Top of the agenda
A round up of pensions developments: July 2015
Top of the agenda
1. Summer Budget 2015: Government to review pensions tax relief and scale back the annual allowance for high earners further
On 8 July 2015, the Chancellor of the Exchequer delivered the Summer Budget. The Budget confirmed measures, already announced in the Conservative Party manifesto, to reduce the amount that high earners (those with income over £150k) can contribute to their pensions tax-free. The Government also launched a Green Paper in which it invited suggestions as to how the pensions tax-relief regime can be changed. The changes are necessary, the Government considers, because the population is living longer, and to reflect the changing shape of UK pensions. The Green Paper floats the idea that pensions should be taxed like ISAs, so that contributions into a scheme are taxed but any growth on the contributions and the benefits when they are paid out are not.
Since then, the Finance Bill 2015 has been introduced into Parliament. The Bill contains clauses in relation to key measures announced in the Summer Budget, such as the reduction in the annual allowance for high earners, alignment of Pension Input Periods with the tax year and changes to the taxation of death benefits.
For our briefing on the Summer Budget 2015, click here.
2. DWP’s Schemes that were Contracted-out Regulations 2015 finalised
In March this year, the Government issued finalised regulations that will give employers the power to amend scheme benefits and/or increase employee contributions to recoup the increased National Insurance Contribution liability on employers when contracting-out on a defined benefit ("DB") basis ends from April next year. These regulations took effect on 5 April 2015 - for our update on the regulations, click here.
The other set of regulations in relation to the cessation of contracting-out, the Occupational Pension Schemes (Schemes that were Contracted-out) Regulations 2015 have also now been finalised. The DWP had consulted on these in May 2014 and the response to the consultation (the "Response") has also been published alongside the finalised regulations.
Additionally, the DWP has published The Pensions Act 2014 (Savings Order) 2015 (the "Pensions Savings Order") which preserves for a limited period some key contracting-out provisions allowing certain "necessary activity" in relation to accrued contracted-out benefits to continue to be carried out.
The Contracting-out regulations
The Regulations aim to ensure that members' entitlements derived from contracted-out employment (such as in relation to indexation of GPMs) continue to be preserved after 6 April 2016. The Regulations also make other provisions to make sure schemes formally contracted-out on a DB basis operate properly post 6 April 2016.
A few key points to note from the consultation stage:
- There were some concerns that the Regulations did not preserve in certain circumstances the Reference Scheme Test for defined contribution schemes that operate a Reference Scheme Test underpin. The DWP has said that it needs more time to develop a solution for the problem but for now has preserved the relevant provisions (as they apply currently) in the Pension Savings Order.
- Amendments have been made from the draft version of the Regulations to ensure that the abolition of contracting-out does not trigger the 'early leaver' rules for those who ceased contracted-out employment at the abolition date but stay in pensionable service.
- The DWP has confirmed in the Response that it will not be providing a statutory override to enable schemes to make amendments, for example to operate rules that relate to the Basic State Pension. The value of the Basic State Pension will remain for those reaching State Pension Age before 6 April 2016 (it will be published in the DWP's annual Up-rating Order) and, in the DWP's view, the amount of Basic State Pension to be taken into account in such rules is the amount of the Basic State Pension set out in the Order.
Pension Savings Order
The Pension Savings Order preserves for a transitional period (until 6 April 2019) some key contracting-out provisions to allow scheme trustees and HMRC to carry out certain necessary activity in relation to any period of contracted-out employment before 6 April 2016. The necessary activity includes:
- provisions relating to certification of contracted-out schemes;
- cancellation of contracting out certificates; and
- the ability to pay a Contributions-equivalent Premium (to restore a member of a contracted-out scheme back into the State Second Pension).
Further consultation and guidance
On the issue of whether employers will need to consult with the members in advance of the end of contracting-out, the DWP has said that it will address the issue in a further consultation. That consultation will also deal with any changes required to the current disclosure requirements under the Disclosure Regulations 2013. A further consultation will also be issued later this year on changes to the regulations governing transfers of contracted-out rights between schemes.
The contracting-out manuals will be updated in 'early 2016' to provide guidance for scheme administrators to operate former contracted-out schemes.
GMP equalisation and GMP conversion
With respect to GMP conversion and GMP equalisation, the Response states that these are being dealt with separately (although no time frame is given).
The Regulations are complex and there are a number of outstanding issues on which the DWP will consult in due course. It is hoped that the updated Contracting-out Manuals will provide sufficient guidance on the operation of former contracted-out schemes.
Perhaps the most disappointing aspect of the finalised Regulations is the lack of a statutory override to enable schemes to amend their rules to make sense of any references to the current State Pension, in particular, to make sense of and operate any Basic State Pension offset contained in a scheme's benefit and contribution rules.
For further information, please contact a member of the pensions team.
3. Treasury Consultation on early exit charges and measures to make transfers “smoother”
HM Treasury has issued a consultation in relation to exit charges that may apply when individuals transfer from one scheme to another or access their pension savings flexibly under the Budget 2014 reforms.
Exit charges are described as those fees and charges incurred when a customer transfers out of their pension into another fund or scheme, or otherwise accesses their pension flexibly before a date specified in a personal pension contract or, in the case of an occupational scheme, the "agreed retirement date" under the scheme rules.
According to the DWP, although many individuals face exit charges or fees that represent fair and reasonable charges to cover costs, it is keen to obtain evidence of fees or charges that could be considered either excessive or disproportionate. The consultation also states that individuals may be exposed to other “exit” fees on accessing their pensions, for example where scheme trustees and mangers charge fees even at an individual’s selected pension age, or where certain bonuses or benefits may be removed for exits at a time different from when the arrangement had specified, and welcomes views on the prevalence of such practices.
In tandem with the consultation, the FCA and the Pensions Regulator are carrying out a data gathering exercise to better understand the scale and quantum of exit fees and charges.
The consultation floats proposals for imposing a cap on exit charges if sufficient evidence of excessive or disproportionate charges is found. The proposals include:
- A cap on all exit charges for those aged 55 and over and before their scheme retirement date, either at a fixed percentage of the value of funds being transferred, or at a capped monetary amount; or
- Proposals for a flexible cap - for example, in order to address concerns about smaller funds, a cap could be limited to pots above a certain de minimis threshold; or could be tailored to apply to particular components of an exit charge that are difficult to justify as being fair to customers.
A voluntary approach to managing exit charges is also floated in the consultation. Such an approach would provide scope for trustees and managers to consider action, such as waiving or reducing early exit charges where members move from an existing arrangement to another offering flexibility, including within the same company or scheme.
The consultation also examines the current legislative framework for pension transfers and considers how the process for transferring could be made smoother and more efficient. This consultation closes on 21 October 2015.
4. Pensions Ombudsman’s annual report 2014/15 – online complaints procedure to be made available soon
The Pensions Ombudsman Service’s annual report and accounts for the year 2014/15 have been published.
Over 2014/15, the Ombudsman Service took on 1,281 new investigations, up some 21% on the last year. 207 of these new investigations were about pensions liberation (although the report makes it clear that this not expected to be a long-term trend).
In keeping with previous years, the most common topics of complaints were:
- missing, late or incorrect benefits;
- transfers; and
- ill-health retirement.
The Ombudsman expects that its workload will increase further as a result of:
- increased flexibility on retirement (i.e. due to the Budget 2014 flexibility measures);
- reforms to public sector pensions; and
- the introduction of automatic enrolment, which will see many more people becoming members of pension schemes
The EU Alternative Dispute Resolution Directive will need to be transposed into national law by 9 July 2015. To comply with its requirements, the Ombudsman’s office will need to enable complainants to be made on-line. Currently, complaints cannot be made on-line and the Ombudsman’s Service will need to have a procedure in place this year for on-line complaints to be made.
5. Ombudsman holds that an ongoing scheme could defer taking action to equalise in respect of GMPs
In Kenworthy (PO-4579), the Pensions Ombudsman has rejected a complaint from the member of Campden RA Pension Scheme that his deferred pension should have been calculated differently. The method he suggested involved equalising in respect of the GMP portion of his pension.
Following the decision of the Court of the Justice of the European Union in Barber v Guardian Royal Exchange Assurance Group (1990) C-262/88 on on 17 May 1990, which required pension schemes to provide equal benefits for men and women, most schemes took action to equalise their normal retirement age ("NRA") for both sexes. As part of the change, scheme benefits generally have to be ‘levelled up’ (that is, increased to the level enjoyed by the advantaged sex during the period from the date of the Barber decision (i.e. 17 May 1990) to the date when scheme benefits are equalised).
Following Barber, the Campden Scheme equalised its NRA in August 1991, changing from 62½ for men and 60 for women, to 62½ for both sexes.
Dr Kenworthy received an estimate from Trijon of his deferred pension when he became a deferred pensioner in August 2010. Trijon, who were the scheme actuary and administrator at the time, had performed a ‘Barber underpin’ check in respect of the portion of his pension in excess of the GMP, when calculating the deferred pension. The purpose of the Barber underpin check was to ensure that Mr Kenworthy’s benefits in the scheme satisfied the minimum requirements imposed by Barber. The method which Dr Kenworthy argued should have been used to calculate his deferred pension, involved applying the Barber underpin in respect of his GMP and not just the excess over his GMP.
On the role of the scheme actuary, the Ombudsman held that an actuary must:
- use best judgment in formulating actuarial advice;
- give proper regard to any relevant professional or other guidance; and
- provide a client with service and actuarial advice to a high standard.
The Ombudsman said that there was room for differences of opinion in relation to actuarial advice and acknowledged that two actuaries may quite probably hold different professional opinions about a particular matter. It was not up to the Ombudsman to decide which of the two different methods developed by the actuaries should be used in calculating Dr Kenworthy’s pension at NRA. The methods used by the current Trijon scheme actuary were her prerogative and it was within her scope to recommend it.
The Ombudsman highlighted that the Ombudsman’s determination in 2000 in the case of Williamson (H00177) which Mr Kenworthy had relied on, had been overturned. In Williamson, the Ombudsman had held that GMPs for men and women should be equalised. The decision was, however, overturned by the High Court in Marsh Mercer Pension Scheme v Pensions Ombudsman, on the basis that the Pensions Ombudsman did not have jurisdiction to make the ruling.
Since then, the Ombudsman pointed out that the DWP had in 2012 issued but not finalised draft legislation in relation to GMP equalisation; the DWP had also withdrawn its preferred method for GMP equalisation that it had suggested at that time. Further, DWP comment was expected on the issue but expected announcements from the DWP had been delayed until Spring 2014 and then into 2015.
In light of the legal uncertainty, the Ombudsman held that the scheme trustee could continue to defer taking action to equalise in respect of GMPs until the issue had been resolved.
As the Ombudsman highlighted, the legal position in relation to whether GMPs have to be equalised and, if so how, has yet to be resolved. It is, however, worth noting that even though the Government had not finalised its regulations on the issue and had withdrawn its preferred method for GMP equalisation, the Government had reiterated at the time its view that there is an obligation to equalise in respect of GMP both under domestic and EU law.
In light of this, on-going schemes will take comfort from the Ombudsman’s determination that they can continue to defer taking action to equalise GMPs until the legal position has been resolved.
6. Ombudsman orders that scheme member could keep pension overpaid to him
In Mayes-Wright (PO-2865), the Pensions Ombudsman has held that a member of the Principal Civil Service Pension Scheme could keep a pension that had been substantially overpaid to him.
The member, Mr Mayes-Wright had retired from his employment with the Foreign and Commonwealth Office ("FCO") and started to receive his pension. Under the rules of the Principal Civil Service Pension Scheme, if a member took up further employment with the Civil Service after he had retired, his pension would be abated so that the total of his salary and the pension he was receiving would not be more than his salary when he retired.
After retiring, Mr Mayes-Wright secured a number of temporary contracts (on a fee paid basis). The fee received on these contracts resulted in him exceeding the relevant earnings margin, and so an abatement under the rules to his pension should have been applied.
The FCO, however, only became aware of the potential problem some five years later and informed Capita, the Paying Authority for the scheme. Further correspondence ensued between the FCO and Capita but Capita did not contact Mr Mayes-Wright until 2010 about the overpayment, suggesting that he should pay back the pension overpaid to him in instalments over a five year period.
The Scheme Management Executive, the managers of the scheme, against whom the complaint to the Ombudsman had been made, argued that the overpayment was recoverable and that Mr Mayes-Wright was not automatically entitled to keep benefits in excess of his true entitlement. Mr Mayes-Wright should have known that his pension was subject to abatement but there was no evidence to suggest that he took action to query or check his pension either with Capita or FCO.
The Ombudsman held that Mr Mayes-Wright should be returned the amount that he had already repaid as part of the repayment schedule from Capita, with interest. The Scheme Management Executive should not attempt to collect any further overpayments from him. In reaching his decision, the Ombudsman highlighted the following:
- The FCO had failed to give Mr Mayes-Wright's earnings information to Capita to enable Capita to apply the abatement.
- When the mistake was discovered in 2005, Capita should have applied the abatement immediately. Instead, it took subsequent reminders from the FCO about the problem for Capita to eventually write to Mr Mayes-Wright asking for the overpayment to be paid back.
- Mr Mayes-Wright had acted in good faith when receiving his unabated pension as he could not have known that he was being overpaid. He was frequently working abroad on a fee paid basis and his salary was paid into his UK bank account. Working on a fee paid basis meant that his income fluctuated so he could not have known that he had reached the limit for an abatement to apply.
- The change of position defence was available to Mr Mayes-Wright, who had argued that he should not have to pay back the overpaid amount as he had used it to provide more generously for his family than he would otherwise have. He had not saved the overpayments but had spent his pension believing it was his to do as he wanted. This could not now be undone.
The determination highlights the importance of employers promptly passing on information that may affect member's benefits on to the scheme administrator/trustees and for any overpayment to be addressed as quickly as possible. Failing to act promptly, can, as in the case, give rise to a successful "change of position" defence being pleaded and the member being able to keep any overpayments made to him. To the extent that the scheme was left "out of pocket" as a result of not being able to recover the overpayment from the member, the Ombudsman did say in this case that the Scheme Management Executive could seek recovery from Capita and FCO "by whatever means and shares as they decide".