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
State Pension Age (SPA)
The Secretary of State for Work and Pensions, Iain Duncan Smith intends to go ahead with plans to equalise the State Pension Age at 65 in 2018, and then increase it to age 66 in 2020.
There remains a certain amount of confusion about the next SPA hike: how and by when will that hike happen? The Government announced a while ago that it would be bringing forward the planned increase from age 65 to age 66 so that the hike would be implemented by April 2020. The vehicle for this change is the Pensions Bill. There appeared to be a delay in the Bill's progress, accompanied by rumours in the press concerning possible changes to the next SPA hike (in recognition of the impact that an accelerated hike would have on women in their fifties, who would only have a short period within which to plan for a delayed retirement). The Government has since decided to stick with its acceleration timetable saying that there would be 'transitional arrangements' to help some women cope with the steep rise in the SPA but that it would not involve a compromise on the rise to 65 by 2018.
The SPA is directly relevant to those occupational pension schemes designed with some measure of State pension integration (for example, members retiring before SPA experiencing a reduction in scheme pension on reaching SPA, to take account of the fact that they will start receiving their State pension). The Budget announced that future increases (aside from those already planned for) will be automatic and stem from independent longevity reviews so this is likely to be an ongoing issue.
As a first step, it would probably make sense for trustees to start looking at any provisions in their rules intended to refer to SPA, to establish whether the future hikes in SPA will apply automatically (where the provision simply cross-refers to the legislation) or whether an amendment would be needed (for example, where the provision refers to a particular age).
The measure is expected to generate an extra £5 billion a year. Following the faster increase to 66, the government is also considering future increases to the SPA linked to longevity.
According to proposals put to MPs by Age UK, delaying the SPA increase to 2020 then accelerating it to 66 by April 2021 and 67 by April 2025 would cost little more than current proposals and would promote sustainability.
RPI v CPI
Little is to alter following consultation on the impact of using the Consumer Prices Index (CPI) as the measure of price increases in private sector occupational pension schemes. This is the clear message coming through in the Department for Work and Pensions' response to its consultation paper published in December 2010. The consultation itself followed the announcement in July 2010 that the CPI should replace the Retail Prices Index (RPI) as the preferred measure for statutory revaluation and indexation of pensions in payment.
The one significant change being considered is to extend the provisions being debated in the Pensions Bill to ensure that the CPI does not act as an underpin on revaluation in deferment for schemes that revalue deferred pensions by reference to the RPI (the Bill currently makes this provision only in respect of increases to pensions in payment). The Government is, however, standing by its proposal not to legislate for a similar dispensation for schemes that explicitly set out increase provisions for guaranteed minimum pensions earned from April 1988.
The Government is intending to proceed with regulations that will result in certain changes to scheme rules on indexation and revaluation becoming subject to consultation with affected members under the employer consultation requirements. But precisely what is caught may differ from that which the "would be less generous" wording in the consultation implied.
As expected, the Government is not to introduce a statutory override imposing CPI on schemes or grant a blanket modification power. It has also decided not to introduce a modification power restricted to those schemes which had previously adopted RPI solely in order to match the statutory minima. This is because of the practical difficulties in demonstrating that this was indeed the case.
The proposed changes to legislation to prevent the creation of a statutory CPI underpin where schemes revalue deferred pensions in line with the RPI are welcome. But otherwise this response is in the main affirming the Government's original intentions and in particular confirms the prevalent view that the impact of the switch will remain a legal lottery based on the historic drafting style of scheme rules and may even differ between sections of the same scheme.
Trustees should be considering the impact on their scheme with their advisers. Inflation figures used by schemes depend on the arbitrary fact of whether RPI has been hard wired into their rules.
Five Providers to NEST Annuity Panel
The National Employment Savings Trust (Nest) has appointed five providers to its annuity panel.
Canada Life, Just Retirement, Legal and General, Partnership and Reliance Mutual will provide conventional or enhanced annuities to Nest members.
Nest members will be able to choose between buying an annuity from the panel or shop on the open market. However, providers on Nest's panel must offer an annuity rate to members with a pot starting from £1,500.
Just Retirement and Partnership will offer only enhanced annuities or, as Nest calls them, retirement income products, while Reliance Mutual will provide enhanced products specifically for those who smoke.
Annual Allowance Calculations for DB Schemes
The question here is what counts as a member's pension accrued from time to time while still in service, for Annual Allowance purposes. HMRC explains that the law says that the calculation is based on the pension (or lump sum where relevant) to which the member would be entitled if drawing pension at the calculation date, but assuming that they had already reached the age at which an unreduced pension would be payable; and explains that this is not necessarily the same as the leaving service pension and could be very different. The interpretation will depend on a scheme's rules' particular wording. A HMRC newsletter gives examples of how to approach the calculations.
Pension Input Periods
The Finance Bill introduces two changes to Pension Input Periods (PIPs). The legislation is not straightforward to interpret, but HMRC's Pensions Newsletter 47 helps to confirm the following:
- For new arrangements set up on or after 6 April 2011 - the default first PIP if no nomination is made will end on 5 April and subsequent PIPs will be tax years if there continues to be no nomination. "New arrangements" encompasses, for example, new schemes set up on or after 6 April 2011, members joining (any) scheme on or after this date and, in many cases, members newly starting to pay AVCs to a scheme. No change applies to the defaults that are already there for existing arrangements
- From 2011/12 - for any arrangement - there is more flexibility to align PIPs to, say, the tax year or scheme year by allowing PIPs to be extended to more than a year
The Newsletter also announces an easement for the first default PIP for new arrangements described above. Nominations to override the default can extend the first PIP to up to 12 months following joining so long as this nomination is made on or before the proposed PIP end date. Without this easement, if a member joined an arrangement on, say, 4 April 2012 there would only be a window of one day to change the first PIP from ending on the default 5 April 2012, to a later end date.
Overseas Pension Tax Loophole Closure
HM Revenue & Customs (HMRC) has published draft legislation to be introduced in the Finance Bill to ensure that, where double taxation arrangements contain provisions to tax pensions or pension-related lump sums solely in the country where they arise, they cannot be used to avoid paying UK tax where the benefits are being paid to a UK resident.
The draft legislation is designed to curtail the practice where pension savings are transferred to an overseas pension scheme principally to take advantage of certain double taxation arrangements that result in UK tax avoidance.
The legislation will have effect from 6 April 2011 and will apply to pensions received on or after that date regardless of when the pensions savings were transferred.
Company Restructuring
The Department for Work and Pensions has launched a consultation on proposed changes to the regulations governing the debt incurred by an employer leaving a multi-employer defined benefit pension scheme. The draft regulations contain a significant easement which the Government intends should address criticisms that employer debt legislation unnecessarily inhibits corporate activity, particularly the ability of companies to restructure.
The proposals fall under two main headings: flexible apportionment arrangements; and periods of grace.
The changes, if enacted, will come into force on 1 October 2011.
As the law currently stands, many corporate restructurings are "employment-cessation events" (or "ECEs") and so are capable of triggering an employer debt.
The last changes to the regulations sought to address this by introducing two easements (a "general easement" and a "de minimis easement") which would take very simple restructurings outside of the ECE definition. However, employers generally remain concerned that these easements are too narrow to cover most typical restructurings
The government is proposing to address these concerns by introducing the concept of a "flexible apportionment arrangement" ("FAA").
This is not the same as the existing concept of a "scheme apportionment arrangement" ("SAA"), because in an FAA it will be the liabilities (as opposed to the debt) that are apportioned. The stated advantage of an FAA over an SAA is that an employer debt need not be calculated for each occasion when an employer ceases to employ active members.
In a simple FAA, Employer A would be apportioning to Employer B (although the apportionment could also be to more than one employer). Instead of apportioning a part of the actual debt to B (as in an SAA), B "steps into A's shoes" as regards the liabilities being apportioned to B (so that, on a future employer debt being triggered in relation to B, B would be treated as having employed members who had in fact been employed by A).
Some of the main criteria for there to be an FAA are as follows:
- the funding test is met (more on this below);
- all the pension liabilities of the leaving employer are apportioned to one or more other employers staying in the scheme;
- the trustees and the employers who are parties to the FAA consent in writing to the arrangements;
- where an ECE has already occurred, no part of the debt has been paid; and
- the scheme is not in a Pension Protection Fund assessment period (and the trustees are satisfied that it is unlikely to go into one in the next 12 months).