Welcome to Pension Matters, produced by Torquil Clark Employee Benefits.
Every month I will update you on the latest legislation and news
surrounding corporate and personal pension planning. To find out more
about the topics covered in this edition, please call 01902 576707.
Ian Hill, Pension Technical Manager
Don't Forget ... 6 April 2011
For
those schemes that retain features of the pre A Day tax rules, the
scheme rules need to be amended before 6 April 2011 to retain features
of the tax regime that existed before 6 April 2006.
Schemes that have not been amended could face a significant increase in liabilities if action is not taken.
With
pre A day limits ceasing to apply the cap on post 1989 joiners'
pensionable earnings ceases to apply on past and future service.
Employees become entitled to pensions of more than two thirds of ‘final
pensionable salary' with trustees not being allowed to recover lifetime
allowance charges from members' benefits.
Retained benefits in
other schemes will not be taken into account in calculating pensions and
trustees could be obliged to make unauthorised payments exposing the
scheme and members to adverse tax treatments.
Early Access to Pension Funds
As
an incentive to encourage people to save more, the government is to
explore the possibility of using early access to part of an individual's
pension savings.
Currently, individuals can only access
savings in a registered pension scheme from age 55 at the earliest
(except in cases of serious ill-health or other limited
circumstances). The Government are examining solutions around allowing
early access to pension savings in situations of acute financial
hardship.
The main early access models currently under
consideration are based on a loan option, permanent withdrawal (possibly
in limited circumstances), early access to the tax-free lump sum and a
feeder-fund option (linking pension savings and liquid savings products
in a single account).
The Government wants to consider whether any
other pension's tax rules may be unnecessarily impeding choice and
flexibility for pension savers. In particular issues that may affect
individuals with smaller pension pots, primarily focusing on the trivial
commutation rules and possible barriers to transfers facing those with
smaller fund values.
Pensions Bill 2011
The government has published the Pensions Bill 2011.
The key measures include:
Implementing automatic enrolment: the Bill legislates to implement the recommendations of the recent DWP review, including:
- Aligning
the earnings threshold at which an individual is automatically enrolled
with the personal allowance for income tax purposes.
- Introducing an optional waiting period of up to three months before a worker needs to be automatically enrolled.
- Simplifying the process by which employers certify that their defined contribution scheme meets the relevant quality threshold.
Section 251 of the Pensions Act 2004: we
have previously reported on the implications of section 251 for schemes
whose rules contain powers allowing payments out of scheme funds to its
sponsoring employers. In order to retain these powers, trustees were
obliged to pass a resolution to that effect before 6 April 2011, after
sending out notices to members (at least three months before the
resolution was passed). Today's Pensions Bill would extend the
transitional period for action from 6 April 2011 to 6 April 2016, and
also restricts the application of section 251 to payments of surplus
from ongoing schemes under section 37 of the Pensions Act 1995.
RPI/CPI:
the Bill contains amendments to primary legislation to give effect to
the Government's decision to allow private sector pension schemes to
move to using the Consumer Prices Index (CPI) as a measure of inflation
for the purposes of (i) uprating pensions in payment; and (ii) revaluing
deferred benefits. At present, schemes must use the Retail Prices Index
(RPI).
As expected, there are no provisions which would allow
schemes to override any restrictions in their amendment power; section
67 (which, broadly, prevents amendments which adversely affect accrued
rights) will apply to the change.
State Pension Age:
the Bill brings forward the increase in State Pension Age to 66 by 2020
and brings women's State Pension Age in line with men's to 65 by 2018.
Transfer Incentives
The
Pensions Regulator has published its guidance for trustees and
employers on conducting incentive exercises, including enhanced transfer
value exercises.
The guidance, which is little changed
from the previous consultation draft, sets out five principles which
should enable employers, trustees and affected members to fully consider
the issues around transferring benefits out of defined benefit
schemes, or modifying benefits within them:
- Clear, fair and not misleading - members should be able to understand the implications and make decisions that are right for them
- Open and transparent - all parties should be made aware of the reasons for the exercise and the interests of the other parties
- Manage conflicts of interest - conflicts should be identified, appropriately managed in a transparent manner and, where necessary, removed
- Trustee consultation - the trustees should be consulted and engaged from the start, with any concerns alleviated before progressing
- Independent financial advice - should be made accessible to all members and promoted in the strongest possible terms
In
the guidance the Regulator believes that trustees should start from the
presumption that such exercises are not in most members' interests and
therefore approach any exercise with caution.
The guidance
however does explicitly recognises that there will be a minority of
members whose personal circumstances mean it is more likely that they
will benefit from accepting such an offer. These might include members
with impaired life expectancy or sophisticated investors who are looking
to balance the risk in a portfolio of retirement benefits. The
Regulator feels that high quality financial advice is paramount to
identifying these members.
In all cases, the Regulator expects
that fully independent and impartial advice should be made accessible to
all members, with the impartiality of that advice not being
compromised. It also says that unless the employer is confident that
scheme members have the ability to understand the structure and
implications of the offer, then the employer should not only pay for
such advice, but also require that members take advantage of advice
before making a decision. No pressure of any sort should be placed on
members to make a decision to accept the offer.
No doubt incentive
exercises will be on the table more and more as sponsoring employers
look to de-risk their defined benefit schemes.
Phasing out of the default retirement age
The
government is intending to proceed with its plan to phase-out the use
by employers of the default retirement age (of 65) to compulsorily
retire workers.
Employers will in future only be able to
retire employees at a set age if they can "objectively justify" it -
examples might include air traffic controllers and the police and
justifications might include being essential for succession planning or
necessary for health and safety reasons. The legislation will remove
the current default retirement age provisions except if the employee had
already been notified of his or her impending retirement, in accordance
with the current requirements, before 6 April 2011 and the retirement
date is before 1 October 2011.
The existing "duty to consider"
procedure will be removed along with the default retirement age and
consequently there will no longer be a need to inform employees of their
right to request working beyond the intended date of retirement or for
employers to give them a minimum of six months notice of retirement.
The
Government is also to introduce an exception to the principle of equal
treatment on grounds of age so that there are not unintended
consequences for employers that currently offer group risk insured
benefits (such as income protection, life assurance, sickness and
accident insurance, including private medical cover). It will permit
such benefits to be withdrawn initially to employees who are 65 or over
and will rise in line with the State Pension Age. This is in response
to concerns raised that removal of the default retirement age could put
such schemes at risk.
Special Annual Allowance Charge
As
a result of the government deciding to go ahead with the £50,000
reduced annual allowance regime, HM Treasury has switched off the
special annual allowance charge (SAAC), with effect from the 2011/12 tax
year.
The SAAC is an income tax charge introduced by the
Labour Government which was applicable from 2010/11 as the essential
part of their anti-forestalling regime ahead of the planned introduction
of the high income excess relief charge. It applied to pension
contributions and benefits accrued in excess of the special annual
allowance.
The Government has decided to go ahead with the reduced
annual allowance regime repealing the provisions within the Finance Act
2010 that would have introduced a restriction of pension tax relief to
the basic rate for high income individuals with effect from the 2011/12
tax year.
The reduced annual allowance will apply to all pension
input periods (PIPs) which end on or after 2011. As the annual allowance
will have more relevance to a greater number of individuals they will
need to know when their PIPs start and end.
Schemes will also
have to gear up for the extra administration to provide members with
information about the value of contributions or accruals made during a
PIP if the PIP is not aligned with the scheme year.
There is a
limited window of opportunity for PIPs to be changed before the new
legislation takes effect. Once the new legislation is in place schemes
may be trapped with PIPs which cannot be changed.
As previously
reported, it is recognised that a number of arrangements are already
operating PIPs that will expire on or after 6 April 2011 and therefore
members will be subject to the lower annual allowance even though
retirement savings are made before 6 April 2011.
Transitional
arrangements will be introduced to deal with the ‘straddling PIPs' which
is one that began before the announcement in October 2010 and ends
after 6 April 2011. In these cases the PIP will have to be apportioned
accordingly being divided into a pre announcement PIP and a post
announcement PIP. The annual alowance will be calculated separately for
each part using the old and new rules as appropriate. If the post
announcement PIP exceeds £50,000 then there will be an annual allowance
charge. For DB members it will be necessary for members to know their
final pensionable salary on 13 October 2010 to calculate the two parts
of the straddling PIP. Post 13 October pay rises could trigger
unexpected annual allowance tax charges in DB schemes
2011/12 PPF Levy Finalised
The time has come for Defined Benefit Schemes to look at what action they should take to minimise their 2011/12 PPF Levy.
The
Pension Protection Fund (PPF) has confirmed that the 2011/12 pension
protection levy will go ahead with no alteration from its September
proposals.
In its conclusions on the consultation and the
determination, the PPF makes clear that the pension protection levy
estimate for 2011/12 will be that which was proposed in September, i.e.
£600m, and that it will be divided between schemes as previously
proposed. This means that:
- The risk-based element of each
scheme's levy will be calculated with reference to the scheme's
shortfall against a 136% section 179 (PPF) funding level, an increase
from the 121% funding level in 2010/11
- Schemes which are better
than 155% funded will avoid the risk-based element entirely, an
increase from the 140% funding level applying in 2010/11, and a taper
will continue to operate for those with funding levels in between 135%
and 155%
- The cap on the risk-based element of the levy will increase from 0.5% to 0.75% of section 179 liabilities
- The
scaling factor used to finalise the risk-based element of the levy
rises from 1.64 in 2010/11 to 2.07 in 2011/12 and the separate
multiplier used to finalise the scheme-based element of the levy falls
from £145 to £135 per £1m of section 179 liabilities
Please
do bear in mind sending in deficit reduction certificates before the
deadline which is 7 April 2011 and certify new contingent assets or
re-certifying existing ones before the closure date of 31 March 2011.
Outsourced Public Services
The
Cabinet Office has announced the introduction of new non-mandatory
Principles of Good Employment Practice, which will regulate the
employment benefits of new staff recruited by providers of outsourced
public services. This replaces the "two-tier code" which has been
withdrawn with immediate effect.
The two-tier code was
designed to prevent an outsourcing arrangement employing new private
sector recruits on worse terms than the ex-public sector workers (whose
pay and benefits were being preserved). However, it provided only
limited requirements in respect of pensions for new recruits, in
particular no obligation to provide defined benefit pensions, so its
withdrawal has relatively limited effect in this area.
The
introduction of the new principles is intended to make it easier for
smaller organisations to deliver public service contracts. The
principles will, however, have no impact on the TUPE terms under which
existing public service staff transfer to new organisations, or on the
"Fair Deal" which requires the new employer to provide them with broadly
comparable defined benefit pensions. The Government has, however,
recently announced that it will carry out a review of the Fair Deal in
the first half of 2011, once the Hutton commission's review of public
sector pensions has provided its final report.
This change affects
central government contracts only. A similar two-tier workforce code
which applies for local authority contracts currently remains in effect.