In this month's Pensions E-Bulletin, we consider a number of issues including the potential implications of the Scotland Bill for the taxation of UK pension schemes, the current goals of the Pensions Regulator set out in its annual corporate plan, the Regulator's drive to improve scheme administration, and the Prudential case, giving employers some comfort when changing discretionary practices in their scheme.
Scotland Bill: pensions implications
The Scotland Bill, which is currently progressing through Parliament, may cause considerable administrative problems for pension providers. If the Bill goes through in its current form then income tax will, in future, have a shared base between the UK and Scottish governments. UK rates of income tax will be reduced by 10p in the pound for "Scottish taxpayers" and the Scottish Parliament will set its own rate of income tax on top.
Pensions tax relief is provided at the rate it is paid so Scottish taxpayers would be entitled to relief at a potentially different rate from taxpayers living elsewhere in the UK leading to systems' challenges for schemes with members north and south of the border. Residence will be the key factor in determining whether a person is liable to Scottish income tax but the problem will come for schemes in identifying who is a "Scottish taxpayer" where, for example, an individual moves during the tax year or has more than one place of residence. The identification of a "Scottish taxpayer" could well be something that becomes very contentious and requires some litigation before it finds its level. There is likely to be less of an issue for the taxation of pensions in payment as an individual's tax code should include details of the tax rates applying but there will still be administrative issues in setting up systems to cope with the additional level of tax rate.
Pensions Regulator's corporate plan
The Regulator has recently published its fifth corporate plan setting out its objectives for the next three years. The plan has the following five strategic themes.
- Improving governance and administration – the Regulator's focus is on ensuring schemes have robust governance structures, including processes for dealing with conflicts of interest and the existence of appropriate internal controls. The Regulator wants to support trustees in becoming more demanding of administrators to drive standards higher.
- Reducing risks to Defined Benefit (DB) scheme members – the Regulator's aim is to develop its approach to regulating DB schemes to better target resources on those schemes where intervention is needed.
- Reducing risks to Defined Contribution (DC) scheme members – the Regulator considers that "it's more important than ever that pension products are designed and run with the best interest of members at heart" and "will be working closely with the industry to support good member outcomes for new and existing savers".
- Preparing for 2012 – helping employers prepare for the move to automatic enrolment next year is seen as a key priority for the Regulator over the forthcoming months.
- Better regulation – the principles of better regulation are for the Regulator to be transparent, accountable, proportionate, consistent and targeted.
Five steps to better scheme administration
The Pensions Regulator has issued a guide for trustees setting out five simple steps to better scheme administration, with the aim being to help trustees of smaller schemes understand their responsibilities and improve standards of administration. It is important for trustees to remember that, although they may delegate responsibility for scheme administration, trustees remain ultimately accountable as it is their duty to ensure that members receive the benefits to which they are entitled. The five steps are as follows.
- Identify gaps and errors in member data – trustees should ask their administrator for a "data scoring" service if not already provided to identify and resolve any issues.
- Understand what to expect from the administration provider and ensure this is delivered – scope and standard of service should be agreed and monitored.
- Understand administration reports – agree content and frequency of reports. Reports should be provided quarterly, if possible, but at least annually.
- Have regular contact with the administration provider.
- Set up an administration committee to monitor scheme's data and focus on resolving any problems which arise.
Prudential case – Prudential Staff Pensions v Prudential Assurance
The High Court has delivered its judgement in the Prudential case where the pension scheme trustee questioned whether Prudential's decision to cap pension increases at 2.5%, following a long standing practice of granting pension increases in line with RPI, was in breach of the employer's implied obligation of good faith. The judge found that it was not and that the correct test for assessing whether or not an employer had breached its obligation of good faith in a pensions context is whether or not the decision of the employer was irrational or perverse. The decision does not have to be substantively "fair". Members' interests and expectations may be of relevance when considering whether an employer has acted irrationally or perversely and there could be circumstances where a decision to override member expectations which an employer had created would meet the test. On the other hand, employer powers like the one at issue in the case are not fiduciary in nature and as a result the employer was entitled to take its own interests into account when making the decision. This is likely to severely limit the circumstances in which a decision could be found to be irrational or perverse and therefore in breach of the implied obligation of good faith.
The case is specific to its own facts and in this case the power was always specified in the rules and in member communications to be discretionary. However, it does show how difficult it is for members to challenge employers on the exercise of their discretionary powers even where strong member expectations have been created that a practice will continue. This will give employers some comfort that they may be able to change even very long-standing discretionary practices.