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
Auto-Enrolment Delays Announced
The timetable for staging in the duty to auto-enrol employees of "small" employers (those with less than 50 employees) has been put back.
The proposal is that small employers, previously scheduled to be staged in between 1 April 2014 and 1 February 2016, will now begin to auto-enrol their staff from May 2015. But it is not clear whether the current 1 year and 10 months transition for such employers will be retained. If it is, then it will not be until 1 March 2017 that all employers will be staged in.
The DWP also says that for those auto-enrolling into a money purchase scheme, the required initial level of contribution will remain in place until all businesses have been staged in. Currently this is due to end on 30 September 2016. So the delayed auto-enrolment for small employers is likely to be of some benefit to all employers using money purchase schemes.
Those with 3,000 or more employees who are due to be enrolled before July 2013 will see no change in their dates. The timetable for employers with more than 50 but less than 3,000 employees will be adjusted to "smooth" out the transition by stretching the timetable for this group into the year vacated by the small employers.
The full revised timetable showing the new staging dates for the affected employers will be published early in the New Year. Employers with between 3,000 and 50 employees will have their staging date put back by a few months.
RPI vs. CPI – The Judicial Review Judgment
Unions (included the Police Federation of England and Wales, Civil Service Pensioners Alliance, National Union of Teachers and Fire Brigades Union) have been fighting through the courts to keep their members pensions increasing on an annual basis by RPI rather than CPI, challenging the legality of the switch from RPI to CPI.
The Government announced in the June 2010 Budget that any increase to public service pensions in payment would be determined by considering CPI rather than RPI as the measure of inflation. The Government said it believes CPI provides a more appropriate measure of pension recipients' inflation experiences.
Pensions paid under many public service schemes are increased in accordance with the Pensions Increase Act 1971 and related legislation. Broadly, this means that the Secretary of State is required to review the “general level of prices” for a given period and, where there has been a price increase, an uprating order will be laid before Parliament increasing benefits by not less than that percentage increase.
Legislation requires the Secretary of State to provide for the increase to public sector pensions in line with the “general level of prices”. The unions’ main argument was that the Secretary of State was not entitled to adopt CPI because it is not an index that measures the general level of prices. It was submitted that CPI’s use of the “geometric mean” showed that it was more akin to a cost of living index than a prices index.
The court rejected this analysis unanimously. It acknowledged that CPI takes into account to some extent the consumer reaction to price increases, but said that both CPI and RPI are measures which the Secretary of State can use “to establish without undue difficulty” the increase in the general level of prices.
The unions submitted that the Government is obliged to make the best estimate of the increase in the general level of prices, not just choose an index that it considers will less accurately reflect the increase simply because the state of the national economy justifies it. They argued the Secretary of State had “put the economic cart before the statutory horse” and said the need to make savings was the dominant factor driving the choice of index, rather than consideration of which index would best achieve the statutory purpose.
The court was not persuaded by this argument. It said if the Secretary of State is satisfied that a particular measure is a fair and genuine method for making the relevant determination he can adopt that method even if his reason for preferring it over other potential candidates is that it “draws less on the public purse”. Even if that was wrong, and the Government had to adopt what it considered was the best index for measuring price changes, the court felt that the Government took its decision to change the index because it considered that CPI was a better measure of price inflation than RPI, quite apart from the savings anticipated.
However, one of the three judges, Mr Justice McCombe, disagreed. He felt that cost considerations dominated the process and the decision was not made on a stand-alone basis.
The claimants said that factors such as explanatory literature, negotiations with unions and past practice created a legitimate expectation that RPI would continue to be used for future up-rating reviews, so that it would be unfair or an abuse of power to go back on that general understanding.
Again, this argument was rejected unanimously. The court found no evidence that clear and unequivocal promises had been given. It said that the only legitimate expectation was that the beneficiaries would be treated in accordance with the lawful policy in place at the time.
The unions argued that the Secretary of State had not properly considered his statutory duty to have due regard to equality of opportunity between men and women, and that the Treasury did not assess fully the adverse effect the change would have on women. It was submitted that women would be disadvantaged by this change more than men.
The court held that even if the duty did arise, it was satisfied by the Treasury’s equality impact assessment.
The court rejected the unions’ challenge (unanimously on all but one of the four grounds) and found that the Government had not acted unlawfully in making the switch from RPI to CPI. The unions are likely to appeal.
Public (and some private) sector schemes will have to consider their own rules to determine whether they are affected by the change from RPI to CPI and, if so, what this case and any appeal may mean for their scheme.
Auto-Enrolment Threshold Review
The Department for Work and Pensions has launched a review of the auto-enrolment earnings threshold, currently set at £7,500, for the 2012-13 tax year.
The consultation highlighted that, under the Pensions Act 2011, such a review would be due each year to guarantee that automatic enrolment would not occur for those who would not benefit.
The qualifying earnings band can be used as one definition of earnings for schemes that seek to qualify for auto-enrolment on a money purchase basis. It is also used for non-contracted-out defined benefit schemes put forward as auto-enrolment vehicles. The earnings trigger is the point which an employee's earnings must reach before the employer auto-enrolment duty applies.
The lower and upper limits of the qualifying earnings band were set (in 2006/07 terms) at £5,035 and £33,540 by the Pensions Act 2008, whilst the earnings trigger was set (in 2011/12 terms) at £7,475 by the Pensions Act 2011.
The consultation closes on 26 January 2012.
Flat-Rate State Pension Edges Closer
The Government has taken another step towards the goal of delivering a flat-rate State Second Pension (S2P) through regulations laid before Parliament that set the "flat-rate introduction year" as the tax year commencing 6 April 2012.
The previous Government first refocused S2P on the lower paid with a complex three bands of earnings approach. The Pensions Act 2007 provides that from 6 April 2012 S2P will accrue in two components:
- A flat rate accrual amount of £72.80 pa (in October 2004 terms - the actual amount, which remains to be announced, should be increased from this date in line with earnings)
- An amount equal to 1/440ths of earnings between the lower earnings threshold (£14,700 for 2012/13) and the Upper Accrual Point (£40,040)
Because the Upper Accrual Point is frozen but the lower earnings threshold increases in line with earnings the second component will diminish over time. It had been predicted that by 2030 it would become zero and so S2P would then accrue on a flat-rate basis.
The stage has now been set for the Government to go further with its own reforms and either make S2P genuinely flat rate on its own, or go further and amalgamate it with the Basic State Pension.
Increase In State Pension Ages
The increase in State Pension Age from 66 to 67 will be brought forwards.
The increase is to take place over a two year period between April 2026 and April 2028. Changes being brought in by the Pensions Act 2011 accelerate the equalisation of State Pension Age at 65 and bring forward the increase in State Pension Age to 66.
Anyone born between 6 April 1960 and 5 April 1969 will see their State Pension Age increase. Those born between 6 March 1961 and 5 April 1977 will now all have a State Pension Age of 67.
The measure is expected to save around £60 billion in today's prices between 2026/27 and 2035/36 (this latter date being when the age 67 State Pension Age was due to take effect).
For those just starting out on their working lives should not expect a State Pension much before they are 70.
Annual Allowance; Carry Forward Rules For The Transitional Years
HMRC has been asked to look again at the interpretation of how the carry forward rules work for the annual allowance for the transitional years of 2008-09, 2009-10 and 2010-11.
As a result of this review the guidance on how carry forward works for the transitional years has been revised. There is no change to the guidance for the carry forward rules outside these transitional years.
The annual allowance for 2008-09, 2009-10 and 2010-11 is deemed to be £50,000. So if an individual's total pension input amount in each of those tax years was £20,000 then they will have £30,000 unused annual allowance to carry forward each year. If their total pension input amount was £50,000 or more in a year then they would not have any annual allowance left to carry forward from that tax year.
The way that pension savings are calculated is based on the new valuation methods. So, for a defined benefit arrangement the new factor of 16 (rather than the existing factor of 10) will be used and increase the opening value CPI to work out how much your pension saving is.
Normally, if one of the previous three years has an input amount of more than the annual allowance then that excess is treated as using up any amount of available annual allowance from the preceding year(s) first and this will reduce the available annual allowance to be carried forward to the current year. However, the position is different for 2008-09, 2009-10 and 2010-11.
If one of the previous three years that has an input amount of more than £50,000 is 2009-10 and/or 2010-11 then that excess is not treated as using up any amount of available annual allowance from the preceding year(s). This is because any amount of available annual allowance from the preceding tax year(s) would not have had the effect of reducing an amount of annual allowance charge for 2009-10 and/or 2010-11.
The method of working out if the individual has to pay an annual allowance charge, and how much, for the tax years 2008-09, 2009-10 and 2010-11 has not changed.
New Framework For The PPF
The PPF announced in May 2011 that a new framework for the pension protection levy would apply from the 2012/13 levy year.
The purpose behind the new framework was to achieve stability and predictability for levy payers by fixing the levy parameters for a three year period. The PPF has now published the final levy determination and supporting guidance for 2012/13. It has also confirmed a levy estimate of £550m, the lowest estimate to date.
The key points to note are:
Contingent assets: the PPF was concerned that some schemes had put in place type A assets (group company guarantees) where there was little prospect of the guarantor paying more than a fraction of the guarantee. The PPF proposed that trustees would have to certify positively that the guarantor was able to meet the full sum guaranteed.
The PPF has modified its proposals as a result of consultation responses that it was effectively asking for an annual covenant review of all guarantors. Instead trustees will be required to certify that they have no reason to believe that the guarantor, at the date of the certificate, could not meet its full commitment under the guarantee. The PPF has also altered the contingent asset certificate so that the trustees have the option of certifying a lower amount than the face value of the asset or of only reporting the most substantial guarantors (where there is more than one) if they feel that they cannot otherwise provide the certification of the guarantor's strength. These changes are designed to achieve additional flexibility for trustees.
The PPF considers that the simplification of the certification process means that it will be able to undertake an assessment of the guarantor's strength. In 2012/13 this assessment will be a comparison of the publicly available financial information with the value that would be attributed to the contingent asset in the levy. However, since this is the first year of this assessment, the PPF comments that the benefit of any doubt will be given in favour of schemes. The PPF confirms that it will review its approach for future levy years.
Investment risk: schemes with liabilities measured on the PPF basis of £1.5bn or more are required to undertake a bespoke assessment of investment risk. The PPF will assess the investment risk for other schemes unless they choose to conduct a bespoke assessment. The PPF has now confirmed that schemes which opt for bespoke assessment will not be required, as originally proposed, to continue with that bespoke assessment in future years where there is no benefit for the scheme. The exception to this is schemes which use derivatives to de-risk. Such schemes should use the bespoke approach consistently or not at all.
Insolvency scores: D&B failure scores will be determined monthly in order to ascertain the average annual score. The PPF has confirmed that where D&B does not have data for all months, they will produce an average score based on the number of months they have.
Trustees and employers should already have started to consider what action they should take as a result of the new levy framework. However, they will need to prioritise any outstanding actions early in 2012 to ensure that they meet relevant PPF deadlines.
Income Tax Rates & Thresholds (Including Personal Allowance)
The draft Finance Bill 2012 contains clauses that (subject to any further announcement in the Budget on 21 March 2012) confirm that the basic, higher and additional rates of income tax remain at 20%, 40% and 50% respectively for 2012/13.
The income tax personal allowance will increase from £7,475 to £8,105 (for those under age 65) and, as a result, the band of earnings subject to 20% tax will reduce from £35,000 to £34,370 in order that 40% taxpayers do not benefit from the higher personal allowance. This means that the threshold for 40% income tax will remain at £42,475 (the same as the Upper Earnings Limit for national insurance contributions).
Short Service Refunds Abolished
Pensions minister Steve Webb has confirmed the Government will abolish short service refunds for defined-contribution pension schemes.
Under current rules, companies can get a refund on employer and employee contributions if a member leaves within two years of joining a pension scheme.
The DWP is also seeking views on a range of reform options designed to make it easier for people to consolidate small pension pots. These range from small changes to encourage transfers to an automatic transfer system where pension pots could either be consolidated in one or more ‘aggregator’ schemes or move with people from job to job.
Short-service refunds, where contributions are refunded if a member leaves a company within two years, have repeatedly been highlighted by the government as a threat to auto-enrolment reforms coming into force next year.
The consultation paper, 'Meeting future workplace pension challenges: improving transfers and dealing with small pension pots', references work undertaken by other countries to address the problem of the growing number of small pots.
It noted that Australia's government was looking to address the issue of 'lost' superannuation pots, where pots that had not received a contribution in two years and the Super fund was no longer able to trace the member, had led to AUD$20bn (€15bn) saved in untraceable accounts.
The end of short service refunds could pose problems for some schemes.
Auto-enrolment will bring into focus the current difficulties experienced by scheme members with small pension pots. These include members losing track of their pension savings or finding that several small pots cannot obtain as good a deal when purchasing an annuity as one larger pot. The DWP expects that auto-enrolment, along with a highly mobile jobs market, will generate a further 4.7 million such pots by 2050.
Having addressed the anomaly that currently exists between trust and contract, this move has created another as, unlike a contract-based policies, trustees are now faced with the responsibility of administering many more small pots.
Flexible Apportionment Arrangements
Changes to the rules surrounding how companies repay pension debts will come into force on 27 January 2012.
The new mechanism reallocates the liabilities of the departing employer to one or more employers remaining in the scheme. For employers who are about to stop having active members in an ongoing multi-employer scheme, it means that to prevent their becoming liable for an immediate debt payment they need to:
- Find one or more employers staying in the scheme who are willing to take on their liabilities
- Convince the trustees through a "funding test" that all the remaining employers will be reasonably likely to be able to fund the scheme and that the security of members' benefits will not be adversely affected
In addition, the trustees, departing employer and those taking on the liabilities must consent to the arrangement and the scheme must not be likely to fall into a PPF assessment period within 12 months.
An employer debt can arise when a company leaves a multi-employer defined benefit occupational pension scheme and is commonly encountered in corporate transactions or during internal restructuring. When an employer leaves a pension scheme it must ensure that there are enough funds in the scheme to pay for the benefits due to its employees. Where there is not enough money to run the scheme, the employer that leaves is still liable for its share of this underfunding.
Under the Pensions Act, repayment of this debt can be put off in some circumstances. Companies can ask the trustees to agree to an arrangement, known as an apportionment arrangement, which allows the employer who is leaving to pay less than the full amount of its debt. Some or all of the other remaining employers must agree to pay the rest. The trustees of the pension scheme must carry out a 'funding test' to make sure that the remaining employers can fund the scheme.
The new regulations introduce 'flexible apportionment arrangements', which allow trustees of pension funds to choose to give some companies more time to pay their share of the debt. Under these arrangements, trustees may decide to carry out the funding test only once where a number of employers leave the scheme at broadly the same time.
The regulations also extend the current 12-month 'period of grace' to 36 months. This is the period during which companies do not have to pay debt on any underfunding when they do not employ any active pension scheme members, but intend to employ some in the future. The new regulations give trustees discretion to extend this period to 36 months. In addition, employers will have two months rather than one month after they cease to employ active members of a scheme to notify trustees if they wish to rely on a period of grace.
Social Security Benefit Rates
The Department for Work and Pensions (DWP) has confirmed the social security benefit rates from April 2012 including the following:
- The Basic State Pension from April 2012 will be £107.45 pw for a single pensioner and £171.85 pw for pensioner couples
- Serps/S2P benefits in payment in 2012/13 will increase by 5.2%
- Post-1988 guaranteed minimum pensions (GMPs) will increase at the 3% capped rate in 2012/13
Deadlines For Information To PPF
The deadlines for providing information to the PPF are as follows:
- 5pm on 30 March 2012 for the compulsory submission of scheme returns (including any voluntary section 179 valuations). The asset split data will be particularly vital this year
- 5pm on 30 March 2012 for certification or re-certification of contingent assets
- 5pm on 10 April 2012 for certification of deficit-reduction contributions
- 5pm on 29 June 2012 for certification of full block transfers that have taken place before 1 April 2012 (failure to have notified the PPF of full block transfers in time is likely to be met with potentially hefty levy penalties)
Scheme Specific Lump Sum Protection (Block Transfers)
This protection applies to members of occupational pension schemes on 5th April 2006 who had a tax free cash entitlement of more than 25% of their pension fund.
The protected lump sum rights could be transferred to other schemes as part of a block or bulk transfers.
The current lump sum value is calculated using the increase in the standard LTA. From 6th April 2012, the calculation will continue to use a figure of £1.8 million in place of the standard LTA (£1.5m) until such time as the standard LTA is increased beyond this amount.
So in the true spirit of ‘Pension Simplification’ confusing the situation even further, for an individual in this group who is considering registering for Fixed Protection, this adds a new dimension to their decision. While Fixed Protection applies, the lump sum scope increase does not.
Commutation Of Small Personal Pension Funds
Draft regulations have been issued to enable individuals to access those savings held in small personal pension schemes, i.e. £2,000 or less, by way of lump sum payment.
From 6 April 2012, it will be possible to pay out funds in this way to individuals aged 60 or over, as an authorised payment, provided certain conditions are met. These payments can be made regardless of the value of the individual's total pension savings and can be made provided the individual has received no more than one other such trivial lump sum payment.
The measure will help individuals aged 60 or over, who cannot otherwise use the lifetime trivial commutation rules, to access a very small personal pension pot, and also some who have already taken a trivial commutation lump sum and later discover small benefit rights in a personal pension scheme.