Pensions What the budget 2014 means for your company’s pension scheme
Businesses will need to think carefully about how the far-reaching changes in the Budget affect their pension scheme. Scheme rules may need amending and investment strategies may need to change – particularly lifestyle funds. Some changes have already come into effect, with the more radical changes being introduced with effect from April 2015. Removal of requirement to purchase an annuity The most radical of the Chancellor’s reforms is without doubt the removal of the requirement to purchase an annuity. From April 2015, members of defined contribution schemes will be allowed to take their pension as cash with amounts over 25% of the total pension pot being taxed at the marginal rate. Currently, members are taxed at a punitive rate of 55% if they take more than 25% of their pension pot as cash. The detail is yet to be announced. Unless the Government introduces overriding legislation, most defined contribution schemes will need to amend their scheme rules in order to enable members to take advantage of the new flexibility. Employers will need to carefully consider their options before making a decision and communicating to members. Some employers may wish to take a paternalistic approach and require some part of the pension to be used to purchase an annuity. On the other hand, purchasing an annuity may not be the right option for all members, especially those who have small pension pots or other sources of income in retirement. The implications for the administration of the scheme should also be considered. Employers will need to review the investment options in their defined contribution schemes, in particular the default fund. Lifestyle funds and target due funds which assume that members will purchase an annuity on retirement may no longer be appropriate default funds. Free guidance From April 2015 members of defined contribution schemes will be entitled to free financial guidance on retirement. Changes already in force Of immediate concern to employers will be the reforms which have already come into effect. The rules relating to trivial commutation and income drawdown are being relaxed. Again, many schemes will require rule amendments to be made in order for members to take advantage of this additional flexibility.2 Corporate transparency BIS discussion paper Desmond Cheung and Hannah Doherty The Department for Business Innovation and Skills (BIS) has published a discussion paper with proposals to enhance corporate transparency and increase trust in UK businesses. Some of those proposals that might affect shareholders are set out below. Central registry of beneficial owners – As a key feature, BIS proposes to obtain, and create a central registry of, beneficial ownership information from all UK companies – It is open to discussion as to whether such information will be available to the general public, or to law enforcement and tax authorities only – Public companies will be exempted because they are already subject to similar disclosure requirements Corporate and nominee directors – BIS proposes to ban corporate directors – Nominee directors will be required to disclose their nomination arrangement to the Companies House, such that the persons behind them can no longer conceal their control of the company, potentially for illicit purposes Clarify directors’ duties in banking and key sectors – BIS invites comments on whether the present statutory directors’ duties should be amended, for the banking and other key sectors, to prioritise “safety and stability” of the firm over shareholders’ interests Disqualifying directors – BIS proposes to widen the statutory factors in relation to the disqualification of directors to include, for instance, the social impact caused by directors’ misconduct and the scale of loss suffered by the creditors of the company Potential impact on shareholders – The paper can be seen as a double-edged sword for shareholders. – On one hand, its proposals should increase transparency in corporate governance and ownership, and the clarified directors’ duties and widened factors to disqualification should encourage directors to manage the business in a responsible and sustainable manner – However, the increased burden on directors might inhibit business development. In particular, the focus on “safety and stability” might dissuade directors from making risky yet worthwhile decisions for the company – Further, beneficial owners of a company might reconsider their investment, to the detriment of the other shareholders, to avoid their identity being revealed – Not surprisingly, the proposals have received mixed reviews Coming up – The BIS discussion paper is entitled “Transparency & Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Business” – Consultation has ended and a government response is expected imminently. Where possible, the government aims to introduce the reform by the end of this Parliament (March 2015)3 Corporate transparency EU shareholder rights directive Rachel Manners On 11 July 2007 a directive was adopted with the aim of improving the quality and timeliness of information being provided to shareholders of listed companies. Seven years on, the European Commission are expected to publish their proposals for a revised directive this Spring. It is anticipated that the Commission will focus on five specific objectives covering the overarching issues of insufficient shareholder engagement with the companies in which they invest and a lack of transparency for shareholders. The objectives which the Commission believes need to be addressed are set out below: – Shareholder engagement – – The Commission believes institutional investors and asset managers are not sufficiently engaged in the long term success or performance of companies which, in turn, leads to worse returns for their own investors – The Commission wants institutional investors to introduce voting policies that will be publicly available and those investors who choose not to provide such a policy will have to explain why – Asset managers may be required to explain to their asset owners how their investment strategy contributes to the performance of the assets - though this will remain private – Director remuneration - The Commission proposes that listed companies be required to publish detailed and user-friendly information on their policies in respect of director remuneration in, order to give shareholders greater scope to comment on and approve such policies – Oversight of related party transactions - Significant third party transactions (those worth over 5% of the company’s assets) of listed companies will have to be put to a shareholder vote to give shareholders the opportunity to oppose abusive transactions – Proxy advisors - Proxy advisors who are appointed to make recommendations and vote on behalf of shareholders, will be required to publish certain information to ensure that all decisions made in their proxy capacity are reliable, based on sufficient analysis of the information available and not subject to any conflicts of interest – Problems with intermediaries - Companies will need to be able to identify their shareholders. This is currently difficult where intermediaries are involved, especially in cross border situations, which prevents shareholder rights from being properly utilised Coming up – The EC is due to publish its proposals for the Internal Market and Services Directorate General’s revised Shareholder Rights shortly – The proposals will then be considered by the European Council and enter into law by 2015CC004960 - April 2014 Clyde & Co LLP The St Botolph Building 138 Houndsditch London EC3A 7AR T: +44 (0)20 7876 5000 F: +44 (0)20 7876 5111 Further advice should be taken before relying on the contents of this Newsletter. Clyde & Co LLP accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary. No part of this summary may be used, reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise without the prior permission of Clyde & Co LLP. Clyde & Co LLP is a limited liability partnership registered in England and Wales. Authorised and regulated by the Solicitors Regulation Authority. © Clyde & Co LLP 2014 Clyde & Co LLP www.clydeco.com Tax Membership without the privileges Phil Norton Proposed legislation intended to have effect from 6 April 2014 has the potential to significantly impact on the attractiveness of becoming a member of a limited liability partnership (LLP) and to alter the deal for those who are already members. Where a person is treated as a salaried member under the new legislation their remuneration will be taxed as if they were an employee. The salaried member test The new legislation sets out three conditions and if all conditions are satisfied then the member will be subject to tax as though they were an employee rather than self-employed. Condition A: It is reasonable to expect that at least 80% of the member’s pay is fixed, or if variable, then it is without reference to, or in practice is unaffected by, the LLP’s overall profit or loss (a “disguised salary”). Condition B: The member has no significant influence over the affairs of the LLP. Condition C: The member’s contribution to the LLP is less than 25% of the “disguised salary”. Implications of being a salaried member A salaried member will be subject to national insurance contributions at higher rates than they would be if they were self-employed. Significantly, the LLP has to make employer national insurance contributions in respect of the amounts paid to salaried members at the rate of 13.8%. This is an additional cost that will not have been taken into account when considering the LLP’s finances. Practical considerations LLPs often set aside money on account of each member’s tax liability (tax reserves) and this amount is effectively available to the LLP as working capital to fund the day to day operations of the LLP. If someone is a salaried member then their tax and national insurance needs to be paid to HMRC under the PAYE system and will therefore cease to be available to fund the LLP. LLPs may therefore need to reconsider their funding arrangements. For large LLPs, trying to restructure the way in which the LLP is run so that all members have a significant influence over the affairs of the LLP is likely to be impractical if not impossible. There will usually be some form of management committee responsible for the strategic decisions and departing from that would be unworkable. In practice therefore any restructuring is likely to focus on Conditions A and C. HMRC guidance makes it clear that HMRC contemplates that LLPs may take steps to ensure that members are not salaried members. However, any restructuring will need to be considered in light of the anti-avoidance rules accompanying the new legislation. By way of an example, if a member is not genuinely exposed to risk in respect of a purported capital contribution then it may not be taken into account when analysing Condition C.