Pensions Radar is a quarterly listing of expected future changes in UK law affecting work-based pension schemes. Please speak to your usual Travers Smith contact if you would like to know more about any topics.
Payments to employers
Key date
5 January 2011 (notice)
5 April 2011 (resolution
Trustees must pass a resolution to avoid running the risk of losing existing powers to make payments to employers. Such a resolution may be needed to allow a payment of surplus to an employer (and possibly other payments) to be made at any time after 5 April 2011. Three months' written notice must first be given to members and employers. For more detail, please see our Payments to employers briefing note.
The Government intends to ask Parliament to amend the law so that it would clearly apply only to payments of surplus from a scheme that is not in winding-up and to extend the deadlines by five years. However, the draft legislation will not be published until after the 5 January 2011 deadline has passed.
CPI to be the measure of inflation for revaluation and pension increases
Key date
2011
CPI will replace RPI as the measure of inflation for the purposes of minimum requirements for the revaluation of deferred pensions and increases to pensions in payment. The impact on private sector occupational pension schemes will depend on the drafting of their revaluation and pension increase rules. Specific advice will therefore be needed.
Additional paternity leave to be available
Key date
3 April 2011
Additional paternity (or adoption) leave of up to six months will be available to new fathers by reducing the mother's additional maternity (or adoption) leave correspondingly. Up to three months would be paid by "additional statutory paternity pay" in place of maternity pay. Paid paternity leave must be treated as pensionable service in the same way as for paid maternity (or adoption) leave.
Transitional tax regulations cease to apply
Key date
5 April 2011
This is a key deadline, with potentially serious financial consequences if it is missed.
When the new tax regime came into force on A Day (6 April 2006), transitional regulations temporarily modified existing approved schemes so that some features of the old tax regime would continue to apply (e.g. old Inland Revenue limits and the earnings cap) until the scheme was amended and the regulations were disapplied. The regulations also had the effect that benefits that would be unauthorised payments under the new tax regime became discretionary. Schemes still relying on these transitional regulations must be amended before they cease to apply. This is especially the case where schemes rely on pre-6 April 2006 Inland Revenue limits and the earnings cap to restrict benefits.
Tax reliefs: reduced annual and lifetime allowances etc.
Key date
6 April 2011 (with anti-forestalling measures in place from 22 April 2009) and 6 April 2012
The Government is scrapping the provisions of the Finance Act 2010 restricting higher rate tax relief for high earners' pension savings. Instead, the annual allowance will be reduced from £255,000 to £50,000 from 6 April 2011 and the lifetime allowance from £1.8 million to £1.5 million from 6 April 2012. The factor for converting DB pensions into pension input for annual allowance purposes will increase, from 10 to 16, putting a higher deemed value on pension accruals. Trustees and employers will have new obligations to provide information. Trustees are likely to have to offer an option for high annual allowance charges to be paid out of scheme benefits. For more detail, please see WHiP Issue 22.
Because the change is not effective until 6 April 2011, high earners might try to make large pension contributions before then so as to get greater tax relief. The previous Government therefore included "anti-forestalling" provisions in the Finance Act 2009, whereby 20% tax (2009/10; 30% in 2010/11) is charged on the individual to take back the benefit of higher rate tax relief in certain circumstances. This can apply to any individual with gross taxable income (not including employer-funded pension savings) of £130,000pa or more. See WHiP Issues 10 and 12.
As an anti-avoidance measure, a new income tax charge and National Insurance contributions will apply from 6 April 2011 on contributions to a non-registered pension scheme (or "EFRBS") and similar arrangements. The scope of the draft legislation is currently unclear.
Compulsory annuitisation to be abolished
Key date
6 April 2011
The Government intends to end the requirement for individuals with DC pots to have secured a pension by age 75. Instead, they may take an unsecured pension with capped drawdown even after age 75. Uncapped drawdown will be permitted for individuals who can demonstrate that they have an annual pension income of £20,000. The restrictions on taking pension commencement, trivial commutation and value protection lump sums after reaching age 75 will be removed.
Transitional provisions, extending the period for securing a pension to the day before the individual's 77th birthday, apply to those reaching age 75 on or after 22 June 2010.
Compulsory retirement at age 65
Key date
6 April 2011
The Government will phase out the default retirement age of 65 for age discrimination purposes. There will be a transitional period for retirements before 1 October 2011 that are initiated before 6 April 2011. Employers may still operate a compulsory retirement age if this can be objectively justified.
Basic state pension increases changed
Key date
6 April 2011 (and 6 April 2012)
A "triple guarantee" will increase basic state pensions annually by the highest of increases in national average earnings, the retail prices index and 2.5%. From 6 April 2012, the consumer prices index will replace the retail prices index in this formula.
Employer debt regulations: further amendments
Key date
1 October 2011
The Government is considering comments raised on the employer debt regulations and may issue further amending regulations.
DC contracting-out abolished
Key date
6 April 2012
It will no longer be possible to contract out of the State Second Pension on a money purchase basis. This applies to both occupational and personal pension schemes. There will be a particular impact for defined benefit schemes that are contracted-out on a money purchase basis. Restrictions in respect of protected rights will cease to apply but schemes' protected rights rules may need to be amended. Transfers from schemes that are contracted-out on a salary-related basis to DC schemes will be permitted.
Automatic enrolment and NEST
Key date
From 1 October 2012
The automatic enrolment requirement of the Pensions Act 2008 is due to take effect but with transitional provisions. The National Employment Savings Trust (NEST) will also be available to employers. Stakeholder designation and access obligations will be abolished.
"Solvency II" Directive implementation
Key date
By 31 October 2012 (but deadline might be put back to 31 December 2012)
The EU's "Solvency II" directive is not expected to affect UK occupational pension schemes directly, but it may affect the cost of buying annuities and deferred annuities. In the meantime, the EU's "IORP" directive is being reviewed, with possible consequences for the funding of UK defined benefit pension schemes.
Record-keeping deadline
Key date
December 2012
The Pensions Regulator will expect trustees to have attained specified standards for member record-keeping and to have addressed any problems with member data.
EU "Portability" directive may come into force
Key date
1 July 2013
This directive is still in draft form and there has been difficulty in agreeing its terms due to the very different stances of EU member states as regards vesting. It may affect preservation requirements in the UK, if it is ever agreed and depending on its final language.
Combined state pensions
Key date
2015(?)
The Government is expected to announce an overhaul of the state pension system. Means-testing seems likely to be reduced or abandoned and the basic state pension and state second pension are likely to be amalgamated.
State pension ages to be raised
Key date
2016 onwards
Women's state pension age will be 65 by April 2020 and state pension age for men and women will increase in stages from 65 to 68 between 2024 and 2046. The Government intends to accelerate the increase in women's state pension so that it is 65 by November 2018. It also intends to bring forward the increase in state pension for men and women to 66 so that it happens in stages from November 2018 to April 2020. These changes may affect, for example, schemes that provide bridging pensions or that feature state pension offsets. Further acceleration of increases in state pension age will be considered.
State Second Pension (S2P) fully flat-rate
Key date
By 2030
Leading up to (approximately) 2030, S2P is gradually changing from being earningsrelated and will become fully flat rate.
The following are expected developments for which there is no fixed date.
Electronic disclosure of information
The Government will consider extending the new electronic disclosure facility to items required to be disclosed other than under the disclosure regulations.
Early access to pension savings
The Government is considering allowing early access to pension savings as an incentive to save or as a means to alleviate cases of hardship. This could be by way of a loan, withdrawal, early access to the tax free lump sum, or "feeder funds" combining ISAs and pensions.
Public sector pensions
An independent commission, chaired by John Hutton, is reviewing the long-term affordability of public sector pensions. An interim report has been published and the final report is awaited.
Sex-based factors for insurance and annuities
A forthcoming decision of the Court of Justice of the European Union may result in unisex actuarial factors being required for insurance and annuity contracts.
VAT for fund management
The challenge by the NAPF to HMRC's VAT treatment of pension schemes' investment management fees is to be progressed.
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.
