DC pensions flexibility: Government consultation response
The Government has published a response to its “Freedom and Choice in Pensions” consultation on the pensionsrelated announcements in the 2014 Budget. Background The 2014 Budget announced that the restrictions on drawdown of pension benefits would be removed, so as to let members with money purchase or cash balance rights (here called “DC members” for short) draw down all their benefits as cash from age 55, effectively removing the requirement to buy an annuity. In addition, it announced that all DC members – whether of contract or trust-based schemes – were to be offered free and impartial guidance at the point of retirement (the “guidance guarantee”). (See our March 2014 legal update for more information.) The consultation response The Government consulted on a number of questions relating to these announcements, and has now reached the following conclusions: • Schemes will have a statutory power allowing (but not requiring) them to offer all or any of the new flexibilities without needing to amend their scheme rules. We assume the power will apply to DC sections in hybrid schemes. • The transfer legislation will be changed to allow members to transfer from one DC scheme to another up to the point of retirement. The Government has said that transfers will not be permitted once a pension is in payment. • The guidance guarantee will be provided by independent organisations to ensure that there are no potential or actual conflicts of interest, with delivery partners including The Pensions Advisory Service. The Financial Conduct Authority (the “FCA”) will set standards for the guidance and will monitor compliance with those standards. The guidance service will be funded via a levy on FCA-regulated financial services firms. • The guidance will be available through a number of different channels, and will be tailored to individuals’ personal circumstances, but will not recommend specific products or providers. Trustees will have a statutory duty to make members aware of their right to impartial guidance and to direct them towards the guidance service as they approach retirement. • Transfers from private sector DB schemes to DC schemes will not be banned. However, members who wish to transfer from a private sector DB scheme to a DC scheme will have to obtain independent financial advice from an FCA-authorised financial adviser before doing so. Schemes will not be required to pay for this advice. In addition, the Government will produce guidance to ensure that trustees of DB schemes are aware of their powers to delay transfer payments where the scheme is at risk, and to reduce transfer values to reflect scheme underfunding. The Government also plans to consult on allowing direct withdrawal of benefits from DB schemes. • Transfers from unfunded public service DB schemes to DC schemes will be banned. However, transfers from funded public service DB schemes (e.g. the Local Government Pension Scheme) will be permitted, subject to similar safeguards as for transfers from private sector DB schemes. • Normal minimum pension age will rise from 55 to 57 in 2028, and will then be pegged to 10 years below state pension age. • The small pots and trivial commutation rules will continue to apply to DB schemes, but the age at which benefits can be commuted using those rules will be reduced from 60 to 55. • The current 55% tax charge on funds held in drawdown products at death or uncrystallised after age 75 will be reduced. However the Government is still considering its options in this area. It intends to confirm its intentions in more detail in the 2014 Autumn Statement. 2 x Trustee Quarterly Review Comment The announcements in the 2014 Budget on DC flexibility represented a fundamental change in the Government’s approach to private pension saving, and the pensions industry raised concerns about the potential implications, both in terms of cost and in terms of whether individuals would make the right choices when given absolute freedom in how they access their DC benefits. The Government’s consultation response will allay some of those concerns, but only time will tell whether the guidance guarantee achieves its aim of ensuring that members make informed, and as far as possible the right, choices. The Government intends to legislate this autumn to introduce the new DC flexibilities (a draft Taxation of Pensions Bill has just been published for comment), and the Pension Schemes Bill that is currently before Parliament will be amended to include provision for the guidance guarantee. In the meantime, however, trustees and employers of DC and hybrid schemes (including DB schemes with DC AVCs) will need to think about what options they will offer members at retirement. Katherine Dixon Ian Wright mayer brown x 3 DB scheme funding: the Regulator’s new approach In our February 2014 Trustee Quarterly Review, we discussed the Pensions Regulator’s draft DB funding code of practice and DB funding policy. Following a period of consultation and various amendments, the code and funding policy have been finalised and came into force on 29 July 2014. The code of practice is significantly shorter than the draft code, responding to views widely expressed in consultation responses, and is supplemented by an “essential guide” for trustees and employers. The Regulator has also published its 2014 annual funding statement. The new code of practice The new principles-based code of practice takes into account the Regulator’s new statutory objective “to minimise any adverse impact on the sustainable growth of an employer” (which came into force on 14 July 2014). The aim of the new code is to balance trustees’ objectives to comply with their fiduciary duties and ensure benefits can be paid as they fall due, with employers’ objectives to run their businesses and grow them as appropriate while ensuring that pension promises are kept. It sets out nine key funding principles, including working collaboratively with the employer; managing and taking risks; and taking a long-term view of funding. The code focuses on employers and trustees understanding employer covenant, investment and funding risks, and promotes an integrated and proportionate approach to risk management across these areas. A notable change in the code of practice following the consultation concerns the guidance on recovery plans. The draft code said that “trustees should aim for any funding shortfall to be eliminated as quickly as the employer can reasonably afford”. This has been removed following concerns that it could be interpreted as requiring deficits to be paid as quickly as possible. The Regulator has said that affordability of contributions is a factor to consider, but that this is not the sole factor when considering the appropriate length of a recovery plan. The new code states that trustees should use the flexibilities inherent in recovery plans to tailor them to both scheme and employer circumstances, so as to eliminate deficits over an “appropriate period”. The Regulator’s categorisation of pension schemes according to covenant strength (“strong”, “tending to strong”, “tending to weak” and “weak”) remains a feature of the finalised funding policy. However, the name of one of the main indicators which will be applied to schemes in each segment has been changed from the “Balanced Funding Outcome” to the “Funding Risk Indicator”. The name change is welcome because the BFO was open to misperception as a new funding objective. At this time, the Regulator will not be publishing detailed descriptions of its risk indicators. The 2014 annual funding statement The Regulator has also published its annual DB funding statement. This sets out expectations for trustees to be in a position to evidence that they have considered market conditions, the uncertain outlook for future investment returns and what this means for the scheme and the employer, when carrying out valuations. The Regulator also expects trustees to be able to evidence that they have taken a proportionate approach in assessing the employer covenant. Comment The new code of practice, “essential guide” and the new funding policy form part of an updated DB strategy from the Regulator. The new code applies to schemes with effective valuation dates from 29 July 2014. However, the Regulator strongly advises trustees to take it into account even if their effective valuation date was before this date. While the “essential guide” is a good introduction to the provisions of the new code, the Regulator’s expectation is that all trustees will familiarise themselves with the new code itself. 4 x Trustee Quarterly Review Overall, the new strategy has been welcomed by the pensions industry. The Regulator plans to hold “roadshows” in the autumn with the aim of embedding its new approach into funding discussions. It is likely that further clarifications of the new regime will emerge from these sessions, as the Regulator learns how the code is being used in practice, and considers what further guidance or learning tools would be useful for trustees and employers. Olivia Caird Anna Rogers mayer brown x 5 Pensions Act 2014 The Pensions Act 2014 received Royal Assent in May this year and many of the changes are already in force. The Act makes significant changes to state and private pensions, and provides the Pensions Regulator with a new statutory objective. State pensions and contracting-out State pension reform: The Act sets up the framework for the single-tier state pension which is to be introduced for people reaching state pension age on and after 6 April 2016. A new flat-rate pension will replace the basic state pension and state second pension. It will be set above the basic level of means-tested support (currently £148.40), and will increase by at least the average growth in earnings. The Act also brings forward the timescale for the increase in state pension age so that those born between 6 April 1960 and 5 March 1961 will have a state pension age between age 66 and age 67, and those born between 6 March 1961 and 5 April 1977 will have a state pension age of 67. Future reviews of the state pension age will be carried out by the Government at least every 6 years to take account of rising life expectancy. Abolition of salary-related contracting-out: Contracting-out on a salary-related basis will be abolished from 6 April 2016 in line with the changes to the state pension. As a result, employers and employees will pay higher National Insurance contributions (“NICs”). In order to mitigate the loss of NICs rebates, the Act gives employers an overriding power to amend their scheme’s rules (without trustee consent) to reduce future benefit accrual and/ or increase members’ contributions. This statutory power cannot be used to make alterations which go beyond what is needed to offset the increase in the employer’s NICs. The power will be available for 5 years from 6 April 2016, and employers will be able to use it more than once in relation to the same members. Any employer who uses the power will have to consult affected members about the proposed changes if they come within the category of “listed changes” under the consultation legislation. They will not have to consult members about the abolition of contracting-out itself. Details of how the statutory power will operate are to be set out in regulations. Private occupational pension schemes Automatic transfers of small money purchase pots: The Act allows regulations to be made requiring the automatic transfer of money purchase pots of less than £10,000 on a change of jobs. It will be up to the new employer’s scheme trustees/provider to find out if the member has a pot to transfer and to request it. The member must be given the right to opt out of automatic transfers. Regulations may also provide that automatic transfer is subject to the receiving scheme meeting minimum requirements as to quality of governance and level of charges. Charges, governance and administration: Building on earlier consultations this year, the Act gives the Government power to restrict the administration charges that a scheme can impose on a member, and to set minimum requirements for governance and administration. Short service refunds from money purchase schemes: The Act prevents schemes from making a refund of contributions from a member’s money purchase pot once the member has 30 days’ qualifying service (currently a refund of contributions can be paid if the member has under 2 years’ qualifying service). This will only apply to those who join the scheme after the date when the relevant provisions have come into force, which is as yet unknown. Power to prohibit incentive exercises: The Act introduces a power for the Government to make regulations prohibiting transfer incentive exercises i.e. where a “financial or other advantage” is offered to members of a salary-related occupational scheme to transfer their benefits out of the scheme. The power will lapse if not exercised by 14 July 2021. Pension Protection Fund compensation cap: For members with more than 20 years’ service with an employer, the standard PPF compensation cap will be increased by 3% for every complete year of pensionable service over 20 years. This is intended to be brought in from 6 April 2015. Automatic enrolment schemes: Regulation-making powers are introduced to simplify the certification requirements for defined benefit schemes, and to allow certain workers to be excluded from the automatic enrolment requirements (for example, those with some sort of lifetime allowance protection and those working out a notice period). 6 x Trustee Quarterly Review The Pensions Regulator The Act amends the Pensions Act 2004 to give the Regulator a new objective, in relation to the exercise of its functions in relation to scheme funding only, “to minimise any adverse impact on the sustainable growth of an employer”. Comment Employers with contracted-out DB schemes that are still open to future accrual will need to start thinking about the implications of the abolition of contracting-out and what changes they may wish to make to benefits or contributions. The compliance requirements for money purchase schemes continue to expand and the requirement for automatic transfers may present a challenge for scheme administrators. With respect to the power to ban transfer incentive exercises, the Government will no doubt wait to see if the Code of Good Practice on Incentive Exercises published in 2012 provides sufficient protection for members, but this new power will allow the Government to act quickly if not. Beverly Cox Richard Goldstein mayer brown x 7 Remembrance of things past: consultation on the abolition of contracting-out From 6 April 2016, contracting-out – and the eponymous Contracting-Out Regulations – will be no more. However, their memory will live on – specifically in two sets of new regulations, consultation on which closed on 2 July 2014. These draft regulations contain: • rules which schemes that were contracted-out will need to comply with when DB contracting-out is abolished; and • details of how employers will be able to use a new statutory override power. to amend scheme rules. Rules that will apply to formerly contractedout schemes One set of draft regulations will apply to formerly contractedout schemes, and will require accrued contracted-out rights, such as GMPs and section 9(2B) rights, to continue to be protected even after DB contracting-out is abolished. However, the leaving service provisions will not apply to members who cease contracted-out employment when contracting-out ends on 6 April 2016. In other words, members in contracted-out pensionable service on 5 April 2016, who remain in pensionable service in the same scheme after that date, will not have the later earnings addition added to their contracted-out rights. At the moment, a scheme can apply GMP revaluation differently for members in pensionable service as compared to deferred members. It looks like the draft regulations intend to allow schemes to retain this power, but the legislation is not perhaps as clear as it could be on this point. Statutory override The abolition of DB contracting-out will of course mean that from April 2016, employers will be required to start paying standard rate employer and employee National Insurance contributions (“NICs”) in relation to each member. The second set of draft regulations set out how employers can exercise the statutory power under the Pensions Act 2014 to amend their schemes’ rules to claw back the cost of the higher NICs, either by increasing the rate of member contributions, or by reducing the future accrual of benefits. There are a number of restrictions on how employers will be able to use this statutory override. Perhaps the most significant is that employers will only be able to use the power to amend scheme benefits to the extent that the amendments offset the cost of the employers’ additional NICs. The draft regulations provide detail about how the actuary is to calculate and certify the value of the employer’s proposed amendments, and provide a template certificate for actuaries to use for that purpose. Importantly for trustees, the draft regulations also impose a duty on them to provide employers with any information they might need to enable them to use the statutory override (such as scheme and membership data). Trustees will have four weeks to provide the information requested and civil penalties will apply if trustees do not take reasonable steps to meet the employer’s request. Other important points to note in the draft regulations include: • the employer will be able to use the statutory override more than once if the first amendment did not fully offset the cost of the employer’s increased NICs, although the power will be revoked five years after it comes into effect; • the power will not apply to “protected persons” (very broadly, employees who accrued pensions in certain schemes run by various formerly nationalised industries (e.g. the electricity industry) before privatisation, and whose benefits are protected by legislation); and • the power cannot be used to adversely affect members’ subsisting rights. (Although the draft regulations override the subsisting rights provisions in the Pensions Act 1995, they contain their own subsisting rights provisions.) Employers will be able to exercise this power at any time after the new regulations come into force, but a rule amendment pursuant to the exercise of the power cannot take effect before 6 April 2016, and must take effect before 6 April 2021. 8 x Trustee Quarterly Review Comment Those hoping that DB contracting-out will be airbrushed from history in the same manner as DC contracting-out will be disappointed. The thorny issue of GMPs – and in particular GMP equalisation and whether GMP conversion is possible – will remain. The power to amend schemes unilaterally will be welcomed by employers. However, because the power only extends as far as to amend scheme benefits to the extent that the amendments offset the cost of the employers’ additional NICs, we would imagine that where possible, employers would want to use schemes’ amendment powers to make any changes in parallel. Abigail Cohen Andrew Block mayer brown x 9 Pension Schemes Bill: defined ambition pensions The Government has published a new Pension Schemes Bill, which it intends to pass during the next parliamentary year, and which is intended mainly to allow collective defined contribution schemes to be established in the UK following its consultation on “defined ambition” arrangements late last year. The Bill also proposes a new three-way classification of pension schemes, and makes a few miscellaneous changes to existing legislation, for example to reflect the decision in the Budget to limit transfers from unfunded public sector schemes. Collective defined contribution schemes The Bill introduces a new framework of legislation to cater for collective benefit schemes. Schemes of this type are common in the Netherlands and have recently been introduced in Canada, but UK legislation to date has not provided for them. A collective benefit sceme shares many features with a money purchase scheme, but differs mainly in that scheme assets are pooled at all times, rather than being separated into individual funds or converted into separate annuities. The employer pays a fixed rate of contributions into the scheme and has no further liability to fund it. The contributions are then invested by the scheme’s trustees, rather than being invested as the individual member decides. At retirement, pension income is paid from the collective pool of assets, instead of individual members having to buy individual annuities from insurers, so that the retirement income members receive is not solely related to the contributions made in respect of them. This collective approach should allow trustees to invest in growth assets for longer and may let members expect a higher retirement income, but it also means that no particular level of retirement income (or pension increases) can be guaranteed, and that even pensions in payment could in theory be reduced from one year to the next. The Bill allows the Government to make regulations that require the trustees or managers of a collective benefit scheme to set targets in relation to the rate or amount of benefits. The Government also intends collective benefit schemes to be managed by experienced fiduciaries so that individual members will not need to make complex and difficult decisions over investments and choices at retirement. The Government’s response to the consultation (published in June 2014) highlights the importance of strong standards of governance and communications to ensure that members are well placed to understand the risks involved with collective benefit schemes, namely that there may not be enough assets available to pay the target benefit on retirement. Individuals would indirectly have access to a greater range of investments through collective benefit schemes than they have in traditional money purchase schemes. The diverse range of investment options combined with the pooled nature of the funds may also protect members’ investments from market volatility. Actuarial commentators have suggested that members of collective arrangements might expect pensions around one-third higher than they would typically get under the standard money purchase model. Whether employers and members will have the appetite for these schemes remains to be seen, but experience overseas suggests that they may expose employers to no more risk than the current money purchase model while providing better expected benefits for members. New categorisation of pension schemes The opening sections of the Bill divides existing and future schemes into three categories – defined benefit schemes, defined contribution schemes and shared risk schemes (which the Bill says were previously known as “defined ambition schemes”). Which category a scheme belongs in depends on the extent to which the scheme contains a “pensions promise”, which the Bill defines as a promise, at a time before the benefit comes into payment, about the level of the benefit members will receive. Broadly a defined benefit scheme is one where there is a full pensions promise about all the retirement benefits that may be provided to members; a shared risk scheme is one where there is a pensions promise about at least some of the benefits members will receive; and a defined contribution scheme is one where there is no pensions promise. The Bill also provides that, for schemes that would not fit into any of these categories, regulations must provide for them to be treated as made up of two or more separate schemes, each of which does then fit into one of the categories. 10 x Trustee Quarterly Review In practice, however, the Bill itself makes very little use of these categories, though it would add a new restriction to s67 which would require member consent to any amendment that would replace a benefit where there is a “pensions promise” with one where there is not. The real purpose of the new classifications seems to be to pave the way for a future approach to pensions legislation, as proposed in the Government’s consultation on defined ambition schemes last year, under which there will be largely separate pensions legislation for defined benefit, defined contribution and defined ambition schemes. Other changes The Bill would also: • ensure that statutory rules about indexing pensions in payment will not apply to collective defined contribution schemes; • allow the Treasury to make regulations in order to stop members of public service schemes from transferring their rights into defined contribution schemes or collective schemes; and • make certain changes to the law governing non-salaryrelated benefits that would have been thought of as money purchase in the past but which fall outside the definition of “money purchase benefits” that came into force in July; in particular, the Bill will change the preservation and revaluation legislation, in order to treat these benefits effectively as if they were still “money purchase” after all, so that they “vest” for preservation purposes after only 30 days service and so that they have to be uplifted (“revalued”) during periods of deferment in the same way as they would have been uplifted if the member was still in pensionable service. We understand that the Bill will be expanded as it passes through Parliament in order to cover other aspects of the Budget proposals announced earlier in the year, particularly in relation to guidance and the extension of DC members’ statutory transfer rights. Comment The main goal of the Pension Schemes Bill is to change the pensions landscape into the future. Its main direct impact on trustees of current schemes is likely to be its implementation of some of the Budget-related changes and the minor changes that it is making to the rules about revaluation and preservation of non-salary-related benefits. Devora Weaver Jonathan Moody mayer brown x 11 Moving from RPI to CPI: further High Court guidance The High Court has given more guidance on the scope for changing the indexation measure used for pension increases and revaluation of deferred pensions. Background In 2010 the Government changed the measure of inflation used to calculate statutory minimum pension increases and revaluation of deferred pensions under DB occupational pension schemes from the Retail Prices Index (“RPI”) to the Consumer Prices Index (“CPI”). Exactly how this change affects a scheme depends on how the scheme’s rules are worded. Where the rules simply link increases and revaluation to the statutory minimum, the move to CPI applies automatically. Where the rules “hard code” a link to RPI, the move to CPI generally has no effect. There are, however, schemes whose rules, while referring to RPI, seem to allow another index to be used in some circumstances. The High Court’s decision In this case, the pension scheme’s rules provided for pension increases and revaluation of deferred pensions to be calculated by reference to the “Retail Prices Index”. This was defined as “the Government’s Index of Retail Prices or any similar index satisfactory for the purposes of the Inland Revenue”. The employer and the scheme’s trustees asked the High Court to decide if that definition contained an implied power to change the inflation measure from RPI to CPI. • Did the definition confer a power to select an index other than RPI? The judge held that, although the definition did not expressly say so, there was a power to select an index other than RPI. The judge thought that the scheme rules had probably been drafted with the pre-6 April 2006 Inland Revenue requirements for scheme approval in mind, which potentially allowed a scheme to adopt an indexation measure other than RPI. • Who can exercise the power of selection? Although the definition did not specify who had the power of selection, having considered the balance of powers in the scheme, the judge held that it was exercisable by the employer and the trustees jointly. • Would CPI be a “similar” index that is “satisfactory” for the purposes of the Inland Revenue? All the parties accepted that CPI was a similar index to RPI, and the judge held that it would be satisfactory for the purposes of the Inland Revenue (now HMRC) since, among other things, schemes no longer have to be approved by HMRC, and the use of CPI has been endorsed by the Government. • What impact, if any, does s67 Pensions Act 1995 have? Section 67 Pensions Act 1995 (“s67”) protects benefits already built up in a scheme. The parties asked whether a switch to CPI would fall foul of s67 and the judge decided that it would not. He followed the decision in the Qinetiq case and held that a member’s entitlement is to: –– a specific level of pension increase in a given year calculated by reference to the indexation measure in force on the increase date that year; and –– a specific level of revaluation calculated by reference to the indexation measure in force on the revaluation date. Comment The Court’s ruling is confirmation of the Qinetiq decision and may be helpful for other schemes with a definition of the Retail Prices Index which does not contain an express power of selection. Such schemes may not have considered adopting CPI because it was uncertain whether there was a power to do so. Clearly, however, whether it is appropriate for trustees to agree to change the indexation measure will depend very much on the circumstances. Stuart Pickford 12 x Trustee Quarterly Review PPF levy: new insolvency risk model and other proposed changes In May, the Pension Protection Fund launched a consultation (now closed) on its plans for the levy for the three years from April 2015. The most significant change proposed is the introduction of a new insolvency risk model, following the PPF’s appointment of Experian in place of Dun & Bradstreet as its insolvency risk provider. The PPF says that the new model will not increase the overall levy raised, but will mean that some schemes pay less, while a smaller number pay more. The PPF proposes to leave most other aspects of the current framework unchanged in the interests of predictability. However, the PPF proposes to change the rules as to “Type A” contingent assets (parent company guarantees), assetbacked contributions (“ABCs”) and “last man standing” (“LMS”) schemes. New insolvency risk model The proposed new insolvency risk model draws on the PPF’s experience of insolvency amongst sponsors of DB schemes. The PPF says the new model will reflect risk more accurately than the current model, and will be more transparent. The PPF proposes to use Experian scores as at 31 October 2014 when setting the 2015/16 levies. Trustees should already have been contacted by Experian with instructions on how to access the free web portal, so that they (or their delegates) can check the data held by Experian, and take steps to correct or add to it if appropriate. Schemes can set up alerts through the portal to allow them to monitor changes in Experian’s scores. It will also be possible to download data and carry out a “what if” analysis, for example to understand what impact forthcoming accounts would have. The new approach will lead to a significant redistribution of the levy – primarily as a result of the model’s focus on financial variables (as compared with non-financial factors which are a feature of Dun & Bradstreet’s standard methodology). Employers that scored well on non-financial variables (e.g. payment performance data), but badly with respect to financial variables, and employers that are members of a group where the parent has a weak PPF-specific model score, are likely to see falls in scores (and an increase in the levy due). The PPF is therefore considering providing some form of transitional protection to reduce the initial impact of the changes. Parent company guarantees The PPF is concerned that parent company guarantees may in practice be much less valuable than they might appear. It therefore proposes that, from 2015/16, it will recognise parent company guarantees for levy purposes only if trustees certify a specific amount that the guarantor could pay if called upon to do so. In other words, trustees will be required to make more of a judgement call than under the current levy framework. The PPF also proposes to adjust guarantors’ insolvency risk scores to reflect their potential liability under their guarantees. Asset-backed contributions The PPF proposes to change the treatment of ABCs for levy purposes so that, from 2015/16, the levy reflects the level of risk reduction these arrangements can offer. Currently, ABCs are included in scheme assets reported through s179 valuations and valued in line with the accounts valuation based upon an assessment of the net present value (“NPV”) of future cashflows from the arrangement. To address the PPF’s concern that on insolvency the scheme might receive substantially less than the NPV, it proposes removing the value attributed in the scheme accounts from the s179 asset valuation and instead requiring schemes to make an annual certification of the lower of the insolvency value of the underlying asset or the NPV of future cashflows. In addition, the PPF proposes only to recognise ABCs with the same underlying assets as apply to Type B contingent assets (i.e. cash, UK property or securities). ABC arrangements with other types of underlying assets would be invisible for PPF levy calculation purposes. mayer brown x 13 “Last man standing” schemes Associated LMS schemes (multi-employer schemes with no option or requirement to segregate assets when an employer withdraws) currently enjoy a 10% discount on the levy they pay, as they are perceived to present a lower risk to the PPF. The PPF is concerned that the membership of many LMS schemes is concentrated in a single employer (with the result that its failure would bring down the rest of the group). The PPF feels that the discount is (in some cases) excessive and is proposing a change to the calculation of the discount to reflect the degree of dispersal of membership across participating employers. Non-associated LMS schemes (also knows as ‘centralised schemes’) are not affected by this proposal. However, the PPF’s proposal to require schemes that select last man standing as the scheme structure on Exchange to confirm that legal advice has been taken would seem to apply to all LMS schemes. Comment Trustees should access the web portal now to check their employers’ risk score, and ensure that the data held is complete and accurate by 31 October 2014. If problems are identified, trustees or employers may need to provide information on Exchange or on the public sources Experian use. Experian aim to correct their records within seven working days where appropriate. It is vital to hit the 31 October deadline because persuading the PPF to allow corrections “out of time” is notoriously difficult. If a scheme has a parent company guarantee, ABC arrangement or an LMS structure, trustees may want to seek advice about the potential impact of the PPF’s proposed new rules. Sally MacCormick Richard Evans 14 x Trustee Quarterly Review PPF entry rules: changes for schemes with overseas employers The Department for Work and Pensions (the “DWP”) has widened the Pension Protection Fund’s safety net following the outcome in the Olympic Airlines case so that some schemes which do not have a UK-based employer will now potentially be eligible for the PPF. Once upon a time... In the Olympic Airlines case, the High Court ruled that it had jurisdiction to issue a winding-up order in relation to Olympic Airlines (the “Airline”) (a Greek company) on the petition of the trustees of the Airline’s pension scheme (the “Scheme”). The Court of Appeal recently overturned this ruling on the grounds that the Airline did not have an establishment in the UK. (For further details about the reasoning for this decision, please see our client alert.) The Court of Appeal’s decision meant that no qualifying insolvency event had occurred in relation to the Airline for the purposes of the PPF entry legislation. Therefore the UK beneficiaries of the Scheme were denied entry into the PPF. A happy ending? The Court of Appeal noted its regret that its ruling resulted in the beneficiaries of the Scheme not being protected by the PPF. In light of this, the DWP drew up The Pension Protection Fund (Entry Rules) (Amendment) Regulations 2014 (the “Regulations”), which came into force on 21 July 2014. The Regulations provide that a qualifying insolvency event occurs on the fifth anniversary of the date of commencement of insolvency proceedings which: (a) on 20 July 2014: (i) relate to an employer with its centre of main interests in a member state of the European Economic Area other than the UK; (ii) have been commenced in that member state; and (iii) have not come to an end; (b) relate to an employer in relation to which a winding-up order was granted by the UK court and which was later set aside on the basis that the UK court did not have sufficient jurisdiction to grant the order because the employer did not have an establishment in the UK; and (c) relate to an employer which would have suffered a qualifying insolvency event as a result of the grant of the winding-up order. The Regulations should help the beneficiaries of the Scheme, but the conditions for a qualifying insolvency event to have occurred are so narrowly drafted that they may end up being the only beneficiaries. Even if the Regulations were to have a wider application, the benefit to members of UK schemes with an overseas employer would still be short-lived as the Regulations will cease to have effect on 21 July 2017. Comment It seems that the Regulations have been paternalistically drafted to protect the Airline employees. It remains to be seen whether this approach will be adopted more widely and, if it is, what impact this will have on the PPF’s resources and levies. Beth Brown Ronan McNabb mayer brown x 15 Recovery of VAT on investment management costs: further HMRC guidance HMRC has recently acknowledged that it will review its new policy on the recovery of VAT charged on investment management costs in light of recent case law. It will issue revised guidance on its policy this autumn.he PPF. Background Last year, in the PPG case, the Court of Justice of the European Union (“CJEU”) decided that an employer was entitled to deduct VAT charged on both administration and investment management services provided to its pension scheme if there was a direct and immediate link between the services and the employer’s economic activities as a whole. The CJEU held that it was for national courts to decide whether there was a direct and immediate link. In February 2014, HMRC published guidance setting out its policy on the recovery of VAT in light of the PPG decision. Unfortunately, the position that it set out was by no means clear – see our February 2014 legal update – and it looked as if HMRC was using the PPG decision to make VAT recovery harder, rather than easier, for employers than before. In March 2014, the CJEU decided in the ATP case that a DC occupational pension scheme could be a special investment fund if it met certain conditions. Management services provided to special investment funds are exempt from VAT. (The CJEU has decided in the 2013 Wheels case that DB occupational pension schemes are not special investment funds.) New HMRC statement HMRC has now published a further statement on its policy on VAT recovery. In this, it acknowledges that it will need to re-think its policy in light of the ATP decision. It is also considering whether to make changes to the policy outlined in February 2014. HMRC plans to publish further guidance in the autumn. In the meantime, the transitional arrangements outlined in its February 2014 guidance (which were due to terminate in August 2014) will continue to be available whereby 30% of the VAT on administration and investment management services is deemed to be attributable to pensions administration and is therefore recoverable by the employer. Comment The CJEU’s decision in PPG offered the hope of significantly improved VAT recovery on administration and investment management costs, and HMRC’s February 2014 guidance was a serious blow to this hope. Schemes and employers will therefore hope that HMRC’s revised policy is more favourable for employer VAT recovery. Peter Steiner 16 x Trustee Quarterly Review Trustee duties in the investment context: Law Commission report The Law Commission (the “Commission”) has recently published a report on the fiduciary duties of investment intermediaries (the “Report”). It has also published guidance for pension scheme trustees on their duties when setting an investment strategy (the “Guidance”). Background In July 2012, Professor Kay published a review of the UK equity market. One of the review’s recommendations was that the Commission should be asked to review the concept of fiduciary duties in the investment context. The Commission decided to focus its review on pensions as this is the area where people most rely on investment intermediaries to look after their interests. In addition, the pensions industry historically has been a significant investor in equity markets meaning that pension scheme decisions affect the equity market as a whole. The Report The key conclusions of the Report are: • Trustees may take account of all financial factors, but should take account of all financially material factors. Trustees may take account of non-financial factors if they have good reason to believe that scheme members share the trustees’ concerns, and taking account of those factors would not involve a risk of significant financial detriment to the scheme. • The law on trustees’ legal duties in relation to investment is confusing and inaccessible, but should not be codified. The Guidance is designed to explain the law and make it more accessible to trustees and their advisers. The primary purpose for which trustees should exercise their investment powers is to secure the best realistic return over the long-term. The Pensions Regulator should consider how the Guidance can be given greater exposure and authority. The Government should review certain aspects of the Occupational Pension Schemes (Investment) Regulations 2005. • There is a “governance gap” in DC pension schemes whereby there is a lack of transparency on charges, there is little pressure to keep charges low, and there is insufficient review of DC investment strategies. The Commission welcomes the Government’s announcement that, from April 2015, among other things a charges cap will be imposed in default funds in automatic enrolment schemes. When the Government reviews the charges cap in April 2017, it should consider whether the design of the cap has incentivised trading over long-term investment, and what measures could be taken to reduce this effect if it has done so. • The current law on fiduciary duties in the investment chain should not be reformed by statute to impose fiduciary standards on all those in financial markets whenever they exercise discretion over the investments of others or give advice on investment decisions. The Government could consider extending existing statutory rights to sue investment intermediaries for loss caused by their unfair behaviour, but this would merit further research and debate. The Government should actively monitor the regulation of investment consultants, and should review the system of intermediated shareholding with a view to taking the lead in negotiating solutions at a European or international level. The contents of the Report and the Guidance are not legally binding, nor is there any guarantee that the Commission’s recommendations will be followed. Comment The issue of trustee investment duties has long been, as the Commission identifies, a complex and confusing area. The Report, and more particularly the Guidance, may go someway to clarifying this area, especially where the question of whether social, environmental and ethical factors should be taken into account is concerned. However, the area will remain complex, and the Guidance, while helpful, raises its own problems – for example, it may not be a simple task for trustees to determine whether a factor is financial or non-financial. It remains to be seen which, if any, of the Commission’s recommendations will be adopted. In the meantime, trustees may wish to review the Guidance and consider whether they feel any changes to their investment strategy would be appropriate in light of it. Edward Jewitt mayer brown x 17 Government review of survivor benefits A Government review of differences in survivor benefits has reached the perhaps unsurprising conclusion that eliminating differences would be expensive and raises complex issues which merit very careful consideration. Now we have to wait to see whether and how the Government will grasp the nettle. A Court of Appeal judgment expected in 2015 might force their hand. The review The Government has carried out a review of the differences in survivor benefits provided by occupational pension schemes to widows, widowers, surviving civil partners and surviving same sex spouses. The review also covered the costs and other effects of eliminating those differences. The options considered in the review paper include: 1. Eliminating all differences in survivor benefits – which would mean equalising between widows and widowers, and then providing identical benefits to surviving civil partners and surviving same sex spouses. 2. Eliminating differences between benefits provided to widows and benefits provided to surviving civil partners and surviving same sex spouses. 3. Eliminating differences between benefits provided to widowers and benefits provided to surviving civil partners and surviving same sex spouses. The findings in the review paper include: • Option 1 would fully remove the possibility of future legal challenge. • But option 1 would be the most expensive, with an estimated capitalised cost of £2.9 billion for public service schemes (of which around £1 billion would be payable immediately) and £0.4 billion for private sector schemes. These costs exclude associated administrative costs. And at least as between widows and widowers, for service before the date of the Barber decision on 17 May 1990, it seems to go further than European law requires because schemes are permitted to treat the sexes differently for that period of service. • Elimination of differences would raise other issues – for example, in relation to members who have paid greater contributions or reduced their pension entitlement to obtain additional survivor benefits. Now that the review has been completed, the next step is for the Government to decide whether to change the law in this area. The review paper refers to there being “complex issues” which the Government will have to consider “very carefully” – and no time-frame is given. Comment It is worth noting that there is due to be a Court of Appeal judgment in 2015 in relation to whether a (contracted-in) scheme unlawfully discriminated against a member by refusing to provide his surviving civil partner with a pension in the same amount as would have been payable to his widow. It remains to be seen whether the Government will wait for this Court of Appeal judgment before making its decision, and if so what influence it will have on the Government’s thinking. Giles Bywater 18 x Trustee Quarterly Review Upcoming Pensions Group events at Mayer Brown If you are interested in attending any of our events, please contact Katherine Dixon ([email protected]) or your usual Mayer Brown contact. All events take place at our offices at 201 Bishopsgate, London EC2M 3AF. • Trustee Foundation Course 16 September 2014 9 December 2014 Our Foundation Course aims to take trustees through the pensions landscape and the key legal principles relating to DB funding and investment matters, as well as some of the specific issues relating to DC schemes, in a practical and interactive way. • Trustee Building Blocks Classes 1 October 2014 – risk management and the importance of internal controls 18 November 2014 – topic to be confirmed Our Building Blocks Classes look in more detail at some of the key areas of pension scheme management. mayer brown x 19 Dates and deadlines 6 October 2014 Automatic enrolment - 3% employer contributions required for DC schemes • Introduction of single-tier state pension and abolition of DB contracting-out • Ban on active member discounts and member-borne adviser commissions in DC qualifying schemes comes into force • Automatic enrolment - 2% employer contributions required for DC schemes • Automatic enrolment - end of transitional period for DB schemes Deadline for schemes which have ceased to be wholly money purchase following introduction of the new definition of “money purchase benefits” to appoint a scheme actuary Lifetime allowance deadline for members to apply for individual protection Deadline for making resolution under s68, Pensions Act 1995 to remove protected rights provisions from scheme rules October 2017 5 April 2018 October 2018 5 April 2017 Key: Important dates to note For information Deadline for employers to exercise statutory power to amend their schemes to reflect increase in employer NICs resulting from abolition of contracting-out 5 April 2021 21 May 2018 Deadline for implementation of Portability Directive into UK law Expected deadline for implementation of IORP II Directive into UK law 31 December 2016 6 April 2016 Revised deadline for making resolution under s251, Pensions Act 2004 to retain scheme rules allowing surplus payments to employer Deadline for schemes which have ceased to be wholly money purchase following introduction of the new definition of “money purchase benefits” to submit first s179 valuation to PPF 5 April 2016 31 March 2015 1 September 2014 New “fit and proper person” test for scheme registration/ deregistration comes into force • Restrictions on drawdown of DC pots (i.e. requirement to annuitise) removed • Requirement for all DC schemes to offer at retirement guidance to members • Quality standards for all workplace DC schemes come into force • Cap on charges in default funds in DC qualifying schemes comes into force • Ban on consultancy charging in all DC qualifying schemes comes into force • Duty on trustees of all workplace DC schemes to report on charges comes into force 6 April 2015 31 October 2014 Deadline for updating information used by Experian to calculate insolvency risk scores for PPF levy purposes About Mayer Brown Mayer Brown is a global legal services organisation advising clients across the Americas, Asia and Europe. Our presence in the world’s leading markets enables us to offer clients access to local market knowledge combined with global reach.We are noted for our commitment to client service and our ability to assist clients with their most complex and demanding legal and business challenges worldwide. We serve many of the world’s largest companies, including a significant proportion of the Fortune 100, FTSE 100, DAX and Hang Seng Index companies and more than half of the world’s largest banks. We provide legal services in areas such as banking and finance; corporate and securities; litigation and dispute resolution; antitrust and competition; US Supreme Court and appellate matters; employment and benefits; environmental; financial services regulatory & enforcement; government and global trade; intellectual property; real estate; tax; restructuring, bankruptcy and insolvency; and wealth management.Please visit www.mayerbrown.com for comprehensive contact information for all Mayer Brown offices.Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the “Mayer Brown Practices”). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe–Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorised and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. “Mayer Brown” and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.© 2014. The Mayer Brown Practices. All rights reserved. 0386pen Americas | Asia | Europe | www.mayerbrown.com
