The last few months have seen a number of developments in the pensions arena, so we have decided to outline some of the key changes in one document for your return from the summer break: Back to school!
Our Combined Human Resources Solutions team have also outlined here those developments concerning salary sacrifice arrangements and maternity leave, as well as recent case law on age discrimination.
Conflicts of interest
The law on conflicts of interest is currently demanding significant attention. Changes will soon be coming into force. However, the Pensions Regulator has been slow to issue guidance, meaning there are difficulties about how to implement the requirements in practice.
From 1 October 2008, the Companies Act 2006 introduces a requirement for company directors to avoid situations in which they have or can have a direct or indirect interest that conflicts or may conflict with the interests of the company (unless the situation cannot reasonably be regarded as likely to give rise to a conflict of interest). The scope of this wording is broad: trustee companies plus sponsors with directors who are also trustees will need to take steps to deal with this in advance of 1 October. The steps will include an assessment of what the company's articles of association say and possibly arranging for shareholder approval to enable other directors on the board to authorise a director to continue to remain in office, despite actual or potential conflicts. Any such authorisation is only the start: the trustee directors will still need to ensure that they have arrangements in place to identify and appropriately manage conflicts of interest which do arise.
Earlier this year, the Pensions Regulator published draft conflicts of interest guidance, the aim of which would be to help trustees to manage conflicts. The final version of the guidance is still to be issued and will be of direct relevance to advice on this area of law. At the moment, the regulator plans to publish final guidance during October. However, we will continue to work with each of our clients to deal with the Companies Act aspects in the meantime.
In the courts
Who counts as an employer under the scheme funding regime?
The High Court has decided that in a situation where participating employers who no longer employ active members give notice to withdraw before the scheme closes to future accrual, those employers are not classed as "employers" under the scheme funding regime (SFR). The court was asked to establish which assets and liabilities should be taken into account when setting contributions for remaining employers. The judge's ruling that an entity must employ active members in order to count as an "employer" for SFR purposes meant that at the time of the scheme's closure to future accrual there was only one employer left (the principal employer). The SFR laws say that a scheme's sections are treated as separate schemes if, among other things, there is more than one employer participating in the scheme. By ruling that there was only one employer in the scheme, the judge had to decide that the principal employer's contributions should be calculated by reference to all the assets and liabilities of the scheme, including those contained in the withdrawing employers' sections.
Although the SFR laws were introduced via the Pensions Act 2004, people are still getting to grips with how the SFR works in practice. This case has clear implications for schemes which have stopped future accrual and should be taken account of by employers who may be considering such a step in respect of their own schemes.
Money purchase benefits and scheme wind ups
Two of the latest cases have looked at how assets representing money purchase benefits should be treated when a scheme which also has defined benefits winds up with insufficient assets to cover all the defined benefit liabilities. One case contains useful guidance on the features that will lead a court to conclude that the benefits in question are money purchase benefits (the judgment distinguished the KPMG scheme case in several respects). The other decision focused on the scheme documentation and the way in which the scheme was run when establishing whether there was a single fund. Both rulings concluded that the money purchase assets in those schemes should not be ignored when applying the priority order on winding up.
These cases turned, to a significant extent, upon their facts. The issues that they raise, however, are interesting and relevant to any schemes in, or about to go into wind up, where there is insufficient funding.
The Pensions Regulator
Delay to changes to the way longevity is to be treated in scheme funding
The Pensions Regulator has announced that it will delay issuing guidance on the way it expects longevity to be treated in the context of the scheme funding regime. The original timetable was for the proposals to apply to recovery plans based on valuations with effective dates from March 2007. The regulator has now said that the changes will apply in respect of the scheme valuation cycle starting in September 2008. This will therefore have an impact on valuations and any recovery plans that are due for submission from December 2009. The delay has come about as a result of replies to the regulator's consultation, issued earlier this year. The Regulator has said that it plans to issue the final version of what it will require in late summer.
The draft guidance said that schemes should be "transparent and evidence-based" when considering longevity and confirmed that the regulator would pay special attention to recovery plans where the mortality assumptions were weaker than certain mortality projections identified in the draft.
Many have welcomed the news. However, it may simply be a matter of time before the guidance is issued and the difficulties commentators have highlighted come into reality.
Pensions Bill amendment on inducements to opt out
The Pensions Bill now includes a provision, the aim of which is to prevent employers from pressurising their employees into opting out of automatic enrolment (from 2012, employees will automatically be enrolled in respect of personal accounts) or giving up active membership of a pension scheme without joining another scheme. The provision is scheduled to come into effect at the same time as personal accounts are introduced (in 2012) and is worded in wide terms, so "any action" by the employer is caught. It would seem, therefore, that offering inducements or making threats, in whatever form, will fall within the scope of the prohibition. Also caught will be any attempts by prospective employers to find out whether job applicants would opt out of automatic enrolment. The Pensions Regulator will enforce the new laws, ultimately by the use of fines. This is all aimed at seeking to ensure the pension saving principle behind the policy of personal accounts is not circumvented.
We will be keeping a watching brief on how this develops. Employers will want to make a decision about when the right time is to start considering the impact of personal accounts and how the new system will integrate with their current pension provision.
Internal dispute resolution code now effective
The Code of Practice on what constitutes "reasonable periods" under the internal dispute resolution procedures legislation has been bought into effect from 28 July 2008. Under the code (which also applies to public service schemes), decisions must be reached within four months of receipt of the application and the applicant must be told about the decision within 15 working days of a decision being made. Although these deadlines are set out in clear terms, the code does recognise that decisions may be reached within longer or shorter timescales if the circumstances lend themselves to that – for example, where the matter is unusually complex then it may not be possible to reach the decision within four months. The code also says that certain types of applicant must bring their applications within six months of the date that they ceased, or claim to have ceased, to be a member, surviving beneficiary or prospective member of the scheme.
It is up to the scheme trustees to decide upon the other details of the procedure. The revised provisions in the Pensions Act 1995 came into effect on 6 April 2008. The changes allowed trustees to adopt either a one-stage or a two-stage procedure, which must set out details on certain matters (for example, how an application can be made). Most clients are retaining the two-stage procedure and good practice ought to mean most schemes already respond within "reasonable periods".
Moral hazard changes
In April of this year, the Government issued proposals to change the moral hazard powers of the Pensions Regulator to issue contribution notices and financial support directions. We issued our analysis of the likely implications of these proposals in our alert of 17 April 2008. The Pensions Bill 2008 contains a clause to cover this, enabling regulations to be laid which would make the changes announced.
Many concerns have been raised about how the proposed changes will work in practice. The regulator involvement in the Duke Street/Focus DIY case has only heightened those corporate concerns. The Government's consultation closed on 20 June so it's another watch this space!
Record keeping consultation
The Pensions Regulator has issued a consultation on record keeping by pension schemes. While many schemes have high standards in this area, there are problems which the Regulator is keen to address (for example, poor-quality legacy data). Specific steps which the consultation focuses on are:
- A benchmark for "core information" (and whether the regulator should, at a later date, consider benchmarks for additional information)
- Whether trustees/providers should identify and measure additional information and, if necessary, develop a plan to obtain the additional information.
The advantages of good record keeping are self-evident. This is another example of the Pensions Regulator's focus on scheme governance, which has been a theme for some time now. Trustees should consider the final guidance with their advisers when it is issued.
HM Revenue and Customs (HMRC)
Money laundering clarification
HMRC has clarified the position for pension scheme trustees as regards its announcement earlier this year concerning registration as a Trust or Company Service Provider (TCSP) under money laundering legislation. HMRC has now confirmed that firms or sole practitioners who only perform professional trustee services for occupational pension schemes do not need to register as a TCSP. Directors of corporate trustees where the trustee company only acts as a trustee of an occupational pension scheme are also exempt from the need to register.
There has been considerable confusion about HMRC's requirements in this area so this clarification is to be welcomed. The result is that most trustees, whether lay trustees or professionals, will not now need to register.
Adult dependents: HMRC extends transitional provisions for children over age 23
HMRC has published some draft regulations which would extend the circumstances in which a child's pension is authorised under the tax regime applying to pensions. Aside from some transitional provisions, the general position under the pensions tax regime (introduced on 6 April 2006) is that where a child is over age 23 the pension is authorised only if the child is dependent on the member because of physical or mental impairment. The draft regulations would extend the transitional provisions by allowing the pension to be authorised where the child has reached age 23 or, if later, has stopped being in full-time education or vocational training, but (in either case) only if certain other conditions are met. Those conditions are:
- at the time of the member's death the child is either financially dependent on the member or has a mutually dependent financial relationship with the member;
- the scheme was approved before 6 April 2006 and the scheme rules allowed pension to be paid in these circumstances;
- the scheme's pension death benefits have not been materially changed since 6 April 2006; and
- on the announcement date (not defined but likely to be 1 July 2008, when the draft regulations were published) either the member's pension or the pension death benefit must have been in payment (or entitlement to the pension death benefit must have arisen before that date).
Extending the transitional provisions relating to adult dependants is likely to be welcomed by many schemes, particularly those schemes which had wider pre-6 April 2006 provisions in this respect.
VAT and investment management services
In 2007, the European Court of Justice ruled that investment trust companies (ITCs) were not required to pay VAT on fees charged by third parties for managing the ITC's assets. Some in the pensions industry believe that investment managers' services to occupational pension schemes should enjoy a similar exemption. This is the basis of the case the NAPF and one of the Ford pension schemes is bringing before the VAT and Duties Tribunal. This issue is relevant to pension funds with segregated investments managed by asset managers (since investment management via pooled funds or insurance wrappers is already exempt).
If the NAPF challenge succeeds then VAT recovery should be available; if applicable, schemes should consider making a protective claim with the VAT and Duties Tribunal as soon as possible given the three year limitation on recovery.
Finance Act 2008
This year's Finance Act contains some provisions affecting pensions. The changes include some tidying up provisions as well as the following:
- Pension increases will only be tested against the Lifetime Allowance if they are higher than 5% or, if higher, the increase in the retail prices index or £250.
- Regulations will allow trivial commutation under an occupational pension scheme to be available in an additional way. Where the member's entitlement is no more than £2,000, trivial commutation will be available without needing to take account of the member's other entitlements under any other registered schemes. The draft regulations say that members wishing to make use of this will need to give the scheme administrator a signed declaration, confirming that certain requirements are met.
- Certain payments that are paid inadvertently and are currently classed as unauthorised will be treated as authorised if particular circumstances apply. The draft regulations on this cover pensions paid in error, payments of arrears of pension after death, pensions continuing to be paid after death and commencement lump sums paid after death.
These changes should make the tax regime easier to apply in practice.
Entry to the Pension Protection Fund eased
New regulations have been made so that if it so happens that a sponsoring employer of a scheme which has entered a Pension Protection Fund (PPF) assessment period is dissolved during that period then that dissolution will not, of itself, disqualify the scheme's entry to the PPF. The amending regulations also provide for each section of a segregated scheme to be treated as a separate scheme where eligibility for PPF entry is retained during an assessment period (apart from the dissolution situation mentioned above this includes, for example, the situation where the scheme ceases to be a tax registered scheme).
This change will benefit those members for whom the PPF presents the only realistic prospect of securing their pension scheme benefits.
Financial Assistance Scheme extended further
Regulations have been made which extend the range of payments available under the Financial Assistance Scheme (FAS), in line with last year's announcement by the Government. Among other things, the regulations introduce payments for those members who are unable to work through ill-health in the five years before reaching normal retirement age. More controversially, people who qualify for FAS payments will no longer be able to buy themselves back into the State Additional Pension.
It is unfortunate that, by removing the buy-back option, the Government has attracted some negative press attention which may undo some of the positive response generated by its other work on extending the scope of the FAS.
Department for Work and Pensions (DWP)
Transfer values new laws
The way in which cash equivalent transfer values (CETVs) are calculated is about to change. From 1 October 2008, trustees of defined benefit occupational pension schemes will choose the assumptions that should apply to the CETV calculation, having first obtained the scheme actuary's advice. Currently, assumptions for CETVs are set by the scheme actuary following the, soon to be withdrawn, Guidance Note 11 (much of which is reflected in the new regulations). Under the new requirements, CETVs must not be lower than a minimum level but can be higher (so long as the trustees have acquired any consents needed). The ability to reduce the CETV in recognition of scheme underfunding (and in certain other circumstances) will continue. A few changes will also be made to the disclosure obligations that apply to transfers.
Although the Pensions Regulator's guidance for trustees has not yet been finalised, from the information available to date it appears unlikely that the new requirements will have any legal impact on incentivised transfer offers.
Trustees should be thinking about their responsibility to set the assumptions. If they are to be in a position to meet the new requirements in time for statements of entitlement (SOE) provided from 1 October onwards, trustees should be having discussions with their actuaries now. Extra disclosure information will also need to be included for SOEs issued after 1 October, so any standard SOE wording should be updated to include this.
Divorce: some simplification of pension sharing laws planned
A couple of changes are due to come into effect from 6 April 2009, with the intention of simplifying pension sharing on divorce.
The DWP have consulted on draft regulations which would enable pension credit members to decide when and how to draw pension in the same way as other occupational pension scheme members. At the moment, the circumstances in which pension credit benefit can be paid before normal benefit age are restricted in relation to occupational pension schemes, but not for personal pension schemes. If adopted, the regulations will allow pension credit benefit to be available from age 50 (or 55 from 2010) or where the pension credit member meets the ill-health condition in the Finance Act 2004. Lump sums would also be available in the same circumstances as for other members.
The introduction of these flexibilities may be another reason to encourage benefits acquired through pension sharing to be transferred out.
This year's Pensions Bill contains wording which will mean that shared rights deriving from contracted-out rights (known as safeguarded rights) will be treated in the same way as other shared rights.
The provisions governing safeguarded rights imposed restrictions on how those rights could be taken and added an unwelcome layer of complexity to pensions so this change would be helpful in practice.
Schemes' administration teams will need to take these changes on board.
Revaluation cap reduction
The Pensions Bill contains a clause that will result in the revaluation cap (which applies in respect of deferred pensions) going down from 5% to 2.5% for rights earned after that change is made. If schemes adopt this, it will reduce their future accrual costs. The change also brings the revaluation cap into line with the cap used for the indexation of pensions in payment (which has applied to accrual since 6 April 2005). Currently, the most likely implementation date for this change is January 2009.
Schemes deciding to adopt the reduced cap will need to make sure that their administration teams make the necessary alterations to their systems and scheme rules are checked to see if any amendment is necessary. If a scheme decides not to adopt the change, it should also check its rules to make sure the change will not apply automatically.
Risk sharing consultation
The Government has sought views on whether pensions legislation should be amended so that employers and employees will be able to share to a greater degree the risks presented by occupational pension schemes. At the moment, the employer takes on most of the risk when the pension scheme provides defined benefits, whereas the employee takes on most of the risk when a defined contribution scheme is used.
The consultation closed on 28 August and the Government has confirmed that there will not be any provisions on risk sharing in this year's Pensions Bill, so it will be some time before we will be able to see the likely direction that this will take. No action is required.
Protected rights changes
As a result of the new Financial Services Authority regulatory regime, which extends to all personal pensions, the Government has laid regulations enabling Self-Invested Personal Pensions to hold protected rights with effect from 1 October 2008. In common with other money purchase schemes, SIPPS will have to track protected rights. The regulations also bring the protected rights legislation into line with the tax regime for pensions (introduced in April 2006) by providing that protected rights will no longer be available for paying a pension to someone other than the member's spouse, civil partner or child. Currently, the Government plans to abolish all protected rights (wherever they are held) in 2012. Schemes with protected rights will need to start thinking about the future abolition of those rights. This may well entail some measure of scheme redesign.
Combined human resources solutions
Maternity leave, salary sacrifice and pension contributions
HMRC has published guidance on its website about salary sacrifice and maternity leave. The guidance states that where a woman is only receiving statutory maternity pay (SMP), the SMP cannot be reduced by a salary sacrifice arrangement. There are some limited authorised payments that a woman can make which reduce her SMP, one such payment is pension contributions.
Any scheme rules with a salary sacrifice element which allow salary sacrifice during maternity leave, even if the woman is only paid SMP, will need to be reviewed – in other words, rules must allow her to revert to being a contributing member or operate a lifestyle event opt out so that she is not sacrificing any SMP.
Following a case in which the EOC successfully challenged the Government's implementation of elements of the Equal Treatment Directive, amendments have been made to the Maternity and Parental Leave Regulations 1999. Women whose expected week of childbirth is on or after 5 October 2008 will benefit from a change in the law. From that date, women will be entitled to the same contractual benefits during additional maternity leave as they receive during ordinary maternity leave, except remuneration. The potential difficulty with this legislative change is whether it is still lawful to have any distinction between paid and unpaid periods of maternity leave in terms of pensions.
The Department of Business Enterprise and Regulatory Reform (BERR) has suggested in the past that pensions are part of remuneration and therefore fall outside the benefits that a woman is entitled to during maternity leave. Unfortunately, more recent BERR guidance is silent on the issue. Also, there is no legal UK authority which suggests that the BERR view is correct, or indeed incorrect. Although this issue will substantially be resolved in 2010 with the introduction of SMP paid leave for 52 weeks' maternity leave, some individuals will still not be entitled SMP. We recommend that at present schemes/employers retain the current distinction between paid and unpaid maternity leave in terms of pensionable service/contributions until clarification is received from the BERR. Schemes/employers should be aware that there is a risk to this approach in terms of possible member challenge, but treating all maternity leave in the same way may be more generous than the minimum statutory requirements.
Age discrimination cases progress
A tribunal has held, by a majority, that the provision of a fund to staff with which to purchase items from a flexible benefits package was not capable of amounting to less favourable treatment on the grounds of age. This was despite the fact that the benefits scheme provided an option to join a private health insurance scheme whose premiums were calculated according to age and gender – i.e. quoting higher premiums for those over a certain age. Arguably, by providing these under a flexible benefits package the increased cost for the insurance is passed onto the employee.
The majority went on to hold, however, that even if the offer of the benefits package had amounted to discrimination on the grounds of age, they were satisfied that the employer had made out the justification defence. It had made all reasonable efforts to offer its employees a flexible benefits package that was the most advantageous possible to staff, and, on the balance of probabilities, the package would have the desired beneficial effect on the recruitment and retention of staff.
Although this is only a Tribunal decision, it does provide some guidance as to the likely justification arguments that might be successful in this area.
The Advocate General has issued an Opinion saying that the rules in a German pension scheme which denied payment of any pension to a spouse more than 15 years younger than her deceased husband would constitute unlawful age discrimination under today's law. Interestingly, the A-G commented that a more proportionate approach – such as the reduction of younger spouses' benefits on a sliding scale - would be acceptable. The European Court of Justice (ECJ) ruling on this case is currently pending.
The UK laws on age discrimination allow pensions for dependants who are more than a certain number of years younger than the member to be actuarially reduced, so if the ECJ ruling follows the A-G's Opinion on sliding scale reductions being acceptable then the UK laws appear to already conform on this point. No action is required.
And finally… don't forget to look out for the A-G Opinion in the high-profile ECJ Heyday reference challenging provisions of the Age Discrimination Regulations in relation to the default retirement age for those aged 65 and over. This is due to be handed down on 23 September.