- 1 - Trustee Knowledge Update – Issue 28, August 2014
Trustee Knowledge Update
Welcome to the August 2014 edition of our Trustee Knowledge Update. It aims to inform trustees about changes in the law to
help them to comply with the legal requirement for each trustee (or trustee director) to have knowledge and understanding of the
law relating to pensions and trusts. This edition focuses on the key legal developments over the last quarter.
Finance Act 2014
The key provisions to note in this Act are:
• Withdrawal arrangements: From 27 March 2014, the
annual cap on withdrawals for members with capped
drawdown increased from 120% to 150% of a
comparable annuity and the minimum income
requirement for flexible drawdown fell to £12,000.
• Small lump sums: The maximum amount of a trivial
commutation lump sum has been increased to £30,000
from £18,000 and the amount of a de minimis lump
sum has risen from £2,000 to £10,000.
• PCLS: If members take a Pension Commencement
Lump Sum (“PCLS”) from a money purchase
arrangement between 19 September 2013 and 6 April
2015, they do not have to take the corresponding
pension within six months but it must be taken before 6
October 2015. (See below in Tax)
• Liberation: Powers for HMRC to address pension
liberation, including additional grounds on which
registration can be refused, or schemes de-registered.
• Individual Protection 2014: Provisions on Individual
Protection which will give individuals a personal
lifetime allowance based on the value of their pension
savings on 5 April 2014, subject to an overall limit of
Pensions Act 2014
The Act (most of which is not yet in force) covers a wide
variety of issues, including:
• A 30 day vesting period for members entitled to money
purchase benefits only.
• A statutory objective for the Regulator to “minimise any
impact on the sustainable growth of sponsoring
employers” when exercising funding functions.
• Increasing the PPF compensation cap for long service
members by 3% for every complete year of service
over 20 up to a maximum of double the standard cap.
• Introduction of the single-tier state pension and the
abolition of salary-related contracting out together with
transitional provisions for existing state benefits. There
is also a power for employers to make amendments to
their scheme by resolution to offset the impact of
increased national insurance contributions.
• Increasing state pension age to 67 in 2028.
• Regulation making powers for automatic “pot-follows
member” transfers. This is intended to apply to money
purchase benefits where the pot is less than £10,000
and which accrued after a date to be specified.
Trustees will need to try and find out whether a
member has transferable benefits and, if so, request
their transfer. Members will either be able to opt-out of
or have to consent to such transfers.
• Regulation making powers to prohibit financial
incentives being offered to induce DB members to
transfer their rights out of a scheme.
• Auto-enrolment changes including: preventing hybrid
schemes using DB transitional periods for members
with no DB accrual; alternative quality requirements for
DB schemes; and a regulation making power to allow
exceptions to the employer auto-enrolment duty.
• A new power for the Regulator to prevent a company
being a trustee if one or more of its directors have
been prohibited from being a trustee by the Regulator.
Response to consultation on pension flexibility
In March this year, the Government announced proposals
to introduce greater flexibility in the pensions landscape by
allowing DC members to take their whole DC pot as a cash
lump sum from April 2015. The Government has now
provided more details on how these proposals will work:
Transfers: To ensure that all DC members are able to make
use of the new flexibilities (as schemes will not have to offer
them), proposals will extend the statutory right to a transfer
up to the scheme’s normal retirement age (as opposed to
one year before that age).
The Government had consulted on the possibility of
preventing DB to DC transfers but has decided to permit
them (subject to conditions). Transferring trustees will need
to ensure that members with pension savings in excess of
£30,000 take financial advice before making a DB to DC
transfer. Generally, the cost of this advice will be met by
members except where a transfer is part of an employer-led
incentive exercise, when it will be met by the employer.
Minimum pension age: This will rise from age 55 to 57 in
2028 and remain 10 years below state pension age.
Guidance guarantee: There will be an obligation on trustees
to signpost DC members approaching retirement to
independent third party guidance. The providers of the
guidance will be monitored by, and the content must comply
with, standards set by the Financial Conduct Authority. It
appears that the guidance will be funded by a levy on
regulated financial services firms rather than occupational
pension schemes or employers having to meet the cost.
More details are given below.
Draft Taxation of Pensions Bill 2014
The Bill will make legislative changes necessary to
implement DC flexibility. Features to note are:
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Drawdown: There are detailed provisions in relation to new
flexi-access and dependant’s flexi-access drawdown
arrangements (drawdown without limits) and the treatment
of existing drawdown arrangements under the new regime.
Lump sums from DC pots: Uncrystallised funds pension
lump sums (UFPLS) will be a new type of authorised
payment. A UFPLS can generally be paid from a money
purchase arrangement to members from age 55. There is
no limit on the amount that can be paid and the member will
be liable to income tax at their marginal rate on 75% of the
UFPLS, with the remaining 25% paid tax-free. There are
restrictions on the availability of a UFPLS for members who
have transitional protections under the Finance Act 2004.
Annual allowances: Where a member has accessed money
purchase savings under the new arrangements, a £10,000
annual allowance may apply to future money purchase
savings. Members will retain a defined benefit annual
allowance of up to £40,000 (less the value of any money
purchase savings). Unused annual allowance from earlier
years cannot be used to increase the £10,000 annual
Override: The Bill contains a statutory override which allows
the trustees to pay a UFPLS; drawdown pension or
purchase a short term annuity “despite any provision of the
rules of the scheme (however framed) prohibiting the
making of the payment.”
Other: The age at which schemes can pay a trivial
commutation lump sum or small lump sum is reduced from
60 to 55 and a trivial commutation lump sum will only be
payable from a DB arrangement. The limit for trivial
commutation lump sum death benefits will rise to £30,000.
Review of survivor benefits
The Marriage (Same Sex Couples) Act 2013 required the
Government to conduct a review of survivor benefits in
occupational pension schemes and look at the differences
in the benefits provided to different groups and the impact
of eliminating those differences.
The report shows that two thirds of schemes are relying on
statutory provisions that provide there is no discrimination
where civil partner or same sex marriage survivor benefits
are not provided in relation to pre-5 December 2005
service. As a result of concerns about the cost to both
private and public sector of requiring any changes and
removing the 5 December 2005 cut-off, the Government
proposes to consider the issues “very carefully before
making a decision on whether the law should be changed”.
Therefore, for the moment, schemes with the cut-off need
take no further action.
Draft Annual Allowance Amendment Order
The Treasury has issued a draft Order and draft guidance
to deal with various annual allowance problems that have
arisen as a result of the significant fall in the annual
allowance in 2011. The majority of the changes proposed
are retrospective to 6 April 2011. The draft regulations
cover many issues, but the key ones are:
• Underfunded transfers: HMRC had indicated that, in
their view, where an underfunded transfer payment
was made and transfer credits were given in the
receiving scheme equal to the full value of the
member’s accrued benefits, a member could be
treated as having increased benefits for annual
allowance purposes equal to the difference in value
between the transfer credit and the transfer payment.
Proposed changes will deal with this for block transfers
by comparing the value of the benefits in the
transferring and receiving schemes rather than looking
at the amount transferred. There is also guidance on
what constitutes a “block transfer” for these purposes.
• Deferred members: There is an issue for pre-2006
deferred members who accrue benefits in a DB or
cash balance arrangement. The opening value of their
benefits will not include pre-2006 accrual but the
closing value will, resulting in a potential annual
allowance charge. Proposed amendments will take
accrued benefits into account in the opening balance.
There is a carve-out from the annual allowance for
deferred members whose benefits are not increased
by more than either what was in the rules in October
2010 or CPI. Amendments will extend this to allow
certain statutory increases and increases by reference
to RPI where this was in the rules on 6 April 2012.
The deferred member carve out is also currently lost if
there is a transfer part way through a pension input
period. Amendments will preserve the carve-out for
members of DB or cash balance arrangements who
transfer to other schemes.
HMRC reconciliation service
HMRC launched the Scheme Reconciliation Service in April
2014 to help scheme administrators and trustees reconcile
records for non-active members against HMRC records in
advance of the ending of contracting-out in April 2016.
HMRC is encouraging anyone interested in using this
service to contact them as soon as possible.
Pensions Flexibility from 27 March 2014: draft guidance
HMRC has issued draft guidance on the temporary time
limits which apply to PCLSs (discussed above) in advance
of April 2015. The key points in the guidance are:
• Members taking a PCLS before 6 April 2015 do not
have to take the associated pension entitlement within
6 months, but must take it before 6 October 2015.
• Members will be able to take their remaining
entitlement as a lump sum (if the scheme permits) and
they do so before 6 October 2015. Where the value of
the pension pot has gone up between taking the PCLS
and the pension, no additional PCLS can be taken.
• Where a PCLS was paid on or after 19 September
2013 but before 6 April 2015 (or before 19 September
2013 where a lifetime annuity contract is entered into,
and that contract is cancelled on or after 19 March
2014) and that PCLS is repaid to the scheme, it will be
treated as never having been paid.
• Under the transitional provisions, where there is a
recognised transfer, the PCLS will remain an
authorised payment provided that the pension is paid
from the receiving scheme before 6 October 2015 (and
certain other conditions are satisfied). There are also
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provisions on what scheme administrators need to do
when making such transfers.
• Where a member has reached age 60 and took a
PCLS before 27 March 2014, but would meet the
requirements for a trivial commutation lump sum using
new £30,000 limit, they can take the rest of their
pension savings as a lump sum. The PCLS will be
treated as a special transitional lump sum (also tax
free). There are similar provisions where the member
falls into the small pot provision if the small pot lump
sum is taken between 6 July 2014 and 6 April 2015.
• There is also guidance on the position of members
with rights to protected lump sums and various new
DB Funding Code of Practice comes into force
The new funding Code of Practice is now in force. It
applies to all schemes in Great Britain with valuation dates
from 29 July 2014 onwards.
Update on pensions liberation
The Regulator has updated its “Scorpion guidance” on
pension liberation. It says that around £495m of assets are
now known to have been transferred into “scams” but it
suspects that the true amount is significantly higher as
many are not reported to it.
The Regulator is asking all trustees and administrators to
include the pension scams scorpion leaflet in their annual
benefit statements and when issuing transfer packs to
members. Where annual statements and transfer packs are
issued via third parties, the trustees should consider if they
should now be sent direct to members.
Record-keeping must improve
The Regulator has issued a statement saying that “recordkeeping
must improve to protect the hard-earned savings of
members”. Its research shows that the failure of schemes
to properly assess the quality of their record-keeping is a
serious issue and more needs to be done to ensure the
right benefits are paid to members at the right time.
PPF publishes trustee guidance templates
The PPF has issued a template valuation summary transfer
letter and valuation summary withdrawal letter, to be used
once a section 143 valuation is approved and trustees are
required to notify members of their final entitlements.
PPF Responds to consultation on Money Purchase
Benefits and releases updated section 179 Guidance
The PPF confirms that schemes need to determine whether
the new definition of money purchase benefits has affected
them and, where the impact is material, the PPF will ask
trustees to commission an out-of-cycle section 179
valuation and for the information to be recorded on
Exchange by 31 March 2015. “Material impact” for these
purposes means an increase in the latest section 179
valuation deficit, or a reduction in the latest surplus, that is
more than 10% in relative terms and more than £5 million in
absolute terms. Schemes that experience an improved
section 179 position will not need to submit a further section
Arcadia Group Ltd v Arcadia Group Pensions Trust
Arcadia had two schemes: the Main Scheme and the
Executive Scheme. Arcadia was the principal employer of
both. The rules of the Main Scheme provided for pension
increases of the lower of a specified percentage or "the
percentage rise in the Retail Prices Index". The rules of the
Executive Scheme provided that increases should not
exceed "the percentage rise… in the Retail Prices Index (or
any replacement of that Index)". Retail Prices Index was
defined in both schemes as: “the Government's Index of
Retail Prices or any similar index satisfactory for the
purposes of the Inland Revenue.” Revaluation was also
calculated by reference to the Retail Prices Index.
Arcadia applied for directions as to whether CPI could be
used as an alternative index to RPI and who could exercise
any power to select an index.
The judge held that the rules allowed CPI to be used as an
alternative index. The provision in the definitions of "Retail
Prices Index" allowing the selection of “any similar index
satisfactory for the purposes of the Inland Revenue” did not
apply only if RPI had ceased to exist. As HMRC always
had the power to approve an alternative index and this
power was not limited to when RPI no longer existed, it was
reasonable to assume that the draftsmen had this in mind
when drafting the scheme rules.
The power to select an index was a joint principal
employer/trustee power. It could not be argued that it
should rest with Arcadia alone as there were powers in both
schemes that were not solely Arcadia’s, including the power
of amendment. As Arcadia could not otherwise alter
member benefits on its own, it would be odd if the power to
select the index was theirs alone. In addition, the trustees
could be seen as the "natural spokesmen for the schemes”.
CPI was a “similar index satisfactory for the purposes of the
Inland Revenue”. The test was whether there were “no
grounds on which HMRC could properly or reasonably
consider it other than satisfactory” for their purposes. As
CPI was used in the relevant statutory provisions and
HMRC no longer needed to approve scheme
documentation, it seemed unlikely that there could be any
reasonable grounds on which HMRC could object.
In relation to section 67 Pensions Act 1995 (modification of
schemes), members “have a "subsisting right" to increases
and revaluation at rates consistent with the definitions of
"Retail Prices Index", but not to increases and revaluation
specifically by reference to RPI”.
Clift - reducing pension to recover overpayments
The member’s pension was put into payment in April 1999.
In June 1999 the trustees discovered that his benefits had
been overpaid and his pension was reduced going forward.
In August 2011 the trustees notified the member of a further
error leading to an overpayment, reduced his pension and
suggested a repayment plan for past overpayments.
The member argued that after the pension was corrected in
1999 he had relied on the new amount, including spending
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nearly £3,000 on take-away meals. In addition, he argued
the Limitation Act provided a defence to repayment as the
mistake highlighted in 2011 could with reasonable diligence
have been discovered in 1999. Finally, reducing his
pension going forwards breached section 91 Pensions Act
1995 (inalienability of pension).
Change of position: The Deputy Pensions Ombudsman
said that the member could not reasonably have known that
he was not entitled to the pension paid. However, his
argument about take-away meals was rejected as he was in
receipt of another pension and it was quite possible that he
would still have chosen to occasionally purchase them. In
any event, the member was not able to provide any
documentary evidence to validate his claim.
Limitation: Generally an action for recovery of an
overpayment made in error should be brought within six
years of the date of the error. However, where the action is
for the relief from the consequences of mistake, the period
of limitation does not begin until the mistake is discovered
or could with reasonable diligence have been discovered.
A reasonably diligent trustee “should have a sound
knowledge of the provisions of the Rules and understand
fully how they are applied in practice” and would not “wait
for a calculation to give “odd results” before fully
understanding the rules...” Trustees should carry out
checks or audits on a regular basis to avoid such errors.
With reasonable diligence, the trustees should have
discovered the second mistake when the first error was
found. The trustees could therefore only attempt recovery
of payments made in the six years before they notified the
member of the second error in August 2011.
Section 91: Where a person is entitled to a pension under
an occupational pension scheme, “the entitlement or right
cannot be charged or a lien exercised in respect of it”
except in limited circumstances. No charge or lien can be
exercised where there is a dispute as to the amount of any
obligation unless it has become “enforceable under an
order of a competent court or in consequence of an award
of an arbitrator”. The trustees were aware by September
2011 that the member disagreed with the proposed
repayments, yet went on to reduce his pension. It was
wrong of the trustees to have commenced recovery of the
overpayment without obtaining the member’s agreement.
The trustees were ordered to confirm that they would not
seek recovery of the overpaid lump sum; would recalculate
the amount of the overpaid pension benefits, taking into
account the provisions of the Limitation Act; and would pay
the member £350 for distress and inconvenience.
New money purchase definition: The new, more
restrictive definition of money purchase benefits came into
force on 24 July 2014 (retrospective to January 1997) as
did the accompanying two sets of regulations which provide
for a variety of things including the treatment of underpin
benefits and benefits historically treated as money
purchase but which will not satisfy the new definition.
Updated guidance on the difference between data
processors and data controllers: The Information
Commissioner has published guidance to help determine
when professional advisers might be data controllers in
relation to information provided by their clients.
Fiduciary duties of investment intermediaries: The Law
Commission has published a report reviewing the duties of
pension scheme trustees in relation to the investment of
scheme assets. In its view:
• Trustees do not have to maximise returns in the shortterm
at the expense of risks over the longer term;
• Trustees should take into account factors which are
financially material to the performance of an
investment, and where ethical, environmental, social or
governance issues are financially material trustees
should take them into account;
• Whilst financial return should be the predominant
concern of trustees, the law allows other concerns to
be taken into account, and permits trustees to make
investment decisions based on non-financial factors
where they have good reason to think that members
share the concern, and there is no risk of significant
financial detriment to the fund.
The Commission has also issued related guidance for
pension trustees in relation to their investment duties.
Dates for diaries: Trustee training remains one of the most important ways of ensuring that trustees have the knowledge and
understanding required to perform their duties. Our next trustee training course is on 14th October 2014. If you have any enquiries about
any of these courses or would like to reserve a place, please contact Karen Mumgaard – E: email@example.com.
General: For further information on our pension services, please contact Mark Grant – E: firstname.lastname@example.org, T: +44 (0)20
7367 2325 or your usual pension partner. Please also visit our website at www.cms-cmck.com.
Get to grips with the requirements of the Pensions Regulator with our Field Guide for trustees. You will need to be a subscriber to our
Law-Now website (which is free) to access this guide. Register at http://www.law-now.com/register. You can also get help here with
understanding the Pensions Act 2004 and all related regulatory publications by viewing our online Plain English guide to the Pensions
Act. If you are interested in the Pensions Ombudsman’s activities, visit our website www.law-now.com/po-info.
The Pensions team is part of the CMS Cameron McKenna Human Capital group and advises employers and trustees of schemes varying in size, from a few
million pounds to several billion pounds. Additionally, we act for some of the largest firms of administrators, actuaries, consultants, brokers and professional
trustees. We provide a full range of services in connection with occupational pension schemes, including all aspects of employment and EU law. The team
also works closely with our corporate lawyers, providing support on mergers and acquisitions, insolvency lawyers supporting us on employer covenant
issues, and the financial services team which specialises in regulatory and fund management matters.
The information in this publication is for general purposes and guidance only and does not purport to constitute legal or professional advice. It is not an exhaustive review of recent
developments and must not be relied upon as giving definitive advice. The Update is intended to simplify and summarise the issues which it covers. It represents the law as at 8
August 2014. CMS Cameron McKenna LLP is a limited liability partnership registered in England and Wales with registration number OC310335.