In previous editions of Pensions Pieces (July 2013 and October 2014), we explained how HMRC's approach on transfers of DB benefits from one scheme to another meant that annual allowance charges could arise for members, even where their pension entitlements pre- and post- transfer did not differ. After a long wait, regulations to resolve this issue (and to make certain other changes in relation to the annual allowance) came into force, on 28 January 2015. The change to the annual allowance calculation on mergers has retrospective effect back to April 2011, so members will not be at risk as a result of mergers that have already taken place.
By way of reminder, the issue broadly stemmed from HMRC's practice of assessing (i) the value of the assets transferred from the transferring scheme, compared with (ii) the value of the benefits to be provided for the member in the receiving scheme. If the benefits were greater than the assets (which would be the case in a merger where the transferring scheme had an ongoing deficit), then HMRC's approach was to treat the difference as a pension input for individual member's tax purposes, which could give rise to an annual allowance charge for the transferring individuals.
Under the new regulations, a merger will not give rise to pension inputs for the purpose of the annual allowance where the value of the members' benefits in the receiving scheme is "equal (or virtually equal)" to the value of the benefits given up in the transferring scheme. It remains to be seen what is meant by "virtually equal", but this is sufficient to give comfort where exactly the same benefits are being provided.
A number of employers and trustees have been postponing scheme mergers to avoid any risk of members being subject to annual allowance charges as a result of a transfer from an underfunded scheme. They can now proceed without worry, provided that exact mirror image benefits are provided in the receiving scheme.