Pension Matters March 2011

Pension Regulator consults on DC Schemes

The Pensions Regulator is inviting views on how it may be possible to further raise standards in defined contribution (DC) provision to deliver good outcomes for savers.

In a discussion paper, enabling good member outcomes in work based pension provision, the pensions Regulator identifies how the DC market should be supported in the delivery of good outcomes and identifies elements which it believes are important for achieving those outcomes. 

It also explores the ability of the different segments of the DC market to provide these elements in the pension products they offer. elements are - appropriate decisions with regard to pension contributions; appropriate investment decisions; efficient and effective administration of DC schemes; protection of scheme assets; value for money; and appropriate decisions on converting private pension savings into a retirement income.

The regulator welcomes comments from everyone involved with DC provision including employers, trustees, advisers, providers and stakeholder groups. Comments should be supplied by Friday 22 April.

Following the discussion paper's feedback, the regulator will consult on any further specific proposals during 2011, which will end with the publication of an updated approach to DC regulation.

DWP reviews workplace pension regulation

The DWP wants to make sure that the separate rules and regulations governing (contract-based) workplace personal pensions and (trust-based) occupational pension schemes are consistent with the aims of automatic enrolment.  

It does not want to see instances of regulatory differences being exploited, but does not want any changes made to add unnecessary burdens on business.  Views and evidence concerning the use of short service refunds and disclosure of information are particularly welcomed, as are ideas for potential solutions to issues that the implementation of automatic enrolment creates.

As it stands employers could respond to auto-enrolment by setting up occupational schemes in order to claw back the employer contribution from leavers with very short service however automatic vesting could be the norm especially given the number of employees who are now able to join defined benefit arrangements.

The call for evidence is open until 18 April 2011 and the Government intends to respond in the autumn, outlining the actions to be taken in response to the evidence presented.

PPF's Early Announcement Enables Schemes to Meet Levy Deadlines

The Pension Protection Fund intends to implement its new pension protection levy framework from 2012/13. 

Details are yet to be finalised but a policy statement due in the spring.

This move responds to calls from industry for an early announcement on the PPF's intentions so that schemes can take them into consideration when meeting deadlines for providing information needed to calculate future levies.

Because of the expected move to a new framework, the new deadline for submitting scheme information for the 2012/13 levy is 31 March 2012.

There will be later deadlines for submitting deficit reduction certificates and block transfer information, again in 2012.

It is still important that schemes provide up-to-date information by 31 March 2011 as the PPF will use it to set the levy scaling factor - which schemes use to calculate their individual levy bills - for the first three years under the new framework.

Also, if the PPF implements transitional protection, it will be based on employer insolvency scores as at 31 March 2011.

There are still details to be ironed out, including the need to publish draft guidance for those schemes carrying out their own assessment of investment risk.  A detailed policy statement, including draft investment risk guidance, is expected in the spring."

Next Steps Announced in PPF Solution for Treatment of GMPs

Differences in compensation or assistance payments for men and women can arise as a result of guaranteed minimum pensions (GMPs) primarily brought about by differences in retirement ages.  

In 2008, the PPF confirmed that it has to take account of GMPs to ensure the equal treatment of men and women. A similar requirement applies to FAS assistance. 

After a long period of consulting with stakeholders, seeking expert advice and in-depth actuarial work, this latest consultation explains in more detail about how GMPs will be taken in account when calculating member entitlements.

Because of the complexities surrounding this issue, and the continuing lack of consensus across pension schemes on how to deal with it, the PPF has explained the thinking on which it has based its approach as fully as possible. 

The PPF are re-confirming their position on the need to equalise and the equalising method favoured. They are now consulting on a method for making detailed calculations which we have been developing since 2009 and which now includes certain modifications.  

As part of the consultation, the PPF is asking for comments on the implementation of its proposed approach for PPF schemes in assessment and FAS wind-up.

Draft Regulations on normal minimum pension age

HM Revenue and Customs (HMRC) has published draft regulations to remove the potential for unintended tax charges that could be imposed if someone aged 50 or over transfers their pension before age 55 to a new provider or changes to a different type of pension.  This follows an announcement on this matter in HMRC's pension Schemes Newsletter 44).  The regulations, once finalised, will be backdated to 6 April 2010 - the date that the normal minimum pension age increased from 50 to 55.

Guidance on pension scheme audits

The Auditing Practices Board has published an updated version of its practice notes on the audit of occupational pension schemes in the United Kingdom.

The new version of PN15 reflects the new International Standards which apply to audits of financial statements of occupational pension schemes for periods ending on or after 15 December 2010 and changes in the legislative and regulatory framework.  It also contains some new guidance in other areas.

Bonas Group Pension Scheme

The first decision of the Upper Tribunal in a case concerning the Pensions Regulator's moral hazard powers has now been released.

 It gives important guidance on:

• the scope of contribution notices for avoidance of employer debt under section 38 of the Pensions Act 2004;
• the procedure applicable to warning notices issued by the Pensions Regulator;
• the ambit of references from the Determinations Panel of the Pensions Regulator to the Upper Tribunal;
• upper Tribunal procedure.

The case is notable because it involved the first ever issue of a Contribution Notice (CN) by the Regulator. This is one of the Regulator's harshest "moral hazard" powers under the Pensions Act 2004 regulatory regime.

The UK Pensions Regulator's Determinations Panel ruled that Michel Van De Wiele (VDW) had "not engaged openly with pension trustees or the regulator" in the lead-up to Bonas's collapse in December 2006.

The Bonas Group pension scheme was subsequently placed into the Pension Protection Fund, the lifeboat set up to protect the retirement fund of failed companies.

It is thought that the Bonas scheme's buy out deficit stood at about £20m which is the amount required to settle the pension scheme's liabilities.

The UK sponsoring employer underwent a "pre-pack administration" with the Belgian parent buying back the business, allegedly at an "undervalue".  The Regulator had pursued a CN against the parent company, the sponsoring employer and the sponsor's managing director personally for the full buy-out deficit.  In the event the Panel granted the CN against the Belgian parent to the tune of approximately £5 million, being the amount of the shortfall compared to Pension Protection Fund benefits, but did not grant CNs against the sponsor or the director.

The parent company appealed against the CN.  The Regulator took the opportunity to have another bite of the cherry against the managing director.

The Tribunal upheld the decision of the Panel.  The CN against the parent was upheld but not expanded to include anyone else.

On an analysis of the legislation the CN may only be for a sum which is reasonable in the context of the avoidance of the pension debt.  What the final amount will be has yet to be determined but it may be a lot less than the Regulator anticipated, perhaps as little as £100,000.

Contracted out rebates

The government has published details in a draft order of the contracted-out rebate rates that will apply from 2012.

It is a legal requirement for the rebate rates to be reviewed at least every five years. At the moment if an individual is contracted out of the State second pension, the employer and the employee pay National Insurance Contributions reduced in total by 5.3%.

The new rebate will mean that from April 2012 if an individual is contracted out, the employer and the employee pay National Insurance Contributions reduced in total by 4.8%.

For the tax years from 2012 to 2017, the government proposes that the rebate for defined benefit schemes should be 4.8%. This will be split 3.4% for employers (secondary Class 1 contributions), 1.4% for employees (primary Class 1 contributions).

The rebate Order contains figures to enable the calculation of rebates for members of defined contribution contracted-out schemes for the tax year 2012-13. While it is planned to abolish contracting out on a defined contribution basis from 6 April 2012, the legislation enabling this change will not be brought into force until 2012. As such the requirement to review defined contribution rebates every 5 years remains. As these figures are not expected to be used, they have only been provided for one tax year.

Age Discrimination in the Civil Service pension Scheme (Hadfield)

The claimant was aged over 60 and, for the relevant period, was still working full time or near full time.

The rules of his pension scheme stated, for the relevant period, that, if he worked full time or nearly full time beyond the age of 60, he could not draw his pension.

The claimant argued that this put him at a disadvantage compared to people under the age of 60 because his post 60 remuneration, for working full time, was less than he would have earned at the age of 59, his remuneration being his salary and benefits, less the pension he could have received if he had not been working.

The second part of his argument was that people wanting to retire younger than 60 would have an actuarial reduction applied to their pension to reflect the number of extra years they would be drawing their pension. The claimant said that his pension should have an upwards actuarial adjustment applied to reflect the fact that he would in effect be claiming for fewer years because he was still working.

The Employment Appeals Tribunal (EAT) struck out his claim, holding that the claimant's position was no different to that of a scheme member who was under 60 years old since neither could draw pension and continue working. Further, since the difference in actuarial adjustment applied only to those who had retired, the claimant had a fundamental problem: he had to have retired to make the comparison that his hypothesis involved. The PCP of which he complained only applied to people who had ceased to be employed.

The EAT agreed. On the issue of direct discrimination, the claimant's treatment actually showed that a member under the age of 60 was less favourably treated since the nature of the actuarial adjustment was that it was an adjustment downwards. The claimant had also not taken into account that by continuing to work longer, he was accruing more pensionable service and so would receive a higher pension on retirement.

PPF Compensation Cap

The Pension Protection Fund (PPF) provides compensation at two levels: 100% or 90%. Pension scheme members who are only entitled to receive 90% compensation are also subject to the compensation cap.

If a pension scheme is eligible for PPF entry, the level of benefit payable depends on the pension scheme member's circumstances immediately before the assessment date (generally the date the scheme applies for PPF entry) and the pension scheme rules.

From 1 April 2011 the Pension Protection Fund compensation cap will be set at £33,219.36, an increase of 0.5% from the present cap of £33,054.09.  This will mean that when applying the 90% provision, the maximum level of compensation available from the Pension Protection Fund to those at age 65 who are subject to the cap will be £29,897.42.  The 0.5% increase reflects the increase in the general level of earnings in the 2009/10 tax year.

Once compensation is in payment, the part that derives from pensionable service on or after 6 April 1997 is currently increased each year in line with RPI capped at 2.5%. This could result in a lower rate of increase than the scheme would have provided.

According to draft legislation, from 1 April 2011, the PPF will use the Consumer Prices Index (CPI) rather than the RPI as the basis for revaluation and for indexation from January 2012.

Watch out for....

Accountabilities and Responsibilities from the Regulator

In the coming weeks the Pensions Regulator intends to publish a number of documents covering various matters intended to help to increase understanding amongst trustees and administrators of their accountabilities and responsibilities for achieving high standards in all forms of work-based pension provision.

Consultation ending on early access to pension funds 25 February 2011

You may recall on 13 December 2010, the Treasury launched a "call for evidence" on early access to pension savings.

It puts forward four potential models, under which individuals could gain access to their pension funds before the current normal minimum pension age of 55:

• Borrowing from pension savings: in broad terms, this is based on the US 401(k) model, with a requirement to pay the loan back with interest;
• Permanent withdrawal: loosely based on New Zealand's "KiwiSaver" model, this would likely be limited to cases of severe financial hardship, potentially where the member's home was at imminent risk of repossession;
• Early access to a cash sum: subject to the current limit of 25%, but potentially based on the fund value at the time the lump sum was withdrawn; and
• A feeder-fund model: for example, by providing an ISA and a pension product under one wrapper.

The consultation notes that there are clear downsides to each model, especially the risks of recycling tax-relieved funds and the potential of creating an unwieldy administrative burden. However, these may be counterbalanced by arguments that early access models could act as an incentive to save.

The consultation reflects closes on 25 February 2011.

Information for annual allowances

Scheme administrators (i.e. the trustees of occupational pension schemes, and the providers of contract-based personal pensions) must proactively identify and automatically provide "pension savings statements" to members whose pension savings relevant for the tax year in that scheme exceed the Annual Allowance (AA). 

This trigger looks at the whole scheme, so including, for example, main accrual and AVCs, having regard to the "pension input period" (PIP) of each.  The requirement covers anyone who accrued benefits, including members who leave partway through the PIP.

The statements must contain:

• The "pension input amounts" used up by the member in each of the scheme's arrangements, for the arrangement's PIP ending in the tax year
• Similar data for the previous three tax years (including figures for 2008/09 2009/10 and 2010/11 where relevant, calculated as if the regime had been in place then)  because the carry forward provisions for the AA charge need this
• Where a PIP is one that begins before 14 October 2010 and ends after 5 April 2011 (a "straddle PIP"), effectively the pension input amount for accrual from 14 October 2010 to the end of the PIP

The administrator must also provide, to other members or former members of the scheme, whichever of the above items they request.

Sponsoring employers of defined benefit schemes will now proactively have to provide sufficient information to enable calculations of the items above for all active members for all PIPs ending in 2011/12 onward; and on request from the administrator for calculations relating to the notional figures for 2008/09, 2009/10 and 2010/11.

For the 2011/12 tax year employers will have to provide this information to the scheme administrator by 6 July 2013 and the scheme administrator will have until 6 October 2013 to issue the pension savings statements.  Thereafter, the dates are 6 July and 6 October immediately following the end of the tax year, or 3 months after request if relevant.

There may be difficulty providing historical AA information for the last three year periods for defined benefit schemes particularly for schemes which have closed to future accrual in the interim period and especially a problem in relation to leavers.

Retrospective Nomination of Pension Input Periods for the Annual Allowance

HMRC has stated that in their view retrospective nominations of pension input periods (PIPS) can be made after 6 April 2011 and up to the date of Royal Assent of the 2011 Finance Act (possibly 1 July 2011).

However, I would suggest that the safest way to deal with the issue of PIPs is to assume that the ‘option' is closed off by 5 April 2011.

Tax implications regarding the Scotland Bill

This Bill contains provisions to devolve to the Scottish Parliament the power to set a Scottish rate of income tax for Scottish taxpayers for the 2016/17 tax year onwards.  

Scottish taxpayers are defined as, broadly, those UK residents whose only or main UK place of residence is in Scotland.  The basic, higher and additional rates of income tax (currently 20%, 40% and 50% respectively) will be reduced by 10 pence in the pound for Scottish taxpayers, who will be liable in addition for whatever rate the Scottish Parliament sets.  

HMRC will be identifying who are Scottish taxpayers, will notify those individuals and issue a Scottish tax code to them if they are on PAYE.

One issue that could arise from the introduction of the new Scottish rate, is that income tax relief on pension contributions is given at an individual's marginal rate so if UK and Scottish rates diverge, the relief granted could differ particularly the relief at source method of claiming tax relief.