Top of the agenda  

1. Budget 2015: Lifetime allowance to be cut from £1.25m to £1m from April 2016  

2. Employers should start thinking about recouping additional NICs payable when DB contracting-out ends


3. Merchant Navy – High Court holds scheme that provided revaluation above statutory requirements is a frozen scheme  


4.HMRC's further VAT guidance 'tunes in' on tripartite agreements  

5. Pensions Tax Manual to replace Registered Pension Schemes Manual

Top of the agenda

1. Budget 2015: Lifetime allowance to be cut from £1.25m to £1m from April 2016

The Chancellor’s Budget 2015, delivered on 18 March, was light on pensions. Here are the key measures announced by the Chancellor:

Lifetime allowance to be reduced and indexed

The Lifetime Allowance will be reduced from £1.25 million to £1 million from 6 April 2016 – according to the Government, this is expected to affect only 4% of pensioners (who have lifetime savings over £1m).

From April 2018, the Lifetime allowance will also be indexed annually by the Consumer Prices Index.

Individuals to be allowed to sell their annuities without adverse tax consequences

As confirmed by Pensions Minister Steve Webb a few days before the Budget announcement, the Government will allow people who are already receiving income from an annuity to sell that income to a third party, subject to agreement from the annuity provider. The proceeds of the sale may then be taken directly or drawn down over a number of years and will be taxed at the marginal rate. Currently, if an individual sold their annuity income, they could incur an unauthorised payments charge of 55% or up to 70% in some cases. This charge will be removed from April 2016. The buyer would receive the annuity income the seller of the annuity would have received for the lifetime of the seller.

Taxation of death benefits paid under an annuity

As already previously announced, the current changes to the taxation of death benefits will, broadly, also be extended to death benefits paid under an annuity. From April 2015, where the annuity-holder dies under the age of 75 with a joint life or guaranteed term annuity, the beneficiary will receive any future payments from the policy tax free. Where the annuity-holder dies on or after age 75, the beneficiary will pay the marginal rate of income tax.

Legislation in relation to these changes is now in the Finance Act 2015, which received Royal Assent on 26 March.

New Personal Savings Allowance

A new personal savings allowance will be introduced from 6 April 2016 – this will remove tax on up to £1,000 of savings income for basic tax rate payers and up to £500 for higher tax rate payers. Additional rate tax payers will not receive an allowance, however.

Public Service pension schemes

On the public sector side, when the reformed Public Service pension schemes are introduced from 1 April 2015, they will allow widows, widowers and civil partners to retain survivor benefits if they remarry, cohabit or form a civil partnership.


A Call for evidence was issued on the same day as the Budget as to how best to remove the barriers to the creation of a market in buying and selling annuities. The government will also work with the FCA on how best to support people’s choices, in light of the proposed changes.

Transitional protection (i.e. in the form of Fixed Protection) will also be available for members with pension savings over £1m.

2. Employers should start thinking about recouping additional NICs payable when DB contracting-out ends

Regulations that will give employers a power (the “employer statutory override”) to recoup the increased National Insurance Contribution liability when contracting out ends in 2016 have been finalised. The Regulations will take effect on 5 April, 2015.

The Regulations will give the employer the power to recoup the increased National Insurance Contribution liability when DB contracting-out ends by amending scheme rules, without trustee approval, to:

  • increase the employee’s existing contributions; and/or
  • reduce scheme liabilities in respect of future benefit accrual.

An actuary must certify that the proposed amendments recoup no more than the increase in the employer’s NICs as a result of DB contracting out ending.

The DWP had consulted on the Regulations last year (see ourupdate for more details).

Some changes have been made to the Regulations from the consultation stage:

  • The Regulations now clarify that the employer (or principal employer) must appoint the actuary. The DWP’s view is that if the scheme actuary is appointed for these purposes, it would result in a conflict of interest for the actuary. (Where a conflict of interest potentially exists, generally, actuaries would be disallowed under published professional guidance from carrying out the work.)
  • The original four week period for trustees to provide the employer with any information requested by the employer in connection with the use of the employer statutory override has now been replaced with “such reasonable period as agreed with the principal employer or employer”. The Regulations do not define “reasonable”. However the consultation response states that where the calculation date for the amendments is the same as the triennial funding valuation date, and that valuation has already been completed, all relevant information should be provided within eight weeks. If the valuation is still in progress, the trustees may need longer.
  • The final version of the Regulations places an obligation on the trustees to provide information “reasonably” requested by the employer or principal employer.
  • For multi-employer schemes, the Regulations now provide that anyone nominated to act on behalf of the employers participating in a multi-employer scheme to agree funding matters with the trustees would be able to use the employer statutory override on behalf of the other scheme employers. Where there is no such person nominated, the employers will have to nominate someone to act on their behalf.
  • Provisions in the draft regulations in respect of different rules for different groups of members and different scheme sections have been removed. The DWP has concluded that schemes do not have groups or sections in the way that the draft Regulations had envisaged. Instead, the DWP has said that it expects employers to explain clearly to employees, as part of the employer consultation process, how different groups of employees are affected by the proposed amendments.

The consultation response makes it clear that the statutory override can only be used for those members who have contracted out, and who are therefore accruing benefits, on a DB basis. It cannot therefore be used for hybrid schemes. So, for example, employers of schemes providing DC benefits with a DB underpin will not be able to use the employer’s amendment power to reduce DC benefits.


With the Regulations now finalised, employers can now start considering the use of the statutory override so that any changes to members’ benefits and employee contributions can be implemented from 6 April 2016. The consultation response on the other set of regulations which set out modified provisions in relation to accrued contracted out rights (section 9(2b) rights and GMPs) will be published in the Summer.


3. Merchant Navy - High Court holds scheme that provided revaluation above statutory requirements is still a frozen scheme

The High Court has handed down its decision in the case of Merchant Navy Ratings Pension Fund Trustees Limited v Stena Line Limited and Others [2015]. The case involved an application to the court by the trustee of the Merchant Navy Ratings Pension Fund (“MNRPF”) to bless its exercise of a unilateral amendment power to impose new liabilities on participating employers (including historic employers) under a schedule of contributions.

The case also looked at the following issues:

  • To what extent should trustees consider the interests of participating employers when exercising their powers (the “Employer Interest Issue”).
  • Is a scheme that is closed to accrual but provides for members’ benefits to be revalued at a rate higher than the statutory minimum a “frozen” or an “open” scheme for the purposes of the employer debt regime under section 75 of the Pensions Act 1995 (“Frozen/Open Scheme Issue”). The revaluation provisions under the Scheme in this case required the members to be in seagoing employment.

Court’s findings

Asplin J approved the trustee’s application to impose the schedule of contributions. The historic employers had opposed the amendment arguing, among other things, that the amendment was outside the scope of the trustee's powers as it had retrospective effect. Asplin J, however, found that the trustee had acted within the scope of its powers and had made its decision properly.

Employer Interests Issue

The Court was asked to consider whether the trustee could take into account the ability of some historic employers, who are not subject to the current funding schedule, to make contributions to the scheme.

Aspin J held that a consideration of the best interests of the beneficiaries of the scheme should not be isolated from the proper purpose of the scheme (i.e. securing benefits under the rules) and that it was legitimate for the trustee in exercising its powers to consider the employer's interests where:

  • the employer covenant is strong enough to support the scheme; and
  • the trustee considers it appropriate to do so.

(Asplin J also considered the Court of Appeal decision in Edge v the Pension Ombudsman, where Chadwick LJ said that trustees “must consider the effect that any course which they are minded to take will have on the financial ability of the employers to make the contributions which that course will entail. They must be careful not to impose burdens which imperil the continuity and proper development of the employers’ business or the employment of the members who work in that business.” Asplin J’s remarks, however, were less directive than this and she left it for trustees to decide whether it is appropriate to take into account the employers’ interests.)

It was also held that trustees are not under a free standing duty to act in the best interests of beneficiaries. It is a duty parasitic on a specific power.

Frozen/Open Scheme Issue – s75 trigger implications

A scheme which ceases to have “active members” is a “frozen” scheme for the purposes of the employer debt legislation.  If the MNRPF was a frozen scheme, there could be no “employer cessation events” triggering an employer debt and the employers would continue to be statutory employers under the employer debt legislation and liable to pay deficit contributions under the new funding schedule. If the MNRPF was an “open” scheme, any employer which had experienced an employment cessation event in relation to the scheme since closure to accrual would have triggered a section 75 debt and on paying that debt would have discharged its liability to the scheme and so would not be liable to pay contributions going forwards.

Asplin J held that the MNRPF is a “frozen” scheme. Non-statutory revaluation, applicable to pensionable service accrued before closure, does not constitute continued accrual:

the service to which the Scheme relates is all in the past… It is service to which the Scheme “related” in the past tense. The benefit accrued as 31 May 2001 when [members] ceased to accrue years of service under the Scheme and the right to revaluation at a particular level is inherent in the accrued benefit as at that date… The right to enhanced revaluation had already been earned by reference to service before 31 May 2001 and had accrued at that date.”

It was further held that “there was no employment to which the scheme relates (present tense) and there were no active members in the statutory sense. There were no members in “pensionable service”.


While the point at issue in the case was one of non-statutory revaluation, the case has implications for schemes that are closed to future accrual but retain a final salary link to members’ benefits. Apslin J’s findings that cessation of pensionable service meant that there were no “active members” and so the scheme was a frozen scheme, can be applied to schemes where the scheme is closed to future accrual but retains a final salary link i.e. such schemes may be regarded as frozen schemes for the purposes of the employer debt legislation. However, Asplin J’s judgment is particular to the facts of the case before her.


4. HMRC's further VAT guidance 'tunes in' on tripartite agreements

HMRC has issued further guidance on the recovery by employers of VAT for management services (i.e. administration and management of the assets of the fund) in respect of DB pension schemes. This builds on earlier guidance issued by HMRC, which sets out the general conditions under which employers can deduct VAT for pension management services.

In the earlier guidance, HMRC had stated that VAT incurred in relation to fund management services will only be deductible if the employer is a party to the contract for the services, has paid for the services and has been the recipient of the services. As management services are normally provided to scheme trustees, tripartite agreements between the service provider, trustees and the employer may be a way of meeting HMRC’s requirements. (For our update on the earlier HMRC guidance, click here.)

The new brief sets out the minimum terms HMRC would expect in a tripartite agreement for management services in relation to which the employer may recover VAT:

  • The employer must be the recipient of the services and have the right to request fund performance reports. This is so, even if the trustees’ appoint the service provider and/or can stipulate when performance reports will be withheld (such as where there is a conflict of interest).
  • The employer must directly pay the service provider for the services and must be issued with a VAT invoice for the full cost of the supply. It is not sufficient for the employer to make an equivalent increase in fund contributions.
  • The service provider must be able to pursue the employer for payment of the service fees and only in circumstances where the employer is unlikely to pay (such as where the employer is in administration).
  • The employer must have a right to terminate the contract (even if this is with the trustees prior written consent). This can be in addition to any right the scheme trustees have to terminate the contract unilaterally.

HMRC has also stated that if the employer recharges the cost of the services to the scheme, this will be treated as a supply by the employer and hence be subject to VAT. However, HMRC accepts that trustees may legitimately make adjustments to the schedule of contributions to take into account service fees paid by the employer.


This guidance will assist employers and trustees of DB schemes to put in place tripartite agreements that will enable employers to deduct VAT paid on the services (although potential conflicts of interest may make the precise terms of such agreements difficult for trustees to agree in practice).

It is unfortunate that HMRC are saying that where employers recharge the cost of services back to the scheme, this will be a supply by the employer and hence be subject to VAT.  Employers who have such recharging arrangements in place must consider carefully whether VAT is recoverable in such a situation and if necessary liaise directly with HMRC.

The guidance does not provide any further assistance in relation to other types of pension schemes (such as defined contribution and hybrid) or assistance on other types of professional services (such as legal, actuarial and accounting services). HMRC is reviewing these issues and intends to provide guidance later this year.

5. Pensions Tax Manual to replace the Registered Pension Schemes Manual

The Registered Pension Schemes Manual is to be replaced by the Pensions Tax manual. HMRC have produced the draft Pensions Tax Manual and will finalise it in the summer when comments on the draft have been received. The (draft) Pensions Tax Manual is available here.