Policy paper suggests ways to support employers and schemes post-referendum Following the UK’s vote to leave the EU, pensioners, employers and scheme trustees alike have been worrying about its long-term impact, particularly in relation to scheme funding and deficits. Following the vote, research suggested that the overall deficit of UK-based DB schemes increased sharply by £110 billion during August 2016. A survey carried out by JLT has predicted that the cost of maintaining UK DB schemes for FTSE 100 companies will double over the next three years. In October, the Confederation of British Industry published a policy paper suggesting ways to improve the position of DB pension schemes and mitigate the effect of Brexit. These include: ‒ using the pre-existing flexibility of the UK’s Regulatory approach to support companies and schemes; ‒ modernising inflation indexation to facilitate schemes moving to CPI; ‒ addressing the consequences of the current “gilt-plus” approach to scheme funding adopted by schemes; and ‒ allowing schemes to invest more in illiquid assets (eg. infrastructure). This would also provide a boost to the UK economy at large. PENSION REFORM The Finance Act 2016 The Finance Act 2016 came into force on 15 September and has introduced a number of pension-specific changes: ‒ Lifetime allowance: this has been reduced from £1.25 million to £1 million until the tax year ending in April 2018. It is then set to rise in line with CPI for subsequent tax years. The usual protective measures have been introduced for individuals who are negatively affected by the lifetime allowance reduction (fixed protection 2016 and individual protection 2016). ‒ Serious ill health lump sums: the requirements for the payment of serious illhealth lump sums have been simplified so that these can now be paid even where some of a member’s benefits have already crystallised. ‒ Dependant’s scheme pension: exceptions have been introduced for the annual test that is carried out to assess the increases in dependants’ scheme pensions where the member dies after age 75. These changes apply retrospectively from 6 April 2016. ‒ Dependant’s flexi-access drawdown: the definition of ‘dependant’ has been expanded to allow dependants to access funds designated for flexi-access drawdown after age 23. ‒ Taxation of serious-ill health lump sums: changes have been made to the tax treatment of serious-ill health lump sums. The 45% flat-rate charge applicable to serious-ill health lump sums paid after age 75 has been replaced by a new marginalrate tax. ‒ Bridging pensions: the provisions in the Finance Act 2004 dealing with bridging pensions (which allow an increase in a member’s pension between the commencement of their occupational pension and that of their state pension) have been repealed as these will now be provided for in regulations. This is in order to accommodate recent extensive changes to the state pension system and the introduction of a single-tier state pension. www.burnesspaull.com The Pension Schemes Bill gives tPR more powers to regulate UK master trusts. ” “ The New Pension Schemes Bill A new Pension Schemes Bill is set to come into force after being introduced by the House of Lords in October. Its main provisions will significantly change the regulatory framework surrounding master trusts. Master trusts are industry-wide multi-employer pension schemes, where the employers are unconnected to one another. They are often used to satisfy employers’ auto-enrolment duties. Currently, they are not subject to tPR authorisation (although schemes can opt to join tPR’s master trust assurance list for trusts that can show high governance standards). This is set to change, and the Pension Schemes Bill gives tPR more powers to regulate UK master trusts. Authorisation will depend on: ‒ those involved in running the scheme being “fit and proper persons”; ‒ the scheme being financially sustainable; ‒ the scheme funder meeting certain requirements; ‒ the scheme's systems and processes satisfying certain requirements; and ‒ the scheme having an adequate continuity strategy in place for when it is faced with certain ‘triggering events’ (broadly similar to winding up events). The Bill will also see the introduction of a cap on exit charges. Following a government consultation last year, it came to light that some members aged 55 or over are reluctant to transfer their benefits due to the charges they may incur. The Bill will allow the government to set a maximum exit charge cap in a large number of situations. This will override any provisions in contracts between members and their schemes. The proposals have been largely welcomed by the industry. However, some experts are sceptical of the Bill’s failure to impose strict capital requirements on master trusts, which could lead to some such schemes having no long-term viability. The Bill has not been formally adopted by Parliament, and so there remains a possibility the details will be amended before it is finalised. Pensions implications from the 2016 Autumn Statement This year’s Autumn Statement referred to a number of anticipated pension changes. The main change which is to be implemented concerns the money purchase annual allowance. The money purchase annual allowance will decrease from April 2017 from £10,000 to £4,000. The money purchase annual allowance applies to pensioners who have flexibly accessed their benefits, and operates to restrict such pensioners from making further contributions (beyond the allowance limit) into a money purchase arrangement. The Autumn Statement also confirmed that certain provisions in respect of which change was anticipated would remain unchanged, including salary sacrifice and the triple lock pensions guarantee. While many salary sacrifice opportunities will no longer be available following government reforms, salary sacrifice arrangements in respect of pension contributions will remain available. The Chancellor has also promised that the triple lock will remain in place until at least 2020 (although many have interpreted this as a warning that it may be removed thereafter). www.burnesspaull.com HMRC Extension of transitional period for VAT recovery As a result of an ECJ ruling in 2013, employers have been entitled to recover VAT on the investment management costs of running their pension schemes. Following this decision, HMRC published a briefing note setting out certain requirements which must be fulfilled in order for an employer to recover VAT, namely that the employer enters into a tripartite agreement with the trustees and the service provider. In addition, HMRC allowed a transitional period until 31 December 2015, during which employers can obtain an input tax deduction for 30% of the VAT element on single invoices that cover administration and investment management services to their pension schemes. The aim was for this to allow time for employers and schemes to negotiate services contracts which comply with the new requirements. In our December 2015 bulletin, we advised that HMRC had extended this transitional period until the end of 2016. It has now been extended again until 31 December 2017. Effects of the reduction of the annual allowance A recent study by Royal London has shown the effects of the reductions in the lifetime allowance in recent years, in conjunction with a fall in annuity rates. For example, a member would only be able to buy an annuity of £45,000 in 2016 without his pot exceeding the lifetime allowance. In comparison, the lifetime allowance and annuity rates in 2007 would have given the same person an annuity of £117,760. There is also concern within the industry that some tax relief measures have made alternative routes to saving more attractive, for example the introduction of the Lifetime ISA. These have been found to detract from the appeal of pensions due to the personal savings allowances these routes offer. PENSION PROTECTION FUND PPF compensation cap for members with long service The DWP has been consulting on legislation that will increase the PPF compensation cap for members with long service from 6 April 2017. The consultation closed in November. The consultation does not cover the merits of the DWP’s suggested reform, and instead focuses on whether the legislation is fit for purpose. The proposal is for existing compensation payments to be increased to reflect the higher cap. However, there will be no backdating in respect of underpayments. 2017/18 PPF levy determination The PPF has published its most recent draft levy determination for the upcoming 2017/18 levy year. It has also updated some of its draft guidance. This year’s main changes to the draft determination concern: ‒ Insolvency risk: a number of schemes will see their PPF levy band affected by the introduction of the new UK accounting standard (FRS 102). While the PPF believes the new standard to be an improvement over the previous one, it acknowledges that this may affect calculation of insolvency risks for a small number of schemes. It has therefore proposed a means by which any such schemes will be able to notify Experian about any shifts in their insolvency risk score attributable to the introduction of FRS 102. www.burnesspaull.com HMRC has extended the transitional period for VAT recovery until 31 December 2017. ” “ ‒ Schemes with no genuine sponsoring employer: schemes with shell companies or special purpose vehicles as their sponsoring employers have been a cause for concern for the PPF, and it is now suggesting that levies should be calculated with this ‘appropriately’ taken into account. The final determination will be published later this month. GUIDANCE PLSA’s Master Trust Committee The PLSA has established a “Master Trust Committee”, consisting of 13 senior representatives from across the UK pensions sector, to provide support to the master trust market. Master trusts have become increasingly relevant since the introduction of autoenrolment, and the new committee aims to represent and promote the interests of savers with benefits in master trusts by drafting policies as well as providing feedback, updates and guidance on legislative and regulatory changes affecting master trusts. It will meet every three months and will publish reports on its discussions and findings. THE PENSIONS REGULATOR Reaction to the 21st Century Trusteeship report Back in July, tPR published a report on the main challenges currently facing trustees. In the report, tPR found that many trustees are not currently meeting the required standard. The report raised the question of whether qualifications for trustees (and trustee chairs) should be introduced, summarised in our previous bulletin. This arose mainly from the general change in the pensions landscape, and from increasing rules on governance. The industry has widely embraced the report’s findings and recommendations. However, some, for example PLSA, believe more needs to be done to ensure robust governance in order to tackle the changes UK pension schemes are having to adapt to. TPR fines Trustees and highlights ongoing ‘tougher approach’ In October, tPR fined two trustees for failure to submit scheme returns. Regulatory intervention reports were published afterwards. This is part of a ‘tougher approach’ taken by tPR to trustees who fail to comply with the basic duties involved with running a scheme. A spokeswoman for tPR referred to the guidance it has published to help support trustees in their decision-making and governance. This latest report highlights the importance of keeping up to date with regulatory changes and tPR’s expectations on present-day pension trustees. Intervention Report for DCT Civil Engineering The Pensions Act 2004 allows tPR to publish the result of its findings during the exercise of its regulatory powers. In October, tPR issued an intervention report following its decision to void a scheme’s deed of amendment. The trustees of a DB scheme executed an amending deed in 2010 to comply with various legislative changes. However, the deed also unintentionally changed the way benefits were calculated. The effect of this was that benefits were calculated on a DC basis. This was not the intention of the trustees, and as such member consent had not been obtained. When the scheme later entered a PPF assessment period, uncertainty rose as to whether it was a DB or a DC scheme and the trustee submitted an application to tPR requesting that the amending deed be declared void. TPR obliged for the following reasons: www.burnesspaull.com The new committee aims to represent and promote the interests of savers with benefits in master trusts. ” “ ‒ the PPF had also agreed with this solution; ‒ the trustees at the time had unintentionally overlooked actuarial advice indicating the change in benefit calculation; and ‒ it was in the best interest of the members to revert to a DB calculation. Comment Although this report is unusual, we have been seeing more frequent intervention reports from tPR. CASES Court of Appeal - Barnardo’s v Buckinghamshire Scheme with ambiguous pension increases wording refused permission to switch to CPI from RPI The Court of Appeal was asked to look at the wording of a scheme’s rules and give its ruling on whether the trustees were able to select a pension increases index other than RPI (in this case, CPI). The Court took a literal approach to interpreting the scheme’s rules. The relevant scheme rule provided for annual pension increases by the percentage rise in the ‘Retail Prices Index’, capped at 5%. Retail Prices Index was defined in the rule as RPI ‘or any replacement adopted by the Trustees without prejudicing Approval’. The Court needed to decide between the following interpretations of the definition of RPI: ‒ “RPI or any index that replaces it and is adopted by the trustees” (in other words, it has to be replaced by the institution that sets it first); or ‒ “RPI or any index that is adopted by the trustees as a replacement for it” (in other words, the trustees have discretion about whether to adopt a new index regardless of whether the RPI is officially replaced). While it admitted this was a difficult decision, the Court eventually found the trustees were not able to adopt a different index unless the RPI was officially replaced by the publishing authority. Comment This case will be disappointing to employers, but highlights the importance of having clearlydrafted rules and avoiding ambiguity. Court of Appeal - Horton v Henry A bankrupt individual cannot be forced to claim his pension in order to repay his creditors Individuals faced with bankruptcy cannot be forced to claim their pensions to pay off outstanding debts, the Court of Appeal has ruled. A Trustee in Bankruptcy asked the courts to order an individual to access his pension in order to contribute to repaying his creditors, but the courts refused to make the order. This decision contrasts with an earlier 2012 case (Raithatha v Williamson) where a bankrupt individual was forced to draw from their pension. Their pension then constituted income, a proportion of which was transferred to the Trustee in Bankruptcy. Comment This reversal suggests a new approach being adopted in order to better protect individuals from losing their pension to creditors when faced with bankruptcy. The Pensions Ombudsman - Mr N Trustees were not required to specifically warn a member of less generous death in service benefits as a result of opting out The Pensions Ombudsman has determined that scheme trustees were not obliged to tell a member of less generous death in service benefits when she opted out after 40 years’ pensionable service (on the basis that 40 years was the maximum service that would be counted when calculating her pension). www.burnesspaull.com The case highlights the importance of having clearly-drafted rules and avoiding ambiguity. ” “ When Mrs N died (before retirement) her death in service lump sum was less generous than it would have been for an active member because she had opted out of the scheme. Mr N complained to the Ombudsman that his wife would not have opted out had she known about this, but the Ombudsman decided in favour of the trustees. This determination was reached on the basis that the opt-out form had indicated the benefits Mrs N would have been entitled to if she remained in the scheme (including death in service benefits) and she had signed a declaration that she understood the consequences of opting out. Comment This case reiterates that trustees who take the right steps and provide all the required and necessary information to members cannot reasonably be expected to do more in order to change a member’s mind when the member has made a decision, even where they will be put in a worse position as a result. The Pensions Ombudsman – Mrs N Trustees who issued an inaccurate statement of retirement benefits were not liable for the mistake The Pensions Ombudsman has determined that it was not reasonable for a member to rely on an incorrect retirement benefits statement and has refused her complaint. As her previous statements were correct, the Ombudsman concluded that she should have realised the error and she had also failed to prove she financially relied on the incorrect information. Three months before retiring, Mrs N was sent an ‘estimate only’ statement of benefits. On actual retirement she was sent an up-to-date statement amending the previous figures. The revised statement indicated the previous one had been calculated in error, and the trustees did not have power under the scheme rules to award the incorrect benefits. The Ombudsman decided that she could not rely on the incorrect statement as she had regularly received correct benefit statements. Mrs N was also responsible for keeping up to date with her statements and should have noticed the statement in question was incorrect. Comment This determination reinforces the point that members themselves are also responsible for keeping up to date with the basics of their benefits. Additionally, it is a reminder of the test members must meet to prove they financially relied on an incorrect benefits statement, before their claim will succeed.