In this issue
Government confirms details of Budget
When is a money purchase benefit not
a money purchase benefit?
No decision on same sex spouses
Pension commencement lump sum time
Defined ambition set to become a
PPF entry rules amended
Retirement age of 65 is not
New Fair Deal
Partners in an LLP may have to be
Law Commission Report on fiduciary
duties of investment intermediaries
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Government confirms details of Budget 2014 reforms
The Budget 2014 included proposals fundamentally to change the pensions
tax rules so that individuals can access their defined contribution ("DC") pots
upon retirement. The Treasury has now confirmed a number of important
points in its response to the public consultation on the Budget changes:
• Guidance guarantee: Every individual with DC savings will have a
right to free and impartial guidance at retirement, and schemes will be
under a duty to ensure members are aware of this right. The guidance
will be provided by independent organisations and will be funded by a
levy on regulated financial services firms. The Financial Conduct
Authority (the "FCA") has published a consultation on the proposed
standards that will apply to the providers of advice.
• Defined benefit to defined contribution transfers: Transfers from
private sector defined benefit schemes to DC schemes will still
be allowed (excluding pensions already in payment), but subject to
two new safeguards: a new requirement for members to take advice
from a professional financial adviser authorised by the FCA; and new
guidance for trustees on the use of their existing powers to delay
transfer payments and take account of scheme funding levels when
deciding on transfer values.
The Government response to the consultation can be viewed by clicking here.
> Back to Top
When is a money purchase benefit not a money
Schemes which provide money purchase benefits should take note that the
new statutory definition of "money purchase benefits" came into force
on 24 July 2014. This change is most likely to affect schemes which are
hybrid in nature (that is, a mixed defined benefit and defined contribution
scheme) or which include cash balance benefits, a benefit underpin or
guarantee, or an option to annuitise a money purchase account within the
Under the new, narrower definition, a money purchase benefit is one where
there cannot be a possibility of a funding shortfall in relation to it. The
definition applies retrospectively from 1 January 1997 but, in most
circumstances, transitional protection means that it will not be necessary to
revisit past decisions and actions.
Affected employers and trustees will, however, need to consider taking the following actions:
• conduct a benefit review to identify any changed benefits;
• confirm whether any changes to the treatment of these benefits is required for the future; and
• confirm that there is no need to revisit any past decisions and actions.
The Pensions Regulator (the "Regulator") has published a statement on the changes to the definition of money purchase benefits which can be viewed by clicking here. > Back to Top
No decision on same sex spouses
We reported earlier in the year on the new legal requirement for pension schemes to provide survivors' benefits to same sex spouses on the same basis required for surviving civil partners. At the time, we noted that the Government was reviewing the law, in particular, the current requirement that, as a minimum, schemes need only provide the same benefits to same sex spouses as they do for opposite sex spouses in relation to non-contracted out benefits accrued from 5 December 2005 and in relation to contracted-out benefits for service from 6 April 1988. The Government has now published its review, which can be viewed by clicking here. However, no decision has been made on the question of whether schemes should be required to provide full benefits for same sex spouses and civil partners, as the Government wishes to give further consideration to the issue. Unfortunately, no timeframe is given for a final decision. The options for schemes are as follows:
• take no action to amend the rules at present and await the Government's decision on the issue. Should a relevant death occur in the meantime, there would be a legal requirement to pay a benefit to a surviving same sex spouse by reference to service from 5 December 2005. Consideration could be given to making the payment under the augmentation power or amending the rules at that time; or
• introduce an amendment in any subsequent deed of amendment that is proposed. A decision would need to be made as to whether to restrict the benefit to service from 5 December 2005 or to provide full benefits for same sex spouses (we would expect surviving civil partners and same sex spouses to be treated in the same way in this regard); or
• amend the rules now to provide benefits for surviving same sex spouses (again, a decision would need to be taken on the application of the 5 December 2005 point). > Back to Top
Pension commencement lump sum time limits extended
The Finance Bill has now received Royal Assent as the Finance Act 2014. This legislation introduces several transitional flexibilities pending the more far-reaching changes announced at the Budget 2014. Trustees should note that amendments were published shortly before the Act received Royal Assent which temporarily extend the 6-month period that members have to draw a pension associated with a pension commencement lump sum. The period has been extended to 5 October 2015 for members who meet the criteria, but it applies in respect of money purchase arrangements only. Trustees will need to check their scheme rules to ascertain whether any amendments are required before members can take advantage of the extension. HMRC guidance on the extension can be viewed by clicking here. > Back to Top
Defined ambition set to become a reality
Employers may be interested in the possibility of "shared risk schemes", express provision for which is included in the Pension Schemes Bill, published on 26 June 2014. The Bill envisages that, in the future, there will be three main categories of pension scheme, defined in terms of the pension promise:
• Defined benefits scheme: a full pensions promise in relation to retirement income and other benefits, and a fixed normal pension age.
• Shared risk scheme: a pensions promise in relation to at least some of the retirement benefits. This would include a cash balance scheme. The Government also hopes that other scheme designs will emerge as part of its "defined ambition" initiative, such as collective defined contribution schemes.
• Defined contribution scheme: no pensions promise in relation to any of the retirement benefits.
The provisions included in the Bill will ensure there is a legal framework in place for more innovative scheme design in the future. The Government response to the consultation, which accompanies the Bill, can be viewed by clicking here. > Back to Top
PPF entry rules amended
The regulations governing entry into the Pension Protection Fund (the "PPF") have been amended to allow members of certain schemes, including the Olympic Airlines UK pension scheme, to access the protection provided by the PPF. This follows the decision of the Court of Appeal last year that Olympic Airlines (a Greek entity in insolvency) did not have an "establishment" in the UK at the time the trustees of its UK pension scheme brought their petition for secondary winding up. This meant that the scheme could not enter into the PPF.
The Government has now confirmed that it was always the intention that a scheme with all the characteristics of the Olympic Airlines UK pension scheme should be able to enter into the PPF. The relevant regulations have therefore been amended to provide further, but very restrictive, access for schemes to the PPF. It is possible that other schemes will benefit from the extension to the entry rules, but the changes have been drafted very restrictively. > Back to Top
Retirement age of 65 is not discriminatory
The Employment Appeal Tribunal (the "EAT") has decided in Seldon v Clarkson Wright & Jakes that a retirement age of 65 can lawfully and properly be chosen. The case concerned a partner in a law firm who was compelled to take retirement at age 65. He complained that he was discriminated against on the grounds of age. His complaint was initially considered by the Employment Tribunal in 2007, and appeals were subsequently heard by the Employment Appeal Tribunal, the Court of Appeal and the Supreme Court. Broadly, it was decided that the law firm had legitimate aims which it was appropriate to achieve by applying a rule requiring retirement at a fixed age - namely, retention of associate solicitors, workforce planning and "congeniality" (not blighting the firm's atmosphere by challenging a partner with evidence of declining performance at a time in his life when it might be more likely). The matter was returned to the Employment Tribunal in 2013 to determine whether the specific age of 65 was reasonably necessary to achieve the law firm's aims. The Employment Tribunal held that it was and that decision was appealed to the EAT. The EAT has now decided that the decision made by the Employment Tribunal was within its entitlement to make - the fact that it could have been set a year later did not mean it was wrong in law to fix it at 65, which fell within a narrow range identified as proportionate (64 - 66). This decision may be helpful to employers, although it should be noted that the Employment Tribunal took into account the fact that the default retirement age was at the time age 65. Now that the default retirement age has been abolished, the outcome might not necessarily be the same. > Back to Top
New Fair Deal
An article by Victoria Thompson-Hill, senior associate, was published in PMI News last month. The article, published with the permissions of the PMI, can be viewed by clicking here. It considers some key practical issues for private contractors when tendering for contracts where employees will continue to be members of a public sector pension scheme after the transfer, or may become re-eligible to join such a scheme. Also in relation to New Fair Deal, the Government Actuary's Department ("GAD") has announced changes to its system for issuing broad comparability passport certificates to contractors, to reflect the new guidance. From 1 July 2014, GAD will issue a single tier passport, which will be valid for a maximum of two years. The announcements can be viewed by clicking here and here. > Back to Top
Partners in an LLP may have to be auto-enrolled
As promised in our June Update, click here for our Employment Law Update. The first article reports in more details on the case of Clyde & Co LLP and another v Bates van Winkelhof. > Back to Top
Law Commission Report on fiduciary duties of investment intermediaries published
The Report follows the Law Commission's consultation on long term investment, focusing in particular on pensions. Baker & McKenzie LLP was involved in the consultation. The Law Commission concluded, inter alia, that:
• while the trustees' main concern is financial return, they can take into account other issues; and
• the law covering fiduciary duties does not need to be reformed by statute.
The Report can be viewed by clicking here. The Law Commission has also published some helpful guidance for pension scheme trustees when setting investment strategy, which can be viewed by clicking here. > Back to Top
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