UK: Pensions Ready Reckoner - October 2014

PARLIAMENT

Topic

Developments in outline

DC flexibility from April 2015 for those aged 55 and over

14 October 2014 – Introduction of the Taxation of Pensions Billin Parliament. The Bill amends the pension tax provisions in Finance Act 2004, to introduce DC flexibility from April 2015, as well as allowing trivial commutation from age 55 onwards from April  2015. The practical effect will depend on scheme rules and and trustee decisions.  Accessing DC funds flexibly is by way of drawdown from the member's "flexi-access drawdown fund", or as a new type of authorised lump sum namely an "uncrystallised funds pension lump sum" ("UFPLS"). Activating flexi-access or an UFPLS triggers the new limited annual allowance of £10,000 for future money purchase contributions.

Member communications should be suitably caveated as (1) the Bill does not become law unless and until it receives  Royal Assent, expected early 2015; and (2) the Bill merely sets the tax parameters – individuals' actual benefits, including any options for DC flexibilities, depend on what trustees decide to allow. This latter part of the Bill has in particular ben criticised as not (at present) also involving the employer in the design of schemes' DC flexibility options.

The Bill reflects the more favourable tax treatment on death for individuals' DC pension pots, announced by the Government on 29 September 2014. 

Onerous HMRC reporting obligations on  trustees/individuals/DC providers operating the  new DC flexibilities are included in the Bill.

Note the "lifetime allowance" tax rules continue notwithstanding the new DC flexibilities introduced by the Taxation of Pensions Bill.

Ancillary changes to the "DC flexibility" changes from April 2015

The Financial Conduct Authority ("FCA") Consultations on proposed changes to its Conduct of Business Rules for FCA independent advisers have closed, namely:

(1) "Retirement reforms and the Guidance Guarantee" issued July 2014 and closed 22 September 2014. The Consultation relates to FCA setting standards for Guidance to DC members at the point of retirement, bearing in mind the proposed DC flexibilities from April 2015.

(2) "Proposed Rules for independent governance committees" issued August 2014, Consultation closed 10 October 2014.

The above FCA Consultations, together with further FCA draft Rules later this year relating to quality standards and charges, will provide a comprehensive and heightened regulatory regime for all DC contract based arrangements. The DWP will implement similar changes to DC trust based schemes by issuing appropriate Regulations.

Defined Ambition Schemes
(risk sharing schemes)

New risk sharing schemes occupy the middle ground between fully promising members' benefits as with a DB scheme, or no promise about the level of pension benefits as in a DC scheme. Accordingly, the Pension Schemes Bill, introduced in the House of Commons on 26 June 2014 and given its Second Reading on 2 September 2014, categorises pension schemes according to the level of the employer's promise relating to benefits in the accumulation (before retirement) phase. The categories are "defined benefits schemes" OR "shared risk schemes" (defined ambition) OR "defined contributions schemes". The legislative framework for shared risk schemes will be lighter than for defined benefit schemes. Many have criticised this new categorisation of "promised" benefits, as adding further complexity and confusion to pensions.  The concept of schemes providing some benefits promise but not a full promise has been around for a long time; shared risk schemes extend and build on this concept.

Pooling of risk - Collective benefits for DC arrangements

Provisions are also included in the Pension Schemes Bill to enable members' DC benefits to be pooled and hence risks shared. It is envisaged that "collective benefits" arrangements will be available under both shared risk schemes and defined contributions schemes. However tax changes will also be needed and these have yet to appear. The detail of how such collectives will work will be in Regulations yet to be published.

Ban or restrictions on DB to DC transfers?

The Government announced in July 2014 that there will be no ban or restriction on DB to DC transfers. Instead deferred members considering transfers must obtain "advice" from an independent professional FCA authorised adviser. Detailed obligations on scheme trustees to satisfy themselves that "advice" has been obtained will be included in the Pension Schemes Bill.

The Government has said it will consult on whether DB schemes may offer direct access to DB benefits to their members rather than DB members first having to transfer to a suitable DC arrangement. Given the consultation has at the time of going to press not yet been issued,  implementation is unlikely to be by April 2015.

and more minor Parliamentary matters:

Same sex marriages

As required under the Marriage (Same Sex Couples) Act 2013, the Government's "Review of Survivor Benefits in Occupational Pension Schemes" was published in July 2014. The Government is still considering its position but looks unlikely to extend the level of survivor pensions required under present legislation unless forced to do so by Court decisions e.g.  the forthcoming decision in Innospec v Walker, see below "From the Courts".

GMP sex equalisation

Government remains of the view that GMP sex equalisation is required. However, the draft Regulations published in January 2012 have still not been made. The Government continues to search for a simplified process for GMP sex equalisation.

New definition of "money purchase benefits"

Section 29 Pensions Act 2011, together with transitional Regulations, came into force at the end of July 2014. This clarifies the definition of money purchase benefits following the "Bridge" case. Some schemes which previously thought they had pure money purchase benefits are now faced with the prospect of final salary benefits which must be dealt with differently.  (See the article on " What does money purchase mean?" ).

and not forgetting:

Introduction of Single Tier State Pension and abolition of DB contracting-out from April 2016

These provisions are in the Pensions Act 2014 which received Royal Assent on 7 May 2014. Employers' overriding statutory power to amend future service accrual/member contributions to help offset the cost of increased National Insurance Contributions is contained in (draft) Regulations expected to come into force this Autumn. Regulations will also be made automatically amending scheme references to certain terms  which will no longer apply from April 2016 e.g.  "basic state pension" which is sometimes used in scheme rules as a deduction in  calculating pensionable earnings. Generally on the April 2016 contracting–out changes, please see our July 2014 eBulletin.

and also not forgetting:

Reforming the law on trustees' investment duties

Following the Law Commission's Consultation (October 2013) on "fiduciary duty" in the investment context, the Government are expected shortly to announce their views on whether further legislation is needed e.g. to regulate fiduciary investment managers and investment consultants

PENSIONS REGULATOR

Topic

Developments

The Pensions Regulator ("TPR")

(1) TPR's new Code of Practice on the funding of DB schemes came into force in July 2014. It reflects TPR's additional statutory objective under Pensions Act 2014 "to minimise any adverse impact on the sustainable growth of an employer";

(2) In addition, on 10 June 2014 TPR published ancillary papers relating to its view of DB scheme funding, including its annual statement on funding, its strategy and policy on enforcement and its segmentation of employer covenants.

These are all important documents for employers and trustees to understand in relation to funding discussions.

FROM THE COURTS/PENSIONS OMBUDSMAN

Topic

Developments

Employer's duty of good faith:

IBM v Dalgleish (April 2014)

The April 2014 High Court decision – see our May 2014 eBulletin – continues to play out. The upshot of the  "remedies" hearing this July concerning the extent of remedies for the Employer's breaches of good faith is awaited.

RPI/CPI:

Arcadia Group Ltd v Arcadia Group Pension Trust (31 July 2014)

The High Court decided that:

(1) The particular definition of "Index of Retail Prices" in the Rules did not preclude the choice of a different index (e.g. CPI);

(2) Following the High Court's 2012 decision in "Qinetiq", switching index for future pension increases and revaluation was not contrary to the "past service" protections under Section 67 Pensions Act 1995; and

(3) The Rules being silent as to who chooses the applicable index, the choice was in the hands of the Employer and the Trustee acting jointly.

See the article on " Which inflationary index?".

VAT:

ATP Pension Services AIS (March 2014, Court of Justice of the European Union)

We reported on "ATP" in our May E-Bulletin. At the end of May HMRC issued a further Brief (22/14) stating that HMRC is now generally reviewing the VAT treatment of pension scheme administration and fund management services and that HMRC will issue further guidance in the Autumn. We have now officially reached Autumn and the HMRC further guidance is still awaited.

Rectification:

Citifinancial Europe plc v Davidson (5 June 2014)

The High Court gave summary judgment (no full trial) allowing the scheme's definition of "salary" to be rectified as there was convincing proof of the parties' intention – a practical decision.

Loss of pension rights:

Griffin v Plymouth Hospitals NHS Trust (26 September 2009)

The Court of Appeal have decided that the Employment Tribunal's approach to calculating compensation for loss of pension rights was incorrect. The Court indicated that the 2003 guidelines were substantially out of date in view of pension developments since then.

Forthcoming decisions:

Innospec v Walker

The Employment Appeal Tribunal's decision is, we understand, under appeal due to be heard in February 2015. The EAT upheld the exclusion of pre-5 December 2005 service in calculating the pension due to the survivor of a registered civil partnership (the exclusion is in Regulation 18, Schedule 9 Equality Act 2010).