Pensions Update August 2014 In this issue DC pension flexibility: (Draft) Taxation of Pensions Bill published Annual allowance charge: draft amending regulations FCA consults on rules for independent governance committees for providers of workplace personal pension schemes Abolition of contracting out: HMRC publishes update on Scheme Reconciliation Service DB Funding Code now in force TPR adds new modules to Trustee Toolkit Arcadia Group Limited v Arcadia Group Pension Trust Ltd and another: scheme rules allow switch to CPI This newsletter is for information purposes only. Its contents do not constitute legal advice and should not be regarded as a substitute for detailed advice in individual cases. If you wish to discuss any of these issues further, please contact your usual Baker & McKenzie lawyer. Jeanette Holland email@example.com Robert West firstname.lastname@example.org Chantal Thompson email@example.com Arron Slocombe firstname.lastname@example.org DC pension flexibility: (Draft) Taxation of Pensions Bill published The Government has published a draft Bill on the taxation of pensions and has produced a draft explanatory note and draft HMRC guidance on the Bill's provisions. The Bill is subject to a consultation which will end on 3 September 2014. The Bill follows the Government's consultation entitled "Freedom and Choice in Pensions" and is intended to implement the defined contribution (DC) pension flexibilities which were announced by the Government in the Budget on 19 March 2014. It does so by amending the legislation to widen the authorised pension benefits which can be provided by DC schemes (or DC arrangements in hybrid schemes). The key changes which would apply from 6 April 2015 are as follows: benefits in DC arrangements can be accessed when members wish (including if they wish to access all benefits immediately at age 55), without being subject to higher tax charges which might previously have applied in certain situations; however, where members or beneficiaries decide to take advantage of these flexibilities, they will subsequently be subject, in relation to any future pension savings, to an annual allowance for funding their money purchase arrangements of £10,000, in order to ensure that unintended tax advantages cannot be obtained; income drawdown will become more flexible (funds under the new regime will be known as "flexi-access drawdown funds"), as the cap on withdrawals, and the minimum income requirements for all new drawdown funds will be removed, and existing drawdown funds will be able to be converted to take advantage of the flexibilities; payments from DC arrangements can be made directly from pension savings, with 25% of the payment being tax free (rather than needing to take a single pension commencement lump sum); a number of the existing restrictions on lifetime annuity payments will be removed; and the maximum value of trivial commutation lump sum death benefits will be increased from £18,000 to £30,000. The changes will not automatically override scheme rules, but schemes will be able to choose whether and how to adopt the changes. The Bill introduces provisions which will grant trustees and managers a limited right to make payments of benefits flexibly from money purchase savings (if they wish to do so), notwithstanding any contrary provision of their scheme rules. We also note that the Freedom and Choice in Pensions consultation response document confirms the Government's intention to
change the normal minimum pension age from 55 to 57 from 2028. The draft Bill can be viewed by clicking here, the draft explanatory note setting out a summary of the Bill's provisions can be viewed by clicking here, and the draft HMRC guidance can be viewed here. > Back to Top Annual allowance charge: draft amending regulations Draft regulations have been published by HMRC, which would make a number of amendments to the annual allowance regime, including amendments to ensure that the changes to the regime made by the Finance Act 2011 work as intended. The changes include the reduction of the annual allowance to £40,000 from the 2014/15 tax year onwards, the flexibility to carry forward unused annual allowance from previous years, and the option for members to elect for their scheme to pay part or all of any annual allowance charge. The draft amending regulations, which follow on from an initial consultation carried out in November 2012, are also designed to reduce further administrative burdens and make other improvements to the legislation. Specifically, the draft regulations would make changes including: adjustments where unintended annual allowance input amounts may have arisen where transfers between schemes are deemed "underfunded". This may occur, for example, where a block transfer is made between schemes during a merger, but the transferring scheme does not have sufficient available funds fully to cover the value of current and future pensions promised by the receiving scheme even where the receiving scheme's benefits mirror the benefits that would have been provided in the transferring scheme. HMRC's initial consultation had proposed wording to address this issue, but its implementation was delayed after concerns were raised. The new provisions are intended to prevent unintended annual allowance input amounts arising; protection of the existing annual allowance easement where deferred members transfer their benefits to other schemes; where pre-2006 deferred members become active members again, only the increase in their deferred benefits in the year of rejoining is counted against the annual allowance, rather than the entire value of the deferred benefits; where a deferred member receives RPI-specific increases under the rules rather than CPI increases on deferred benefits, or on indexed deferred annuities provided after a winding-up of the scheme, those increases will not count towards the annual allowance. Further changes also seek to ensure that statutory increases to deferred benefits are not tested against the annual allowance; from the date the regulations come into force, in relation to "scheme pays" provisions, the removal of an unintended advantage under which a member of a DB scheme would pay a lower annual allowance charge in the year he took his benefits if he relied on the "scheme pays" provision, and giving increased access to "scheme pays" in certain situations where members may have previously been denied access;
certain changes relating to whether refunds of excess contributions to a money purchase arrangement would count towards the annual allowance. A consultation on the draft amending regulations ended on 27 August 2014. The draft regulations can be viewed by clicking here, a draft explanatory note can be viewed here, and the draft HMRC guidance can be viewed here. > Back to Top FCA consults on rules for independent governance committees for providers of workplace personal pension schemes The Financial Conduct Authority has begun a consultation on proposals for rules which would require providers of workplace personal pension (and stakeholder) schemes, such as insurers, to set up and maintain independent governance committees ("IGCs"), which would operate independently of the provider, and would have a duty to act in the interests of scheme members. The proposals arose following a 2013 report by the Office of Fair Trading on defined contribution workplace pension schemes, which identified weaknesses in the buyers' side of the market for such schemes. It found that employers made many of the key decisions regarding such schemes, but did not always have the capability or incentive to ensure that the members would receive value for money in the long term. The proposals would require IGCs to be set up by the workplace pension providers, and for the provider to ensure that the IGC provides a "credible and effective challenge on the value for money" of workplace schemes. The IGCs would: act in the interests of members; assess the value for money of the provider's schemes and raise any concerns with the provider's board, which would have a "comply or explain" duty in relation to concerns; escalate any concerns to the FCA as necessary, alert members and employers, and make concerns public; and produce an annual report of their findings. Smaller providers would have the option of establishing a "governance advisory arrangement" as an alternative. This would require an independent third party to be appointed by the provider to take on IGC responsibilities. The consultation will continue until 10 October 2014, with the new rules being published in January 2015, and coming into force in April 2015. The full consultation document, which includes a draft of the proposed rules, can be found by clicking here. > Back to Top Abolition of contracting-out: HMRC publishes update on Scheme Reconciliation Service As reported in our March 2014 update, HMRC has put in place the Scheme
Reconciliation Service ("Service") in order to assist trustees and scheme administrators of DB schemes in the run-up to the abolition of contracting out. The Service is designed to help to reconcile administrators' records of the guaranteed minimum pension relating to deferred members and beneficiaries with the HMRC's records. The Service has now been live for several months, and HMRC has provided, in its Countdown Bulletin, an update which addresses various questions which have been raised by trustees and administrators. The update confirms that HMRC is considering, based on feedback it has received, providing contributions and earnings information directly to schemes via a clerical process, or an automated process. HMRC is also considering whether to provide further details such as surviving spouses' details and members' addresses. HMRC has requested that schemes which intend to use the Service in the future submit their requests to do so as soon as possible, even if they do not intend to use the data immediately, to assist with HMRC's future planning. The full update can be found in the HMRC's Countdown Bulletin here. > Back to Top DB Funding Code now in force The Code of Practice on funding defined benefits came into force on 29 July 2014. Further information on the Code of Practice can be found in our June Update, which can be viewed [here]. The Code of Practice can be accessed here. > Back to Top TPR adds new modules to Trustee Toolkit The Pensions Regulator has updated its Trustee toolkit to include four new modules to reflect changes to the new DB and DC Codes of Practice. A link to the updated Trustee toolkit can be found here. > Back to Top Arcadia Group Limited v Arcadia Group Pension Trust Ltd and another: scheme rules allow switch to CPI The High Court has decided that the Rules of two DB schemes in the Arcadia group gave the trustees and the employer a joint power to select an index other than RPI for the purposes of revaluing deferred pensions and indexing pensions in payment. The judge came to this conclusion notwithstanding the fact that the Rules expressly referred to RPI. The schemes' Rules, broadly, provided for pension increases and the revaluation of deferred pensions to be calculated by reference to "the
Government's Index of Retail Prices (or any replacement of that Index)". The Retail Prices Index was defined as "the Government's Index of Retail Prices or any similar index satisfactory for the purposes of the [HMRC]" (it should be noted that there had been some variation in how the relevant Rules were framed over the life of the two schemes). The judge took the view that, when read in context, the Rules did allow an index other than RPI to be selected and that this power could be exercised jointly by the trustees and the employer. In addition, the exercise of this power was not restricted to circumstances in which RPI had been discontinued or replaced. This is a potentially helpful decision for schemes who are considering whether to switch to CPI (or another alternative such as RPIJ). However, the ability of a scheme to switch indices will depend on how its particular Rules are drafted. Where, for example, a scheme refers expressly to RPI, and does not provide any alternatives, trustees and employers' ability to switch is likely to be much more restricted. > Back to Top Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. Before you send an e-mail to Baker & McKenzie, please be aware that your communications with us through this message will not create a lawyer-client relationship with us. Do not send us any information that you or anyone else considers to be confidential or secret unless we have first agreed to be your lawyers in that matter. Any information you send us before we agree to be your lawyers cannot be protected from disclosure.
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