a company. Corporate trustees of pension schemes will need to make sure they comply with the requirements. There are criminal sanctions for failure to comply. For more information, click here.
Court holds exchange of e-mails sufficient to vary contract
The recent case of C&S Associates v Enterprise Insurance shows that a relatively informal exchange of e-mails may operate to vary the terms of a contract, notwithstanding a requirement in the contract that any variation must be in writing and signed by or on behalf of each of the parties. In the case in question, representatives of the two parties had exchanged e-mails in which they agreed to vary the terms of the contract. One party's e-mail contained an e-mail auto-signature. The other party's e-mail ended with the words, "Many thanks Myles, much appreciated. Mike". The court held that this was sufficient to meet the requirement for a contractual variation to be signed by both parties. Parties exchanging e-mails regarding the terms of a contract should ensure their e-mails are headed "Subject to contract" if they do not intend their e-mails to give rise to a legally binding agreement.