Spring is a good time to clear out the clutter and take a fresh look at things. Pension schemes often benefit from a spring clean too, so we've looked at recent developments since our acting, noting and watching alert to identify those issues that could use a fresh look.
Taking a fresh look at scheme rules
Revaluation and indexation
The reduced revaluation cap and the statutory overrides enable trustees to take advantage of the new cap (as well as the reduced cap for indexation that was introduced in 2005), where the scheme rules would otherwise prevent them from doing so. For our commentary on this, please see our acting, noting and watching alert.
Upper accrual point/upper earnings limit
The new upper accrual point (UAP), by reference to which State Second Pension (S2P) accrual and National Insurance rebates are set, was introduced on 6 April. At the same time, the upper earnings limit (UEL) was extended so as to be higher than the UAP.
Trustees and employers should, therefore, check their scheme rules to see whether this will have an impact on their scheme benefits and to establish whether any amendments are needed.
For example, if the rules say that pensionable salary is capped at the same level as the UEL then (without amendment) that cap will be higher (in turn, increasing scheme benefits). On the other hand, where scheme benefits are reduced by reference to a S2P offset, if the offset calculation in the rules is based on the UEL then (without amendment) the amount of the offset will be greater than the actual amount of the S2P received (which will be based on the UAP), so leaving a gap (and, overall, lower benefits).
The long-awaited regulations dealing with trivial commutation and payments made in error have now come into force.
The changes surrounding trivial commutation are effective for payments made on or after 1 December 2009, while the provisions covering payments made in error apply to payments made on or after 6 April 2006.
Schemes have been able to act in accordance with the draft version of these regulations without sanctions, following HM Revenue & Customs' (HMRC) announcement saying this in January of this year. Nonetheless, it is good to see the regulations in their final form (the more recent predictions suggested that they would not be available before the autumn).
The new, alternative, £2,000 commutation limit applies on an individual scheme basis (irrespective of the benefits held by a member in other schemes). This should be welcomed by those schemes wishing to take advantage of the change, although it is likely that they are facing more pressing matters, higher up the agenda. The recognition that mistakes happen and can lead to payments being made in error is also helpful, although some common situations still appear to fall outside the scope of the regulations.
Trustees and employers wishing to take advantage of the new commutation rules will need to check their scheme documentation, to see whether any changes might be needed.
 The Registered Pension Schemes (Authorised Payments) Regulations 2009.
Pension credit benefit
The laws on pension credit benefits (which are benefits for a member's former spouse, deriving from a pension sharing order granted on divorce) have been relaxed. Pension credit benefits are now (since 6 April 2009) available from age 50 (or 55 from 2010) or where the pension credit member meets the ill health condition set out in the Finance Act 2004. Lump sums are also available in the same circumstances as for other members.
It may be worth looking at your rules if your arrangements for pension credit benefits mean that you provide those from your scheme, rather than transferring out the liability.
The Pensions Act 2008 provisions abolishing safeguarded rights (which are pension sharing rights deriving from contracted-out benefits) came into effect on 6 April 2009.
If your rules contain references to safeguarded rights these will need to be removed, although that exercise can probably wait until the next time you need to make rule amendments.
Converting Guaranteed Minimum Pensions (GMP)
6 April 2009 saw the introduction of legislation enabling trustees (with the employer's consent and after consulting members) to convert any guaranteed minimum pensions in their schemes into scheme benefits. Some restrictions apply to how the benefits must be structured (for example, survivors' benefits must be provided) and the amount of post-conversion benefit must be actuarially equivalent (on an individual level) to the GMP being converted.
If all the GMPs in a scheme are converted then it is likely that the scheme rules will need amending. However, we think that few schemes will be taking up the opportunity to convert GMPs until the issue of equalisation is addressed properly.
The Budget: schemes and executives taking a fresh look
This year's Budget has meant yet more complexity for pensions. From 6 April 2011 tax relief for individuals with an annual income of £150,000 or more will be restricted. Relief will be tapered away so it will be worth 20% for people earning over £180,000.
It's worth bearing in mind that all this is expressed as subject to consultation. There is a great deal of lobbying from the pensions industry and some aspects of what is being proposed may well change before Royal Assent (expected in July).
From 22 April 2009 HMRC will restrict higher rate tax relief on pension contributions for people who try to get round the measures being introduced in 2011 by increasing their contributions in the meantime.
These interim restrictions will apply where the person's:
- income is £150,000 or more (looking at the tax year in question as well as the previous two tax years, and ignoring any salary sacrifice arrangement entered into on or after 22 April 2009); and
- total pension savings (counting both employee and employer contributions) each year exceed £20,000. For defined benefit schemes, this is calculated by multiplying the increase in value of accrued rights by 10. This new "special annual allowance" will run alongside the annual allowance, but the legislation will be structured to prevent any double charging.
In broad terms, the special annual allowance will not apply where the normal regular contributions (to be known as "protected pension input amounts") that a member had in place on 22 April 2009 are not increased (or where any increase was agreed before 22 April). How well documented must any prior agreement be? Administrators and employers may well find themselves dealing with requests from anxious executives looking for as much evidence as possible on this front.
Other issues to consider around "normal" pension saving established before 22 April 2009 relate to provisions concerning whether any material change has been made to the scheme rules. In some circumstances (for example, where there is a material change to the way defined benefits are calculated for less than 50 active members) any protection will be lost to the extent that benefits are attributable to the change.
If the member's pension savings exceed the special annual allowance then a charge will apply (payable via the member's tax return). The HMRC guidance says that for 2009/10 this will be 20% and for 2010/11 the charge "might" be 30% (because that's when the 50% income tax rate comes in and special annual allowance charge is likely to be set as the difference between the higher and the basic rates of income tax).
In limited circumstances, high earners may be able to claim a refund of additional voluntary contributions (AVCs) paid on or after 6 April 2009, if the AVCs were not paid on a quarterly (or more frequent) basis as a result of an agreement made before 22 April 2009. This will only be possible if the scheme rules allow. Although the refund would be treated as an authorised payment, a 40% tax charge on the refund would apply (payable by the scheme administrator).
Scheme administrators will be concerned about how they will address these restrictions. The announcement says that when establishing what counts towards the £150,000 threshold HMRC will look at income in the tax year in question as well as the previous two tax years - that means going back to 2007/08 when looking at the tax year 2009/10, for example. Salary sacrifice arrangements entered into on or after 22 April 2009 will be ignored when calculating whether the £150,000 threshold has been crossed.
The current economic climate means that redundancy is more of a possibility. Executives with a pension element in their redundancy package will look for that package to be structured in a way that best minimises the tax impact. Until the legislation is finalised, there cannot be any guarantee that what might appear to work best in the light of the announcement will continue to work as favourably.
Executives remaining in post may well look to other forms of investment for the top slice of their income. Hopefully, this will not result in those high earners who are responsible for staff pensions becoming disengaged from, and therefore less inclined to prioritise, pension provision within their organisations.
As ever, HMRC is keen to address the risk of any loopholes being exploited. To this end there is a provision in the Finance Bill to deal with any schemes which have as their main purpose the avoidance or reduction of liability to pay the special allowance charge, annual allowance charge or lifetime allowance charge by reducing a person's pension input amount.
A fresh look at the Pensions Regulator's powers
Failure to consult
At the end of last year, the Pensions Regulator issued a reminder to employers about their duty to consult affected members before making certain future service changes listed in legislation. Since then, some regulations have been laid which introduced (on 6 April 2009) civil penalties for employers who fail "without reasonable excuse" to comply with their duty to consult members. The fines can be up to £5,000 for an individual or £50,000 in any other case.
The Department for Work and Pensions (DWP) have yet to give guidance on the meaning of "without reasonable excuse", which is unfortunate since those words go to the heart of liability. This is very much a "live" issue currently, with many companies seeking to reduce their benefits or closing their schemes to future accrual.
 Occupational, Personal and Stakeholder Pensions (Miscellaneous Amendments) Regulations 2009 (SI 2009/615)
Financial support directions
In another extension of the Regulator's powers, a change has been made to the legislation on financial support directions, so that the look-back period (during which the employer must be either a service company or insufficiently resourced) will be increased incrementally between 6 April 2009 and 6 April 2010, from 12 months to 24 months.
It is not clear why a 24-month period (as opposed to a different length of time) has been chosen, but the effect of this must mean that the Regulator will be able to issue a financial support direction in more instances than was previously the case.
 Pensions Regulator (Miscellaneous Amendment) Regulations 2009 (SI 2009/617)
On 6 April 2009 the list of notifiable events was shortened so that two or more changes in any key scheme post or key employer post within the previous 12 months and any change in the employer's credit rating no longer counted as notifiable events.
The DWP has said that it plans to reduce the list of notifiable events further, if justified by the Regulator's experience. Last year saw the introduction of a duty on trustees to notify the Regulator of any scheme apportionment arrangements, although that change was made as a consequence of amendments to the employer debt legislation.
 Pensions Regulator (Miscellaneous Amendment) Regulations 2009 (SI 2009/617)
The market: forcing everyone to take a fresh look
Earlier this year we issued an alert regarding the Pensions Regulator's most recent statement on scheme funding.
While that statement was concerned with the actions of the sponsoring employer, schemes also appear to be looking at investment losses in the current economic climate in a more focused way.
Added to this, trustees are having to consider their response to the impact that quantitative easing may have on their scheme funding levels.
The feeling at the National Association of Pension Funds (NAPF) is that investors will be less tolerant of non-compliance with the combined code in the current climate, especially where the explanation is unsatisfactory. It has updated its corporate governance guidelines, with a consultation planned in the coming months on further amendments.
No changes are proposed in respect of remuneration but the NAPF urges investors to take a stronger stance, emphasising that executive pay policy should be aligned with pay policies for the rest of the company (for example, base pay increases should be capped at inflation, unless there are sound and compelling reasons not to do so, and bonuses should be aligned with profits).
Other changes: made and in the pipeline
Member-nominated directors and independent trustees
Schemes have been exempt from having to appoint member-nominated directors where the sole director or all the directors on the trustee board are independent. There is now a further exemption where every trustee of the scheme is a company, at least one trustee only has independent directors and at least one trustee has one or more directors who are not independent. In that situation, the requirement for member-nominated directors will not apply to the company which only has independent directors.
This change was first promised by the DWP over a year ago and is likely to be welcomed.
Pension Protection Fund (PPF)
The PPF has been the focus for a number of changes.
Regulations have been made which mean that since 1 April 2009:
- Where the sponsoring employer is an EEA credit institution or insurer then the trustees can apply for PPF entry in the same way as trustees of other institutions that cannot experience an 'insolvency event'.
- PPF compensation can be payable to people entitled to benefits in respect of deferreds or pensioners who died before the assessment period.
- The requirement to revalue PPF compensation will not apply where immediately before the assessment date the scheme rules did not provide for revaluation in respect of any member.
- The PPF must pay 90% of transfer payments and contribution refunds to which the member became entitled before the assessment date but which had not been paid by the date the scheme entered the PPF.
- There will be more regulations (and, therefore, another consultation) in the future to allow trustees to send information to the last known address of individuals, unless they have been told that the person has moved.
 Pension Protection Fund (Miscellaneous Amendments) Regulations 2009 (SI 2009/451)
The Pensions Act 2008 also contained some provisions dealing with PPF compensation which have now been brought into effect so that:
- since 1 April 2009, terminal illness lump sums are available where a person has a progressive disease and death can reasonably be expected in the next six months; and
- since 6 April 2009, PPF compensation is based on the new 2.5% revaluation cap (unless the scheme rules did not provide for revaluation immediately before the assessment date).
 Pensions Act 2008 (Commencement No. 3 and Consequential Provisions) Order 2009 (SI 2009/809)
The DWP has recently consulted on how the disclosure obligations of occupational, personal and stakeholder schemes should be restructured (the target date for change is April 2010). The consultation stems from the deregulatory review, which urged a more principles-based approach on disclosure.
The overarching principle being put forward is that: "Members should be given sufficient information that allows them to understand the benefits to which they will be entitled and any other relevant information that will enable each member to make decisions in his or her own best interests". This principle appears to be extremely broad and, if retained, may have unintended consequences.
It looks like disclosure will not be as streamlined as was hoped. Most disappointingly, disclosure will still be dealt with across various sets of regulations where the DWP thinks that putting certain requirements into one central set of disclosure regulations would be "unhelpful". The only areas identified as having scope for deregulation are: basic scheme information, the annual report and certain other annual information requirements and statutory money purchase illustrations.
The Government wants deadlines for disclosure to be replaced with a "reasonable period" requirement (to be dealt with in a Code of Practice), although basic scheme information will need to be given within 14 days (to fit in with the auto-enrolment timeframe for personal accounts).
The Government also wants electronic disclosure to be possible, with the onus on members of schemes taking that approach to request hard copies if that is what the member wants instead.
Under the proposals, the Pensions Regulator would still be allowed to impose penalties for breaches of up to £5,000 for an individual, or £50,000 otherwise.