This bulletin looks at ten key pensions developments over the next 12 months and considers what action employers and trustees should be taking to prepare.
Budget Day, 16 March 2016: Radical changes to the pensions tax regime?
The Government has announced that it will respond to its consultation on the future of pensions tax relief on Budget Day, 16 March 2016. Possible options range from fundamental reform, such as removing tax relief on pension contributions altogether and replacing it with a Government "top up" and tax exemptions when benefits are taken, to less radical changes. Trustees and employers should be mindful of the possibility of radical changes to the pensions tax regime being announced on 16 March 2016, possibly with some measures taking immediate effect. We will update you further on Budget Day.
Tax Year 2016/17: Annual Allowance reduced for high earners; Lifetime Allowance reduced
For tax year 2016/17 the annual allowance will be reduced for those with annual incomes over £150,000. For every £2 of income over £150,000, an individual’s annual allowance will be reduced by £1, down to a minimum of £10,000. Pension contributions are counted as income for this purpose unless the individual's income net of pension contributions is £110,000 or less. The lifetime allowance will reduce from £1.25M to £1M for the tax year 2016/17. Scheme employers and trustees who have not already done so should consider how to communicate these changes to members, bearing in mind that members may be making decisions now about pension contribution levels for the coming year. Member literature should be reviewed to make sure that any information about tax allowances is up-to-date. Please contact your usual AG contact for assistance with drafting/reviewing any communications.
6 April 2016, End of Contracting-out
From 6 April 2016 the new single tier state pension will be introduced and the ability of pension schemes to contract out of the state second pension will cease. Where benefits in a scheme are still accruing on a contracted-out basis, this will result in an immediate increase in employer and member National Insurance contributions (NICs) from 6 April 2016, as the lower rate of NICs for members in contracted-out employment will cease to exist. Scheme benefits will continue to accrue as normal unless action is taken to terminate or reduce accrual. Employers who have not already done so should urgently consider whether to propose changes to the scheme to reduce future costs. Measures may require trustee agreement and/or member consultation depending on what is proposed. We can assist employers/trustees in putting together or reviewing proposals (as applicable) and ensuring they meet all legal requirements.
6 April 2016, Ban on "Active Member Discounts"
Where a scheme providing money purchase benefits is a "qualifying scheme" (ie used by an employer to satisfy its auto-enrolment obligations), it will not be permitted to impose higher charges on a member whose contributions cease after 6 April 2016 compared to an equivalent member in respect of whom contributions are still being made. Trustees should understand whether their scheme is affected by this measure, and if so, consider how to address it. We can advise on the options based on a review of the rules.
6 April 2016, Ban on Member-borne Commission
The Government also intends to ban new member-borne commission arrangements in relation to qualifying schemes from 6 April 2016, with a ban taking effect later in the year in relation to member-borne commission arrangements entered into before that date. "Commission" refers to an arrangement whereby a financial adviser is remunerated by a service provider who imposes an administration charge on scheme members to recover the cost. Much important detail in relation to the commission ban is yet to be announced, including the question of whether responsibility for compliance should rest with a scheme trustees or its service providers, but trustees of potentially affected schemes should monitor developments in this area. We will keep you updated.
31 October 2016, First Chair's Annual Governance Statement due for Money Purchase Schemes with a 31 March Year End
New regulations in 2015 introduced a requirement for occupational pension schemes providing money purchase benefits (other than AVCs) to produce an annual governance statement, signed by the chair of trustees dealing with various matters relating to scheme governance and charges. The deadline for producing the statement is seven months from the scheme year end, meaning the deadline falls at the end of October 2016 for schemes with a 31 March year end.
31 December 2016, End of Transitional Period for VAT on Pension Scheme Services
In February 2014, HMRC announced that it was ending its existing practice in relation to VAT on pension scheme services, whereby it allowed a scheme employer to claim a VAT deduction in respect of VAT on pension scheme services relating to the management of a pension scheme, notwithstanding that the services had legally been provided to the scheme trustees rather than the employer. HMRC has been allowing its old practice to continue for a "transitional period" which, having been extended, is now due to end on 31 December 2016. Once this expires, employers who have previously made use of the old practice to claim a VAT deduction will see a 20% increase in the "real" cost of their pension scheme services. There are possible legal routes whereby employers may be able to avoid this happening, but the best approach will vary and HMRC's announcements on this issue to date leave considerable uncertainty. Employers and trustees need to consider how best to address this issue in relation to their own schemes.
Automatic enrolment legislation requires employers to go through an automatic re-enrolment exercise every three years. Many large employers were required to implement auto-enrolment in 2013 and will therefore be due to carry out a re-enrolment exercise in 2016. Employers have some discretion around the exact date of re-enrolment and the question of exactly which workers will be re-enrolled. Employers due to carry out a re-enrolment exercise in 2016 should be planning for this now. We can assist with any queries arising as part of implementation of the re-enrolment process.
Automatic Enrolment – Changes to minimum contribution rates
In his Autumn Statement on 25 November 2015, the Chancellor announced that the increase in minimum contribution rates required by auto-enrolment legislation which had been due to take effect in October 2017 and October 2018 will now each occur in April of the following year. Where schemes have contribution rates specified in their rules, a change in the legal minimum contribution will not necessarily result in a reduction in contribution levels due under the scheme rules. Where a scheme's rules provide for contribution rate increases to take effect in October 2017 and October 2018, employers need to consider whether they will seek to amend the rules to bring them into line with the statutory legal minimum requirements. Whilst such amendments do not necessarily need to be made in 2016, an amendment of this type will generally trigger a requirement to consult with affected members, and the rationale for such an amendment may be easier to communicate if the amendment is proposed shortly after the Chancellor's announcement. We can assist with drafting rule amendments and communications regarding this.
Data protection and safe harbor
In October 2015 the Court of Justice of the European Union gave a ground-breaking ruling in which it held invalid a European Commission decision on the "safe harbor" regime which many businesses had relied on as allowing them to transfer data from the EU to the US. Many UK pension schemes have entered into agreements which allow data transfer to the US. The UK Information Commissioner (ICO) is due to publish further guidance on the implications of the judgment for UK businesses. Trustees of UK schemes which allow data transfer to the US should be aware of this. We will monitor the ICO's website for further announcements and keep you updated.