Top of the agenda
1. The Pensions Regulator's revised codes of practice on reporting late payment of contributions
The Pensions Regulator is to revise its codes of practice on reporting late payment of contributions to defined contribution (DC) occupational pension schemes and personal pension schemes. The Regulator had consulted on revisions to the codes in October 2012. A key motivation behind the consultation is the advent of auto-enrolment, which is expected to lead to a rise in the use of new and existing DC arrangements.
The existing legal requirements
In summary, the duties on employers, trustees of occupational pension schemes, and managers of personal pension arrangements in relation to payment of contributions are as follows:
- Employers of DC arrangements are required to pay over employer contributions and any employee contributions deducted from salaries within prescribed time limits (generally by the 19th day of the following month).
The Regulator intends to issue employer guidance in due course alongside the revised codes of practice. The guidance will cover the employer's responsibility to understand what is due to be paid to the scheme, by when, and how to calculate, deduct and pay over contributions to the scheme.
- Managers of personal pension arrangements have a statutory duty to monitor the payment of contributions by the employer. The Regulator's view is that this duty includes duty to monitor over and under payments (and not just the timing and fact of payment).
- If the employers fail in their duties, trustees and managers should report the failure to the Regulator if they have "reasonable cause to believe" that the failure is likely to be "materially significant" to the Regulator in the exercise of its functions.
Effective monitoring of payment of contributions, therefore, remains fundamental to enabling both trustees and managers to fulfil this duty.
- Trustees may also have a fiduciary duty to chase missing assets of the scheme in certain circumstances.
The key points arising from the consultation response are:
- The obligation to monitor is not a "one size fits all" approach. Trustees and managers must decide on the most effective monitoring processes, based on the circumstances of their schemes. The revised codes will include more information on effective monitoring processes as well as the Regulator's view on high risk situations that may require greater intervention.
- The Regulator has stated that "reasonable cause to believe" means more than unsubstantiated suspicion. The trustees and managers must use their judgement to assess materiality. They may make reasonable assumptions about materiality based on an employer's behaviour. So if an employer does not respond to multiple contacts, it may be inferred from this that the employer is unwilling to pay the outstanding contributions.
- Trustees and managers are expected to seek to resolve the payment failures first (many of which are caused by administrative errors) before reporting them to the Regulator.
- To carry out their duties properly, trustees and managers must have access to up to date payment information (including information about members' pensionable pay). They may take this information at face value, unless they have reason to believe it is incorrect. That said, they should have a process in place that will flag significant errors which may require detailed examination and intervention. The Regulator has stressed that it is not intending to place a large burden on trustees and managers: their monitoring process can be risk-based and should be commercially viable and proportionate so that it is in the interests of the scheme membership as a whole (for example, a sampling and spot check exercise, not a systematic duplication of all payroll calculations).
Some measures proposed at the consultation stage have been dropped. These include extending the current deadline for reporting material payment failure from 90 to 120 days and the proposals to require trustees and managers to submit nil returns (as regards reporting material failures) as this would be unnecessarily onerous.
The revised codes are expected to be in force from autumn 2013.
Providers of personal pension arrangements should consider, if they have not already done so, extending their monitoring arrangements to monitor any under-payment and over-payment of contributions and not just the late payment of contributions.
Trustees of occupational schemes should also consider reviewing their monitoring systems to ensure they meet with the Regulator's guidelines in the revised codes of practice; this may require a review of their administration agreements.
Employers, in due course, will need to factor in the Regulator's impending guidance for employers on payment of contributions into their practices. Where there are delays, employers need to bear in mind that they have not only to pay the contributions but also to make good any loss of investment return to the member arising from the delay.
2. Desmond & Sons: judicial review application by recipients of contribution notices rejected
An application for judicial review against the Pensions Regulator in the Desmond & Sons case has been rejected on the grounds that the applicants, Mr Gordon and Mr Desmond, had delayed bringing their application and had no arguable case.
There had been an earlier Upper Tribunal hearing in the case (which was published in March 2012) relating to the issuing by the Regulator in 2010 of Contribution Notices (totalling £1m) against the two director shareholders of Desmond & Sons Ltd (Mr Gordon and Mr Desmond) for their role in a Members Voluntary Liquidation (MVL) of the Company. A consequence of the MVL was that, under Northern Ireland Legislation as it stood at the time, the Desmond pension scheme's employer debt fell to be calculated on the MFR (rather than the buy-out) basis.
The directors had appealed to the Upper Tribunal against the issuing of the Contribution Notices (CNs). The trustees of the Desmond scheme also lodged a reference to the Tribunals, arguing, among other things, that the CNs should have been for a higher amount and a CN should also have been imposed on a third shareholder, Mrs Desmond. The Pensions Regulator had also made a reference, broadly making the same points as the trustees. At the hearing, the Upper Tribunal had held that it was time-barred from requiring a CN to be imposed on Mrs Desmond, but that it did have jurisdiction to increase the sum under the CNs imposed on Mr Desmond and Mr Gordon. (see our bulletin on the Upper Tribunal hearing here).
The trustees and the Regulator appealed against the Upper Tribunal decision to the Court of Appeal in Northern Ireland. Following this hearing, Mr Gordon and Mr Desmond applied for leave to apply for judicial review against the Regulator, arguing that certain steps taken by the Regulator and the Determinations Panel had invalidated the CNs imposed on them. The judge held that even if the Regulator had not complied fully with the relevant legislation his determination was not unfair, and should not be overturned on a technicality.
The appeal to the Court of Appeal by the Regulator and the trustees against the earlier Upper Tribunal decision was heard in December last year. It is not clear on which points the Regulator and the trustees were appealing, but it may have been over the Tribunal's findings that it was time-barred from imposing a CN on the third shareholder (the other findings of the Tribunal had largely been in the trustees' and the Regulator's favour). The Court of Appeal's judgment is expected shortly.
3. D Payne/AON: Deputy Pensions Ombudsman's determination
The Deputy Pensions Ombudsman (DPO) has ordered a scheme administrator to pay over £50,000 to a member who was given an incorrect estimate of his early retirement benefits.
Mr Payne's scheme pension was subject to a 37% reduction as a consequence of a pension sharing order following his divorce. Unfortunately AON, the third party administrator of his employer's pension scheme, issued one benefit illustration which made no allowance for this reduction. Mr Payne then accepted voluntary redundancy at the age of 55, as an alternative to taking another job offered by his employer. The DPO held that the incorrect benefit illustration constituted maladministration and that, on the balance of probability, Mr Payne would not have accepted voluntary redundancy if the correct lower pension figure had been quoted to him, and would probably have remained with his employer until age 60. AON was ordered to pay Mr Payne compensation for income loss calculated from the date of redundancy to age 60, together with £2,500 for distress. A complaint against the scheme trustees was not upheld because they paid the correct benefits.
In many cases an incorrect benefit statement will not give rise to a successful claim. However, in this case the Ombudsman was persuaded, on the evidence provided, that the difference between the incorrect and correct benefit illustrations was critical to Mr Payne being able to live his chosen lifestyle, and that he would not have chosen to retire with a substantially lower standard of living, therefore compensation for maladministration was appropriate. Scheme administrators should ensure that pension sharing orders are correctly reflected in their benefit illustrations.
4. HM Treasury issues consultation on Individual Protection
HM Treasury have issued a consultation on the individual protection regime (described previously as "personalised protection" by the Chancellor in his Autumn Statement) to give individuals some protection against the planned reduction in the pensions lifetime allowance (LTA) from £1.5m to £1.25m from 6 April 2014.
The key proposals in relation to individual protection (IP14) are as follows:
- IP14 will give individuals a personalised LTA based on the value of their pensions savings at 5 April 2014 (subject to a maximum of £1.5m). So, for instance, if an individual's total pension savings at 5 April 2014 are valued at £1.35m, that person will have a personalised LTA of £1.35m and he will be treated as having a standard LTA of £1.35m for tax purposes.
- Unlike Fixed Protection where individuals are generally not permitted to accrue further benefits, (if they do, fixed protection is lost), IP14 will allow individuals to continue accruing further benefits after 5 April 2014 while protecting tax relieved pension savings that have accrued until then (subject to an overall maximum of £1.5m). So, in the above example, if a member accrues further benefits after 5 April 2014, they will be subject to a LTA charge on the additional savings, but £1.35m of their savings will not attract the LTA charge.
(The LTA charge is 55% on the excess over the LTA if the benefit is taken as a lump sum, or a charge of 25% if it is taken as pension income).
- Individuals will be given three years from 6 April 2014 to apply for IP14.
IP14 versus FP14
- FP14 (details of which are set out in the draft Finance Bill 2013 and which is based on the same principles as Fixed Protection 2012), will entitle individuals who claim it to an LTA of £1.5m (so in most cases a higher LTA than IP14).
- However, any new pension savings made by the individual after 6 April 2014 above a minimum level are likely to lead to the loss of FP14 (with the result that the individual will revert back to his standard LTA of £1.25m and be subject to the LTA charge on any excess savings above this limit). The effect of this is that individuals will have to stop active membership of all registered pension schemes if they want to keep FP14. IP14, on the other hand, according to the consultation document, is more suitable for those wishing to continue in active membership of a pension scheme.
While individuals will have three years from 6 April 2014 to apply for individual protection, they must apply for FP14 before 6 April 2014.
- Individuals may, however, apply for both individual protection and FP14 (so long as they meet the eligibility conditions).
Legislation for IP14 will be included in the Finance Bill 2014 together with supporting regulations (dealing with when an individual can apply for IP14 and the reporting requirements for members and the scheme administrator to HMRC). IP14 and FP14 will apply from April 2014 when the LTA is reduced.
Issues put forward for consultation
A number of detailed questions in relation to proposals have been put forward for consultation.
- Whether there will be particular difficulties for scheme administrators in monitoring individuals with fixed protection (that includes Fixed Protection 2012 as well as FP14 and IP14).
- How member savings are valued, as an individual who wants to apply for IP14 will need to have a valuation of all their pension savings built up with UK tax relief on 5 April 2014. It is worth noting in this regard that that benefits that came into payment before 6 April 2006 (i.e. before the LTA regime was introduced) and any pension a person has built up in an overseas pension scheme with UK tax relief all need to be included in the valuation. The Treasury is proposing that the existing methods for valuing pension savings under the Finance Act 2004 (as amended by the Finance Act 2011) should be used as far as possible for valuing pension savings.
One aspect which is not clear is the interaction of IP14 with the auto-enrolment requirements. Currently, individuals that have claimed Fixed Protection 2012 may lose the protection if they are auto-enrolled by their employer under the auto-enrolment requirements. However, given that IP14 allows individuals to continue accruing benefits, it would seem that there would be no immediate risk to those employees losing that protection if they are auto-enrolled; the only consequence there would be that any extra benefits that these employees accrue under the auto-enrolment scheme would be subject to the LTA charge. The position is potentially more opaque where individuals claim both Fixed Protection and IP14 – on the face of it, auto-enrolment will result in the loss of fixed protection, so the member would be left with only the benefit of IP14. It would be helpful if the DWP or the Treasury would clarify the position in due course.
5. US bankruptcy court approves Kodak deal
The US bankruptcy court has approved the settlement between the trustees of the Kodak Pension Plan and Eastman Kodak, the US parent company of the sponsoring employer of the Plan. The settlement, which is now expected to complete, will give the trustees of the Plan a stake in the personalised imaging and document imaging businesses of the Company. For more about the settlement and the events leading to it, read our earlier briefing here.
6. PPF compensation cap to be increased
The DWP announced on 25 June that the compensation cap applicable to pensions payable by the PPF will be increased for those individuals affected who have a long period of pensionable service. The normal cap (currently £34,867.04, revised annually) will increase by 3% for each complete year of pensionable service that exceeds 20 years, subject to a maximum of twice the normal cap.
This change will be implemented in future legislation, not yet drafted, and will then apply to future payments.
7. Pensions Regulator policy on prohibiting trustees
The Pensions Regulator has published a statement, effective from 25 June, to explain its policy on its statutory power to prohibit a person from acting as a scheme trustee. The statement also comments on the charging of fees for trustee services, and on what the Regulator may take into account in assessing the required standards of honesty, integrity, competence, capability and financial soundness.