- 1 - Trustee Knowledge Update – Issue 30, February 2015
Trustee Knowledge Update
Welcome to the February 2015 edition of our Trustee Knowledge Update which summarises recent changes in the law. It is
aimed at helping trustees (including trustee directors) comply with the legal requirement to have knowledge and understanding of
the law relating to pensions and trusts. This edition focuses on the key legal developments over the last three months.
Pension Schemes Bill 2015
This Bill has almost finished its passage through Parliament
and should become law in the next few weeks. There is
quite a lot in it but the things that trustees need to focus on
Changes to when members can transfer their rights.
Members with money purchase benefits will have a
right to transfer them right up to the point at which they
start to receive benefits. There will also be a right to
transfer different categories of benefit (principally, DB
and DC) separately and scheme rules must not
Scheme rules will not be able to prevent continued
accrual in one category of benefit where a transfer is
taken from another category.
Members with final salary benefits in a scheme worth
over £30,000 who want to transfer them to a money
purchase arrangement or convert them to money
purchase benefits will need to take independent
financial advice. Trustees should not make the
transfer until they have checked that members have
received the relevant advice.
These provisions are likely to come into force on 6 April
2015 so trustees need to be preparing for them now.
DC Governance and Charging Regulations
These Regulations are now in their final form and for most
purposes will come into force on 6 April 2015. They are
relevant for all schemes with DC benefits (other than DC
AVCs only). They include requirements for:
A charge cap of 0.75% on default funds in autoenrolment
A chair of trustees;
An annual governance statement (signed off by the
chair) covering a range of governance issues;
Default investment strategies to be designed in
members’ interests and regularly reviewed;
Core scheme financial transactions to be processed
promptly and accurately;
Scheme rules not to restrict the trustees’ appointment
of advisors and administrators;
Trustees to assess the levels of charges borne by
members and the investment costs; and
Trustees to have the knowledge and competencies
necessary to properly run their scheme.
There will be mandatory fines for trustees who fail to
prepare the new governance statement.
Annual Allowance Amendment Regulations
The final regulations correcting a number of annual
allowance problems are now in place. In particular these
regulations will ensure:
Where there is a bulk transfer and the receiving
scheme provides the same benefits as the transferring
scheme no annual allowance charge should arise even
where the transfer is underfunded (subject to certain
Protection against the annual allowance for deferred
members whose benefits are transferred or where
revaluation is calculated by reference to RPI rather
than CPI (providing in each case that certain
conditions are met).
Taxation of Pensions Act 2014
This is the legislation that creates the new DC flexibilities.
We summarised the content of the Taxation of Pensions Bill
in the last edition of TKU and there have been no significant
changes. The legislation will come into force on 6 April
2015 and schemes need to consider now which, if any, of
the new DC flexibilities they intend to offer.
Guidance on end of DB contracting-out
The Government has issued separate fact sheets and
overviews for employers, employees and trustees relating
to the end of contracting-out in April 2016. The things that
trustees need to consider include:
Checking the impact on their scheme and how it will
operate going forward.
Checking whether the sponsoring employer will make
changes to benefits accruing after April 2016 and/or
increase member contributions.
Agreeing timescales for implementing any changes
with advisers and administrators.
Ensuring records are up-to-date and hold the same
information about members’ GMPs etc. as HMRC
Authorising administrators to sign up for the HMRC
Scheme Reconciliation Service.
Notifying members of any changes being made to their
benefits and / or contributions.
Ensuring administration systems and processes will be
amended in good time.
HMRC has issued two new Briefs about employers’ ability
to recover VAT in relation to pension schemes.
HMRC’s longstanding practice had been to allow employers
to deduct VAT incurred in relation to the general
management of a defined benefit pension scheme but not
in relation to managing scheme investments. A European
Court case in 2013 challenged this approach.
HMRC has now accepted that the employer will potentially
be able to deduct input tax in relation to either scheme
administration or investment management so long as it (and
not the pension scheme) is the recipient of the services.
This will be a question of fact but HMRC says that it will
only accept that VAT incurred in relation to a pension
scheme is deductible by an employer if “there is
contemporaneous evidence that the services are provided
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to the employer and, in particular, the employer is a party to
the contract for those services and has paid for them.”
Last year HMRC also announced the end of the “70/30” rule
under which, where it was not possible to break down a fee
into general management and investment activities,
employers would assume that 70% of activities were
investment and 30% were management. There is a
transitional period until 31 December 2015, during which
the current arrangements, including the 70/30 rule, continue
to be permitted.
Another European case decided that a defined contribution
scheme could be regarded as a “special investment fund”
for VAT, making the investment management expenses
exempt from VAT altogether. HMRC says that pension
funds will be “special investment funds” where: they are
solely funded by persons to whom the retirement benefit is
to be paid; those “pension customers” bear the investment
risk; the fund contains the pooled contributions of several
pension customers; and the risk borne by the pension
customers is spread over a range of securities.
HMRC Newsletter 66
Summarises the DC flexibility changes and explains that
normal PAYE rules will apply to payments made as a result
of pensions flexibility. Details are given for administrators
on how the PAYE rules will apply in different circumstances.
The Newsletter also contains a reminder that annual
allowance statements for the 2013-14 year should have
been issued to members contributing more than £50,000
per year, together with a warning that some schemes
operating relief at source have still not submitted their 2013-
14 annual return of individual information.
Essential guide to DC governance and charging
Explains what trustees will need to do to comply with the
new DC governance and charging regulations (see above).
Trustees will have to notify the Regulator via Exchange who
the chair is (even where there is already a chair in place).
They will also have to declare in the scheme return that a
governance statement has been prepared and confirm
compliance with the requirements on charges.
In relation to when the first chair’s governance statement
has to be prepared, the guidance says the first “statement
must be produced as part of the first annual report and
accounts relating to the scheme year ending on or after 6
July 2015… If your scheme year-end is within the three
months following 6 April 2015, you are still obliged to
prepare a chair’s statement covering this period. However,
as this would result in you writing a statement covering a
very short period of time, you are required to include this
short period within the statement for the following year.”
The Regulator also reminds trustees that the DC Code of
Practice continues to apply (to the extent it does not conflict
with the new regulations). An updated version of the DC
Code of Practice is expected later in the year.
Guide to publishing information
The Regulator has released a guide setting out its approach
to publishing information on its regulatory and enforcement
decisions using its powers under Section 89 of the
Pensions Act 2004.
The Regulator says “We are mindful of our obligations
towards those who supply information to us, in particular,
where that information involves commercially or market
sensitive information. We expect those supplying us with
information to identify whether it is sensitive. We will take
into account any representations made on sensitivity of
information when considering publication and will, as far as
is practicable to do so in the particular circumstances of
each case, seek to avoid publishing commercially,
market/price or otherwise sensitive information”.
Draft guidance on DB to DC transfers
In light of provisions in the Pension Schemes Bill (see
above), the Regulator is consulting on draft guidance for
trustees of DB schemes on managing member requests for
transfers from DB to DC arrangements. It is intended to
help trustees ensure they have appropriate processes in
place to manage transfer requests. Trustees will need to
consider what action to take when the final version is
The draft guidance says that trustees can support members
in a number of ways, including by providing information on
finding appropriate advisers and informing members that
advice should explain benefits being given up when
compared to any future options and will depend on the
In addition, the guidance acknowledges that whilst “it is
likely to be in the best financial interests of the majority of
members to remain in their DB scheme” it is not “the
trustee’s role to second-guess the member’s individual
circumstances and choice to transfer [DB] benefits. Nor is it
their role to prevent a member from making decisions which
the trustees might consider to be inappropriate to the
Notification about former money purchase benefits
Where a scheme has benefits which were formerly treated
as money purchase benefits, but are not within the new
definition, regulations may require that “the trustees…must,
on or before 31st March 2015, inform the Regulator that the
scheme includes benefits which are not money purchase
benefits but have been treated as money purchase
benefits”. Fines may apply where trustees fail to do so.
Levy determination for 2015/16
The levy calculation is broadly unchanged but there are
several issues in the 2015/16 levy determination that
trustees and employers should consider.
Where trustees are intending to claim a levy reduction on
the basis that their scheme is a last-man standing scheme,
they will need to update Exchange by 31 March 2015 and
confirm they have received legal advice that the scheme
satisfies the definition of a last-man standing scheme by 29
Certain mortgages (including charges in favour of the
scheme) can be discounted and improve the employer’s
insolvency score. Relevant certification will need to be
supplied to Experian, by the employer, by 31 March 2015.
There are also new certification requirements for schemes
that want asset backed funding arrangements to be taken
into account in the levy calculation.
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Response to consultation on automatic enrolment
earnings trigger and the qualifying earnings band
The Government proposes that the new thresholds for autoenrolment
£10,000 for the automatic enrolment earnings trigger;
£5,824 for the lower limit of the qualifying earnings
£42,385 for the upper limit of the qualifying earnings
Trustee of Singer & Friedlander Ltd Pension and
Assurance Scheme v Corbett (High Court)
After the scheme employer entered administration the
insolvency practitioner issued a scheme failure notice, and
a section 75 debt was triggered. The scheme submitted a
claim for that debt in the administration, which was admitted
by the administrators. As a result, the trustee could not
wind up the scheme because of the possibility of further
distributions from the employer’s administration. The
trustee sought a declaration from the court that the section
75 debt owed was assignable (its intention being then to
sell the debt) and that the proposed assignment was one a
reasonable and properly advised trustee could make.
The court allowed the trustee’s application. The judge
considered that before the Pensions Act 2004, a section 75
debt would have been assignable. The 2004 Act
complicated the position: for example, it contained provision
allowing the Regulator to order trustees not to take further
steps to recover section 75 debts, pending recovery under
a contribution notice. However, Parliament had not shown
any intention to change the clear pre-2004 position that
section 75 debts could be assigned by a trustee.
Horton v Henry (High Court)
The Insolvency Act 1986 provides that “the income of the
bankrupt comprises every payment in the nature of income
which is from time to time made to him or to which he from
time to time becomes entitled, including… any payment
under a pension scheme” (excluding GMPs).
The member was adjudged bankrupt in December 2012.
His assets at that date included a SIPP and three other
personal pension policies. The trustee in bankruptcy
applied to the court asking for it to order the member to
crystallise his pension rights and to exercise his elections in
the manner desired by the trustee.
The question was whether the member would become
“entitled” to a payment under an uncrystallised pension,
even though he was not in receipt of any payments. An
earlier case of Raithatha v Williamson held that a bankrupt
did become “entitled” to a payment under a pension
scheme where, under the rules, he would be able to receive
the payment merely by asking for it.
The judge accepted that this case could not be
distinguished from Raithatha. However, he declined to
follow that case and instead, held that the word ‘entitled’ in
the Act referred to a pension in payment under which
definite amounts had become contractually payable. There
was no obvious wording which would give the court power
to decide how a bankrupt was to exercise the different
elections open to him under an uncrystallised personal
pension. Nor was there any obvious route by which a
trustee in bankruptcy could be said to have that power.
Indeed, to say that a trustee in bankruptcy could decide
how the bundle of contractual rights inherent in a personal
pension was to be exercised was not easy to reconcile with
the intention of the Welfare Reform and Pensions Act 1999
to remove pensions in general from a bankruptcy estate.
The member was not entitled to payment under his
pensions “merely by asking for payment”. A variety of
options were available to him. Only after he had made such
elections could he become entitled to any payment. There
was no power for the court or the trustee to require the
member to elect in any particular way.
It is hoped that the conflicting decisions in these cases will
be resolved in an appeal of the Horton case
Kenyon, Stobie and Jerrard - pension liberation
These are three of the long-awaited determinations on
pension liberation. The determinations concerned members
who had been denied a transfer to purported “occupational
pension schemes” by their personal pension providers on
the grounds that they were in fact liberation vehicles.
The Ombudsman’s starting point was to ask whether the
members had a legal right to a transfer. On the facts, he
found that the proposed transfers did not meet the precise
statutory requirements and so the providers were justified in
not allowing transfer. In two cases, the receiving schemes
were not “occupational pension schemes” and in the third,
the transaction did not satisfy the statutory definition of
“transfer credits” (see below). The Ombudsman criticised
the providers for not having carried out sufficient analysis to
establish whether there was a statutory right, relying
instead on comments from relevant regulators and a
general hostility to liberation activity.
The Ombudsman notes that even if a receiving
arrangement is an occupational pension scheme, legislation
requires that a statutory transfer must be made with a view
to acquiring “transfer credits” in that scheme. Transfer
credits are defined as “rights allowed to an earner under the
rules of an occupational pension scheme by reference to…
a transfer to the scheme”. The Ombudsman said that this
required the member to be an “earner” in the receiving
scheme, and in relation to a scheme employer. On the facts
before him, the members had no relevant earnings with an
employer under the new scheme. This meant they had no
statutory right to a transfer in the first place. This
emphasises that when trustees are doing the due diligence,
they should explore the member’s status under the new
scheme, including the member’s employment relationship
with any participating employer.
In Stobie, in which the member failed the “earner” test but
the receiving arrangement was still a registered
occupational scheme, the Ombudsman went on to find that
although the member had no statutory right to transfer, that
was not the end of the matter: the provider should still have
considered whether or not to exercise the power it had to
allow non-statutory transfers to another scheme. The
decision was partially remitted on that basis.
The Ombudsman concluded that where there is a risk of
liberation activity, trustees and providers “should satisfy
themselves of the position, on the balance of probabilities
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and a correct interpretation of the law, based on such
evidence as they can obtain from the member or receiving
scheme or other sources - and reaching a decision may
include drawing inferences from a failure to provide
evidence. Where they find that there is no right to transfer
they should be expected to be able to justify that to the
person asserting the right.”
Although suspicions of liberation may justify delay, the
Ombudsman is clear that a transfer can only be withheld
completely if there is no legal right to it. Where there is such
a right, suspicion alone does not justify failure to pay: “if the
transferors had had a statutory right that they were
determined to enforce, even in the face of severe warnings,
then, after the providers had made such enquiries as
thought necessary to establish whether the right existed,
the providers could not have further resisted payment.” In
each case, it was for the pension provider to satisfy itself
that a member did not have a right to transfer. The burden
of proof should not lie with the member.
The Ombudsman’s view of the balance between members’
rights and the responsibilities of the personal pension
scheme operator is clear: “once [the Insurer] had followed
all the relevant steps, the individual’s right to make what
might be a life-changing mistake must take supremacy over
[the Insurer’s] obligation to help them not to.”
Whilst the cases concerned personal pension schemes, the
same analysis applies to occupational pension schemes.
Crossan - Ombudsman declines to consider complaint
where complainant suffered no harm
A life-cover only member died in service. He had two adult
sons and lived with A, who said that she had been his
partner for 12 years and that they co-habited and shared
living expenses. The trustees paid A the whole of the lump
sum. On a complaint by the sons, the Deputy Pensions
Ombudsman held in 2011 that the trustees had failed to
properly investigate how long the member and A had lived
together and had not produced sufficient evidence to
support the payment made. She directed that the trustees
take their decision afresh.
When the trustees reconsidered the decision in October
2011, they did not change their minds. Although they
acknowledged that the extent of A’s financial dependence
was “unclear” they concluded that there were no other
potential beneficiaries, as there was no evidence of either
son being dependent on the member.
One of the sons brought a further complaint, arguing that
proper investigation would show that A was not a
dependant and could not therefore be a beneficiary. He
also put forward arguments that he and his brother were in
fact beneficiaries under the rules. However, the
Ombudsman explained: “The only basis on which Mr
Crossan can complain to me is that at least some of the
death benefit should have been paid to him… I cannot
entertain an independent complaint from Mr Crossan that
Ms A should not have received the benefit. That is a
secondary question that I can only consider if the Trustees
ought to have considered him as a potential recipient
alongside or as an alternative to Ms A. If they have rightly
concluded that he did not fall in the class of beneficiaries as
defined then I can go no further.”
The Ombudsman noted that the son had made some
submissions to him that had not been put to the trustees.
However: “My role is to review the decision making process
of the Trustees when they made their decision. They would
only be at fault in relation to that information if it was
maladministration not to have obtained it before making
their decision”. On the facts, the trustees had rightly
concluded that the son was not a potential recipient under
the rules and so whether a payment was made to A, or not
made no practical difference to him.
Code of Good Practice on Incentive Exercises – Q&A
The Incentive Exercise Monitoring Board has introduced a
new Q&A section to its website.
One of the Q&As is given in the light of the potential
significant increase in trivial commutation exercises over
the coming months and states that one-off TCLS and small
pension commutations are within scope of the Code, and it
would be reasonable to work on the basis that they are a
“Modification” rather than a “Transfer”. This would mean
that guidance (but not advice) from a “member adviser”
may be required, and that the Code’s provisions on
“vulnerable customers” should be followed. The document
confirms that winding-up lump sums can be expected to fall
outside of the scope of the Code, but parties should
consider its principles to ensure that members are
Schemes contemplating a trivial commutation exercise will
need to consider how the Incentive Code might apply to
Dates for diaries: Trustee training remains one of the most important ways of ensuring that trustees have the knowledge and
understanding required to perform their duties. Our remaining 2015 trustee training courses are taking place on 9th June 2015 and 6th
October 2015. If you have any enquiries about any of these courses or would like to reserve a place, please contact Karen Mumgaard
– E: firstname.lastname@example.org.
If you are interested in any additional trustee or employer training, please contact Karen Mumgaard who can provide you with a list of
our current training topics or discuss any particular training needs you might have.
General: For further information on our pension services, please contact Mark Grant – E: email@example.com, T: +44 (0)20
7367 2325 or your usual pension partner. Please also visit our website at www.cms-cmck.com.
The Pensions team is part of the CMS Cameron McKenna Human Capital group and advises employers and trustees of schemes varying in size, from a few
million pounds to several billion pounds. Additionally, we act for some of the largest firms of administrators, actuaries, consultants, brokers and professional
trustees. We provide a full range of services in connection with occupational pension schemes, including all aspects of employment and EU law. The team
also works closely with our corporate lawyers, providing support on mergers and acquisitions, insolvency lawyers supporting us on employer covenant
issues, and the financial services team which specialises in regulatory and fund management matters.
The information in this publication is for general purposes and guidance only and does not purport to constitute legal or professional advice. It is not an
exhaustive review of recent developments and must not be relied upon as giving definitive advice. The Update is intended to simplify and summarise the
issues which it covers. It represents the law as at 13 February 2015. CMS Cameron McKenna LLP is a limited liability partnership registered in England and
Wales with registration number OC310335.