Final version of Pensions Regulator's DC Code of Practice
The Pensions Regulator has published the final version of its DC Code of Practice (re-named "Governance and administration of occupational trust-based schemes providing money purchase benefits"). The Code is broadly similar to the draft on which we reported in our December 2015 Update, but changes include:
- the Regulator accepts that it may not be possible to invest all contributions within three working days of receipt if the dealing cycle is less frequent than daily. In such cases it expects investment to take place at the next available dealing date, and within a maximum of five working days;
- a specific paragraph on the application of the Code to money purchase AVCs in schemes that are otherwise defined benefit, which says trustees of such schemes should consider the risks to members in the context of the significance of the value of AVCs relative to members’ overall benefits in the scheme, and apply a proportionate approach to meeting relevant standards in the Code;
- more detail on the test for a "default arrangement" where a member has previously exercised a choice, but since then a change has been made to the arrangement to which his contributions are paid; and
- additional paragraphs on member-borne commission and risk warnings to reflect changes to legislation since the draft code was published.
One of the points covered in the Code is that the Regulator expects trustees to assess the extent to which, and in what circumstances, any loss of scheme assets might be covered by indemnity insurance or similar arrangements, or a compensation scheme such as the Financial Services Compensation Scheme (FSCS), and to communicate the overall conclusion about the security of assets to members and employers. In this respect, trustees should note the recent changes to FSCS rules relating to pension schemes (see item below) and may find it helpful to refer to the DC Assets Working Party's guide to the security of DC assets.
The Pensions Regulator has consulted on six guides that are intended to support the new code. The subject areas covered are: the trustee board; scheme management skills; administration, investment governance; value for members; and communicating and reporting. The code sets out the standards the Regulator expects trustees to meet, whereas the guides are intended to provide information on how the trustees might meet those standards, but are not intended to impose mandatory requirements.
Changes to Financial Services Compensation Scheme (FSCS) in relation to pension schemes
Following consultation, the FCA has amended its rules relating to the eligibility of pension scheme trustees to make a claim on the FSCS. The FSCS provides compensation to investors in certain circumstances if they hold investments with a financial services firm that then defaults. The rule changes will mean that trustees of certain occupational pension schemes will now be eligible to make a claim in circumstances where this would not previously have been the case, though this does not necessarily mean that the investments which they hold will be protected as the FSCS rules are complex. In its recently published DC Code of Practice, the Pensions Regulator has made clear that it expects trustees to assess the extent to which scheme assets are covered by the FSCS, and communicate their conclusions regarding the security of assets to members and employers.
The amendments took effect from 29 April 2016, but the old rules continue to apply to a claim against a person that was in default before 29 April 2016.
Scheme Return to include new question about Chair's Statement
The Pensions Regulator has announced that the scheme return for 2016 will include a new question requiring trustees of relevant schemes to declare whether they have produced a chair's statement setting out how the scheme is complying with various governance standards. The requirement to produce a chair's statement applies to schemes which provide at least some money purchase benefits (subject to exceptions for certain small schemes and schemes where the only money purchase benefits are AVCs). The deadline for producing a chair's statement depends on the date of a scheme's year end. For a scheme with a 31 March year end, the deadline for the first statement will be 31 October 2016.
Pensions Regulator publishes 2016 Annual Funding Statement
The Pensions Regulator (TPR) has published its annual scheme funding statement for 2016. The statement is primarily aimed at defined benefit schemes undertaking valuations with effective dates in the period 22 September 2015 to 21 September 2016. Key points in the statement are:
- As schemes mature, liquidity planning is increasingly becoming an issue. Trustees should ensure they have appropriate cash flow management plans in place.
- Trustees who continue to assume that gilt yields would revert to a higher level and/or sooner than implied by the markets (‘yield reversion’) should reconsider their assumptions in light of market developments.
- TPR expects that most schemes will have a larger than expected deficit at their valuation date and will need to make changes to their existing recovery plan.
- TPR's analysis indicates that for the majority of schemes there may be sufficient affordability for the sponsor to increase contributions so that their existing recovery plan end date can be maintained. TPR expects trustees to seek higher contributions where there is sufficient affordability for the sponsor, "without a material impact on its sustainable growth plans".
- Adjustments to assumptions to reflect expected take up of the new pensions freedoms introduced in April 2015 should be evidence-based and, as it is still early days under the new freedoms, there is likely to be very little evidence at this time to support adjustments.
- Where schemes are having difficulty meeting the statutory deadline for submission of their valuation they should engage with TPR and provide a clear timetable for completing the valuation, agreed by all parties. TPR is more likely to take enforcement action where delays could have been predicted, or where trustees do not engage with TPR regarding a breach of the statutory deadline.
TPR's approach to the BHS pension scheme in the run up to BHS going into administration has come under considerable scrutiny, with its Chief Executive giving evidence before Parliament's Work and Pensions Select Committee. It will be interesting to see whether its experience in relation to BHS results in TPR showing a greater willingness to use its enforcement powers in the context of scheme funding issues.
Government consults on options for helping British Steel Pension Scheme
On 26 May 2016 the Government published a consultation on possible options for helping the British Steel Pension Scheme (BSPS) as part of a wider package of support for the UK steel industry, as the Government recognises that the BSPS deficit would otherwise be likely to render it impossible for Tata to secure a sale of Tata Steel UK. As well as considering whether existing regulatory measures such as a regulated apportionment agreement could be used, the Government is also considering legislating to allow measures which would not be permitted under current legislation, but which could potentially allow the BSPS or a successor scheme to operate on a self-sufficient basis, providing benefits that are less favourable than under the current BSPS but nevertheless better than those which would be available if the scheme were to enter the PPF.
The sheer scale of the industry at stake and the related pensions issues have prompted the Government to consider changing the law specifically in relation to the BSPS in the hope that this will enable a buyer to be found for Tata Steel UK. If such measures are adopted, they could potentially provide a blueprint for future changes to the law in relation to schemes generally. However, it is at this stage too early to say whether any changes that may be implemented will be a "one off" or have wider implications for pension schemes generally.
High Court confirms security of benefits not relevant to actuarial certificate allowing transfer without consent
In the recent case of Pollock v Reed the High Court has confirmed that when deciding whether to give the actuarial certificate that is necessary in order for members' benefits to be transferred without consent, the actuary need not take into account the security of the benefits provided for by the rules. For more information, click here.
High Court rules on meaning of term "benefits accrued due" in scheme amendment power
In its judgment in the case of Sterling Insurance Trustees Ltd v Sterling Insurance Group Ltd the High Court has ruled on the meaning of a restriction in a scheme amendment power to the effect that an amendment could not substantially reduce in aggregate the value of the benefits "accrued due" in respect of any member up to the date of the amendments. For more information, click here.
Supreme Court VAT ruling in Airtours case potentially relevant to pension schemes
In a 3:2 majority ruling in the case of Airtours Holidays Transport Limited v HMRC, the Supreme Court has held that Airtours Holidays Transport Limited (Airtours) was not entitled to claim VAT input credit under a tripartite arrangement whereby an accountancy firm prepared a viability report for a number of financial institutions which were considering whether to extend credit to Airtours notwithstanding its financial difficulties. The engagement documentation was signed by all three parties. It provided that the accountants' reports were for the sole use of the financial institutions, to whom the accountancy firm owed a duty of care. However, Airtours was the party responsible for meeting the accountancy firm's fees. By majority, the Supreme Court judges ruled that the contract gave Airtours no right to require the services to be provided. It was therefore not the recipient of the supply and so could not claim VAT input credit on the fees. (The dissenting judges took the view that both the financial institutions and Airtours were entitled to require the services to be provided under the contract.)
We have previously reported that from 1 January 2017, HMRC will end its current practice of allowing VAT on certain pension costs to be treated as employer input VAT notwithstanding that the services are legally being provided to the scheme trustees. Tripartite contracts between employer, trustees and service provider have been suggested as one possible route for addressing this issue, and further guidance is awaited from HMRC. The Supreme Court's judgment in Airtours indicates that tripartite contracts can in principle be a viable route, but that getting the detail of the contract right will be key.
Court of Appeal: Contract can still be varied orally even if it provides that only written variations valid
In its recent decision in Globe Motors v TRW Lucas, the Court of Appeal has expressed the view that it is still possible for a contract to be varied orally or by the conduct of the parties, notwithstanding a clause that says any variations must be in writing. The Court's logic was that, just as the parties are free to agree the terms initial terms of the contract, they are also free to agree a variation by whatever means they choose (and the clause providing for variations to be in writing is itself capable of variation).
Where the parties entering into a contact intend that any future variations must be in writing, a clause to that effect can still be valuable in terms of providing evidence as to whether or not the parties intended a subsequent variation to the contract. However, it is important to appreciate that such a clause will not be conclusive. Where the parties to a contract adopt a course of action which is materially different to what the contract provides, it is advisable to set out the agreed course in writing in a way that makes clear the extent to which the original contract has been varied. Adopting such an approach at the outset can avoid costly legal disputes further down the line.
Pensions Ombudsman holds scheme to incorrect figures quoted (Mather)
A recent Pensions Ombudsman determination highlights the dangers of stating that every effort has been made to ensure the accuracy of a benefit statement if that is not strictly true. The member had received annual benefit statements which contained the words, “The figures in this Statement are for illustration only. Every effort has been made to ensure accuracy, however this Statement confers no right to the benefits quoted.” When the member applied to take her pension at normal retirement date, a detailed check by the scheme administrator revealed that the figures quoted had not been accurate. They had wrongly included a period of service in respect of which the member had received a contribution refund. The pension due was therefore significantly lower than the figures previously quoted. On the facts of the case, the Ombudsman upheld the member's complaint that she had relied to her detriment on the figures quoted. The Ombudsman held the scheme to the incorrect figures quoted in the benefit statement (less a deduction in respect of the refund of contributions received).
A crucial factor in the Ombudsman's determination appears to have been that the words, "Every effort has been made to ensure accuracy", were not true and should not have been included. In the light of these words the Ombudsman held that the member was entitled to expect that the details held by the scheme administrator were recorded accurately, or at best contained only trivial errors.
In the light of the Ombudsman's determination, trustees are probably best advised to avoid assurances in benefit statements that every effort has been made to ensure accuracy. The inclusion of such a statement could increase the risk of the Ombudsman holding the scheme to the incorrect statement in the event that an error is subsequently discovered.
Pensions Ombudsman holds scheme should have taken urgent action to pay death benefits within 2 year time limit (Lettman)
The Pensions Ombudsman has upheld a complaint against the administrators of part of the Local Government Pension Scheme who failed to make payment of a lump sum death benefit within two years of being informed of the deceased's death, with the result that the benefit was subject to penal tax charges as an unauthorised payment. The documentation required by the scheme in order to make a decision regarding the lump sum was provided just 13 business days before expiry of the two year period. The Ombudsman held that the scheme should have taken urgent action to ensure the benefit was paid before expiry of the deadline, and its failure to do so was maladministration. For more information, click here.
New General Data Protection Regulation to apply from May 2018
The EU's new General Data Protection Regulation (GDPR) was published in the Official Journal of the European Union on 4 May 2016, meaning that it will directly apply in all EU member states from 25 May 2018. The Regulation will make major changes to the data protection regime and introduce greatly increased financial penalties for non-compliance. For more information, click here.
Information Commissioner issues guidance on encryption
On 3 March the Information Commissioner published new guidance on its expectations of data controllers in relation to encryption. It states that, "Data controllers should have a policy governing the use of encryption, including guidelines that enable staff to understand when they should and should not use it.
"For example, there may be a guideline stating that any email containing sensitive personal data (either in the body or within an attachment) should be sent encrypted or that all mobile devices should be encrypted and secured with a password complying with a specific format."
Trustees should consider whether their agreements with scheme administrators impose adequate obligations on the administrators regarding data encryption, as well as considering whether their own procedures comply with the Information Commissioner's guidance.
6 April 2016: a key date for pensions law changes
A number of important pensions law changes took effect on 6 April 2016, in particular:
- the end of contracting-out. Shortly before 6 April 2016 the Government introduced a new power for trustees to modify a scheme by resolution in order to apply fixed rate revaluation in accordance with the post-6 April 2016 requirements, as the GMP rules of many schemes did not tally with the post-6 April 2016 requirements on this point. The new power to pass a resolution will expire on 6 April 2017, so trustees who have not yet done so should consider whether they need to pass a resolution before then;
- the reduction in the lifetime allowance to £1M;
- the introduction of the tapered annual allowance for those with an income (including employer pension contributions) over £150,000pa;
- the introduction of a discretion whether to auto-enrol company directors and "genuine" partners of LLPs (ie those not treated as employees of the LLP for income tax purposes);
- the ban on "active member discounts" in schemes that are "qualifying schemes" for the purposes of auto-enrolment legislation; and
- the new requirement to give risk warnings to members at the point when the member is being provided with the ability to access his money purchase benefits, eg via an application form.
No change to circumstances in which pension savings statement required
In our March 2016 Update we reported that the Government had published draft regulations which would require a scheme administrator to provide a member with a pensions saving statement if his pensionable earnings exceeded £110,000. This requirement has been dropped from the final form regulations. HMRC has confirmed in its Pension schemes newsletter 78 that the position for tax year 2016/17 is unchanged, with a scheme administrator only required to provide a standard pension savings statement to a member if that member’s pension input amount for that scheme exceeds the general untapered annual allowance of £40,000 rather than if it exceeds the member’s personal tapered annual allowance. HMRC states that the requirements for providing a money purchase pension savings statement also remain unchanged. The newsletter also sets out the circumstances in which individuals subject to the tapered annual allowance can use "scheme pays".
HMRC new RTI reporting requirements finalised
New regulations came into force on 6 April 2016 which impose new real time information (RTI) reporting requirements on schemes making certain types of lump sum payment, including uncrystallised funds pension lump sums. There have been reports of HMRC wrongly issuing tax demands in respect of certain non-taxable lump sum death benefits that have been reported to it. In its Pension schemes newsletter 78, HMRC states that it is investigating the issue and suggests that in the meantime scheme administrators keep records of such non-taxable death benefits but stop reporting them. This only applies where the whole of the payment is non-taxable.
Budget introduces Lifetime ISA
The Budget on 16 March 2016 saw the announcement of the introduction of the new Lifetime ISA as well as various technical changes to the pensions tax regime. For more detail, see our Budget e-bulletin.
Government consults on capping early exit charges for members of occupational pension schemes
On 26 May 2016 the Government published a consultation on capping early exit charges in occupational money purchase and cash balance schemes. The Government is proposing a cap of 1% of fund value for existing contracts and zero for new contracts. Its proposed definition of early exit charge relates to the situation where a member aged 55 or over takes or transfers his benefits (or converts them to a different type of benefit) before his expected retirement date and a charge is imposed where no charge or a lower charge would have been imposed had the member reached his expected retirement age. (A "market value adjustment" to a with profits policy is not regarded as an early exit charge.) The Government intends to impose the primary duty to comply on trustees and/or service providers depending on who applies the charge in practice. It intends that the legislation will take effect in 2017.
The consultation, which runs until 16 August 2016, has been published at the same time as a similar FCA consultation in relation to personal pension schemes.
Government consults on creating a secondary annuity market
The Government is consulting on the tax framework for the secondary market for annuities which will allow individuals to sell their annuity income in return for a lump sum. The consultation document states, "Although the new rules will apply only where the rights to receive payments under the annuity have been assigned by the individual receiving payments under the annuity, it is intended that schemes should be able to assign annuities in their name to members." However, where an annuity is held in the name of the scheme trustees, it does not appear to be the Government's intention to confer any new rights on the member to have the annuity transferred into his name, as the consultation states, "it is not intended that these new tax rules will override any other contractual, (non-tax) legislative or other legal restrictions that prevent individuals from assigning or surrendering annuities that are not in their name."
The consultation closes on 15 June 2016.
Government proceeds with changes to investment disclosure requirements in scheme accounts
In our December 2015 Update we reported on proposals to make significant changes to the investment disclosure requirements in scheme accounts. The Government has made the proposed changes (subject to minor clarificatory changes to the wording). The relevant regulations came into force on 1 April 2016.
New check and confirm procedure for company annual returns
Corporate trustees should be aware that from 30 June this year, Companies House is introducing a new "check and confirm" procedure for companies submitting their annual return (which will for the first time include the new PSC requirements on which we reported in our previous Update). This will need to be used by any company where the "made up" date of its annual return is 30 June 2016 or later. Companies who submit their annual return online will automatically be prompted to use the new format, but companies submitting paper returns should take care to use the up-to-date format. Companies will have 14 days to submit the check and confirm statement to Companies House, a reduction from the previous time limit of 28 days.