Hopes for a laid-back summer appear to have had no place in the pensions landscape. The early part of summer saw the Pensions Regulator continuing to publish statements and finalise codes, HM Revenue & Customs (HMRC) refined its restrictions on pension contribution tax relief, work continued on the PPF/FAS pension lifeboats and the courts ruled on pensions disputes. In the meantime, schemes are grappling with issues thrown up by the wider economic context, such as the prospect of deflation, and are starting to think about the not-too-distant introduction of personal accounts.
It has been a far-from-lazy summer.
A busy Regulator
Debt on employer
Summer ended with the long-awaited consultation paper on how to amend the debt on employer legislation introduced by section 75 Pensions Act 1995. The main focus of the proposals (scheduled to come into force on 6 April 2010) was how best to address the concern that the legislation had been inhibiting legitimate corporate activity.
The draft legislation sets out two alternative routes for avoiding the trigger of a s75 debt:
- a general easement - involving a long series of steps, including the requirement that after the restructuring, the receiving employer will be "at least as likely" as the exiting employer to meet the exiting employer's liabilities as well as its own liabilities; and
- a de minimis easement - requiring, among other things, that less than 2% of scheme members in the scheme can have defined benefits arising as a result of service with the exiting employer and that liabilities for those members must not exceed £100,000.
Questions remain about how the changes put forward would operate in practice. For instance, it is not yet clear what the "at least as likely" test will involve. The reach of the proposed changes is also in question. The requirement for all the steps outlined in the legislation to be applied to each transaction on a one-to-one basis (one exiting employer and one receiving employer) appears overly onerous in a business environment where multiple transactions are the norm. At the consultation stage there is, of course, scope for the detail to change, although we suspect that the main features proposed will remain.
The Regulator continues to focus on scheme funding. Another statement on this was issued, making points in line with the Regulator's previous two statements on the subject (see our February alert on the statement - Pensions Regulator's latest statement on scheme funding: revolution or evolution?), There were no great surprises in the statement, which urges trustees to measure liabilities prudently (taking account of the employer covenant when setting any risk margin in the assumptions), with flexibility on offer when creating a recovery plan to repair any deficit.
While the recovery plan should set contributions by reference to what the employer would find reasonably affordable, the Regulator urges trustees to be mindful of their duty to secure member benefits. However the recovery plan is structured, trustees must ensure that the pension scheme is treated fairly in relation to other creditors (a point dwelt upon in the February statement). The Regulator also took the opportunity to say that it did not think that FRS17 was likely to be a sufficiently prudent measure because of the current spread between gilts and AA corporate bonds. This view has been a source of concern to some, urging that other factors (for instance, the scheme's investment strategy) should be taken into account.
The Regulator has also worked on the new material detriment test for contribution notices.
The Code came into force on 29 June and a range of provisions covering material detriment (as introduced by the Pensions Act 2008) were also brought into effect from that date. The material detriment powers will be retrospective to 14 April 2008 however.
The wording of the Code is identical to that published in May, and which was discussed in our alert - Material detriment stays materially the same.
Similarly, the illustrative examples where the Regulator does not expect to issue a contribution notice include all those mentioned in its May 2009 consultation response. There are also some examples covering those instances where a contribution notice would be likely (for example, the removal or weakening of the employer covenant and risking members' benefits by choosing an inappropriate investment strategy). None of these examples deliver any surprises.
The guidance on corporate transactions is a brief document, urging employers to:
- work with the trustees in order to understand the nature and impact of the event and whether appropriate mitigation to the pension scheme is needed;
- manage conflicts of interest appropriately (acknowledging that employers and trustees may need to obtain independent professional advice); and
- take a systematic approach - keeping a record of advice, decisions and outcomes (since those records could form part of a statutory defence if the Regulator decides to consider issuing a contribution notice using the material detriment ground).
The industry has been getting used to the idea of a material detriment test for some time, so knowing that the legislation and code are in force now provides a measure of certainty. However, the illustrative examples deal with the obvious acceptable/unacceptable scenarios and therefore some unease remains about how the test might be applied in less obvious situations.
Trustee knowledge and understanding (TKU)
Following the Regulator's consultation on draft revisions to the TKU code (see our alert Pensions Regulator consults on updated draft TKU code and guidance), the revised version of the code was laid this summer. When launching the final code, the Regulator took the opportunity to say that scheme specific learning would be more valuable if pitched at an audience at a 'post toolkit' level, so schemes not already adopting this approach may consider doing so. For the first time, the revised code also covers small schemes, with 12-99 members (schemes with less than 12 members remaining exempt).
TKU is a key component of scheme governance and, as such, is moving up the Regulator's agenda. The National Association of Pension Funds (NAPF) have been working on a trustee self-assessment toolkit, focusing on trustees' progress on the TKU front. It seems reasonable that, as the law, regulatory requirements and products on offer in the pensions world develop, so too should the Regulator's TKU expectations.
Employers' duty to consult
The Regulator's power to enforce the duty on employers to consult affected members when planning certain changes (listed in legislation) in respect of their pension scheme is likely to be exercisable in a new scenario. The Department for Work and Pensions (DWP) wants the duty to consult to be triggered when there are proposals to change the definition of pensionable earnings. A consultation paper has been issued on draft regulations which anticipate the change taking effect on 6 April 2010.
The impact of this may not be that significant, however, as we understand that many schemes which have recently been contemplating this sort of change (say, freezing pensionable salary) have undertaken some form of consultation exercise anyway.
Tax: we might not all be getting richer...
Our alert A fresh look, looking at developments in the months leading up to June, covered in some detail the Government's Budget announcement introducing restrictions on tax relief in respect of pension contributions by people earning at least £150,000. Since then, we have produced a further alert - Changes to pensions schemes: potential pitfalls for high earners, looking at how changes to pension schemes could generate pitfalls for high earners.
In response to concerns raised in the immediate aftermath of the announcement, the Government has conceded that:
- contributions made on an irregular basis (meaning less often than quarterly) will no longer be capped at £20,000 but will instead qualify for full tax relief up to the lower of £30,000 and the member's average contribution during the previous three years;
- in recognition of delays that happen in real life, tax relief will be available where pension contributions were agreed before the Budget but the first payment has not yet been made; and
- people who change pension provider while keeping the same pattern of contributions will still be entitled to full tax relief.
In response to some of the questions that have come through to HMRC, more Q&As have been published to cover a range of scenarios, such as flex benefits and redundancy payments. It seems likely that further Q&As will be produced as more themes emerge.
As expected, HMRC has also added schemes designed to avoid or mitigate against the special annual allowance charge to its existing disclosure regime, to enable it to spot potential loopholes that would need closing.
Dependants - transitional provisions finally introduced
The long-awaited regulations extending the circumstances in which a child's pension is authorised under the tax regime applying to pensions have finally been laid (the regulations have retrospective effect to 6 April 2006).
Aside from some transitional provisions, the general position under the pensions tax regime (introduced on 6 April 2006) was that where a child was over age 23 the pension was authorised only if the child was dependent on the member because of physical or mental impairment. The amending regulations expressly allow block transfers to qualify for transitional relief and extend the transitional provisions by authorising the pension where the child has already reached age 23 if he was financially dependent on the member, or had a mutually dependent financial relationship with the member, and certain other conditions are met.
But we're all getting older...
It has always been a sad fact that we are all getting older, but the increases in the UK population's longevity have been significant enough for the actuarial profession to consult on a new model to project future mortality rates (the projections were last published seven years ago). Pensions revolve around old age of course (and tax breaks!) so this demographic shift has had implications beyond mortality projections and, in common with other countries around the world, has had a direct impact on Government policy.
In an attempt to address the gap in pension provision between the well-off and the less well-off, the Government has pressed-on with its lead-up to the introduction of personal accounts. To see what personal accounts are likely to mean in practice, take a look at our alert - Personal accounts and auto-enrolment - what does this mean for you?
European law led to the introduction of age discrimination legislation in 2006 and that body of legislation continues to evolve, with the UK's default retirement age of 65 now in the spotlight. The Government has decided to bring forward its review of the default retirement age to next year (the review was originally due to take place in 2011). Cases looking at this have also been in the courts. Most notably, the Heyday case was returned to the High Court by the European Court of Justice. The High Court decided that employers could compulsorily retire employees at age 65. However, the judge made it clear that his decision would have been different if the Government had not recently brought forward its review of this area, giving a clear steer that employers should expect changes. To see more on this, please read our alert - Heyday challenge fails: UK default retirement age is legal .... for now.
The Government wants fathers to have the chance to take off as additional paternity leave the second half of what would have been the mother's maternity/adoption leave (fathers would be able to do this only once the mother has returned to work). Under the proposals, the father might qualify for additional statutory paternity pay, calculated broadly in line with statutory maternity/adoption pay (SMP), if the mother was entitled to SMP. Any payments to the father would only be available for whatever period the mother would otherwise have received SMP if she had continued with her maternity/adoption leave.
The timing proposed envisages new legislation next April, to apply in respect of babies due from 3 April 2011.
If these proposals go ahead then it is likely that your scheme rules will need to be revisited.
For costs reasons, the Government has dropped its proposal to extend paid maternity leave from nine months to 12 months.
In the courts
As well as looking at age discrimination, the courts were addressing pensions disputes which focused on:
The Court of Appeal gave its ruling in the Foster Wheeler case about equalisation, and came to a decision that avoided the expensive outcome feared by employers in the wake of the High Court's ruling. Our alert"Minimum interference": some relief at last for employers on the equalisation front? about the Court of Appeal ruling gives more detail regarding the decision and the implications for other schemes.
Should the trustees of a scheme that had received a transfer-in of members be treated as having notice of those members' existence when the trustees forgot about them years later during the scheme wind-up? The High Court decided that they did have notice, although we understand that that ruling may be appealed. What will the implications be if any appeal fails? The likelihood is greater expectations of scheme administrators and a greater awareness of the importance of missing beneficiary insurance. See our alert - the importance of being earnest (about keeping pension scheme records accurate and up-to-date)! - on this.
Unfair dismissal compensation
The Court of Appeal has also expressed its views on losing the ability to accrue pension under a defined benefit scheme. The Court overturned the Employment Appeal Tribunal by deciding that compensation for an unfairly dismissed employee did not need to take account of the fact that her new job only offered money purchase benefits, in contrast to the defined benefits that she was able to accrue under the job from which she was dismissed. In the court's view, a final salary pension scheme was an important part of the total remuneration package, but not a unique benefit. For more on this, see our alert Unfair dismissal - pensions benefits are not unique says the Court of Appeal.
The wider economic context: what's the true cost of deflation?
The UK is now looking at the prospect of deflation. With pension schemes traditionally calculating revaluation for deferred pensioners as well as increases to pensions in payment by reference to the retail prices index, this has led to the question 'what does this mean for pensions?'. To read more, see our alert Deflation, revaluation and pension increases - can pensions be reduced?
FAS free to rescue more often whilst PPF seeks greater control
Financial Assistance Scheme (FAS)
The DWP has continued to introduce its package of reforms extending the FAS (first announced in 2007). One set of regulations which came into effect in July introduced a number of changes, such as the introduction of 2.5% limited price indexation for post-6 April 1997 accrual. Other changes included increasing the £26,000 cap to £26,936 (to be indexed annually in line with RPI), transferring management responsibility for the FAS from the DWP to the Pension Protection Fund Board and extending the categories of people who can receive survivor payments (for example, surviving cohabitees).
The DWP has also issued for consultation some draft regulations to deliver the remaining FAS extensions (such as the transfer of remaining scheme assets to Government, the expectation being that this would release additional value).
Pension Protection Fund (PPF)
Lots continues to happen on the PPF front. After a series of regulations extending the availability of PPF compensation (to read more on this, see our alert A fresh look), the PPF now appears to be seeking greater control in a range of circumstances.
In future the PPF will be able to issue directions when a scheme's rules are amended during an assessment period, with a view to ensuring that the scheme's PPF liabilities do not exceed its assets (or that any excess is kept to a minimum).
The PPF is also hoping to reduce the number of schemes that it takes on by bringing the assumptions used from 31 October 2009 for scheme valuations under Section 143 and 179 Pensions Act 2004 closer into line with pricing in the buy-out market. If this proposal goes ahead, the hope is that fewer schemes will enter the PPF because the revised assumptions will mean that schemes are more likely to be classed as able to pay benefits above PPF levels of compensation.
Work on the levy also continues. The 2010/11 levy estimate remains at £700 million, indexed to wages (so the figure is set at £720 million, although the PPF has not ruled out raising the levy above the rate of inflation in the future). The PPF has also announced that it will reduce the levy cap (from 1% to 0.5%) and the levy scaling factor (likely to be reduced from 2.22 to 1.64). So what does this mean? According to the PPF, reducing the levy cap will mean that the most vulnerable 10% of schemes will be protected. The other side of the coin is how this will affect schemes presenting a lower level of risk (if the cap had been set at 0.8%, for example, then the levy scaling factor would have been set at 1.54). The point to remember about the scaling factor is that it's only one part of the equation when working out a particular scheme's levy, so other factors (for example, the D&B failure score) have a role to play and if the position has worsened for a scheme in respect of any of those other factors then it might mean that the scheme will still pay a higher levy than it did the previous year anyway.
Another proposal in respect of the 2010/11 levy is to change the way probabilities of insolvency are assigned to the overseas failure scores of foreign employers, so that those probabilities are consistent with those in the UK.
For those schemes that don't pay their levy on time, the PPF anticipates its power to charge interest on late payment (set out in the Pensions Act 2008) will be introduced in time for the 2010/11 levy.
If you're wondering whether the scope of contingent assets available for certification will be broadened (for example, should credit default swaps count?) the PPF has looked at this and decided against any broadening. They have, on the other hand, updated their standard form contingent asset agreements (available on the PPF website).
Looking to the coming months, the annual certification deadlines for 2010 are as follows:
- 5pm on 31 March 2010 for certification/re-certification of contingent assets;
- 5pm on 7 April 2010 for certification of deficit reduction contributions; and
- 5pm on 30 June 2010 for certification of full block transfers that have taken place up to and including 31 March 2010.
Looking further ahead, the PPF expects to consult on proposals for the 2011/12 levy in November 2009. It has also published an update on its consultation into the future of the PPF levy. Last year it unveiled proposals aimed at making the levy more tailored to the individual risk each scheme posed to the PPF, two key features being the probability of the scheme's sponsoring employer going bust during a five-year period (as well as the possibility of that happening during a one-year period, as now) and the scheme's investment strategy. The PPF has decided to set up two groups - one being a steering group of senior business figures to formulate revised proposals for a new levy formula and the other being a group of technical experts to help with the practical aspects of formula design. The PPF plans to issue revised proposals for consultation in early 2010, although any changes won't apply until the 2012/13 levy, at the earliest.
And finally ...
The fast pace of change in pensions means that it's hard to achieve an overview. With this in mind, we have put together a timeline setting out developments since the start of the year and identifying changes coming up the tracks.