Abolition of DC contracting-out – DWP introduces a power to help schemes amend their rules

The DWP has issued a consultation seeking views on two proposed changes to regulations concerning contracting-out. They are:

  • Introducing a regulation allowing trustees of contracted-out defined contribution (DC) occupational pension schemes to change their scheme rules to take into account the abolition of "protected rights" from 6 April 2012. (For our earlier e-bulletin on the abolition of DC contracting-out, see here). The power provided is time limited and trustees will have until the end of the three year transitional period (6 April 2015) for the abolition of protected rights to amend their rules.
  • Increasing the amount of compound interest used in the fixed rate revaluation of GMPs for early leavers on and after 6 April 2012, from currently 4% to 4.75%.

HMRC has also published the 4th issue of its Countdown Bulletin on the abolition of contracting-out.  Key points to note from the bulletin are as follows:

  • HMRC plans to perform a one-off  'closure' scan in early 2013 which will automatically close any open Appropriate Personal Pension Plans and Contracted-out money purchase scheme ("COMB") memberships, using a termination date no later than 5 April 2012. This process will not produce any electronic or paper acknowledgements to the scheme or the customer.
  • On 6 April 2012, all contracting-out certificates held by DC schemes will be cancelled automatically. This includes certificates issued in respect of the money purchase sections of COMB schemes.
  • Only schemes that are contracted-out on a Defined Benefit (DB) basis (by virtue of section 9(2) of the Pension Schemes Act 1993) will be able to contract out after 5 April 2012.  Salary-related sections of existing COMB schemes will be able to continue to contract-out using their existing contracting-out certificate. These certificates will remain valid and HMRC will not be replacing them.
  • If a scheme is currently contracted-out on a DC basis only, but is able to meet the requirements for contracting-out on a DB basis at the abolition date, i.e. it can satisfy the Reference Scheme Test (RST), it will be able to switch from DC to DB contracting-out. From 6 April 2012, this can be done without the scheme having to discharge its liability for what were protected rights.  As the DC contracting-out certificate will be invalid, the scheme will need to make a new election to contract-out on a DB basis.

The HMRC bulletin can be viewed here.


Section 68 of the Pensions Act 1995 allows scheme trustees, by resolution, to modify their scheme for listed purposes. The proposed change will extend the list of prescribed purposes under section 68 to allow trustees to remove protected rights rules that will no longer be required as a result of the coming into force of the abolition of protected rights legislation. "Protected rights" for these purposes, however, is the statutory definition contained in section 181(1)(i) of the Pension Schemes Act 1993, with the result that schemes are unlikely to be able to use the power to change protected rights which do not fall within this definition.

Many scheme rules, for instance, adopt a "free standing" definition of protected rights, which goes beyond the statutory definition (such as that in the model rules appended to Memorandum 93 issued to the pensions industry by the Inland Revenue in 1988). It is unlikely that the draft power will enable schemes to remove those provisions in their rules, or for that matter more complex provisions, such as protected rights underpins to benefits contained in DB schemes that are contracted out on a DC basis. In such cases, schemes may have to grapple with the restrictions in section 67 of the Pensions Act 1995 and their amendment powers before they can remove those provisions.

Next Steps

We are advising a number of schemes as to their options in relation to the abolition of protected rights proposals and how they may amend their scheme rules to remove provisions relating to protected rights. For more information, please speak to your contact in the pensions team.

Auto-enrolment – more on staging dates

On 9 August 2011, the Pensions Regulator issued a statement announcing a proposed postponement of the staging date (the date on which an employer needs to implement auto-enrolment) for employers who:

  • employed fewer than 10 people immediately before 1 April 2011; and
  • who share a PAYE scheme that has more than 239 people in it.

The period of the proposed postponement may be up to 23 months and small businesses should check the list of staging dates on the Pension Regulator's website for details. It is expected that the Pensions Bill will be altered before becoming law to allow for this change.


The above change means that where a small employer shares a PAYE scheme with a larger employer, the small employer will not be forced to implement auto-enrolment just because it shares a PAYE scheme with a larger business.

With Parliament having returned from the summer recess this week, it is likely that the Pensions Bill (including any further amendments to it regarding auto-enrolment) will be finalised shortly and employers will then be in a position to start taking more concrete action in relation to auto-enrolment. For a list of the practical steps that employers should be considering in order to be auto-enrolment compliant, see our "Countdown to auto-enrolment – a call to action!" briefing that we published last month.

Finance Act 2011 – further HMRC guidance and regulations issued

Following the enactment of the Finance Act 2011 in July, August saw a flurry of activity as far as HMRC guidance and regulations in connection with the Act are concerned. The long awaited draft guidance on the disguised remuneration provisions and draft guidance on the Scheme Pays facility were published, together with HMRC's Pension Schemes Newsletter 48.

Regulations in relation to the relaxation of the effective requirements to purchase an annuity at age 75 for defined contribution schemes were finalised. The Occupational Pension Schemes (Assignment, Forfeiture, Bankruptcy etc.) (Amendment) Regulations 2011, which remove a legislative barrier which would otherwise prevent a reduction to a scheme member's benefits for the purpose of paying an annual allowance tax charge on behalf of that member under the Scheme Pays facility were also issued. Click here to see our earlier e-alert on these developments.


The draft guidance issued contains gaps. The disguised remuneration guidance, for instance, is unclear as to the application of the rules to an Unfunded Employer Financed Retirement Benefits Scheme where security for the benefits to be provided under the EFRBS is granted to a third party security trustee. We have made representations to HMRC to clarify this and other issues. The Scheme Pays guidance needs more detail, especially around the voluntary Scheme Pays option for schemes. For information on how these issues and other provisions of the Act apply to your scheme, speak to your contact in the pensions team. 

We will shortly be issuing a detailed briefing on the key provisions of the Act and its implications for registered and unregistered pension schemes.


High Court upholds HMRC decision to withdraw a Singaporean scheme's QROPS status

In Equity Trust (Singapore) Ltd v The Commissioners for Her Majesty's Revenue and Customs [2011] 1463 (Ch), the High Court upheld HMRC's decision to withdraw the Qualifying Recognised Overseas Pension Scheme (QROPS) status of a pension scheme in Singapore.


Where an overseas pension scheme is registered as a QROPS with HMRC, transfers from a UK registered pension scheme to the QROPS will not be subject to draconian tax charges (such as a tax charge of 40% on the member and a further 15% Unauthorised Payment Surcharge if certain conditions apply, and a Scheme Sanction Charge on the scheme of up to 40%).

There are several complex conditions that an overseas pension scheme must satisfy before it can receive QROPS status. HMRC does not actively consider whether these conditions have been satisfied when granting QROPS status. Instead, it relies on a notification from the scheme manager of the overseas pension scheme that these conditions have been satisfied and requires the scheme manager to undertake to notify HMRC when the conditions are no longer met.

The decision

In this case, HMRC took the view that certain qualifying conditions were not met and that the scheme's QROPS status should be withdrawn. The particular qualifying conditions that the court was asked to consider were whether: (i) there was "a system for the approval or recognition by, or registration with" the Inland Revenue Authority of Singapore of pension schemes in Singapore and (ii) the pension scheme in Singapore was "open to persons resident in Singapore". The court found in favour of HMRC.


Although an overseas scheme may be on HMRC's QROPS list, trustees should still make reasonable enquiries when making a transfer to an overseas pension scheme and be aware that tax charges could arise in future if HMRC withdraws the scheme's QROPS status because the qualifying conditions for it are not satisfied.  

Parish v Pensions Ombudsman (No.2) – issue of jurisdiction

In Parish v Pensions Ombudsman (No.2) [2011] 044 PBLR – [2009] EWHC 969 (Admin), the High Court held that section 146 of the Pension Schemes Act 1993 does not prevent the Pensions Ombudsman from investigating a complaint if investigations in relation to the matter have already begun in an employment tribunal which have similar facts. For our detailed briefing on the High Court's decision, click here

High Court dismisses an appeal against the Deputy Pensions Ombudsman's decision on an ill health matter

In Batt v Royal Mail [2011] EWHC 900] (Ch), the High Court held that the Deputy Pensions Ombudsman had not erred in law when reaching a decision in relation to the member's application for an incapacity pension. To see our detailed briefing on the High Court's decision, click here

Deputy Pensions Ombudsman upholds complaint against trustees because they misinformed a member about his benefits

In the case of Phillips (8093312), the Deputy Pensions Ombudsman has upheld a member's complaint against trustees of his pension scheme that they had misinformed him in relation to his pension benefits, in particular, whether the member could take his defined benefits at age 60 without a reduction. To view our earlier briefing on this determination, click here.

Financial advisers who take on administrative duties may be administrators for the purposes of the Pensions Ombudsman's jurisdiction

Under the Personal and Occupational Pension Schemes (Pensions Ombudsman) Regulations 1996 (SI 1996/2475), the Ombudsman can, in certain circumstances, hear a complaint against "administrators" who are concerned with the administration of an occupational pension scheme. In Middleton (880448/1), the Deputy Pensions Ombudsman held that a financial adviser who had taken on administrative duties in connection with a pension fund transfer came within the Pensions Ombudsman's jurisdiction as an "administrator". This was the case even though the adviser did not believe that it had been appointed or paid to provide such a service. The Deputy Pensions Ombudsman held that the delay by the firm in processing the member's request for a transfer amounted to maladministration but, as the delay had not caused the member any financial loss, the member was only entitled to compensation of £250 for the distress and inconvenience he had suffered.


Disclosure of tax avoidance schemes: EFRBS may need to be disclosed under a proposed new hallmark

HMRC has issued a paper ("the Paper") on 22 June 2011, picking up the thread from its 2009 consultation on measures to amend the Disclosure of Tax Avoidance Schemes ("DOTAS") regime. Under the regime, certain types of arrangements (called "hallmarks") have to be disclosed to HMRC. In relation to pensions, the paper proposes to:

  • Remove the current pensions hallmark 8. Hallmark 8 requires disclosure of schemes that seek to circumvent the Special Annual Allowance Charge, a charge that was introduced in connection with the anti-forestalling provisions for high earners for the tax years 2009/2010, and which ceased to apply from 6 April 2011. HMRC will, however, monitor developments in the use of pensions relief and keep the need for a replacement hallmark under review.
  • Introduce a new "employment income schemes" hallmark which will target arrangements that seek to provide a tax advantage in relation to employment income. The Paper recognises that the disguised remuneration provisions in the Finance Act 2011 deal with tax avoidance schemes that would be covered by such a hallmark. However, HMRC wants to ensure that all such schemes are disclosed in order that "they are risk assessed and the appropriate operational responses taken". While it is not yet fully clear which arrangements will require disclosure under the employment income schemes hallmark, it appears likely that it will apply to unregistered pension arrangements, Employer Financed Retirement Benefit Schemes ("EFRBS"). (Registered Pension Schemes are expressly excluded).

The consultation closed on 31 August. We understand that any changes introduced as a result of the consultation will be provided for in the next Finance Bill.


It is unclear whether all EFRBS will require disclosure to HMRC under the proposed new employment income schemes hallmark and, if not, under what circumstance they need to be disclosed.  In particular, where HMRC clearance has been obtained for an EFRBS, will the EFRBS still need to be separately disclosed under the new hallmark?

State Pension reforms: DWP publishes consultation response

On 27 July 2011, the DWP published a summary of responses to its Green Paper on reforms to the State Pension. The Green Paper had floated two broad options:

  • Option 1: speeding up the current transition to a flat-rate two-tier pension. Currently, the Basic State Pension ("BSP") is a flat rate pension and the Second State Pension ("S2P") is partly flat-rated and partly linked to earnings with the latter expected to become flat-rate by the early 2030's. Under this proposal, the flat-rating of the S2P would be accelerated so that it becomes a flat-rate pension by 2020 so that everyone with a full contribution record would then build up the same amount of pension, through two tiers, of approximately £140 per week on current estimates.
  • Option 2: moving to a new single tier flat-rate pension. This would involve combining the current BSP and the S2P and will result in ending contracting-out for DB schemes.

The responses to the consultation indicate a broad support for Option 2 (the single-tier option) and little support for the faster flat-rate option. The Green Paper had also sought views on whether there should be an automatic mechanism for increasing state pension age – this received a high level of support.


Option 2 will result in the end of contracting-out for DB schemes and therefore major implications for DB schemes and employers (for instance an increase in National Insurance Contributions). Schemes that are integrated with the BSP (for instance where the amount of the BSP is deducted from the total pension payable), will typically make explicit references to the BSP in their rules and if the BSP is replaced with a new single flat rate pension , it is not clear how those rules would be interpreted.

The Pension Protection Fund

PPF invoices for 2011/12 Pension Protection Levy

The PPF has (from 1 September 2011) started issuing invoices for the 2011/12 Pension Protection Levy. It has also published a guide to the 2011/12 levy. Amongst other things, the guide highlights the changes to Dun & Bradstreet's methods for calculating insolvency failure scores, most notably that:

  • PPF compliant contingent assets will no longer be treated as charges on company assets; and
  • A parent company's failure score will override the subsidiary's failure score where the parent company has a substantial risk of insolvency. 

European perspective

Dutch Parliament raises questions with the Minister of Social Affairs about exorbitant investment management fees paid by pension schemes

On 24 August 2011, the Dutch Parliament raised questions with the Minister of Social Affairs in reaction to a verdict of 8 August, 2011 of the court of Rotterdam. The Rotterdam court's verdict had revealed that one of the biggest industry-wide pension funds in the Netherlands, the Pension Fund of the Metal and Electrical Engineering Industry, had, to its own surprise, paid together with another Dutch pension fund €450 million in management fees to its investment manager, Mn Services in 2008. Dutch Parliament members and the Dutch central bank (DNB) said that this fee was "exorbitant".

This revelation has come 4 months after the Dutch Minister and the Dutch financial regulator, The Netherlands Authority for the Financial Markets, urged pension funds to formulate, on a self-regulation basis, best practices in respect of transparency and being in control of, and being properly informed about, investment management costs. The Minister has now been requested to report to the Dutch Parliament what progress pension funds have made in this regard and whether he believes pension funds have taken sufficient steps.


Claim for Civil Partners' benefits

A claim is to be heard at Reading Employment Tribunal in January 2012 on the lawfulness of time barring civil partner pension rights. Under the Civil Partnership Act 2004, schemes are only obliged to provide benefits to Civil Partners in respect of pension accrued (other than that relating to contracted-out rights) from 1 December 2005, the date the Act came into force. Contracted-out rights are required to be provided as far back as 1988. Some pension schemes are thought to provide benefits to Civil Partners for all accrual, but those that do not may be affected, depending on the result of the claim before the Tribunal.