Equality Act – update on implications and age discrimination exemptions

As previously mentioned in our April 2010 E-Bulletin, the Equality Act 2010 is a major new piece of legislation enacted whilst the previous Government was in power. This Act largely came into force, however, on the first of this month. This Act re-states and consolidates existing discrimination legislation and brings together, for the first time, the existing legislation on sex, race, disability, sexual orientation, religion or belief and age discrimination. Although a non-discrimination rule relating to age, disability, religion or belief and sexual orientation is currently implied into all pension schemes, the Act extends this to cover sex, gender reassignment, and marriage and civil partnerships.

Trustees and scheme managers need to be aware of the new types of discrimination included in the Equality Act to ensure that no actions are taken (such as making decisions/exercising their discretion) in such a way that they potentially fall foul of the Equality Act. The Act does confer on trustees an overriding power to make "non-discrimination alterations" to their scheme rules by way of resolution. This power can be used by trustees where they do not already have a power to amend the scheme or if the procedures for altering the rules, including obtaining consent, are unduly complex or would take too long.

In April we highlighted that a slight cause for concern was that from 1 October 2010, the exceptions to the age discrimination legislation for pension schemes (upon which many schemes rely heavily) were due to be repealed. Age discrimination is, of course, the main area of discrimination law that impacts on pension schemes. The exceptions to age discrimination for pension schemes, as originally enacted, meant that a discriminatory practice was not unlawful if it fell within one of the age discrimination exceptions or could be objectively justified. We promised to update you on this issue once it had been clarified and can confirm that fortunately the age discrimination exemptions have now been replicated in the Equality Act, so this is no longer an area of concern.

Section 251 – Department for Work and Pensions announcement

In our June 2010 E-Bulletin we highlighted the need for schemes wishing to preserve the right to make repayments to the sponsoring employer in the future to take action. In terms of tax simplification legislation introduced on 6 April 2006, repayment of a surplus is only to be permitted in future if the trustees of a scheme make a resolution under section 251 of the Pensions Act 2004 prior to a deadline of 6 April 2011. There is also a requirement within the legislation that before passing such a resolution, trustees must give members and the sponsoring employer three months' written notice.

As previously mentioned, although the legislation was clearly intended only to apply to ongoing schemes, there was some ambiguity within the pensions industry as to whether the legislation was wide enough to potentially also include a surplus on winding-up. The Department for Work and Pensions (DWP) was asked to clarify the matter and has now issued a letter to certain industry bodies. The DWP letter confirmed it is not the intention of the Government that a surplus resolution should be required in a winding up situation and, crucially, announced that the deadline for passing the resolution under section 251 will be extended by five years to April 2016. The DWP also confirmed that new legislation will be required to clarify the position when a suitable opportunity arises.

The dilemma for schemes would now seem to be whether to proceed to pass a resolution anyway, if this process is already underway (and particularly if member communications have already been issued), or to await the DWP's forthcoming legislative amendments. There is arguably merit in either stance - acting now prevents any risk that the need to pass a resolution is overlooked in the future, whilst those trustees that await clarity on the law may find that they are better informed when the time comes to pass the resolution. We will be happy to provide tailored advice on this issue, if required.

Pensions tax changes for high earners – Annual and Lifetime Allowances

The Coalition Government announced in the June 2010 Budget that restricting pensions tax relief for high earners from next April (as provided for by the previous Labour Government) was something it wished to review and a consultation process was launched. Earlier this month, the Government confirmed it is to proceed with a new approach. Labour's restrictions on pension tax relief for high earners will now be scrapped. Instead, the approach of the Coalition is to reduce the Annual Allowance for pension saving from £255,000 to £50,000 from April 2011 and to reduce the Lifetime Allowance from £1.8million to £1.5million, likely to be from 2012.

It will inevitably be complicated for defined benefit schemes to measure the increase in value of pension accrual in a given year. The Government believes that all individuals should be able to readily access information on the current value of their pension benefits, but also intends that any burden on schemes is proportionate and minimised where possible. For this reason, the Government seems to be ruling out any mandatory requirements to provide information to all individuals to enable them to test their benefits against the Annual Allowance. Instead, it intends that information must be provided to those individuals who have contributions above the Annual Allowance, who have exceeded the Annual Allowance in a given year or who request the information. Legislation on the requirements for provision of information applicable to schemes is expected early in 2011 and there are also plans to give employers and pension schemes extra time to provide this information during the implementation phase, to allow systems and processes to be put in place. Further information is expected on the Lifetime Allowance, particularly protection mechanisms for those already relying on the £1.8million limit, later this year.