Here are the latest developments from the pensions world.
TRUSTEES ARE EXPECTED TO GET THEIR DETECTIVE HATS ON TO ASCERTAIN THEIR SCHEMES' STATUTORY EMPLOYERS
By Alison Hills
What does the Regulator want Trustees to do?
Trustees are being asked to identify and assess the type, nature and extent of the legal obligations an employer owes to the scheme.
Whilst this has always been a general duty of Trustees the Regulator drew attention to this requirement by issuing a statement in July 2011 to remind trustees of their duties.
Trustees can test their understanding of this issue using the Regulator's bite-sized training module:
www.thepensionsregulator.gov.uk/doc-library/biteSized/StatutoryEmployer/index.htm
Why?
The Regulator is concerned that as more schemes close to future accrual there is an increased risk of schemes being left without statutory employers. Scheme transfers and employer group restructuring increases this risk.
Misidentifying the statutory employers can lead to an incorrect covenant assessment which can have ramifications for funding arrangements and investment strategy.
However, perhaps more vitally, if a scheme is left without a statutory employer the scheme may cease to be eligible to enter into the Pension Protection Fund. This clearly leaves such scheme members in an extremely vulnerable position with potentially significant reductions to the benefits they expect to receive upon retirement. Whilst the Government are currently discussing the possibility of an extension of the Financial Assistance Scheme this will not extend protection to all schemes.
How?
Trustees must keep in mind that a scheme's statutory employer(s), as defined in legislation, may be different to its Principal and Participating Employers.
Schemes which remain open to accrual will start by listing the employers of the active members. Trustees will also need to assess employers who are paying contributions to the scheme and those who have previously left the scheme...so Trustees will have to get their magnifying glasses out and carry out a proper audit of the scheme's past and present employers. Trustees need to be confident that any employers who have exited the scheme have properly discharged their liabilities to the scheme. It is the identification of past employers which can become rather complicated and may well warrant Trustees seeking legal advice (on employment and pensions aspects).
If the Trustees conclude, after conducting their review, that the scheme has no statutory employers they must inform the Pensions Regulator and should also discuss this with the contributing employer.
When?
From November 2011 Scheme Returns will require Trustees to identify the statutory employers of their scheme.
CLARITY AT LAST - THE FINANCE ACT 2011
By Clive Weber
The Finance Act 2011 received Royal Assent on 19 July 2011. It is important that employers and trustees note the changes that have or will come into effect. The key provisions of the Act have been identified and are summarised below:
- The annual allowance has been reduced from £255,000 to £50,000. This has been made with retrospective effect from 6 April 2011. Individuals can use the carry-forward mechanism to take advantage of unused annual allowance from the previous three years. This is a form of protection for those whose pension saving would not normally exceed the allowance.
- The standard lifetime allowance will be reduced from £1.8 million to £1.5 million. This will be effective from 6 April 2012. Individuals will be able to keep the £1.8 million lifetime allowance if they register for a "fixed protection" regime before 6 April 2012. However, for this to apply they can accrue no further benefits.
- It is no longer a statutory requirement to take benefits in the form of a scheme pension or a lifetime annuity on reaching 75 years of age. This relaxation mainly affects DC benefits. The changes have taken effect from 6 April 2011. Scheme rules will need to be altered if advantage is to be taken of this relaxation in the statutory rules.
- Unrestricted drawdown pension provisions are available to individuals with DC benefits who can satisfy a minimum income requirement; this enables them to withdraw whatever funds they want from their pension fund. To satisfy the minimum income requirement an individual must have a lifetime pension income of £20,000. Individuals who do not satisfy this requirement have a capped drawdown arrangement.
- Anti-avoidance legislation has been introduced to prevent unregistered employer-financed retirement benefit schemes from being used to avoid or defer tax liabilities. It is important that employers and advisors are aware of this as employers may need to alter their arrangements to avoid potential liabilities arising.
PENSION SCHEME DEFICITS - USING INTELLECTUAL PROPERTY TO PLUG THE GAPS
By Justin McGilloway
Controlling pension scheme deficits continues to be a major challenge for UK companies. Traditionally, companies have sought to reduce their deficits by using straightforward cash contributions and/or contingent asset arrangements to fund their schemes. Over the last few years companies have pledged a widening variety of assets, such as real estate and other tangible assets to their schemes in order to conserve cash. However with an increasingly large proportion of an average UK company's value being typically made up of intangible assets, the pledging of a company's Intellectual Property is likely to increase.
How does this work?
The principle is simple: a company transfers Intellectual Property to a special purpose vehicle (SPV) or partnership. Typically the assets will generate royalty income (payable by the corporate sponsor) and this income is used to deliver a pattern of payments to the pension scheme - which can be a mixture of a regular payment stream and/or lump sums. The vehicle is usually bankruptcy remote, thus providing increased security to the trustees on insolvency of the corporate sponsor.
Benefits of using Intellectual Property
Using Intellectual Property to plug scheme deficits can be significantly more attractive to both pension scheme trustees and corporate sponsors. The main advantages can include:
- Preservation of cash - the corporate sponsor minimises cash expenditure, and the increased security enables deficit repair costs to be spread over a longer period;
- Deficit reduction - immediate improvement in the scheme's funding position and PPF levies;
- Maintenance of asset control - the intellectual property assets remain in the corporate sponsor's control and reverts to the corporate sponsor at the end of the term;
- Avoids trapped surplus - the structure can include contingencies for cash costs to fall and reduce the risk of trapped surplus;
- Increased security/covenant - higher level of security for pension scheme trustees - the trustees have the benefit of the income stream from a bond-like asset; and
- Tax advantages - an acceleration of corporation tax deductions which can have significant benefit to the corporate sponsor.
The Future
In May this year TUI Travel, the tour operator, agreed a deal with the trustees of its pension schemes that used the value of its Thomson and First Choice brands to cut the pension fund's deficit. Similarly GKN, the multinational engineering company headquartered in Redditch has also pledged royalty income from the use of some of its trade marks to help plug the deficit in its scheme.
The UK Pensions Regulator has acknowledged the usefulness of structured arrangements and as more companies find ways to effectively monetise their Intellectual Property rights many more UK companies may look towards their intangible assets to fund their ailing pension schemes.
BACK TO BASICS – MEANING OF "MONEY PURCHASE BENEFITS"
By Clive Weber
Surely everyone knows the difference between money purchase and final salary benefits?
After all this time one would certainly hope so. However, the Supreme Court's decision on 27 July 2011 in Bridge Trustees v Yates demonstrates how fine distinctions can be.
Legislation
Pension legislation treats money purchase and final salary benefits quite differently. One needs to identify the type of benefit in order to apply the correct legislation. For instance, revaluation of deferred pensions applies only to salary related benefits and not to money purchase benefits. Money purchase arrangements are also outside the scheme funding and employer debt legislation and are treated differently in the priority order where a scheme winds up in deficit.
Identifying money purchase benefits
Simplistically: if the benefit comprises employer and employee contributions plus investment return (positive or negative) the benefits are money purchase. In technical terms a money purchase benefit is a benefit "The rate or amount of which is calculated by reference to a payment or payments made by the Member or by any other person in respect of the Member..." (Section 181(1) Pension Schemes Act 1993).
Facts in Bridge v Yates
The pre-2000 part of the scheme had 2 features which, it was argued, meant the scheme did not provide money purchase benefits, namely:
- contributions plus investment return were uplifted to match a guaranteed rate of investment return if the actual return was less; and
- on retirement the scheme itself would pay the member a pension from its own resources instead of the scheme purchasing an annuity from an insurer. The rate of internal "annuity" would be calculated in line with actuarial rates recommended by the actuary.
Decision in Bridge v Yates
The Supreme Court decided, by 4 to 1 majority, that neither conditions (1) nor (2) above prevented the benefits being calculated "by reference to" contributions and therefore the benefits were money purchase benefits. The dissenting judge in the Supreme Court (Lord Manse) could not see where the line can sensibly be drawn once the direct link between contributions and benefits has been broken, such as by a "guarantee" or internal annuity provision as in the 'Bridge' case. Accordingly in his (minority) view the benefits in question were not money purchase benefits for the purposes of pension legislation.
The Government's view
The Secretary of State for Work and Pensions intervened in the Court of Appeal hearing in Bridge v Yates and was also represented by leading Counsel in the Supreme Court hearing.
The Government's concern (query whether the concern is well founded) is that European law requires protection for any benefits where there is a risk of a shortfall in meeting the benefits, such as in the case of the benefits considered in 'Bridge'.
The Government has stated it intends to introduce new clarifying legislation and that, subject to transitional provisions, this is to have retrospective effect.
Quite how the new legislation will work and what its effect will be remains to be seen. The definition of money purchase scheme was introduced in 1993. Some 18 years later its interpretation is still causing difficulties!
TRUSTEE TRAINING – IMPORTANT REMINDER
By Clive Weber
Trustees are under a statutory obligation to be "conversant...with the trust deed and rules" and to "have knowledge and understanding of...the law relating to pensions and trusts" (section 247, Pensions Act 2004).
Whether you are a new Trustee or an existing Trustee wanting a refresher, training remains key. The training Wedlake Bell provides gives practical insights from the legal perspective to enhance Trustees' understanding.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.