Pensions Update January 2014 In this issue GMP Scheme Reconciliation Service accounced Regulator announces changes to defined benefit and hybrid scheme annual returns PPF factsheet on restructuring and rescue DWP to publish response to consultation on Pension Protection Regulations in February 2014 Order made for 2014/2015 PPF compensation cap and levy ceiling Proposed 2014/2015 auto-enrolment thresholds announced DWP publishes Memorandum on alternative quality requirements for DB schemes to demonstrate sufficient quality for auto-enrolment purposes Court of Appeal rules approves partial buy-out mechanism enabling trustees to maximise section 75 debt VAT: Attorney General gives opinion in the ATP case: defined contribution arrangement constitutes a special investment fund Lehman: High Couirt confirms that the aggregate amount which can be recovered where two or more contribution notices are issued can exceed the shortfall sum Box Clever: Upper Tribunal rejects strike out application based on Regulator moving the goalposts Print link GMP Scheme Reconcilliation Service announced In preparation for the abolition of DB contracting out, HMRC is extending the GMP reconciliation service. Previously this has only been available to schemes which were winding up. The service allows pension schemes to reconcile the membership and GMP data held on their scheme records against HMRC records. HMRC will provide access to its data through Shared Workspace. This will be of relevance to administrators and trustees of occupational schemes with historic GMP liabilities. Requests for data can be made now, although HMRC will not provide the data until April 2014. Details of the service can be found on HMRC's website here > Back to Top Regulator announces changes to defined benefit and hybrid scheme annual returns A number of new questions will be included on annual scheme returns which defined benefit and hybrid schemes must complete. The new questions will be included on scheme returns from January 2014 onwards. Hybrid schemes will be required to answer questions about DC membership. New questions are also now being included about asset backed contribution arrangements and incentive exercises. The Regulator has published a guide explaining the information which should be included in the scheme return and highlighting the new questions. This will be of interest to administrators and trustees of defined benefit and hybrid schemes. The Regulator's guide can be accessed here > Back to Top PPF factsheet on restructuring and rescue The PPF has published a factsheet outlining the principles which it will apply when considering whether to enter into rescue or restructuring deals. This is essentially a summary of existing guidance, but will provide a useful overview for employers in financially distressed groups with defined benefit scheme, as well as the trustees of those schemes. The factsheet can be accessed by clicking here > Back to Top DWP to publish response to consultation on Pension Protection Regulations in February 2014
This newsletter is for information purposes only. Its contents do not constitute legal advice and should not be regarded as a substitute for detailed advice in individual cases. If you wish to discuss any of these issues further, please contact your usual Baker & McKenzie lawyer. Robert West firstname.lastname@example.org Jeanette Holland email@example.com Chantal Thompson firstname.lastname@example.org Arron Slocombe email@example.com We understand that the DWP will publish its long awaited response to the consultation on the draft Pension Protection Regulations in February. We will report on this in a future update. > Back to Top Order made for 2014/2015 PPF compensation cap and levy ceiling The Secretary of State has made an order confirming the compensation cap and levy ceiling for 2014/2015. The compensation cap will increase to £36,401.10 from 1 April 2014. This represents an increase of 4.4% and is in line with increases in earnings during the 2012/2013 tax year. The overall PPF levy ceiling will rise to £941,958,542 for the year ending on 31 July 2013. This represents an increase in 0.9% and is in line with the increase in earnings for the year ending on 31 July 2013. > Back to Top Proposed 2014/15 auto-enrolment thresholds announced The Pensions Minister has announced the proposed automatic enrolment thresholds for the year 2014/2014. These are as follows: £10,000 for the automatic enrolment earnings trigger; £5,772 for the lower limit of the qualifying earnings band; £41,865 for the upper limit of the qualifying earnings band. The Order is due to come into force on 6 April 2014. It is not expected that the proposed limits will change before they are implemented, although they must first be approved by Parliament. > Back to Top DWP publishes Memorandum and alternative quality requirements for DB schemes to demonstrate sufficient quality and auto-enrolment purposes The DWP has published a memorandum explaining the purpose of the new and amended powers which have been delegated to it in the Pensions Bill. These are intended to address concerns which have been expressed about the complexity of the current alternative quality test for DB schemes - the test scheme standard. A DB scheme can meet the necessary quality requirements under the automatic enrolment legislation (and therefore be used by the employer to comply with its auto-enrolment duties) if it is contracted out. If a DB scheme is not contracted out currently, the only other way it can meet the quality requirement is to meet a particular test called the "test scheme standard". The test scheme standard has been criticised as being too complex. This is a particular concern because after DB contracting out has been abolished the test scheme standard will be the only way in which DB schemes can meet the quality requirement. The DWP is concerned that employers will be discouraged from using DB schemes to meet their auto-enrolment requirements. The DWP is intending to introduce two new alternative quality requirements for DB schemes. The new alternatives are:
to allow certain DB schemes to satisfy the money purchase requirements; to introduce two new tests based on the cost of funding future accruals. The memorandum can be accessed by clicking here > Back to Top Court of Appeal rules approves partial buy-out mechanism enabling trustees to maximise section 75 debt The Court of Appeal has ruled that the trustees of two occupational defined benefit (DB) schemes can use a particular mechanism, known as a Headway agreement, to maximise the amount of s.75 debt payable by the employers. In the case of Sarjeant and others v Rigid Group Ltd, both schemes commenced winding up in 2000. No insolvency event had occurred before the winding up in either case. The applicable legislation at the relevant time required the s.75 debt to be calculated on the MFR basis. Based on the actuary's estimate as of 30 September 2009, the implementation of a Headway arrangement would have resulted in additional s.75 debt for the Company of £1.9 million and £1.6 million respectively in relation to each scheme. This would still not have been enough to fund the full buy-out cost of the members' benefits. A Headway agreement is typically achieved by a three stage process: 1. the trustees apply the entirety of the available scheme assets (after a retention for expenses) in the purchase of annuities for the payment of benefits; 2. the trustees fix the "applicable time" for the calculation of the s.75 debt after the completion of stage (1) and then collect the debt from the employer; 3. the trustees apply the amount of the s.75 debt in the purchase of further annuities so as to secure further benefits to which members are entitled under the scheme. The difference in outcome is due to the fact that, under the Headway arrangement, the liabilities discharged at stage 1 are effectively valued on the buy-out basis rather than on the prescribed s.75 basis (based on the legislation which applied at the time the schemes went into winding up, this was calculated by reference to the MFR). The Court of Appeal did not need to rule on whether a Headway agreement could be effective (the Headway case itself had established that it could). The key point for the Court of Appeal to determine was whether the particular rules of the schemes, which did not expressly allow the trustees to implement a Headway agreement (or indeed a partial buy-out in any other context), gave the trustees sufficient power to implement such an agreement. The Court of Appeal, in adopting a purposive approach to the construction of the relevant rules, concluded that they did. In reaching its conclusion Patten LJ cited with approval the approach taken in the British Airways case. The decision provides helpful authority for the general principles to be applied to the construction of pension schemes. The Court of Appeal noted that the starting point when considering the nature of trustees' duties under a particular rule should be the objective and purpose of the duty. In this case,
the duty of the trustees under the winding up rules was to secure insurance policies or annuities which as nearly as practicable matched the beneficiaries' entitlements under the schemes. If the trustees were able to increase the value of the assets available to fund the purchase of such annuities by using a two stage rather than a one stage process, that was entirely consistent with the duty which the trustees were required to perform. This case is useful in confirming the general principles of construction which should be used when interpreting a scheme's governing documentation. It will be of interest to employers and trustees grappling with any issue of interpretation in their scheme rules. It will not, however, be of any direct relevance to issues facing schemes have commenced winding up more recently. This is because, since the employer debt legislation changed so as to require s.75 debts to be calculated by reference to the buy-out basis (from 11 June 2003), there has not been any reason for trustees to enter Headway arrangements. > Back to Top VAT: Attorney General gives opinion in the ATP case: defined contribution arrangement constitutes a special investment fund The Attorney General (AG) has delivered his opinion in ATP case (ATP PensionService A/S v Skatterminsteriert). The AG has concluded that the term "special investment funds" should include occupational pension funds: where such funds pool the assets of several beneficiaries; and allow the spreading of risk over a range of securities. This opens the door for occupational pension schemes to fall within the exemption from VAT in Article 13B(d)(6) of Council Directive 77/388/EEC in relation to management services provided to them. This is particularly the case for DC occupational funds, which were the subject of the reference to the CJEU in this case. Article 13B(d)(d) requires Member States to exempt from VAT "the management of special investment funds as defined by Member States". The AG concluded that assets can only be considered to be pooled where the beneficiaries bear the risk of the investment. The fact that contributions are made by an employer as part of remuneration and that payments out of the fund are only made upon retirement is irrelevant, as long as the beneficiary has a secure legal position with respect to his or her assets. This is for the national courts to decide, although the AG did note that where the investment is lost in the case of death and does not fall to the heirs of the beneficiary, it is unlikely that the beneficiary could be viewed as having a secure legal position. Although the approach and methodology adopted by the AG in this case differed in some important respects from the approach adopted by the CJEU in the Wheels case (for example the AG dismissed the purpose of the investment as irrelevant in ATP), in both cases a crucial factor in determining whether the pension fund constituted a "special investment fund" was whether or not the beneficiaries bore the cost of the fund and the risk of their investment. In a DC context this is clearly an easier hurdle to jump than in a DB context. The AG left several questions unanswered. In particular, he did not give an opinion on what services would constitute "management" of a special investment fund. The PPG case has previously suggested that this should cover investment services as well as administration services. Nor did he give any indication of how the exemption for the management of special investment funds should be distinguished from
other exemptions (such as the exemption in Article 13B(d)(3)). Whether or not the CJEU wil follow the AG's opinion when it delivers its ruling remains to be seen. The decision will be awaited with interest by employers and trustees of both DB and DC occupational arrangements and those involved in their management, as will the comments of HMRC. > Back to Top Lehman: High Court confirms that the aggregate amount which can be recovered where two or more contribution notices are issued can exceed the shortfall sum The High Court has ruled that, in circumstances where two or more contribution notices are issued following non-compliance with a previous FSD, the Regulator can seek to recover a maximum aggregate amount which exceeds the shortfall sum payable under section 48(2) Pensions Act 2004. Section 47(2) empowers the Regulator to issue a contribution notice where there has been a previous failure to comply with an FSD. It can be issued to one or more of the persons to whom the direction was issued stating that the person is under a liability to pay to the trustees or manger of the scheme the sum specified in the notice (known as the shortfall sum). Section 48(2) sets out the basis on which the shortfall sum is calculated. The ruling in Re Storm Funding Ltd (in connection with the Lehman Group) was made following an application for directions by the administrators of 14 Lehman companies. The shortfall sum was £119 million. This was Lehman Brothers Limited's s.75 debt when it entered administration in September 2008. The buy-out deficit increases significantly after that date, with estimates of the buy-out debt ranging between £214 million and £275 million. The High Court concluded that the statutory provisions did allow the Regulator to impose a maximum aggregate amount which was greater than the shortfall amount where two or more contribution notices were being issued. It also included that the aggregate sum recovered from more than one target under such contribution notices could exceed the shortfall sum. In reaching this conclusion, the High Court relied heavily on the purpose of an FSD and noted that the support which the Regulator could require under an FSD was not directly linked to the amount of any s.75 debt (and could potentially be greater). The judgment provides some clarity on the amounts which the Regulator can seek to recover where contribution notices are imposed following an earlier failure of a target to comply with and FSD. It means that the number of targets subject to the FSD will have a direct bearing on the aggregate amount which the Regulator can potentially recover following and subsequent non-compliance. > Back to Top Box Clever: Upper Tribunal rejects strike out application based on Regulator moving the goalposts The Upper Tribunal has rejected an application by the targets of an FSD to strike out parts of the Regulator's case before it reaches the tribunal. The applicants argued that the Regulator had moved the goalposts and was seeking to bring a different case to the tribunal from that which it had brought before the Regulator's determination panel. The case is part of the Box Clever litigation which arose out of the collapse of the joint venture between Granada and Thorn in 2003. In December 2011 the
Regulator's determinations panel ordered an FSD against five Granada companies. Those Companies subsequently filed a reference to the tribunal. The tribunal refused to strike out parts of the Regulator's case in advance of hearing the substantive reference. In reaching its conclusion the tribunal noted that, on a reference from the determinations panel, the tribunal considered the matters "as new" and not as an appeal. It acknowledged that its jurisdiction was limited to considering the facts and circumstances before the determinations panel and recorded in the decision notice. However, if a party wished to rely on facts and circumstances beyond this limit, it could seek permission from the tribunal and the tribunal should grant permission "where appropriate". The case will be of interest to those who have an interest in the procedure of the Regulator and its appeals process. > Back to Top Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. Before you send an e-mail to Baker & McKenzie, please be aware that your communications with us through this message will not create a lawyer-client relationship with us. Do not send us any information that you or anyone else considers to be confidential or secret unless we have first agreed to be your lawyers in that matter. Any information you send us before we agree to be your lawyers cannot be protected from disclosure.
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