Welcome to Pension Matters, produced by Torquil Clark.
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, Pensions Technical Manager
Contracting Out To Be Abolished?
The Government has taken several legislative steps in preparation for the abolition of contracting-out of the state pension system through defined contribution pension schemes.
From the "abolition date", 6 April 2012, the removal of special provisions applying to protected rights from that date will also be removed.
- Transfers will be able to be made from defined benefit contracted-out schemes to other types of scheme, overseas schemes or overseas arrangements, as long as certain safeguards are met
- Defined contribution contracted-out schemes will be required to provide certain disclosures to members (such as a one-off statement explaining the effect of the abolition of protected rights on the status of their accrued rights and on the state additional pension)
- Contracting-out certificates in relation to money purchase contracted-out schemes and appropriate schemes will cease to have effect.
Trustees Subject To New Bribery Laws
A wide-ranging criminal law on bribery that applies to pension scheme trustees came into force in April 2011.
The new law also applies to advisers and service providers, to sponsoring employers and to almost everyone else in business.
The risk for trustees is low as normally their main concern will be hospitality and other promotional activity by advisers and service providers. In practice, this is unlikely to breach the Bribery Act as long as it only involves reasonable and proportionate expenditure in pursuit of good relations. On the other hand, there is no exhaustive list of what can constitute bribery and no minimum value. Parliament has deliberately set a very low threshold for potential prosecution. In the worst case an individual may face an unlimited fine and up to 10 years in prison.
To decrease the likelihood of decisions being called into question as part of their governance regime, trustees should consider developing a policy on corporate hospitality. This could include setting up a register for trustees to record any corporate hospitality received.
U-turn Over Draft Flexible Drawdown Rules
HM Revenue & Customs (HMRC) may back down on draft rules excluding inflation-linked annuities from the minimum income requirement (MIR) for flexible drawdown.
Under the draft proposals, annuities linked to the Retail Prices Index would not count towards the £20,000 guaranteed annual income needed to enter flexible drawdown. Nor would scheme pensions and defined benefit pensions with fewer than 20 members.
It is premature for providers to conclude that this is the outcome that the government wants or intends. The regulations are only in draft. There is scope to change how they will operate (as from 6 April 2011) before they are finalised.'
Barring RPI-linked annuities from counting towards the MIR does not seem right. As if someone has a capital sum big enough to purchase a flat rate annuity that would satisfy the MIR, then if they want to go for RPI linkage it is a total nonsense not to allow them to do just that.
Pensions Bill Delayed
The second reading of the Pensions Bill has been put back, so as to allow the Government some time to reconsider a certain aspect of its plans to raise State Pension Age.
Under the Bill provisions, the most sudden rise in State Pension Age is to women who are currently aged 57 and are expecting to reach State Pension Age in 2018. They will have to wait a further two years as a result of the Government's acceleration in the time over which State Pension Age rises from 65 to 66.
As a number of the MPs are from its backbenches, that pressure could yet turn into a defeat on the matter when it next comes before Parliament.
PPF Compensation Levy Up By 2p Per Member
The Pension Protection fund will charge the fraud compensation levy for the second consecutive year for 2011/12 after anticipating an increase in future claims.
The lifeboat fund will also increase the levy payment to 25p per scheme member.
The PPF has said the increase was necessary as a result of being informed of activities in respect of a number of eligible schemes which it believes makes future claims more likely.
The announcement follows the making of recent regulations that increased the maximum fraud compensation levy that can be raised on occupational pension schemes from 23p to 75p per scheme member.
The levy will be charged against all UK defined benefit and defined contribution pension schemes, at the increased rate of 25p per scheme member.
Although not a big number for schemes, the concern would be if the PPF finds they had to charge every single year.
The Fraud Compensation Fund came out of the Pensions Act 1995 after the Maxwell affair to provide compensation from the Fraud Compensation Fund to occupational pension schemes where the sponsoring employer has gone bust and where the scheme has suffered loss through fraud or dishonesty.
The amount payable is calculated by reference to the total number of members of the scheme on the last day of the scheme year before the beginning of the previous financial year. So for the levy year 1 April, 2011 to 31 March, 2012, the reference point for many schemes is likely to be 31 March 2010.
The assets held in the fund will be managed by the PPF board in accordance with its statement of investment principles.
Agency Workers
The Department for Business, Innovation and Skills has published guidance for employers and the recruitment sector to help them prepare for the introduction of the Agency Workers Regulations on 1 October 2011.
The Regulations give agency workers the right to the same basic employment and working conditions as if they had been recruited directly by the hirer, if and when they complete a 12 week qualifying period in a job. As far as pensions are concerned, the guidance restates the intention that occupational pensions are excluded from "pay" in this context but notes that agency workers will be covered by automatic enrolment which will start rolling-out from October 2012.
Asset Backed Pension Contributions
The Government is consulting on changing the tax rules around employer asset-backed contributions to defined benefit registered pension schemes.
The proposed changes will limit the unintended tax relief that can arise from the ways some contributions are structured. The aim is to ensure that the amount of tax relief given to employers accurately reflects the value of the contributions received by pension schemes, while preserving flexibility for both employers and pension schemes to use these arrangements to manage pension deficits.
The consultation is on how tax relief is calculated for asset backed contributions (ABCs). The aim is to ensure that the tax relief granted to companies is commensurate with the value of the ABC to the trustees. The consultation wants to ensure that pension taxation remains 'fair and sustainable' over the long term and that tax relief accurately reflects the fair value of contributions made to pension schemes.
As reported previously, asset-backed contributions can be a good funding solution for trustees and employers alike. The pension scheme has its deficit addressed up front and the employer's cash flow requirement is less onerous than under a typical cash-only recovery plan. This is particularly important in the current economic climate. However, there needs to be a level playing field between different structures for making contributions as far as tax relief is concerned.
Asset-backed funding structures are a viable alternative to cash funding schemes. These arrangements increase the security of schemes, providing greater protection for members' benefits, and can help pension schemes mitigate the risk of falling into the Pension Protection Fund as a result of company insolvency.
In the consultation document, HMRC and HM Treasury have identified two main options for tax relief in relation to asset-backed funding structures.