Pensions Update November 2014 In this issue Update on the Pension Schemes Bill Update on the Taxation of Pensions Bill Holiday Pay Cases: Potential Pension Implications Government Announces Abolition of Short Service Refunds for Money Purchase Benefits from 1 October 2015 The Pensions Regulator reports on Involvement in Kodak, UK Coal and MG Rover Restructurings User Guide for Online HMRC Service Published Countdown to Abolition of DB Contracting Out: Third HMRC Bulletin Published Together with DWP Guidance Shared Parental Leave and Pensions: New Regulations from 1 December 2014 STOP PRESS: Deduction of VAT on pension fund management costs and services: HMRC issues Revenue and Customs Briefs 43 and 44 following reconsideration of its position This newsletter is for information purposes only. Its contents do not constitute legal advice and should not be regarded as a substitute for detailed advice in individual cases. If you wish to discuss any of these issues further, please contact your usual Baker & McKenzie lawyer. Jeanette Holland firstname.lastname@example.org Robert West email@example.com Chantal Thompson firstname.lastname@example.org Arron Slocombe email@example.com Update on the Pension Schemes Bill The Pensions Schemes Bill implements a new framework for categorising of private pensions based on the type of "promise" that the scheme offers. The aim is to encourage greater risk sharing between employers, members and third parties, via "shared risk" schemes (also known as defined ambition schemes) and "collective benefits". The Bill is also one of the two key pieces of legislation which will implement the Budget 2014 changes. Key developments in this context are: new provisions have now been inserted relating to the guidance guarantee; and further amendments have recently been tabled by the Government, including: provision for an additional "safeguard" where members either wish to transfer or convert DB benefits to DC benefits in order to access the new flexibilities. Trustees will need to take reasonable steps to check that members receive "independent financial advice" (still to be defined in secondary legislation); and extend the right which certain members (those with uncrystallised DC benefits) currently have under legislation to transfer benefits, up to and beyond normal retirement age (currently the statutory right to transfer only applies if a member is more than 1 year from normal retirement age). DB benefits would not be affected by the extended right to transfer. > Back to Top Update on the Taxation of Pensions Bill The Taxation of Pensions Bill is being progressed to the next stage in Parliament. As reported in our October Update, the Chancellor has announced that individuals will be able to pass on their unused DC pension when they die under a more favourable tax treatment, and a new schedule has been included in the Taxation of Pensions Bill to effect this. Of particular interest are the new definitions of nominees and successors, which will effectively permit individuals other than a member's dependants to inherit the member's pensions savings on his or her death. These are as follows: a "nominee" is an individual (other than a dependant) nominate by the member or the scheme administrator; and
a "successor" is an individual nominated by a dependant of the member, nominee of the member, successor of the member, or the scheme administrator. > Back to Top Holiday Pay Cases: Potential Pension Implications The Employment Appeal Tribunal has ruled in Bear Scotland and Others v Fulton and Others that "non-guaranteed overtime" (overtime which the employer is not obliged to offer, but which employees are obliged to work if the employer chooses to offer it) together with certain travel allowances, should be included for the purpose of calculating the 4 weeks' statutory holiday pay required under the Working Time Directive. The EAT decision follows several recent cases involving the highly technical issue of how holiday pay should be calculated (including some heard by the Court of Justice of the European Union). Further detail on the recent cases is contained in our Employment Department's Update, which can be accessed by clicking here. The cases also raise a number of questions in relation to pensions, including: whether there will be any change to the pay which must be taken into account for assessment and contribution purposes under the automatic enrolment legislation (specifically, whether the decision affects the elements of pay which fall within "qualifying earnings" and "basic pay"); and/or whether there will be any change to the level of pay by reference to which contributions and benefits are calculated under a scheme's trust deed and rules (this will largely depend on how pensionable pay (or equivalent) is defined). Leave to appeal to the Court of Appeal has been given. The timing of any appeal is uncertain and so the matter will remain unresolved for some time. In the meantime, employers with relevant elements of pay in their remuneration structure may consider it prudent to conduct an audit of their payroll and pensions and seek advice in order to assess and, where appropriate limit their legal and financial exposure. > Back to Top Government Announces Abolition of Short Service Refunds for Money Purchase Benefits from 1 October 2015 The Government has announced that it intends to bring into force Section 36 Pensions Act 2014 from October 2015. This will mean that money purchase benefits will vest immediately after the member completes 30 days' qualifying service. The effect of this is that, in such cases, the ability to make a short service refund to members with money purchase benefits who give up their membership within two years, but after 30 days, will no longer be available. The change will only apply in respect of money purchase benefits accrued after Section 36 is brought into force.
The change is driven by the Government's concern that members who are automatically enrolled into occupational schemes could otherwise be "cashed out" of schemes rather than contributions remaining in the scheme. The change will bring occupational schemes into line with contract based arrangements, where there is a analogous 30 days "cooling off" period for money purchase benefits. Occupational schemes will still be able to make short service refunds to money purchase members who leave within the first 30 days if they wish to do so. Schemes will need review their Trust Deed and Rules and other scheme documentation in advance of Section 36 coming into force to check whether any changes are required. The DWP's press release can be viewed by clicking here. > Back to Top The Pensions Regulator reports on Involvement in Kodak, UK Coal and MG Rover Restructurings The Pensions Regulator (the "Regulator") has issued several reports in relation to its involvement with the trustees, employers and the Pension Protection Fund ("PPF") in respect of three cases. They give a useful snapshot of the Regulator's approach in difficult restructuring and potential insolvency cases, but the legal and commercial issues will always require detailed consideration as each case is different: Kodak Pension Plan- this involved the purchase from Chapter 11 bankruptcy of parts of the business of the global Kodak group by the Kodak Pension Plan in exchange for the release of the Kodak group from its liabilities to the Kodak Pension Plan. A new pension plan was established and the majority of members accepted the offer to transfer to it and the original Kodak Pension Plan then went into a PPF assessment period;The UK Coal Operations Limited ("UKCOL") Sections of the industry wide Coal Staff Superannuation Scheme- the report explains the Regulator's role in facilitating the July 2013 restructuring of UKCOL's operations, following a fire which resulted in the closure of the Daw Mill mine. A restructuring was agreed under which the trustees gave up part of their claim against UKCOL as an unsecured creditor in return for the PPF securing interests in the new group and the deal also preserved the remaining business as a going concern; MG Rover Group Senior Pension Scheme- MG Rover Group Limited ("MGRG"), the principal employer of the Scheme, went into administration in 2005. A joint venture company, Capital, was established to acquire the loan book from MGRG. The Regulator believed that the loan book could have been acquired by a company within the MGRG group of companies, and issued a warning notice seeking the issue of a financial support direction against Capital. The Regulator considered it reasonable to issue the FSD because the acquisition of the loan book could have been structured so as to have benefited MGRG instead of Capital. A settlement was subsequently reached under which the Scheme received £8.085 million from Capital, which will enable the Scheme to wind up outside of the PPF. > Back to Top
User Guide for Online HMRC Service Published HMRC has published a new guide to using its online Service for Scheme Administrators and Practitioners. This includes sections on how to register a scheme administrator, how to file forms using the online service and how to register a new scheme with HMRC. The guide can be accessed by clicking here. > Back to Top Countdown to Abolition of DB Contracting Out: Third HMRC Bulletin Published Together with DWP Guidance HMRC has published its third Countdown Bulletin in relation to the abolition of DB contracting out in April 2016. To date, HMRC has received 1889 requests for data through its reconciliation service and has issued records for 1175 schemes. HMRC has noted that the number of follow up requests which it has received is lower than expected. It has urged schemes to progress the review of their data so that any discrepancies can be addressed in sufficient time. The Countdown Bulletin can be accessed by clicking here. Separately, the DWP has also published guidance for employers, trustees and employees on preparing for the abolition of DB contracting out. The DWP guidance can be accessed by clicking here. > Back to Top Shared Parental Leave and Pensions: New Regulations from 1 December 2014 The new system of shared parental leave are due to come into force on 1 December 2014 and will change the way that employees can take time off following birth or adoption. Shared parental leave will be treated for pension purposes in the same way as maternity leave, with pension provision during paid shared parental leave being based on the pay the employee would be likely to have received if working normally. The new regime will apply to qualifying employees whose baby is due, or who are adopting a child, on or after 5 April 2015. Employers are now starting to consider their approach to this and how it fits with existing family leave policies. Under the new regime, as now, mothers will be able to take up to 52 weeks' maternity leave, including 39 weeks' statutory maternity pay, and fathers will be able to take up to 2 weeks' ordinary paternity leave and ordinary paternity pay. However, the additional paternity leave system will be abolished and replaced with the new shared parental leave scheme. Under the shared parental leave scheme, mothers will be able to convert up to 50 weeks of their maternity leave (and 37 weeks of their statutory maternity pay) into shared parental leave and pay and effectively share it with their
partner. The shared parental leave system will give parents significant flexibility – for example, they can apply to take the time off together, or separately, and as one continuous period, or in up to 3 discontinuous blocks of leave (with each block of leave having a minimum duration of one week). There is a complex notification process. From a pensions perspective, under the draft legislation the key point to note is that for any period of paid shared parental leave, continuing membership and accrual of rights under a pension arrangement must be in accordance with the "normal employment requirement". This means that: for the purposes of accrual of benefits, the individual must be treated as if they were working normally and receiving the remuneration likely to be paid for doing so; however, for contribution purposes, the member must only be required to pay contributions based on the amount of contractual remuneration or statutory shared parental pay actually paid to them for the relevant period. Employers will wish to factor the pensions requirements into their policies on shared parental leave and shared parental pay and consider how this fits with existing family leave policies in order to ensure that they are fully compliant and understand the cost implications. > Back to Top STOP PRESS Deduction of VAT on pension fund management costs and services: HMRC issues Revenue and Customs Briefs 43 and 44 following reconsideration of its position This issue was last reported in our February Update in which we reported HMRC's initial reaction to the PPG judgment, and the transitional provisions put in place until the issue was further considered. HMRC has now concluded its reconsiderations and revised its position. Brief 43 covers VAT on pension fund management costs (addressing the PPG judgement). It confirms that "HMRC is changing its policy on the recovery of input tax in relation to the management of pension schemes. This means that there are circumstances where employers may be able to claim input tax in relation to pension schemes where they could not do so previously." To reclaim input tax, an employer will need to be able to provide contemporaneous evidence that the services are provided to it and, in particular, it is a party to the contract for those services and has paid for them. Brief 43 can be viewed here. Brief 44 covers VAT treatment of pension fund management services and confirms, in light of the ATP judgment, that HMRC now accepts that defined contribution pension schemes can be special investment funds for the purposes of the fund management exemption if certain crietria are met, and therefore the services of managing and administering those funds "should be, and always should have been, exempt from VAT…". Brief 44 can be viewed here.
Employers should consider whether there are costs in relation to the administration and management of their pension funds that are now exempt from VAT, and whether they should claim a refund for VAT paid on services now confirmed to be exempt. > Back to Top Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. Before you send an e-mail to Baker & McKenzie, please be aware that your communications with us through this message will not create a lawyer-client relationship with us. Do not send us any information that you or anyone else considers to be confidential or secret unless we have first agreed to be your lawyers in that matter. Any information you send us before we agree to be your lawyers cannot be protected from disclosure.
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