PENSIONS round-up SEPTEMBER 2015 02 Introduction 03 The Pensions Regulator 04 Pension Protection Fund 05 Department for Work and Pensions 06 HMRC 07 Case Law 08 Public Service Pension Schemes 09 Other News 10 On the Horizon 11 Contact Details IN THIS ISSUE Welcome to the first edition of DLA Piper’s new monthly newsletter – Pensions Round-Up – in which we provide an overview of developments in pension legislation, case law and regulatory guidance. In this edition we look at key developments from September 2015 including the following. ■ The Pensions Regulator: the results of research by the Pensions Regulator and the Financial Conduct Authority about the operation of the DC flexibilities; and a regulatory report detailing action taken by the Regulator in a case where a scheme missed two consecutive valuation deadlines. ■ The Pension Protection Fund: the announcement of the Levy Estimate for 2016/17 and the publication of the consultation about the levy rules. ■ Department for Work and Pensions: an update to the response to consultation and regulations about administering accrued contracted-out rights to address a procedural error identified in respect of the documents published in July; and the launch of a communications campaign about the upcoming State Pension changes. ■ HMRC: the publication of the latest Countdown Bulletin in relation to the end of contracting-out, and the latest pension schemes newsletter. ■ Case law: a judgment given at the end of July (and subsequently published) about the extent to which a scheme’s rules permitted the trustees to adopt CPI in place of RPI as the measure for revaluation and pension increases. ■ Public service pension schemes: the Government’s response to consultation and the publication of draft legislation about the imposition of a cap on exit payments for the public sector. ■ Other news: an announcement about a change to the oversight of Pension Wise; the date for the Autumn Statement 2015; the publication of TPAS’s annual review for 2014/15; and an update on timing for the review of the Incentive Exercises Code of Good Practice. ■ On the Horizon: a timeline of some of the key future developments in pensions to help employers and trustees plan ahead. If you would like further information about any of the issues raised in this edition of Pensions Round-Up, please get in touch with Cathryn Everest or your usual DLA Piper pensions contact. Contact details are at the end of this newsletter. 02 | Pensions Round-Up – September 2015 INTRODUCTION RESEARCH ON DC FLEXIBILITIES In September the Regulator and the Financial Conduct Authority published the results of research conducted to gather evidence to inform the Government’s consultation launched at the end of July about possible barriers to people switching their pensions in order to access the new flexibilities. The Regulator’s survey looked at DC and hybrid schemes and was comprised of an online self-completion questionnaire completed by 226 trust-based schemes including master trusts. The FCA’s report is based on 107 responses with respondent firms consisting of three main groups – life insurers, investment companies, and SIPP providers. Both reports look at the flexibility options offered, the transfer process, requirements for members to take advice and exit charges. In terms of options offered, the Regulator’s survey showed that the most common options available for occupational schemes were withdrawal of a tax free lump sum (77%) and a lifetime annuity (74%). 43% of schemes offered uncrystallised funds pension lump sums and 31% offered drawdown. A key issue for employers and trustees of occupational pension schemes is whether, as a result of the Government consultation, changes will be made to the statutory transfer process. Some notable findings therefore include the following. ■ In the Regulator’s survey, analysing the findings by members the average transfer time was 25 days and, analysing by schemes, most said the average was 39 days. In the FCA’s survey there was an average of 16 days or, where the Origo Options pension transfer service was used, 6 days. ■ While only a minority of respondents to the Regulator’s survey made concrete suggestions for improvements to the transfer process, 10% felt that standardisation and simplification would improve the efficient operation of the transfer process. Suggestions for improvement given by respondents to the FCA survey included setting maximum timescales, standardising and digitalising the process, streamlining the transfer verification process in a number of areas, and providing easier access to the information necessary to facilitate a more efficient transfer process. REGULATORY REPORT – FUNDING INVESTIGATION On 3 September the Regulator issued a report setting out how it considered using its statutory powers in relation to a failure to meet the statutory deadlines for a scheme’s 2009 and 2012 actuarial valuations. The trustees in this case had been unable to reach agreement with the employer in respect of the 2009 recovery plan and schedule of contributions. The Regulator issued a warning notice on 31 August 2012 requesting that the Determinations Panel direct the trustees to obtain skilled persons’ reports about the scheme’s funding position and the strength of the statutory employer’s covenant. This was issued reluctantly because the Regulator believed that the trustees had power to seek contributions under the scheme’s rules but the parties did not agree with this interpretation. The proceedings were suspended because there was potential for a consensual solution but this was not reached and the trustees did subsequently make a demand under the scheme’s contribution rule and issued court proceedings. While matters continued, the 2012 valuation deadline passed. Ultimately the trustees and employers reached a settlement whereby the £36.1 million deficit as at the 2012 valuation date will be cleared by January 2018, with over £20 million payable by January 2016. The Regulator’s comments in the report include that: (i) where there is a late valuation its focus will be to help trustees reach an appropriate outcome as soon as possible; (ii) where the parties are not taking urgent positive steps to remedy non-compliance in a timely way, it will consider whether to use its powers; (iii) the Regulator will generally expect any options capable of addressing the issues to have been pursued before it will consider exercising its powers; and (iv) where the parties engage in settlement discussions which have the potential to avert the need for regulatory action, the Regulator is open to working constructively with the parties. www.dlapiper.com | 03 THE PENSIONS REGULATOR PPF LEVY In September there were two key publications from the PPF, both of which relate to the levy. In the early part of September, the booklet that accompanies 2015/16 levy invoices – “A guide to the Pension Protection Levy 2015/16” – was added to the PPF’s website. The booklet covers issues including payment of the levy, the levy calculation, and querying invoices. On 21 September a consultation was published in relation to the 2016/17 levy (the second year of the current triennium). The Levy Estimate for 2016/17 is £615 million which is lower than the £635 million estimate for 2015/16 and reflects improvements in the Experian scores that scheme employers and guarantors are receiving, balanced by a deterioration in smoothed scheme funding. Reflecting the PPF’s desire to maintain stability of methodology for the three years of the triennium, the Levy Rules for 2016/17 will be “very substantially the same” as for 2015/16 and the only proposed changes in relation to the new PPF-specific insolvency risk scoring methodology are of “an essentially limited and technical nature”. The proposals for 2016/17 also include: amendments to the draft guidance on Asset-Backed Contribution structures to indicate the potential for a light touch approach to recertifying arrangements previously certified; and proposals to change the standard Measurement Time for the submission of scheme data (including hard copy contingent asset documentation) to midnight at the end of 31 March 2016 in order to align deadlines between the PPF and the Regulator. The PPF also reports that it will be offering a series of interactive seminars for trustees, employers and professional advisers in the autumn providing an introduction to the issues raised in certifying Type A contingent assets for recognition in the levy. Whilst not strictly an issue for consultation or the 2016/17 levy, the PPF provides an update following the new requirement introduced in 2015/16 for schemes identified on Exchange as having Last Man Standing (LMS) status to confirm that they had taken legal advice to confirm their structure. This exercise has shown that some schemes were incorrectly identified as LMS in the past and benefitted from a reduced levy. The PPF therefore takes the opportunity to explain its proposals to deal with this issue, which essentially involve contacting schemes and re-invoicing where appropriate. Whilst at this stage the final form of the rules is not known, it is useful for schemes to be aware of the proposed approach not only to the levy but also to the issue of LMS status. The consultation closes on 22 October and the PPF plans to publish the response and final Determination in December 2015. PENSION PROTECTION FUND 04 | Pensions Round-Up – September 2015 www.dlapiper.com | 05 THE END OF CONTRACTING-OUT In our Pensions Alert dated 24 July 2015 we reported on the publication of the Government’s response to its May 2014 consultation and the final form of the Occupational Pension Schemes (Schemes that were Contracted-out) Regulations 2015 (“July Regulations”). The response and the July Regulations concern how schemes should administer accrued contracted-out rights when the new State Pension is introduced on 6 April 2016 and contracting-out ends. However, it has subsequently been discovered that a procedural error was made in relation to the July Regulations. The provisions within the July Regulations about conversion of survivors’ benefits should only have been made after a draft of the regulations was laid before, and approved by a resolution of, each House of Parliament. This procedure has not been correctly followed and therefore on 16 September the Occupational Pension Schemes (Schemes that were Contracted-out) (No.2) Regulations 2015 (“Replacement Regulations”) were laid before Parliament. In summary the July Regulations are revoked by the Replacement Regulations from 31 October 2015 and the Replacement Regulations remake the provisions in the July Regulations save for those which relate to the conversion of survivors’ benefits. The DWP will include the provisions about conversion of survivors’ benefits in a future set of regulations which it intends will be debated and made before the end of the year. Also on 16 September, the DWP published a replacement version of the response to consultation reflecting the points set out above. STATE PENSION – COMMUNICATIONS On 19 September the DWP announced the launch of a new communications drive ahead of the introduction of the new State Pension in April 2016. The campaign (which is under the tagline “Our state pension is changing”) aims to broaden the public’s understanding of how the new State Pension will work and how people can find out how it affects them, based on their own National Insurance record. The press release about the launch of the campaign states that, in particular, the new advertisements target people within 10 years of reaching State Pension age, a group which also has access to the new DC flexibilities. It is noted that many of these people may want to base decisions about whether or not to draw down their private pension savings on their likely State Pension amount. The press release also contains some information about the fact that anyone aged 55 or over can apply for a personalised State Pension statement. It is reported that these statements will give an estimate of what the person will receive under the new system, and that they have recently been updated to include information on the contracted-out deduction that may have been made. The key point for schemes to note is that if looking at the legislation about administering accrued contracted-out rights from 6 April 2016, it is the Replacement Regulations rather than the July Regulations which will be relevant. However, the policy decisions made in July have not changed. The key upcoming developments in relation to the end of contracting-out will be the further consultations and regulations about administering accrued rights which were previously announced in July and are detailed in our Pensions Alert. It is worth employers and trustees being aware of this communications campaign because it may lead members to raise queries about whether their employment is or was contracted-out and, more generally, may prompt members to request information about their benefit entitlements including GMPs. DEPARTMENT FOR WORK AND PENSIONS COUNTDOWN BULLETIN – END OF CONTRACTING-OUT On 30 September HMRC published the latest edition in its series of Countdown Bulletins in relation to the end of contracting-out. The Bulletin sets out some updates about the Scheme Reconciliation Service including that from 30 September 2015 there is a designated Customer Relations Team which will support scheme administrators with their registrations of Expressions of Interest and submission queries/updates. This team will also be contacting schemes yet to register for the Service to encourage registration ahead of the April 2016 deadline, and will be engaging with scheme administrators to agree an appropriate date/time for submissions queries to help HMRC understand how many queries it may expect to receive. HMRC also provides a list of discrepancies that it is not necessary to query, such as where the scheme holds a start (or end) date different to that held by HMRC but both are in the same tax year, or the GMP the scheme holds is one pence different to that held by HMRC. Other points of note in the Bulletin include that: ■ HMRC will no longer track contracted-out rights after 5 April 2016 – it will be the responsibility of schemes to continue to track movements of membership that take place after that date and they will no longer need to advise HMRC of these; and ■ as the introduction of the new State Pension gets nearer, administrators are likely to get a lot of questions about the end of contracting-out and how this will affect pension entitlements. The Bulletin provides links to information on Pension Tube explaining contractingout and the impact on the new State Pension and to the State Pension Toolkit. PENSION SCHEMES NEWSLETTER On 28 September HMRC published its latest Pension Schemes Newsletter. In August HMRC stated that it aimed to provide more detail in this newsletter about the new protection regimes that will apply when the lifetime allowance reduces to £1 million on 6 April 2016. HMRC states that unfortunately it is not able to provide as much detail as it would have liked. However, it does note that: ■ legislation for the reduction in the lifetime allowance and the protection regimes will be delivered in the Finance Bill 2016, and as a result it will not be possible for scheme members to apply for protection until after April 2016; ■ individuals who want to rely on Fixed Protection 2016 need to start thinking about what arrangements they need to make to stop accruing benefits after 5 April 2016; and ■ the application process for Fixed Protection 2016 and Individual Protection 2016 will be online and will require the member to provide similar information and declarations as for the 2014 protections. Some brief information is provided about the online system, and HMRC states that it hopes to be able to provide much more detail about this process for members and administrators in October 2015. Other issues reported on in the newsletter include: updates to Real Time Information reporting for flexibility payments; and upcoming changes so that when the tax charge on certain lump sum death benefits changes from 45% to the recipient’s marginal rate from 6 April 2016, reporting of such payments will be made through Real Time Information rather than the Accounting for Tax return. HMRC 06 | Pensions Round-Up – September 2015 www.dlapiper.com | 07 CHANGING FROM RPI TO CPI A July judgment was published in September concerning the Barnardo Staff Pension Scheme. Increases and revaluation for the Scheme are currently calculated by reference to RPI but the principal employer has proposed that the trustees substitute this with CPI and argues that they have power to do so. Representative members appointed as defendants to the proceedings argue that the trustees do not have the power to make this change so long as RPI is still published. The relevant definition Several editions of the rules were relevant to this case, however, the key definition which the court had to consider was that of “Retail Prices Index” in the 1988 Rules which means “the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval. Where an amount is to be increased “in line with the Retail Prices Index” over a period, the increase as a percentage of the original amount will be equal to the percentage increase between the figures in the Retail Prices Index published immediately prior to the dates when the period began and ended, with an appropriate restatement of the later figure if the Retail Prices Index has been replaced or re-based during the period”. The court’s conclusions The court considered whether: (a) the adoption of a new index by the trustees results in a replacement under this definition; or (b) whether a replacement can only follow on from the discontinuance of RPI. It was concluded that (b) was the correct answer. The judge stated that the replacement must be one which has the same status as RPI at the time of the 1988 Rules (an officially published index) and must also, assessed at a fairly general level, have the same purpose (a measure of price inflation by reference to a basket of elements). Crucially, it was concluded that the index must properly be seen as a replacement “divorced from its particular potential use under the Scheme”. The judge’s reasons included that there was force in the submission that the second part of the definition refers to “re-basing” and since this can only be implemented as a result of the way RPI is compiled by the Office for National Statistics, so too RPI can only be replaced as the result of similar official action, outside of the scheme. The judge also rejected the principal employer’s argument that the definition must be referring to something other than an official replacement otherwise there would be no need to specify that it must not prejudice approval. He did not accept that it is inconceivable that there could be a situation in which the use of a replacement index would prejudice approval. The judge also concluded that under the definition, RPI can only be replaced when it has ceased to be published. He dismissed the alternatives that it could be replaced while still published but (i) not used for any purpose, (ii) not used for any official purpose, (iii) superseded for some purposes, or (iv) no longer recognised as a national index. The judge noted difficulties with the alternative interpretations, for example, alternative (i) would be practically impossible to establish and (ii) would beg the question of what is an official purpose. He concluded that the interpretation that RPI can only be replaced when it has ceased to be published produces a result which is simple to apply and “gives a perfectly ordinary meaning” to the word replacement. Further support was found for this conclusion in the fact that the principal employer’s construction would give the trustees a unique power to increase the principal employer’s funding liabilities by adopting a more costly index. It is useful to see the court’s construction of these rules. However, it should be borne in mind that construction will depend on the precise drafting of the rules in question and, given a different definition, the use of the word replacement may not necessarily lead to the same conclusion. This underlines the importance of seeking advice before making any changes to the basis for increases or revaluation to ensure that there is power in the rules to do so. CASE LAW CAP ON PUBLIC SECTOR EXIT PAYMENTS Background On 31 July HM Treasury issued a consultation seeking views on the detail of its policy proposals to end six figure exit payments for public sector workers. The proposals included that there would be a £95,000 cap on the total value of exit payments made to employees in the public sector, and that the cap would apply to all forms of exit payment including the cost to the employer of funding early access to unreduced pensions. Response to consultation The Government response to consultation was published on 17 September reporting that, having considered the responses to the consultation, the Government proposes to continue to legislate to introduce a cap on exit payments. In relation to pensions, it is reported that a significant number of respondents disagreed with the intention to include early access to unreduced pensions within the scope of the cap. However, in response, the Government states that it believes that the cap should apply to the wide range of payments related to exit and that this approach will ensure the cap is fair and not subject to avoidance through individuals taking early retirement or being offered other forms of payment. The Government does not accept the argument made by some respondents that this approach is contrary to the 25 year guarantee on pension reform made by the Government in the last Parliament, and emphasises that these changes will have no impact on individuals’ accrued pension rights. It is also worth noting that the consultation contained a general question about how to approach individuals with TUPE terms that could lead to a future entitlement to an exit payment in excess of the cap. In its response the Government states that it is currently minded not to include those individuals with protected TUPE terms within the scope of the cap. Draft legislation On 16 September the Enterprise Bill was published which includes draft clauses providing the framework for the cap, which largely takes the form of regulation-making powers. The Bill includes a power to make regulations to amend public service pension schemes and draft amendments to the Local Government Pension Scheme Regulations 2013 to give effect to the restriction. These provisions will come into force on such day or days as the Treasury may appoint by regulations. Whilst the provisions are in draft and much of the detail will follow in regulations, it is useful for employers and administrators of public service schemes, as well as private sector contractors who are providing or planning to provide outsourced services, to be aware of the proposed changes. PUBLIC SERVICE PENSION SCHEMES 08 | Pensions Round-Up – September 2015 www.dlapiper.com | 09 PENSION WISE On 16 September HM Treasury reported that at an evidence session for the Work and Pensions Select Committee, the Economic Secretary to the Treasury had announced that: (i) responsibility for the delivery of Pension Wise will move from the Treasury to the DWP by the end of the financial year (31 March 2016); and (ii) the Government will be making core data, including website visits and number of appointments, publicly available and updating it regularly. The move to the DWP will not mean a change to the Pension Wise service itself or a change to Citizens Advice Bureau and The Pensions Advisory Service being the delivery partners. AUTUMN STATEMENT DATE On 9 September it was announced that the Government will publish a joint Autumn Statement and Spending Review on 25 November 2015. REVIEW OF INCENTIVE EXERCISES CODE The industry Code of Good Practice on incentive exercises is in the process of being reviewed. This reflects the fact that when the Code was published in 2012 it was agreed that a review would be undertaken after three years. The review is also taking into account how the Code should change in light of the DC flexibilities. It is expected that a revised version of the Code will be available for publication by the end of 2015. TPAS ANNUAL REVIEW The Pensions Advisory Service (TPAS) published its Annual Review 2014-2015 in September. Of particular note for employers and trustees are the statistics in relation to disputes. TPAS reports that 5,070 complaints were referred to TPAS, and 2,607 of these were accepted for further investigation (an increase of 17%). Other points of note in relation to disputes include the following. ■ The top five reasons for investigated complaints were overpayment, decision-making (60% of which were about ill health retirement), mistakes, entitlement, and delays. ■ There was a 28% increase in complaints about delays and a 16% increase in complaints about mistakes. ■ 44% of complaints investigated related to DC plans, 30% were about public sector schemes, and 26% were about DB schemes. FCA FINANCIAL SERVICES REGISTER On 7 September the Financial Conduct Authority announced the launch of a new Financial Services Register which makes it easier to find information on firms, individuals and other bodies that are, or have been, regulated by the Prudential Regulation Authority and/or the FCA. The FCA reports that the new Register has one search field to help users find a firm, individual or collective investment scheme by looking up its name, reference number or postcode, and that it includes clearer language and help text to explain some important financial, technical and regulatory terms. The FCA also states that firms that it has been told are providing regulated products or services without the required authorisation – or are knowingly running a scam – are included in the Register for the first time, with these firms highlighted in search results by red text and a warning symbol. OTHER NEWS 10 | Pensions Round-Up – September 2015 DATE DEVELOPMENT Unknown A consultation on revised regulations about equalising GMPs is expected in this Parliament. It has previously been stated that it is envisaged that the provisions on Defined Ambition and collective schemes would be available in time for the end of contracting-out in April 2016, however, it is not clear whether this remains the case. Timing for the publication of the response to the July consultation about whether there is a case for reforming pensions tax relief has not been announced. A draft updated IORP Directive is currently under consideration. The current draft version states that Member States would have 18 months after the entry into force to transpose provisions into national law. An updated version of HMRC’s draft Pensions Tax Manual was expected to be published in Summer 2015 but as at the end of September had not been published. Autumn 2015 The Regulator will consult on a revised draft DC Code. (A consultation on supporting guidance will follow in spring 2016.) The Government response to its consultation on exit charges and the transfer process is expected to be published. 2015 Further consultation and regulations are expected in relation to the end of contracting-out, for example, consequential amendments to the legislation on transfers and the disclosure requirements. The Regulator intends to publish further guidance to help trustees navigate the DB Code, including guides on integrated risk management and investment strategy. Further developments expected on proposals for transparency of costs and charges. Early 2016 A final response is expected from the Board of the UK Statistics Authority in relation to the June consultation on consumer price statistics. 2016 It is expected that any changes to the legislation as a result of the February 2015 consultation on the investment regulations would be made in 2016. The Regulator intends to review its guidance on transfers. 6 April 2016 The reform of State Pension and the end of contracting-out will take effect. The tapered annual allowance is due to be introduced. The lifetime allowance is due to fall to £1 million and transitional protection (fixed protection and individual protection) is expected to be introduced. It is proposed that member-borne commission payments and Active Member Discounts will be banned from DC qualifying schemes. October 2016 The first phase of the system of automatic transfers is intended to be launched. Further detail and a consultation are expected to be published in 2015. 2017 Legislation to enable the development of a secondary annuities market is expected to be introduced. The measures on DC charges and governance standards will be reviewed. 6 April 2018 The lifetime allowance is due to be indexed annually in line with CPI. ON THE HORIZON David Wright Partner, Liverpool T +44 (0)151 237 4731 email@example.com Claire Bell Partner, Manchester T +44 (0)161 235 4551 firstname.lastname@example.org Tamara Calvert Partner, London T +44 (0)20 7796 6702 email@example.com Michael Cowley Partner, London T +44 (0)20 7796 6565 firstname.lastname@example.org David Farmer Partner, London T +44 (0)20 7796 6579 email@example.com Jeremy Harris Partner, Manchester T +44 (0)161 235 4222 firstname.lastname@example.org Vikki Massarano Partner, Leeds T +44 (0)113 369 2525 email@example.com Ben Miller Partner, Liverpool T +44 (0)151 237 4749 firstname.lastname@example.org Kate Payne Partner, Leeds T +44 (0)113 369 2635 email@example.com Matthew Swynnerton Partner, London T +44 (0)20 7796 6143 firstname.lastname@example.org Cathryn Everest Professional Support Lawyer, London T +44 (0)20 7153 7116 email@example.com www.dlapiper.com | 11 CONTACT DETAILS www.dlapiper.com This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended and should not be used as a substitute for taking legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or not taken on the basis of this publication. DLA Piper uk llp is authorised and regulated by the Solicitors Regulation Authority. DLA Piper scotland llp is regulated by the Law Society of Scotland. Both are part of DLA Piper, a global law firm operating through various separate and distinct legal entities. For further information please refer to www.dlapiper.com. Copyright © 2015 DLA Piper. All rights reserved. | OCT15 | 3004966
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Pensions round-up - September 2015
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