Planning for the future is what every business has to do. Pension schemes bring their own deadlines and key dates to watch out for.

Now that January has arrived, what are we expecting to see in 2013? Here's an overview of some of the key dates to watch out for.

2013 changes Pension Protection Fund levy 

 Click here to view table.

Scheme funding

Speaking at a recent pensions conference, the Pensions Regulator grabbed headlines when saying "we do not want trustees to be 'recklessly prudent' in the valuation assumptions they make and in their negotiations with employers. There will be occasions when the right thing to do for the employer and the scheme will be to invest in the growth of the sponsoring company rather than making higher pension contributions"

The Regulator went on to say that this also applied to investment strategy, explaining that those schemes with a strong employer may be able to afford to take more risk.

The term 'reckless prudence' has yet to be defined. The Regulator plans to issue Statements on scheme funding annually, so it may be that the next Statement (due this spring) provides guidance on this.

The Department for Work and Pensions (DWP) announced (in last year's Autumn Statement) its intention to consult in 'the New Year' on:

  • whether to introduce smoothing for asset and liability values, and
  • whether to adopt a new objective for the Pensions Regulator that would provide an explicit statutory requirement to take account of the long-term affordability for employers of deficit recovery plans.

Calls for evidence on these two proposals have just been published. Schemes with 2013 valuations could, potentially, be affected.

Automatic enrolment

Automatic enrolment is nudging closer for many. For some employers, their staging date (when an employer becomes subject to auto-enrolment duties) will take place in 2013. Our microsite on workplace pension reform is a good starting point for finding out about the basics of auto-enrolment plus news on the latest reforms.

Those employers considering whether to use NEST (National Employment Savings Trust) will be directly interested in the Government's response to its call for evidence regarding the restrictions on transfers and the contribution limit. The call for evidence closed yesterday and the Government response is expected this spring.

What is a money purchase benefit?

In summer 2011, the Government first announced its intention to redefine 'money purchase benefits' (with effect from 1 January 1997) so that benefits capable of producing a funding deficit would be excluded from the definition. This was announced in a bid to address the problem left by the Bridge[1] judgment, which decided that arrangements could still be treated as providing money purchase benefits even though a deficit was possible. This appeared to leave the UK in breach of EU requirements concerning the security of benefits because the Pension Protection Fund does not cover money purchase benefits.

The Association of Pension Lawyers, among others, has identified the (many and complex) issues that such a change would bring. The Government is consulting on how to meet these concerns and, as a result, the new definition introduced in the Pensions Act 2011 has yet to be brought into effect.

The latest position is understood to be that draft regulations will be available for consultation this summer. The Pensions Act provision contemplates transitional provisions, along with power to amend the definition yet further, so a suite of changes is on the cards.

Regulating defined contribution schemes

This year is likely to feature final versions of the Pensions Regulator's draft Code of Practice and guidance on the regulation of trust-based defined contribution (DC) schemes (the drafts were very recently issued for consultation, closing on 28 March). The consultation also covers 31 DC quality features and a 'comply or explain' regime regarding those features.

To read more about this, please see our alert earlier this month which examines the Code of Practice in more detail.

Solvency II

Solvency II is a European measure relating to the toughening of capital reserving requirements for insurance companies. There has been a great deal of press coverage about European moves to assess whether similar requirements should be applied to occupational pension schemes. The UK Government has expressed concern about what Solvency II might mean for pension provision and is arguing strongly for the economic impact assessments to be done thoroughly.

The complexities raised by these impact assessments resulted in the announcement last year that Solvency II has been delayed. The European Commissioner for the Internal Market has announced that revisions to the Institutions for Occupational Retirement Provision (IORP) Directive are timetabled for 'before summer 2013, rather than at the end of 2012'. There has been press speculation that further delays are likely.

Bulk transfers

Last autumn, the DWP consulted on various easements for schemes contracted-out on a defined benefit basis. The proposed changes are timetabled to come into force on 6 April 2013, although the more recent proposal to end contracting-out in 2017 means that the relaxations will be relevant for only a few years.

The proposals include the DWP's intention to allow bulk transfers from contracted-out schemes to formerly contracted-out schemes without member consent. There are also plans to allow both contracted-out and contracted-in schemes to make a bulk transfer to a scheme which used to apply to employment with the same employer but no longer does (in other words, where one scheme no longer has any active members).

Bridging pensions

The DWP consulted on some draft regulations last autumn[2] under which trustees (with employer consent) would acquire the power to link, or unlink, (via a section 68 Pensions Act 1995 resolution to modify) from the ever-increasing State Pension Age (SPA) any bridging pensions provided under their scheme as at 5 May 2010. The DWP anticipate the regulations coming into force on 6 April 2013.

The draft regulations offer a section 68 resolution escape route for schemes that would otherwise be unable to adjust their bridging pension rule, although any decision to use a section 68 resolution would only be exercisable within the limits set for that particular power and would still need to be reached in line with trustees' various duties as set out in case law.

Drawdown cap

Last December the Government announced that it would raise the annual drawdown limit from 100% to 120% of the value of a level single-life annuity without a guaranteed term (a return to the original limit). Scheme administrators will need to be made aware of this where drawdown applies to their scheme.

HMRC has since published draft legislation, which will form part of this year's Finance Bill. The deadline for comments on the draft legislation is 6 February, with an anticipated effective date of 26 March 2013.

Cases

A number of cases relevant to pensions will be coming through the courts this year. These include:

  • A Court of Appeal hearing concerning the nature of pension-related rights that will transfer across on a TUPE transfer (see our alerts, split into part 1 and part 2 on the story so far) - the hearing date has not been set yet
  • This March, the Supreme Court will focus on the Hastings-Bass rule (see our alert on the Court of Appeal's re-statement of the principle), which has been used over a number of years as a means of unravelling the past exercise of a discretionary power which differs from that intended
  • The reach and status of the Pensions Regulator's moral hazard powers will come under the judicial microscope. Towards the end of April, the Court of Appeal will look at the Upper Tribunal's decision that the Lehman scheme trustees were allowed to appeal the Determination Panel's decision to limit the scope of any financial support direction to the six companies already targeted in the Determination. The Upper Tribunal gave leave to appeal because the trustees were directly affected and the two-year limit only applied to the Regulator's process, as opposed to that of the Determination Panel. This opens up the possibility that a further 38 companies listed in the Warning Notice could be issued with financial support directions. The Supreme Court will then assess (on 14 May) the Court of Appeal's ruling in 2011 that contribution notices issued by the Regulator rank as an expense of an administration or liquidation, where all the relevant events happen during such administration or liquidation, meaning that lenders relying on floating charge security rank lower down the list.
  • The VAT case concerning the Wheels Common Investment Fund (used by the Ford schemes) has been ongoing for several years. The parties bringing the case are arguing for occupational pension schemes to be exempt from the requirement to pay VAT on fees charged by third parties. This issue is relevant to pension funds with segregated investments managed by asset managers (investment management via pooled funds or insurance wrappers is already exempt). The proceedings were prompted by the fact that investment trust companies were granted this exemption following a European Court of Justice (ECJ) ruling a few years ago. The Court of Justice of the European Union heard this case last autumn, with a judgment expected in the first few months of this year.

Finding out more

While certain developments are scheduled to take place in later years, this year is likely to yield more detail on the shape of some of those developments.

We would expect (or at least hope) to find out more about the developments outlined below.

End to DB contracting-out

The Government's recent White Paper confirms the introduction of a flat rate State pension for people reaching State Pension Age on or after 6 April 2017 (with protections built in for those who will have already accrued a higher amount by then). As a consequence, defined benefit contracting-out will come to an end from that date. A hike in National Insurance Contributions is likely to prompt a reappraisal of how benefits are provided. Trustees will need to take on board the implications for members if benefits are reshaped (or, indeed, if accrual ceases).

In recognition of the end to rebates, the White Paper proposes to give employers powers to change scheme rules without trustee consent (benefits already accrued would not be affected). The Government has indicated that these modification powers would only exist for a limited period and would only allow changes to the extent that they offset the cost of additional employer National Insurance contributions. The detail of this has yet to be established.

Although the changes are four years away, these changes need to be kept under review and planning for it should start now (if it hasn't already).

Defined ambition

Defined ambition currently covers many possibilities. Some shape was given to that term in the DWP's paper ("Reinvigorating Workplace Pensions") published last November. It's not yet clear how the timing of this will pan out.

The implication is that the models being considered will apply to future schemes/benefits (the paper is light on detail), although linking normal retirement date to the State Pension Age retrospectively to the date of legislation (if, or whenever, such legislation is introduced) appears to be in contemplation.

Options include:

  • Converting defined benefits to a lump sum on death or when the member leaves employment or retires (for the member to buy a pension with or transfer to another scheme)
  • Greater flexibility for benefits, which would be discretionary, above a minimum/core level (referred to as simplified or core DB schemes), such as conditional or optional indexation, the removal of spouses' pensions, a lighter funding regime and fluctuating pension payments dependent on the financial status of the scheme
  • Giving employers the option to link normal retirement date to State Pension Age, for future service and service accrued since the date of the introduction of new legislation to enable this (with people close to retirement to perhaps have some protection)
  • Setting up a pension protection fund equivalent for DC schemes. The introduction of a levy would present its own set of challenges, however. Taking this development further, the Pensions Minister is investigating the possibility of making schemes with guarantees exempt from pot-follows-member (more on which below)due to concerns about the transferability of guarantees.

Disclosure

Announced as part of its defined ambition plans (in its "Reinvigorating Workplace Pensions" paper, please see above) the DWP is planning to consolidate all disclosure requirements into one statutory instrument (streamlined/simplified where possible), with a consultation planned for early 2013.

For several years, the Government has deemed any significant consolidation of the disclosure requirements too difficult to achieve. Many will welcome this change of heart.

Pot-follows-member automatic transfers and short service refunds

Last summer, the Government announced that (from a date to be decided) a member's pension pot will be transferred automatically to any new employer's pension arrangements. This is a response to the likely proliferation of small pots that will result from employers' new duty to auto-enrol staff and will therefore only apply to automatic enrolment schemes (meaning defined benefit and legacy pots will not be covered). In response to concerns that some members will be transferred to schemes capable of providing less favourable outcomes, members will be able to opt-out of any automatic transfer that would otherwise take place.

It is expected that the new pot-follows-member approach will not come into effect before 2015, although more detail on this may well be forthcoming during 2013.

The Government also took the opportunity last Summer to confirm its commitment to the abolition of short service refunds, scheduled to come into force alongside the pot-follows-member regime.

GMP equalisation

The Government first announced that guaranteed minimum pensions (GMPs) needed to be equalised in January 2010. Regulations in draft form were published in January 2012 and continue to be the subject of discussion. It is not yet clear whether the Government has a target date in mind but it is to be hoped that some clarity on this will be forthcoming in 2013. In the meantime, most schemes will continue to feel that the option to convert GMPs to 'normal' scheme benefits (first introduced in 2009) is not open to them, since any attempt to equalise without the certainty that the equalisation is effective would run the risk of having to unravel and correct the attempted equalisation at some point in the future.

Annual and lifetime allowances and new LTA protections

The announcement in last year's Autumn Statement that the annual and lifetime allowances would be reduced to £40,000 and £1.25 million, respectively, from 2014/15 also included references to two new types of protection for individuals affected. These protections are currently known as 'fixed protection 2014' and 'personalised protection'.

Fixed protection 2014 would work in the same way as existing fixed protection. Anyone with UK tax relieved pension savings would be able to apply for fixed protection 2014 regardless of the current level of their pension savings, provided they do not have one of the existing protections from the LTA (primary, enhanced or fixed protection).

Personalised protection is the subject of HMRC feasibility discussions with 'interested parties', along with discussions about whether such protection could be applied for at the same time as 2014 fixed protection. The idea is that personalised protection would give people with pension pots over £1.25 million on 5 April 2014 an LTA of the greater of (1) the value of their pension rights on 5 April 2014 (up to £1.5 million) and (2) the standard LTA (i.e. £1.25 million from April 2014). Unlike fixed protection 2014, people with personalised protection would be allowed to continue building up pension without losing their protection.

Takeover Code consultation

Last summer, the Takeover Panel issued a consultation about extending the Takeover Code in relation to pensions. The proposals aim to facilitate debate at an early stage by, among other things, requiring bidders to set out their plans for the target's pension scheme over the next 12 months, in the absence of a 'material change of circumstances' (there is no definition of a 'material change of circumstances'). The proposals also give trustees the right to express their views on the bid and where the bidder and trustees agree on the future funding of the scheme, a summary of that agreement must be publicised.

Trustees are often brought into the process at a relatively early stage where there is a possible weakening of the employer covenant. However, the proposals will mark a change for those trustees who would otherwise have been kept out of the process until a late stage. This change could, potentially, give those trustees greater influence over the outcome for the scheme.

The consultation closed last September so it is to be hoped that final changes will be announced this year.