Top of the Agenda

  1. Budget 2013: Pensions highlights or was it 'lowlights'?

There were no real surprises in the Budget 2013 announced by the Chancellor of the Exchequer this month, as far as pensions are concerned. Most of the measures announced were confirmatory, having been forecast by the Chancellor in the Autumn Statement. These include:

  • A reduction in the annual allowance (which refers to the maximum pension saving that an individual can make in a year without triggering a charge to tax) from £50,000 to £40,000 from the tax year 2014/15 onwards.
  • Reduction in the Lifetime Allowance (which relates to the total amount of pension savings that an individual can make within a registered pension scheme during their lifetime without triggering a tax charge) from £1.5 million to £1.25 million from the tax year 2014/15 onwards.
  • Reforms to the State pension, which will involve the creation of a single-tier pension and result in the abolition of contracting out (provisions for which are contained in the draft Pensions Bill 2013). These reforms will now be introduced from 2016 and not, as announced in the Autumn Statement, 2017.

If there was a surprise, it was the abandoning of the proposals to allow smoothing of pension scheme assets and liabilities. A new "employer" objective for the Pensions Regulator to "support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer and fully consistent with the 2004 funding legislation" will be introduced, however. The DWP had consulted on these measures earlier in the year.  The Government will consult on this new objective for the Pensions Regulator shortly. Immediately after the Budget was announced, the Pensions Regulator also announced that it will amend its code of practice for defined benefit (DB) funding and issue an annual funding statement, which will set out the Regulator's guidance to trustees in light of the current economic circumstances. The Regulator will consult on both the revised code of practice and the annual funding statement.

For more on the Budget 2013 measures and how it may impact on your pension scheme, see our earlier briefing here.

  1. Death knell sounding for RPI – time to move to another index for revaluing and increasing pensions?

Following an earlier consultation in relation to the Retail Prices Index, the Office for National Statistics has produced a report stating that:

  • Due to the methodological shortcomings associated with the index, the UK Statistics Authority is reassessing whether or not the RPI merits "continued designation as a national statistic".
  • As one of the formulae used to produce the RPI does not meet international standards, a new index should be published. The new index is called 'RPI Jevons' and uses essentially the same basket of goods as the RPI but different formulae.

The ONS has also published another index which is a variation of the Consumer Prices Index called "CPIH" - this variation of CPI uses the same formula and basket of goods as CPI but also includes a measure of owner occupier housing costs. (Unlike RPI, owner occupier housing costs, including mortgage interest payments and depreciation costs are excluded from the CPI).


With serious doubts cast over the future of the RPI as a national statistic, pension schemes currently using RPI as the inflationary measure for the purposes of revaluing deferred pensions and increasing pensions in payment may need to consider switching to a more appropriate index where RPI is not hard-wired into the rules of the scheme. Switching to another index may result in lower increases for members (RPI Jevons and CPIH are reported to have placed a lower value on inflation than RPI and CPI respectively) and result in a reduction in pension scheme liabilities and therefore the pension scheme deficit. 

  1. Automatic enrolment simplification measures proposed

The DWP has published a consultation paper and draft regulations setting out further proposed amendments aimed at simplifying the automatic enrolment regime and providing greater flexibility for employers. The key measures proposed are as follows:

Exclusions from the scope of auto-enrolment

The Pensions Bill 2013 will provide for  a power to make regulations that will allow certain groups of workers to be excluded from auto-enrolment by their employers. The consultation suggests that this might be appropriate for the following categories of individuals:

  • Eligible Jobholders who have registered with HMRC for fixed or enhanced protection in relation to the lifetime allowance. At present, employers are required to auto-enrol these individuals, who risk losing the benefit of fixed and enhanced protection if they fail to opt out within the required statutory period.
  • Active members of defined contribution schemes who have given notice of retirement.
  • Eligible Jobholders who have resigned from their jobs during a postponement period.

Easement for contractual enrolment

The consultation paper notes that some employers have decided to contractually enrol all workers into a pension scheme which satisfies the minimum statutory contribution requirements and benefit provision for auto-enrolment purposes. The DWP is asking if these employers may be certified or self-certify that they are meeting their employer duties under the Pensions Act 2008.

Simplifying the quality requirement for DB Schemes

At present, the quality requirement for a DB scheme will be satisfied if the scheme is contracted out or if the 'test scheme standard' is met. Given that DB contracting out will cease in April 2016, the government wishes to explore whether there may be simpler ways to determine whether DB schemes are good enough to be used for auto-enrolment. The DWP is seeking comments on this, including whether a quality requirement is needed for DB schemes at all.

Technical amendments

The draft regulations also make a number of technical changes to the existing auto-enrolment legislation.  The key changes proposed are as follows:

  • A new method for determining a 'pay reference period' – the draft regulations provide that the pay reference period may start on either:
    • the first day of the period by reference to which the person is paid (this reflects the legislation as currently drafted); or
    • the first day of the tax month (if paid monthly) or tax week (if paid weekly).
  • Contribution payment deadlines – when the auto-enrolment regime was introduced, the time limits within which employers must pay contributions deducted from an employee to a scheme were extended for an automatic enrolment scheme. The draft regulations now provide that this extended deadline will apply to all contributions deducted in the first 2 months of membership, including those of entitled workers and workers who have been contractually enrolled.
  • The draft regulations exclude from auto-enrolment any jobholder who voluntarily ceased active membership of a qualifying scheme in the 12 months before the duty to auto-enrol would otherwise have arisen.
  • At present, employers must auto-enrol Eligible Jobholders and issue enrolment information within 1 month of the Eligible Jobholder's automatic enrolment date. The government is proposing to extend this 'joining window' from 1 month to 6 weeks.
  • Form of the opt out notice – a clarificatory amendment is proposed to make it clear that the opt out form does not need to match the statutory template exactly, provided that it is in substantially the same form. It is open to employers to add branding and other supplementary information.
  • Certain amendments are also proposed to the 'test scheme standard' – it is proposed, for instance, that future changes in state pension age should be taken into account when the test is applied.

The consultation closes on 7 May 2013. The draft regulations are intended to be brought into force by April 2014.


  1. UK defined benefit schemes not exempt from paying VAT on investments management fees following ECJ ruling

The European Court of Justice has ruled in Wheels Common Investment Fund Trustees and others v Commissioners for Her Majesty's Revenue and Customs, that a common investment fund which pools the assets of defined benefit schemes for investment purposes does not fall within the exemption from VAT on management services contained in the European Community Directive 206/112.

Under Article 135 of Directive 2006/112, fees paid for the management of "special investment funds" may be exempt from VAT. The referral to the ECJ in the current case was prompted by the ECJ ruling in JP Morgan Fleming Claverhouse Investment Trust plc v Commissioners for Her Majesty's Revenue and Customs. In that case, the ECJ extended the meaning of "special investment funds" to include closed-ended investment funds, such as investment trusts. In another case, Deutsche Bank Finanzamt Frankfurt am Main V-Höchst v Deutsche Bank AG, funds which constituted "undertakings for collective investment in transferable securities" within the meaning of the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive were also considered "special investment funds".

The hope for defined benefit pension funds in Wheels was that they too could be classed as a "special investment fund" or be sufficiently similar to one and therefore claim the same VAT exemption with regard to management fees. However, the ECJ rejected the comparison and the claim. The key differences it highlighted were that:

  • The defined benefit fund, unlike those discussed in Claverhouse, was not open to the public, but an employment related benefit.
  • Members of a defined benefit scheme do not bear the same risk as private investors did in Claverhouse and Deutsche Bank as their return does not depend on the performance of the investments.
  • The employer is contributing to the scheme to comply with legal obligations unlike a private investor in a collective investment undertaking.


  1. One set of regulations for changes in relation to stakeholder pensions, bulk transfers and RPI/CPI

Over the past year, the Government consulted on two sets of changes to regulations in relation to occupational pension schemes: the first set predominantly included changes in relation to bulk transfers without consent and the other proposing changes to various sets of regulations as a result of the switch from CPI to RPI as the statutory inflationary measure for revaluing deferred pensions and increasing pensions in payments. Some minor changes were also needed to regulations in relation to stakeholder pension schemes, following the abolition from 1 October 2012 of the statutory requirement to designate a stakeholder pension arrangement.

As all these changes are due to come into force on 6 April this year, the DWP has decided to include them all in one set of regulations: the Occupational and Stakeholder Pension Schemes (Miscellaneous Amendments) Regulations 2013. Among other things, these regulations provide for:

  • Bulk transfers to be allowed without member consent from a contracted-out salary related scheme or a formerly contracted-out salary related scheme to another contracted-out salary related scheme or a formerly contracted-out salary related scheme. It was unclear whether these provisions allowed the transfer to schemes that did not have any active members. The final regulations confirm that such transfers can take place.
  • Bulk transfers to be allowed to schemes in EEA member states without requiring member consent. Previously, only transfers to occupational pension schemes were permitted, and such schemes were defined as being based in the UK or outside the EEA.
  • Schemes to be allowed to increase pension credit benefits (i.e. those portions of pensions given to ex-spouses on divorce under a pension credit order), by reference to the RPI. This is the case even if CPI is higher in any year (i.e. there need not be a CPI underpin in the same way that schemes that continue to revalue deferred pensions by reference to RPI need not have a CPI underpin).

The Pension Protection Fund

  1. PPF changes how it values employer guarantees in last man standing schemes

The Pension Protection Fund has amended its contingent asset guidance on how it values employer guarantees in 'last man standing schemes', being multi-employer schemes where there is no partial wind-up rule (for instance in the event of an employer withdrawing from the scheme or becoming insolvent). Under employer debt legislation, an employer in a last man standing scheme could potentially be on the hook for the liabilities of all the other employers in the scheme in the event that those employers become insolvent. The PPF had therefore previously taken the view that for the purposes of valuing any guarantee from that employer, that employer should be assumed to be insolvent. However, now the PPF has recognised that there are additional benefits to the scheme even when the guarantee is from an employer in a last-man standing scheme, including the potential for the scheme trustees to call on the guarantee before the last employer is insolvent. Consequently, the PPF is now prepared to value such guarantees on the basis that the employer giving the guarantee is solvent. Schemes should see an increase in the value put by the PPF on such guarantees and expect a lower PPF levy as a result.

  1. PPF bulletin 13 issued

The Pension Protection Fund has issued the thirteenth edition of its PPF bulletin. Among the matters covered is the move by the PPF to expand the range of professional panels it uses to manage schemes through the PPF assessment period and the winding up process. Three new panels will be established in due course: a trustee advisory panel, an assessment process legal panel and an auditors panel.

Following the completion of its pilot project on equalising for the unequal effect of GMPs, the PPF will now be ready to roll out the procedure for equalising in respect of GMPs to all pension schemes in its assessment period. Schemes which are scheduled to transfer to the PPF before 31 May 2013 will not have to do GMP calculations in line with PPF methodology. Instead, the PPF will do the calculations and adjust the compensation payments. Schemes not expected to transfer before 1 June 2013 will have to equalise in respect of GMPs using the PPF methodology before transferring to the PPF. The PPF will write to trustees of all schemes in assessment to explain how the process will work for them.