Top of the agenda

1. Taxation of Pension Schemes Bill introduced into Parliament but key piece of the flexibility jigsaw is still missing

In our August bulletin we discussed the draft Taxation of Pension Schemes Bill, which contains the draft tax legislation for the flexibility measures that will apply from April 2015. The draft bill has now formerly been introduced into Parliament. New clauses have been added to the Bill following the announcement of further flexibility measures by the Government and changes made to existing clauses to reflect the outcome of the consultation on the draft Bill.

New reporting requirements

New reporting requirements have been introduced for administrators and scheme members where individuals have flexibly accessed their pension savings. These reporting requirements are intended to ensure that:

  • every scheme that an individual is a member of is aware of that they have accessed their funds flexibly;
  • the individual is able to get the right information to declare on their self-assessment tax return any annual allowance charge due; and
  • HMRC is provided with sufficient information to ensure the right amount of tax is paid

The new draft requirements include:

  • An obligation on the scheme administrator to issue a statement within 31 days of when the member first flexibly accesses their pension rights containing certain information including the fact that the individual is subject to the new money purchase allowance rules.
  • An obligation on the member within 31 days of receiving the statement to report that they have received this statement to the scheme administrator of other schemes of which they are a member.
  • A member must also provide this information to the scheme administrator of any new scheme that they join.
  • If a member is subject to the money purchase allowance rules and their pension input amount (i.e the aggregate of the member and their employer’s contributions) in the year exceeds the new money purchase allowance limit of £10,000, then the scheme administrator must:
    • give the member a pension saving statement; and
    • notify HMRC about the contributions made.

Overseas schemes

Where individuals who are members of overseas pension schemes get UK pensions tax relief, similar information requirements and conditions and limitations to the tax relief available and the benefits that can be provided apply to those schemes as those for UK registered pension schemes. The idea behind these rules is that members of a relieved non-UK Pension Scheme (RNUK) are in broadly the same position as members of UK registered pension schemes in respect of their UK tax-relieved savings. To maintain this comparability in light of the new flexibility measures, changes have been made to the legislation to ensure (among other things) that:

  • a payment from an overseas scheme that would be an uncrystallised funds pension lump sum if paid from a registered pension scheme can be taxed as pension income;
  • flexibly accessing pension rights under an RNUKS will trigger the money purchase annual allowance rules.

Taxation of unused funds on death

The Bill also contains clauses covering some (but not all ) of the provisions in relation to the changes to the taxation of death benefits announced by the Chancellor of the Exchequer on 29 September – for our update on those changes, please read our September bulletin. Further clauses in relation to the taxation of death benefits will be introduced at a later stage .

The changes in relation to death benefits were set out in a statement from HM Treasury dated 29th September 2014. This statement was followed by another briefing note to the Association of Consulting Actuaries which gave further details. The briefing note clarified that the following death benefit lump sums will be tax free where the individual dies before age 75 and taxed at 45% where the individual dies age 75 or older:

  • A flexi-drawdown fund lump sum death benefit;
  • Pension protection lump sum death benefit;
  • Annuity protection lump sum death benefit;
  • Draw down pension fund lump sum death benefit;
  • Define benefits lump sum death benefit;
  • Uncrystallised funds lump sum death benefit.

The 45% tax rate will be subject to review so that from 2016 the 45% charge may be reduced to the marginal rate.

The briefing note also explains how death benefits from defined benefits will be affected by the changes (the Treasury statement had focused on DC benefits only) – the briefing note is on the ACA website.

The trustee statutory 'override'

A number of drafting and technical changes have also been made. These include an amendment to the trustee override, so that as well as in relation to the UFPLS and income drawdown, trustees of a registered pension scheme may use the override to provide the following in relation to a money purchase arrangement:

  • the payment of a pension commencement lump sum where the member becomes entitled to income withdrawal;
  • a flexi-access drawdown fund lump sum death benefit;
  • the new category of trivial commutation lump sum death benefit payable (under paragraph 20(1B) of Schedule 29 to the Finance Act 2004).

The Bill and the explanatory notes to the Bill may be found here;  HMRC’s draft guidance on the bill is here.


Employers and trustees of schemes are having to work hard to keep up to speed with the Budget 2014 flexibility measures as they develop. There is, however, a key piece missing in the flexibility jigsaw: the Government’s proposals on enabling DB schemes to offer the flexible measures internally. In its response to the “Freedom and Choice in pensions consultation” published in July this year, the Government promised to issue a consultation on measures so that DB members will not need to transfer first to a DC scheme in order to access their savings flexibly. However, nothing has been issued so far.

Until it is, employers and trustees of schemes that provide defined benefits face a real challenge in making key decisions around flexibility, such as whether to offer it internally or perhaps make another DC arrangement available, such as a group SIPP, to which members can transfer their benefits to take advantage of DC flexibility, and what to tell their members.

2. Pension Schemes Bill 2014/15: guidance guarantee provisions published

The Government has tabled (the long awaited) clauses relating to the Guidance Guarantee in the Pension Schemes Bill 2014/15. The clauses cover the following ground:

  • The guidance will be provided by The Pensions Advisory Service (TPAS) and the Citizens Advice Bureau (CAB) – it had previously been announced that TPAS and MPAS would provide the guidance but MPAS’ role has been replaced with the CAB. An information note on the Bill states the TPAS will be responsible for providing the telephone guidance and the CAB the face to face guidance across the UK. The Treasury is understood to be working on an on-line version of the guidance.
  • It will be an offence for a person to falsely describe themselves as a designated guidance provider, when they are not, or behave in a manner that gives that impression.
  • The FCA will set standards for the giving of pensions guidance and to also monitor compliance with these standards. The Treasury has a backstop power to direct guidance providers to take remedial action in the event that it receives a recommendation from the FCA. Individuals who suffer loss as a result of the guidance provider failing to comply with FCA standards will have a claim for breach of statutory duty against the guidance provider.  The FCA will fund its relevant activities through a levy on designated guidance providers.
  • A duty is placed on the FCA to make general rules requiring schemes to provide information about the availability of pensions guidance to members of schemes that provide cash balance or money purchase benefits.


The clauses are mainly enabling provisions. The precise detail of what the guidance will cover have yet to be unveiled.

Pensions Minister, Steve Webb, has recently told MPs that the guidance is intended for those with mid-sized pots. According to the Minister, those with very small pots are likely to take them as lump sums; those with large pots will obtain independent financial advice.  This explanation is unlikely to allay the concerns of trustees and employers of pension schemes over whether their members will have enough information as to their options, given the raft of choices that DC flexibility measures open up, even for those with middle-size pots at whom the guidance is predominantly targeted.


3. DWP issues draft legislation in relation to a cap on charges on DC auto-enrolment schemes and new governance standards

The DWP has issued a Command Paper, which sets out its response to its earlier Command Paper of March 2014, in which it had proposed a 0.75% cap on default funds of DC auto-enrolment schemes ('qualifying schemes'). It also proposed various governance standards and a requirement that compliance with them be reported in an annual statement by the chair of trustees.

The charges cap

The charge cap applies to occupational pension schemes but also extends to trust-based stakeholder schemes and contractual schemes which are used for auto-enrolment. The cap would be introduced from 6 April 2015 or the date from which the scheme begins to be used as a "qualifying scheme" for auto-enrolment, if later.

As proposed, the charge cap will apply to "member-borne deductions" (MBDs) but not to transaction costs (a non-exhaustive list of MBDs and transaction costs is given at Annex B of the Command Paper). The DWP has also now decided that the charge cap will not cover costs and charges incurred by trustees in respect of pension sharing on divorce and complying with court orders attributable to specific individuals, and also the costs incurred by trustees as a result of winding-up the scheme.

Where different default funds are applied by employers in a multi-employer scheme, the charge cap will apply to each default arrangement, and where the arrangements consists of several funds it applies across them as a whole, even if some of the component funds exceed the cap.

Active member discounts, commission and consultancy charges

An active member discount (AMD) is where a member who has ceased contributing, such as when they have moved to a different employer, is subject to a higher level of charge, whether it is called an 'AMD' or not. As proposed in March, AMDs will be banned for any member who makes a contribution to a qualifying scheme from April 2016. Between April 2015 and April 2016 they will be subject to the charge cap so that they will not be permitted to take the total charges over 0.75% for any member who ceases contributing in that period. However, employers will be permitted to pay charges on behalf of their current employees.

The DWP will be introducing regulations for occupational pension schemes to ban member-borne payments for advice given to the employer (consultancy-charges) in qualifying schemes from April 2015 and member-borne commission-payments from April 2016. The DWP will be consulting further on the best way to enable the ban to work. Separately, the Financial Conduct Authority will be consulting on draft rules for similar bans in respect of workplace personal pension schemes.

Adjustment measures where trustees are unlikely to be able to comply with the charge measures

DWP recognises that trustees of occupational pension schemes may not necessarily have access to additional funding (such as the financial reserves a personal pension provider may have) or recourse to the employer for additional administrative costs under the scheme rules. Given this "closed loop of funding", the DWP proposes that trustees can seek permission from the Pensions Regulator to take 'adjustment measures' if:

  • Within the 6 months from April 2015, it is unlikely they will be able to comply with the charges measures (eg. they are tied into an expensive long term contract with a supplier); or
  • There are 'unexpected circumstances' such as a costly legal action or a sudden fall in the value of the arrangements' assets which means they expect they are unlikely to be able to meet the charge cap.

Compliance and governance

DWP will introduce a requirement for occupational pension schemes to have a Chair of trustees. The identity of the Chair will need to be submitted as part of the scheme return. The only additional duty which the Chair will have, over the duties of a trustee, will be to sign off on a Chair's Statement (see below). There will be no prescription as to how a Chair is appointed or elected, but schemes will be given a three month transitional period to appoint one from when the regulations come into force, and three months to replace a Chair who leaves office.

It was proposed in March that trustees be required to have, or have access to, all the knowledge and competencies required to properly run the scheme. Following the consultation, the DWP has changed this to a requirement that the trustees as a whole have such knowledge and competencies, or access to advice to enable them to properly run the scheme. An assessment of how the trustees satisfy this requirement will need to be set out in the Chair's statement.

The DWP also proposes that provisions in scheme rules which restrict the trustees' choice of administrative, fund management, advisory or other services will be overridden so that they are not tied into using specific service providers.

Governance standards and reporting in a Chair's Statement

As proposed in March, various matters will need to be reported in a Chair's Statement, signed by the Chair of trustees on behalf of the trustees. Such a statement will need to be prepared annually and included in the scheme's annual report. The scheme return will also include statements about compliance with the requirement for a Chair's Statement and compliance with the charges measures. It is proposed that members, prospective members and beneficiaries will have a right to request to see it, though many schemes may choose to make it freely available.

The Chair's Statement will cover various new governance standards to be introduced from 6 April 2015:

  • Default investment strategies must be reviewed at least every three years, and after any significant change in investment policy or in the demographics of the scheme's membership policy. The Chair's Statement will include a report on any review undertaken in that year and any changes because of it or, if there has been no review, when the last review took place.
  • There will be a duty for trustees to ensure that "core scheme financial transactions" i.e investment of contributions are processed promptly and accurately. The trustees will have a duty to calculate the charges and transaction costs and assess whether they provide good value to members. The Chair's Statement must report on various aspects of these charges and transaction costs:


The Government is consulting on the draft regulations to give effect to these policy decisions, the majority of which will come into force on 6 April 2015.

While the majority of schemes will already have a chair of trustees, the new Chairman's Statement adds statutory duties to the role alongside any which are imposed under scheme rules. The Pensions Regulator's Code of Practice on Governance and administration of occupational defined contribution trust-based schemes and Regulatory Guidance on Defined Contribution schemes, issued in November 2013, covers many of the same topics but the Chairman's Statement now requires express descriptions of compliance in certain areas rather than the comply-or-explain approach taken by the Pensions Regulator's Governance Statement.


4. ECJ rules BT is not exempt from paying Pension Protection Levy in relation to liabilities covered by its Crown guarantee

BT to pay £17 million in unpaid PPF levy following ECJ ruling against the exemption

The European Court of Justice ("ECJ") has ruled that BT is not entitled to a partial exemption from paying the Pension Protection Fund Levy on account of a Crown guarantee (the "Crown Guarantee") under the terms of which BT's obligations to members of the pension fund would be met by the government if BT went insolvent.

Background to the dispute and the contested decision

BT was granted the Crown guarantee at the time of its privatisation in 1984.

Following a complaint lodged by a competitor concerning the Crown guarantee, the European Commission concluded that the guarantee itself did not constitute unlawful State aid (within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union (TFEU)) as the guarantee only benefitted BT's employees and did not create an advantage for BT in affecting its credit rating, investment or employment policy.

At the same time, however, the Commission also initiated a formal examination procedure, under Article 108(2) TFEU, in respect of additional exemptions subsequently granted to the Scheme in connection with the Crown Guarantee, namely:

  • the exemption from the minimum funding requirements under the Pensions Act 1995;
  • and a partial exemption to the Scheme from paying the PPF levy.

The Commission concluded that the exemption from the minimum funding requirements was not unlawful State aid. However, the exemption from the PPF levy was in fact an economic advantage under Article 107(1) TFEU for BT owing to the use of public resources of the UK. Such an advantage was liable to distort competition and trade between Member States.

BTPS and BT plc sought an annulment of the Commission's decision from the General Court. BT argued it should not have to pay a PPF levy for those employees already covered by the Crown guarantee. Furthermore, BT also argued that even if they had an advantage from the levy exemption, there was no transfer of state resources without BT first becoming insolvent. The General court however concurred with the Commission's findings.

Case summary

BT and BTPS Trustees appealed to the ECJ against the General Court's judgment, arguing that the Commission and the General Court erred in not considering all the components of the 'pension protection package' which flowed from the privatisation of BT; this included the Crown guarantee but also resulted in 'additional pensions liabilities' for the scheme – such as full indexation of employee rights against inflation, providing for an age of retirement of 60 years instead of the typical 65, and inheriting the net deficit of the BT Pension Scheme on privatisation. These obligations constituted structural disadvantages and outweighed the advantage to the scheme and BT from the partial PPF levy exemption.

The ECJ held that the General Court had not in fact erred in law, and that the guarantee could validly be considered independent of the liabilities. The additional pensions liabilities protect the rights of certain employees following the privatisation of BT, whereas the Crown guarantee protects the rights of those employees in the event of their employer's insolvency. Furthermore, the apparent temporal link between the additional pension liabilities and the PPF levy exemption was non-existent as the two mechanisms were adopted 20 years apart. The ECJ noted that the General Court also observed that even if they had existed in the same time frame this aspect would be of little importance.


A key point to note from the decision is that in considering whether there has been unlawful State aid, it is the effects of the aid that are key.  As the General Court had highlighted earlier, the TFEU 'does not distinguish between the causes or the objectives of State aid, but defines them in relation to their effects" so while the BT guarantee itself does not amount to unlawful State aid, the partial exemption granted to BT from the PP Levy was unlawful State aid.

British Telecommunications v Commission [2014] EUECJ C-620/13


5. PPF to go ahead with its new method for calculating insolvency risk but with some modifications

Measuring insolvency risk

In May this year, the PPF consulted on the levy framework for the next three years (2015/16 to 2017/18). The consultation proposed a radical move away from using “failure scores” assigned by Dun & Bradstreet when assessing "insolvency risk" of employers and replacing them with a new PPF-specific model. For our update on the consultation, click here. The PPF has now confirmed that it will go ahead with this new model, but with some modifications, proposals in relation to which have been put up for further consultation. The PPF has also published its levy estimate of £635 million (the total amount it estimates it will need to charge schemes by way of levy ) for 2015/16.

Measuring insolvency risk

The new model is more closely based on PPF’s experience of insolvencies among employers sponsoring defined benefit schemes and so is a more accurate tool for predicting insolvency risk of companies with defined benefit schemes. The proposals for the new model were generally well-received.

Mortgages – further consultation

The most commented-upon variable was that of mortgage age as an important predictor of insolvency risk in the universe of PPF employers. Following the consultation, the PPF has acknowledged that the impact of some mortgages may be immaterial and should possibly be excluded, and to this end has chosen to exclude certain specific mortgages (charges given when refinancing on equal or better terms, charges in favour of the pension scheme, and rent deposit charges) from Experian's calculations. In order for a charge to be excluded, Experian must be satisfied that the criteria are met and provided with a copy of the relevant documents and an officer's certificate by 31 March 2015. The PPF is also seeking views on two possible broader tests which would exclude any mortgage which was "immaterial". The first compares the size of the charge with the resources of the business, and the second focuses on access to capital markets, using an investment grade credit rating. Satisfying these tests would also involve completion of an officer's certificate; the PPF are seeking comment on draft certificates, which can be found here.

No transitional measures

The PPF's proposals for transitional measures to soften the effect of the move for companies whose PPF levy would increase substantially under the new system were unpopular and have been rejected. The PPF will focus instead on ensuring that trustees are aware of the changes. The PPF reports that approximately three quarters of trustees have accessed the free web portal set up to provide information on insolvency scoring.

Contingent assets

The PPF will adopt its consultation proposals on contingent assets; from now on, trustees will be required to certify each contingent asset as having a fixed value, which they are confident the guarantor can pay if required. This value is known as the "realisable recovery". The consultation document contains new certification wording which should be used by trustees when certifying an asset:

"The trustees, having made reasonable enquiry into the financial position of each certified guarantor, are reasonably satisfied that each certified guarantor, as at the date of the certificate, could meet in full the Realisable Recovery certified, having taken account of the likely impact of the immediate insolvency of all the employers (other than the certified guarantor, where that certified guarantor is also an employer)."

Valuing asset-backed funding structures

The PPF had in the consultation suggested restricting reductions in the PPF levy to property-based asset backed funding arrangements (and so arrangements using non-property based assets, such as branding, would not be recognised for levy purposes). This proposal has now been dropped.

However, the PPF has stressed that the current arrangements for the valuation of ABCs remains unsatisfactory, and has sought comments on revised proposals to address the issue. The PPF has suggested that trustees should be required to certify the lower of the insolvency value of the interest in the special purpose vehicle and the fair value reported in the most recent scheme accounts. The PPF will also require an annual valuation of the assets on an insolvency basis by an “appropriate professional”. The valuation must consider whether the asset is separable from the employer’s/group’s business; the PPF gives the example of protected patents, which are more likely than brands to be separable from an employer or group, and therefore more valuable. This valuation must be supported by legal advice, to enable the valuer to assess what effect the contractual arrangements might have on value. This legal advice must explicitly state that it can be relied upon by the PPF and the draft Guidance, on which the PPF is seeking comment, contains compulsory wording to this effect.

Last man standing (LMS) schemes

The PPF has implemented the changes proposed in its consultation document for LMS schemes. The PPF will continue to apply a discount to the levy for LMS schemes, its amount will now vary according to the dispersal of employees across the schemes concerned, with a greater dispersal of employees attracting a greater discount. The greatest discount available will be 10%. The PPF will also write to all schemes which identify themselves as LMS schemes on Exchange to request confirmation that they have taken legal advice to support this conclusion. This confirmation must be supplied to the PPF by 31 May 2015 in order for a scheme to benefit from the discount.


The current consultation will close on 13 November 2014, with conclusions and finalised levy rules due to be published in December.

Despite the reduced levy estimate for 2015/16 and the PPF further anticipating that the levy estimates for the next two years are likely to fall than rise, as a result of the new Experian score system, approximately 1,500 schemes will face an increase; 600 schemes will face increases of £50,000 or above, and 200 of those face an increase of over £200,000 in their levy. Given the lack of transitional measures, the PPF is strongly encouraging schemes to check the data which Experian hold and their PPF specific score on the web portal.