Pension Matters May 2011

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

Requirement to buy an annuity ends

The effective requirement to buy an annuity by the age of 75 from money purchase arrangements will be removed and the alternatively secured pension rules repealed from 6 April 2011.

 Individuals who do not wish to purchase an annuity at that age will have two "drawdown" options available:

• "Capped drawdown" - the maximum withdrawal of income that an individual will be able to make from most drawdown funds on reaching normal minimum pension age will be capped at 100% of the equivalent annuity (calculated using tables prepared by the Government Actuary's Department) that could have been bought with the fund value.  This amount will be reviewed every three years until the end of the year in which the member reaches the age of 75, after which reviews will be carried out annually
• "Flexible drawdown" - individuals able to demonstrate that they meet the "minimum income requirement" (MIR) by having a secure pension income for life of at least £20,000 pa will be able to draw unlimited amounts from their pension fund (so potentially the entire fund in one go).  Pensions that count towards the MIR must be in payment and must, broadly, be state pensions, final salary/ defined benefit pensions or lifetime annuities.  Certain limitations are placed on what counts towards the MIR, for example, drawdown pensions cannot be counted

All withdrawals will be subject to tax as pension income.  Once an individual has started flexible drawdown any new pension savings will be liable to the annual allowance charge on all pension input amounts.

With effect from 6 April 2011, inheritance tax will not typically apply to drawdown pension funds remaining under a registered pension scheme, including when the individual dies after reaching the age of 75.  Also with effect from 6 April 2011, inheritance tax anti-avoidance charges that apply to registered pension schemes and Qualifying Non UK Pension (QNUP) Schemes where the scheme member omits to take their retirement entitlements (eg a failure to buy an annuity) will be removed.  These changes will also apply to Section 615 schemes.

Government Proposals for State Pensions

The Government has highlighted two options on offer in relation to the state pension:

• Increase to rate of reforms so that State Second Pension (S2P) becomes flat rate by 2020 instead of the early 2030's.  From this point, all those with a full contribution record would build up the same state pension, currently estimated at around £145 pw, through their Basic State Pension and S2P.  The Savings Credit would continue as would contracting-out on a salary-related basis.  It might be possible to consolidate past accrual of State pension to simplify the system (as has already been legislated for).  It would also be possible to better align the crediting arrangements between the two pensions, bring the self-employed and job seekers into S2P and use the same uprating for both pensions when in payment, although savings would then need to be found from elsewhere to ensure this option remained cost neutral.
• Subject to a seven-year qualifying rule, combine the Basic State Pension and S2P into one single-tier state pension from some point.  The new benefit would be contributions-based and individuals would have to qualify to receive it individually, irrespective of whether they were married, divorced or widowed.  Future pensioners (including the self-employed) with at least 30 qualifying years would receive the same flat-rate pension currently estimated at £140 pw (but for some, for many years to come, part will come from the contracted-out element of their private sector scheme).  As the £140 is set above the basic level of support provided by the Pension Credit minimum guarantee, the Savings Credit element of the Pension Credit would cease for future pensioners.  Because S2P would cease to exist, so would contracting-out on a salary-related basis.

Plans halted allowing early access to pension savings

Insufficient evidence that early access would promote pension saving has been cited as a reason for shelving plans to allow individuals to withdraw part of their pension funds before retirement.

The Government intends to conduct a review once the 2012 auto-enrolment reforms are implemented in full, and an assessment can be made on whether early access would reduce the anticipated level of employee opt-outs. If, once automatic enrolment has been fully phased in, some people decide to opt out and access to pensions savings is a significant factor, the Government may decide to revisit the issue.

2012 preparation a priority for the Pensions Regulator

Preparing UK employers for the 2012 auto-enrolment reforms is among the main strategic goals set out in the Pensions Regulator's corporate plan for the period 2011 to 2014.

Among five key areas, which also include reducing risks to members of both DB and DC schemes and promoting good scheme administration, the Regulator highlights its plans to promote the Pensions Act 2008 employer compliance regime.

Detailed technical guidance will be published over the coming year, including materials tailored for small and micro-employers.

The Regulator is also expecting an increase in clearance and withdrawal applications in the 2011/12 year; the number of scheme returns filed is expected to rise too, from around 24,000 to 30,000.

Central government spending cuts may though have an impact on the Regulator's work, given that it faces a budget cut of 25% over the next four years.

Guidance from the Pensions Regulator on administration

The Pensions Regulator has highlighted "5 simple steps" to help trustees of pension schemes to understand their responsibilities and improve these standards in their scheme.

Trustees are encouraged to:

• Identify the gaps and errors in their member data
• Understand what they can expect from their administration provider and make sure it is being delivered
• Understand their administration reports
• Have regular contact with their administration provider
• Set up an administration committee

It is important that Trustees take heed of the Pensions Regulator's guidance for improved administration as these issues are firmly on the Regulator's agenda for the foreseeable future.

Taxation of QUROPS

The Treasury is to apply UK tax to all Qrops pension income to prevent the schemes being used for tax avoidance.

The rules are targeted at cases where funds are transferred to a Qrops advantage of a double taxation agreement, which allows savers to avoid being taxed twice. Some savers have been able to pay tax at lower rates overseas due to the agreements.

According to HM Revenue and Customs (HMRC) the new rules aim to prevent tax avoidance created by the interaction of pension tax relief and double taxation arrangements between the UK and other countries. In the event that tax is paid in the other jurisdiction, credit will be paid against the UK tax charge.

The government has set out a clear strategy on preventing tax avoidance and will not hesitate to take action to stop those who seek to take unfair advantage of unintended tax loopholes.

This will have effect in relation to payments of pensions or other similar remuneration made on or after 6 April 2011.

Short-term refunds

The Government is close to banning short-service pension refunds amid concerns about the impact that trust schemes could have on the success of automatic enrolment and Nest.

Currently companies can get a refund on employer and employee contributions if a member leaves within two years of joining a pension scheme.

The Department for Work and Pensions has held a series of meetings with senior industry representatives as it weighs up the risks presented by the refunds to its pension reform agenda.

Officials are understood to be sympathetic to arguments in favour of banning short-service refunds altogether.

The DWP has highlighted specific concerns about employers launching trust-based schemes in order to obtain contribution refunds.

PPF's strategic plan for 2011

The Pension Protection Fund has published its 2011 Strategic Plan which sets out its priorities and objectives for the next three years. 

Chief Executive, Alan Rubenstein, has stated that they have demonstrated resilience during the recession but economic recovery remains uncertain and the public sector spending environment is challenging. 

The details include;

• Strategy setting out priorities and objectives for the next three years
• PPF confidence in sustainability remaining but capacity will be tested
• PPF on track to fulfill its mission, and meet 2030 funding target 

During 2011/12, the PPF will focus on a number of critical areas. They are to: 

• Successfully implement the new pension protection levy framework which comes into effect in 2012/13
• Make the Assess & Pay programme the standard model for processing eligible schemes through the assessment period to further improve efficiencies and effectiveness
• Increase its pool of fund managers, and further develop its management of risk, so the PPF's Statement of Investment Principles (SIP) can target a higher expected investment return, and
• Retain and develop its staff to encourage and value high performance.

Both the levy and its investment performance are crucial to the ability of the PPF to meet its funding target, set last year, of becoming self-sufficient by 2030.

Barber v GRE. Just when you thought the window was shut

This case questioned the validity of a purported scheme amendment relating to equalisation of retirement ages for male and female members.

 The High Court recently ruled in the case of Capita v Sea Containers on the administration of the Sea Containers 1990 Pension Scheme where equalisation of its minimum pension age (MPA) and normal retirement date (NRD) to comply with the 1990 Barber judgment was not properly carried out until 2003.

The scheme was set up in 1990 by means of an interim deed.  In 1991 a draft announcement purporting to equalise MPA and NRD was drawn up.  There is no evidence that this announcement was issued; crucially no deed to document the change was ever executed.  However, the scheme was then administered on the basis that the change had been made.  When it came to court all parties were agreed that the 1991 equalisation attempt was invalid.  The judge concurred.

Eventually in 2003 a new deed was executed which all parties agreed implemented the Barber solution.  But prior to that, in 1995 the definitive deed was adopted which largely replicated the purported 1991 amendment.  Later in 1995 another attempt at equalisation was made, this time with effect from 1 February 1996, in the form of an announcement to members which included a form for the members to sign signifying that they understood these changes and continued to authorise the deduction of member contributions.  The exercise was not carried out centrally and the records could not subsequently be found.  In the end it could only be demonstrated that 13 of the 120 active members at this point had returned their forms giving their consent.

In 2006 the principal employer became insolvent.  As part of the insolvency process it became important for the employer to argue for the earliest possible equalisation date.  So the 1995 attempt was revisited in Court.  The employer argued that the 1995 changes were valid (an argument based upon whether or not there was a "free-standing" power of amendment in the deed).  The judge rejected this.  The employer also argued that the members who signed the forms were bound by them, either in contract or by estoppel.  The judge rejected this too.  Equalisation was therefore only achieved as from 2003.

Lump Sum Payments

The Finance Bill provides for many lump sum benefits to be paid after the member has reached age 75 such as pension commencement lump sums, serious ill-health lump sums, trivial commutation lump sums and winding-up lump sums.  Similarly, it provides that most lump sum death benefits can also be paid on the death of a member after age 75.  The tax rate for all lump sum death benefits is set at 55%, apart from death benefits for those who die before age 75 without having taken a pension, which will remain tax free.

TPR sets out its strategic focus for 2011-2014

TPR has published its Corporate and Business Plan 2011-2014. The plan sets out how TPR will help employers to:

• prepare for automatic enrolment;
• improve standards in defined contribution schemes; and
• address funding challenges within different segments of the defined benefit landscape.

The plan also details TPR's continued focus on educating and enabling employers and the pensions sector, as well as addressing the minimising of risks to retirement savings and the Pension Protection Fund.