Abolition of DC contracting-out – are you prepared?
HMRC has published the fifth edition of its Countdown Bulletin, which deals with practical issues for pension schemes as a result of the abolition of protected rights from 6 April 2012. The bulletin deals with the following key issues:
- How HMRC will pay any late rebate payments after the 3 year transitional period ends on 5 April 2015 - from April 2015, any late rebate payments relating to periods before 6 April 2012 will be made directly to members.
- Employers wishing to continue a contracted-out mixed benefit scheme (COMB) as a contracted-out salary-related scheme (COSR) after the abolition date do not have to send employees any notices about this or consult with employees. The scheme’s current COMB certificate will remain valid for its COSR element.
- Contracted-out money purchase (COMP) schemes which switch to a COSR scheme after the abolition date, will, however, need to follow the formal process of making an election and notifying employees in accordance with HMRC’s guidance CA14C.
We are advising schemes as to their options in relation to the abolition of contracting-out on a defined contribution basis and amending rules to remove provisions relating to protected rights. For further information, speak to your usual contact in the pensions team.
Finance Bill 2012: get set for the next lot of pensions tax changes
On 6 December 2011, HM Treasury and HMRC published a document “Overview of legislation in draft” (“the overview document”) summarising the measures to be implemented through the Finance Bill 2012. We consider below the key measures affecting pension schemes.
Tax relief for asset-backed funding arrangements
Asset-backed funding (ABF) arrangements are put in place by employers with defined benefit pension schemes to provide funding for the scheme and to reduce the scheme’s deficit. Draft clauses have been published in the Finance Bill 2012 changing the tax rules for tax relief on ABF arrangements. The proposed changes to the tax rules are meant to ensure that the tax relief that employers receive accurately reflects the payments received by the scheme. They will affect:
- New ABF arrangements where a contribution of assets is made on or after 29 November 2011.
- ABF arrangements already in place and which generate income for the scheme after 29 November 2011 – detailed transitional rules apply.
The Pensions Regulator’s guidance requires that trustees secure agreement in the ABF arrangement in relation to what will happen following a change of law. The documentation of existing ABF arrangements may therefore require a mandatory review and discussion between employers and trustees (and/or mandatory action) as a result of the transitional legislation. For our detailed e-alert on the proposed changes to the tax relief for ABF arrangements, click here.
Small pots under personal pension schemes and tightening up of QROPS
Other measures relating to pensions set out in the overview document are to be introduced by secondary legislation. We consider these below:
- Under regulations issued under the Finance Act 2004, a member of an occupational pension scheme who is aged 60 or over can currently commute a sum of up to £2000, providing that it extinguishes his rights under the scheme. Draft regulations have been issued introducing a similar provision for registered personal pension schemes from 6 April 2012. However, a member cannot commute a small pension pot more than twice, the aim being to stop people from setting up mirrored arrangements with pots of £2000 or less and then commuting them to get round the existing limits on authorised lump sum payments. The DWP is also consulting on a range of proposals to reduce the current barriers to transfers of small defined contribution pots between pension schemes and to consolidate an individual's small pots – see below for further details.
- Draft regulations have been issued in relation to Qualifying Recognised Overseas Pension Schemes (QROPS) to prevent QROPS from being marketed to pay amounts, or enable the payment of amounts, that are not allowed under UK rules, once the UK tax rules no longer apply. The regime currently allows transfers of pension savings from UK registered pension schemes to QROPS to be made free of UK tax. Currently, under UK legislation, a 100 per cent. lump sum can only be taken in very restrictive circumstances. The regime can therefore potentially be manipulated to transfer a UK member’s pension pot, free of tax, to an overseas arrangement from which the member may then take a 100 per cent. lump sum. The draft regulations contain measures strengthening the conditions that a scheme has to meet to be a QROPS and the information and reporting requirements for a QROPS from 6 April 2012.
Draft guidance on the proposals relating to small pots and QROPS has also been published.
HMRC Newsletter 51
HMRC Newsletter 51 has a useful summary of the tax changes proposed under the Finance Bill 2012. The newsletter also states that HMRC will be making further amendments in January 2012 to the Registered Pension Schemes Manual (RPSM) in connection with the Finance Act 2011 to:
- reflect changes in processes or interpretation of the legislation; and
- correct any technical inaccuracy or include material covering new processes or legal changes.
In November, members of the Herbert Smith pensions team gave a seminar at the Association of Pensions Lawyers on problem areas and outstanding issues in relation to the Finance Act 2011. It is hoped that the proposed updates to the RPSM will deal with some of the matters that were touched on at the seminar. To see a copy of the slides from the seminar, click here.
New flexible apportionment arrangement regime introduced under amending regulations
The Occupational Pension Schemes (employer debt and miscellaneous amendments) Regulations 2011 were laid before Parliament on 15 December. The DWP had consulted on a draft of these regulations last June. The main features of the regulations are:
- The introduction of a new arrangement, a “flexible apportionment arrangement” for apportioning the liabilities of an employer withdrawing from a multi-employer defined benefit scheme, with some key changes made from the draft regulations issued in June.
- Extension of the 12 month grace period within which a leaving employer can employ an active member of the scheme and avoid triggering an employer debt. The grace period may now be extended to 36 months at the scheme trustees’ discretion.
As well as the regulations, the DWP has also issued its response to its June consultation, giving some helpful explanations to the changes made from the earlier draft. The regulations are intended to come into force on 27 January 2012. For our e-alert on the regulations, click here.
More sections of the Pensions Act 2011 now in force
The Pensions Act 2011 (Commencement No.1) Order 2011, the first commencement order to be made in respect of the Pensions Act 2011, is now in force. The order brings various sections of the Act into effect, including section 8 (which allows the Secretary of State to review the auto enrolment earnings trigger and qualifying earnings band) and section 19 ( the CPI indexation and revaluation provisions) – these sections are effective from 3 January 2012. For our earlier e-alert on the Pensions Act 2011, click here.
Test Achats: insurance companies to be stopped from using gender specific factors but no corresponding prohibition for pension schemes
On 8 December 2011, HM Treasury published a consultation (“Consultation”) setting out its response to the European Court of Justice’s judgment in the Test Achats case. The ECJ had decided in that case that from 21 December 2012, insurance companies will not be allowed to use gender-related factors in determining premiums and benefits in insurance contracts. For our briefing on the Test Achats decision, click here.
The measures proposed in the Consultation follow closely what the Government had said in its ministerial statement ("the Ministerial Statement") issued in June last year. To implement the Test Achats judgment, the provision in the Equality Act 2010 that effectively allows insurance companies to use gender related factors in determining premiums and benefits under insurance contracts will be removed from 21 December 2012. Contracts “concluded before 21 December 2012” (which we understand to mean contracts that have been entered into before that date, whether or not obligations still remain in relation to them after then) will not be affected. The Consultation states that if a contract is renewed after that date, it will create a new contract but a review of a contract under its terms is less likely to do so.
No amendment is to be made to the exception in the Act that allows insurers to provide insurance pursuant to arrangements made by an employer for its employees as a consequence of their employment without reference to the anti-discrimination provisions in the Act.
The Equality Act 2010 also contains exemptions allowing occupational pension schemes to use gender-specific factors, for instance in the context of commuting lump sums, early retirement benefits and calculation of transfer values. HM Treasury is not proposing to remove these provisions.
Insurance companies may be exposed to claims if the ECJ takes a different view to the Government's that the Test-Achats decision applies to contracts concluded before 21 December 2012 where premiums and benefits are still payable after that date.
Unlike insurance companies, occupational pension schemes may, under UK legislation, continue using gender-based factors as permitted under the Equality Act 2010. There is, however, a risk that if a referral were made to the ECJ that these provisions in the Act are unlawful, the ECJ could hold them to be unlawful, even retrospectively. Schemes may therefore wish to consider switching to unisex factors now but there may be a cost involved and any decision to do so must be considered on its own merits.
The proposals are still under consultation, however and it may be that representations are made to HM Treasury to remove the exemption in the Act in relation to occupational pension schemes but it is unlikely that the Treasury will do so given that neither the Consultation, nor the Ministerial Statement, propose removing the exemption and the Treasury has had plenty of time to consider the matter.
The Consultation closes on 29 February 2012. HM Treasury intends to publish a summary of the results of the Consultation within three months of that date and to legislate the ban on gender discrimination early in 2012.
PPF levy determination 2012/13 published together with guidance
As announced previously, the PPF levy for 2012/2013 has been set at £550 million (the lowest levy that the PPF has set so far).
The PPF has also published the final 2012/13 levy determination which implements many of the measures proposed in its consultation on the levy framework in September last year. Key features of the new framework are:
- Fixing levy rules for three years to provide certainty for levy payers;
- Averaging funding levels so that short-term volatility in financial markets is not reflected in the measure of underfunding risk;
- Reflecting investment risk in the levy calculation for the first time;
- A system of ten insolvency rating bands, an increase from the six originally proposed. This responds to industry concerns that six bands would create ‘cliff-edges’ where schemes could possibly face large levy rises.
There are some differences in the final determination from the measures proposed in the September consultation, in particular in relation to the parent/group company guarantees. Trustees will now be required to certify each year that they “have no reason to believe that each guarantor, as at the date of the certificate, could not meet its full commitment under the contingent asset”. The expectation is that this double negative expression should enable trustees to certify unless they have clear grounds for not going so. The PPF had originally proposed that trustees should give a positive form of certification. The determination also provides that if the trustees are unable to provide certification for the whole of an existing guarantee, they can certify up to a specific lower amount, or certify only in respect of the most substantial guarantor.
The determination also sets out key dates for the 2012/13 levy year:
- Information from the scheme return submitted by 5pm on 30 March 2012 will be used in the calculation of levies. The Pensions Regulator’s Exchange system will continue to be the sole point of data submission for the purposes of the PPF levy.
- The deadline for certification and/or re-certification of contingent assets will be 5pm on 30 March 2012. Trustees and companies wishing to put in place company guarantees or recertify existing ones (in order to obtain a reduction in the PPF levy) should take action now to ensure that the new certification requirements are met and the relevant information submitted by 30 March.
Alongside the determination, the PPF has published investment risk, contingent asset and block transfer guidance and a practical guidance to the levy, which may be found here.
Court of Appeal hands down some useful reminders for construction of pension scheme rules
In Singapore Airlines Ltd v Buck Consultants Ltd (2011) EWCA Civ 1542, the Court of Appeal interpreted various definitions in a pension scheme’s trust deeds and rules, in particular the definition of “Earnings” and “Basic remuneration” in line with the position taken earlier by the High Court. The analysis is detailed and specific to the pension scheme in question but the case is interesting in that Lady Justice Arden, giving judgment on behalf of the court, reiterated her comments in the earlier case of British Airways Pension Trustees Ltd v British Airways plc (2002) PLR 247 in relation to the interpretation of pension scheme rules:
- There are no special rules of construction. Pension schemes, however, have certain characteristics which tend to differentiate them from other analogous instruments (such as private trusts).
- The relationship of members to the employer must be seen as running in parallel with their employment relationship. This factor, too, can in appropriate circumstances, have an effect on the interpretation of the scheme rules.
The case is also interesting in that the fiscal background at the time was also taken into account in interpreting the scheme rules.
Pensions Ombudsman: misleading statements in explanatory literature is maladministration
In Harlow (76889/2), the Deputy Pensions Ombudsman (DPO) held that misleading statements in explanatory literature amounted to maladministration. However, these statements were qualified by others to the effect that the rules prevailed or the full details had not yet been decided. There was no evidence to show that the misleading statements were relied upon by the member. The member, Mr Harlow, therefore failed in his claim for an enhanced redundancy pension based on the description of the relevant rules in the explanatory literature. Mr Harlow was, however, awarded £1,000 compensation (payable by his former employer) for distress and inconvenience, a higher sum than is usually awarded in such cases, owing to the significant impact that the Ombudsman considered the former employer’s failures had had upon Mr Harlow.
DWP to review auto-enrolment earnings trigger and qualifying earnings band
The DWP is consulting on raising the earnings trigger and qualifying earnings band for auto-enrolment purposes as follows:
- The earnings trigger, which is the level of earnings that an eligible jobholder must earn to be auto-enrolled, to increase from its current level of £7,475 to £8,105;
- The qualifying earnings band would be changed to £5,564 - £39,853 from the current level of £5,035 - £33,540.
The consultation ends on 26 January 2012.
DWP consultation on short service refunds and small pension pots
The DWP is consulting on a range of proposals to reduce the current barriers to transfers of small defined contribution (DC) pots between pension schemes and to consolidate an individual’s small pots. It is concerned that having multiple small, dormant pension pots, with no easy way to amalgamate them, is detrimental to people’s long-term savings. Among the measures proposed are:
- An automatic transfer system so that small pots can be moved when an employee changes jobs;
- Removal of the current short service refunds regime for DC schemes at the earliest opportunity. Currently, legislation requires DC schemes to offer a refund of contributions or a cash transfer if a member leaves after 3 months and before two years’ service, but has not accrued any right to future benefits under the scheme. According to the DWP, these rules conflict with the primary objective of automatic enrolment of helping people save more for their retirement. By allowing a refund, these rules jeopardise persistent saving by excluding some individuals from building up a decent pension pot.
The consultation ends on 23 March 2012.
Pensions Ombudsman to investigate Heineken
The Pensions Ombudsman has confirmed that he is investigating a complaint by a group representing the Scottish & Newcastle scheme pensioners that parent company Heineken has refused to award inflation-linked pension increases relating to pre-1997 service. Heineken took over the Scottish & Newcastle pension scheme when it bought the company in 2008. The dispute focuses on whether, at the time of the takeover, Heineken agreed that pensions would be increased annually to offset the effect of inflation. Heineken’s position appears to be that such increases were previously made on a discretionary basis only, but the pensioners’ group is contesting that there was a public undertaking that such increases would be continued in future.