Pensions takes centre stage in Queen's speech
Delivered on 4 June 2014, the Queen's Speech unveils key pension reforms. New legislation will provide "discretion over the use of retirement funds" and "allow for innovation in the private pensions market to give greater control to employees". Pensions Tax Bill: This Bill follows the well-publicised Budget 2014 proposals and will allow individuals aged 55 or over to withdraw DC pension savings in full, subject to their marginal tax rate and the scheme rules allowing the new flexibilities. In addition, anti-avoidance provisions will be introduced to tackle the risk of individuals using the new rules for tax avoidance. Private Pensions Bill: This Bill will facilitate 'collective schemes' that, broadly, aim to pool risk between members. Such schemes will be designed to enable greater stability and reduce investment risk in DC schemes, but without exposing employers to funding risk. As part of the new landscape, three "mutually exclusive definitions for scheme type", that are based on degrees of certainty for members and employees, will be established: Defined Benefit (DB); Defined Contribution (DC); and Defined Ambition (described as a "shared risk pension scheme"). Further information on the Queen's Speech can be found here and the consultation on Defined Ambition can be found here.
Publication of new DB funding code On 10 June 2014 the Pensions Regulator (the "Regulator") published its revised Code of Practice on funding defined benefits. The Code of Practice is intended to be a guide to help trustees and employers reach a funding outcome that reflects a "reasonable balance" between the need to pay benefits and minimising the impact on the employer's plans for sustainable growth. The Regulator's new statutory objective comes into force on 14 July 2014. In response to the consultation in December 2013, the Regulator has made a number of changes to the Code of Practice. For example, the recovery period refers to eliminating the deficit over an "appropriate period", and no longer states that deficits should be eliminated as quickly as the employer can afford. Trustees should also take a proportionate approach to risk management by having to "manage" risk rather than specifically to "mitigate" it.
The Code of Practice is awaiting parliamentary approval and is expected to come into force in the next few months. However, the Regulator recommends, in its recently published Annual Funding Statement, that the Code of Practice be taken into account, where reasonable, in current scheme valuations. The funding statement is intended to support the approach in the Code of Practice, by also emphasising a need to recognise both the scheme's needs and the employer's plans for sustainable growth. It recommends an "open dialogue and collaborative working" between trustees and employers. Further information on the Code of Practice can be found here and the Annual Funding Statement can be found here. > Back to Top PPF proposes change to levy calculation On 29 May 2014 the Pension Protection Fund (the "PPF") published a consultation setting out its plans for the levy over the next three levy years (starting from 2015/16). A key change is the PPF's proposal to change the basis for measuring insolvency risk, which could lead to a redistribution of the levy of around £200 million. While some schemes may see a reduction in their bill, others could see a significant increase. The changes provide for a "PPF-specific measure" of insolvency risk. The new model is based on financial information limited to organisations sponsoring DB schemes, which will be captured by Experian (appointed by the PPF in July 2013) from a range of sources including Companies House and the Charity Commission. The model is designed to be more transparent, with schemes being able to check their data and scores through a free web portal. This approach should also help trustees understand the likely impact of future accounts on the scheme's levy. Schemes wishing to respond to the consultation have until 9 July 2014 to do so. Further information on the consultation can be found here. > Back to Top
PPF consults on changes to valuation guidance in relation to non "money purchase" benefits The PPF has also published a consultation outlining its policy for the treatment of scheme valuations in light of the change in definition of money purchase benefits which is expected to become law in July (see our special May UK Pensions Update). The consultation confirms that the PPF will only exercise its discretion to require an out of cycle valuation where the impact is "material". This will be the case where the change in the latest PPF valuation's surplus or deficit is more than 10% in relative terms and more than £5 million in absolute terms when taking account of benefits that will cease to be "money purchase" (which benefits will therefore in future need to fall within funding deficit valuations).
Partners in an LLP may have to be auto-enrolled The Supreme Court has held in the case of Clyde & Co LLP and another v Bates van Winkelhof, that a member of a limited liability partnership was a "worker" and therefore entitled to whistleblowing protection. Of greater interest from a pensions perspective is that the Regulator has also confirmed that the decision is relevant when considering whether LLP members are "workers" for the purposes of the auto-enrolment requirements. The Supreme Court (overturning the Court of Appeal) held that a former equity partner of a law firm was a "worker" for the purposes of the Employment Rights Act. However, the decision means that LLP members may potentially fall within the scope of a range of other rights available to "workers", including the right to be auto-enrolled into a pension scheme. LLPs - which are a popular structure for many professional services firms - should consider the implications of this case carefully and as a matter of urgency if they have already passed their auto-enrolment staging date. Each case will need to be considered on its individual facts, taking into account the "worker" test as laid down in case law, Regulator guidance, and potentially the LLP's pay structure in terms of what may count as qualifying earnings. Our employment department will provide a more detailed alert, which we will include in next month's Pensions Update.