UK: Banking and Capital Markets Insight - January 2011

Last Updated: 28 January 2011
Article by Deloitte Financial Services Group

Most Read Contributor in UK, August 2017

Welcome to the first edition of Banking and Capital Markets Insight for 2011, which focuses on technical issues currently coming out of the banking, capital markets, securities and fund management arenas. This issue again is a wide ranging one, covering significant issues in respect of current regulatory, accounting and tax matters.

Our articles cover the following diverse areas:

  • Client Money: Back to the Future – Mike Williams on the current reanalysis of the Client Asset rules by the Financial Services Authority (FSA), which is causing challenges both for auditors reporting on Client Assets and firms in reviewing and resetting their Client Assets systems and procedures ahead of this year's round of audits;
  • Hedge Accounting: Change Ahead – Mateusz Lasik on the International Accounting Standards Board (IASB) exposure draft of proposed changes to hedge accounting, which was published in December 2010 and which will, inter alia, extend the list of eligible hedged items, remove the "hedge effectiveness" test, and end the de-designation of hedges when they cease to be effective;
  • UK Bank Levy: An Update – Wayne Weaver, Pete Muir, Jeff Lyne and David Nobbs on the changes in the mechanics and scope of the UK Bank Levy post Summer 2010, the changes to and exemptions from the Levy and the competitiveness and level playing field issues for both foreign banks doing business in the UK and UK banks doing business overseas, and the likelihood of late concessions by the UK government; and
  • Pension schemes and the "alternative approach" – Neville Bramwell and Olivia Cummins on the expanded analysis in the HM Revenue & Customs publication "Restriction of pensions tax relief: a discussion document on the alternative approach" as to whether the Higher Income Excess Relief enacted in the Finance Act 2010 should be scrapped in favour of a simpler method.

We look forward to your comments on the current edition and your suggestions for future articles.

Mike Williams

Client money: Back to the future?

With the current micro-focus on the Client Money Rules by the FSA, you could be forgiven for thinking that the wheel has swung back to the version of the Client Money Rules, which really set the pattern for the current rules, in 1991 – some 20 years ago. At that time, Bob Hudson, who was in charge of Client Money policy at the Securities and Futures Association – one of the Self-Regulatory Organisations which preceded the FSA – took the view that, in order to protect the interests of investors, no materiality should be applied to Client Money for year-end purposes as part of the auditor's reporting to the FSA, although the Client Assets opinion itself relates to the effective operation of systems to meet the Client Assets Sourcebook (CASS) requirements throughout the year.

This was partly because there had been some examples of inexperienced Client Money auditors at that time, deeming that an absence of adequate systems for calculating the Client Money Requirement was an immaterial item at the year end. Interestingly though, while nothing was communicated formally, there was an acceptance that if auditors were to identify breaches during the year, which were rectified on discovery and reported as required to the regulator, then an auditor could exercise his judgement as to whether the breach was reportable as part of the year-end Client Assets auditor's opinion.

This view has been carried down, with at least the tacit approval of the regulators, as the basic positioning on the auditor's Client Assets opinion (Client Assets being the collective name used for Client Money and Assets), with some relaxation of the "no materiality" at year-end position happening over the years. In the past nine months however, the wheel has swung back to the 1991 position and beyond, with Section 3.9 of the Consultation Paper (CP) 10/20 on improving the auditor's report on Client Assets stating that "it is important to recognise that materiality is not a relevant consideration when determining if a CASS rule has been breached" for reporting purposes to the FSA, so seemingly attempting to create an absolute assurance regime.

The prevailing mood of the FSA towards the application of the Client Asset Rules, and standards of compliance with them, should preoccupy firms in the run-up to the year-end Client Assets audit. Currently, the FSA is actively reinterpreting its view of the existing rules. Admittedly, there are some important changes already, following CP 10/15, which set out the FSA's view that title transfer collateral arrangements are not appropriate for retail clients, and Policy Statement 10/16 on the Client Assets (Enhancements) Instrument 2010. The latter document will bring into place, across the period from January 2011 to October 2011, changes such as requirements for daily prime brokerage reporting and appropriate risk warnings for re-hypothecation transactions, 20% limits on monies held at group banks, Client Money and Assets Reporting, and a designated oversight role under CASS.

The most important issue, however, is the revised lens with which the FSA is viewing the existing Client Money Rules, which has moved its interpretation from a position where, for a number of firms, there was an acceptance that their processing did not always meet all of the minutiae of the FSA CASS requirements, but that it did appropriately safeguard Client Money and Assets, to an expectation that all firms should be able to map their processing directly to relevant rule book sections. This has not been assisted by the fact that firms, as time has gone by, have become less able in some circumstances to evidence documentation supporting their detailed CASS compliance for long established non-standard processing.

This is causing a large number of firms to review their Client Money processing, either as part of a formal Section 166 review or as part of an internally generated review. There is certainly a lot of value in examining the underlying principles of how they calculate individual parts of their Client Money calculation, and re-documenting the decisions which led to the current Client Money and Asset treatments ahead of their auditors' arrival. This is often more of a challenge than firms might think, in terms of tracking down alternative Client Money approvals and waiver documentation, often 13 or 14 years old.

In this environment, it pays for firms to consider some of the underlying principles which are most important to the FSA on Client Money currently. These include:

1) The requirement for segregation throughout the chain. Following the Lehman's judgement in December 2009 and the subsequent Court of Appeal hearing in July 2010, the FSA is not content with firms which receive monies under the normal Client Money approach receiving client funds into a nonsegregated account and then segregate funds within 24 hours as part of standard processing. Given that one of the key pieces of Justice Briggs' Lehman determination related to the characterisation of money as Client Money on receipt (which may have an important effect on the acceptability or otherwise of the alternative Client Money approach) is also influencing the expectation of firms using the normal Client Money approach.

2) The necessity for trust letters to precisely convey the status afforded to individual bank accounts, on an account by account basis. Firms should review letters which do not clearly identify individual accounts or which provide trust status on a blanket basis to make sure that they appropriately earmark the Client Money status of those accounts. Firms should also take care to close new accounts where the bank is not able to provide an appropriate trust letter within 20 business days.

3) The need for strength of senior management oversight of Client Assets, which the FSA will expect auditors to comment on more specifically going forward, not just where governance weaknesses result in specific Client Money breaches. A number of firms have decided to early adopt the Client Assets oversight role to provide clearer accountability for Client Assets processing for this year-end.

4) The strength of due diligence on banks holding Client Assets for firms, particularly those overseas, and the need for firms to diversify their Client Assets between different banks. This is an area where the FSA has challenged firms in particular in the past months, and it is starting to try to set quantitative limits, in line with the proposed Group bank limit of 20% of total Client Money deposits, for bank deposits with an individual bank. This reflects the challenge of the current environment for firms where prospective rules or derivations thereof are being invoked, at least unofficially, as the benchmark for current Client Money processing.

Firms should prepare for the current level of Client Assets scrutiny to continue as part of business as usual FSA oversight. This is a timely moment for firms to review existing procedures, before the level of Client Assets changes proposed in 2011 becomes the primary focus of their Compliance, IT and dedicated Client Assets resources.

Hedge accounting: change ahead

On 9 December 2010, the IASB published for public comment the long awaited exposure draft on the accounting for hedging activities. This forms one of the phases of a larger project to replace the current standard, IAS 39 "Financial Instruments: Recognition and Measurement" with the successor standard IFRS 9 "Financial Instruments". The final requirements in this area, along with those regarding impairment, are scheduled for release by the end of the second quarter of 2011.

The IASB's stated aim for this phase of the project is to improve decision-usefulness of financial statements for users by fundamentally reconsidering the current hedge accounting requirements. The Board has committed itself to considering hedge accounting of both financial and non-financial hedged items. Given the fundamental rethink promised in this area, the Exposure Draft will be studied carefully by users and preparers.

Hedged item and hedging instrument: what's in and what's out

The IASB has proposed to expand the list of those items that may qualify as an eligible hedged items compared with IAS 39. The proposals will permit derivatives to be hedged items, where previously they could only ever be hedging instruments. This change will allow a number of economic hedge strategies that utilise multiple derivatives to get hedge accounting where previously they could not.

With one exception, all that IAS 39 previously permitted as a qualifying hedged item still stands. The exception is for equity instruments designated as at fair value through other comprehensive income. These cannot be hedged as IFRS 9 requires all fair value gains and losses to be permanently recognised in other comprehensive income (OCI). As the hedged risk will not impact profit or loss as gains or losses will never be recycled to profit or loss, the IASB has concluded it cannot be a qualifying hedged item.

The approach to designating risk components as the hedged item, often referred to as hedging 'portions', also looks set to change as the proposals would loosen the restrictions on hedging portions of non-financial items. IAS 39 already permits some flexibility in designating a portion of a financial item but limits this for non-financial items. The proposals would introduce a principle whereby a risk component can be designated as a hedged risk if it is separately identifiable and reliably measureable, irrespective of whether it is a financial or non-financial item.

In contrast, an area where no change is proposed from the current requirements is the restriction from designating risk components which exceed the total cash flows of the hedged items. In practical terms this means that as before, issuers of sub LIBOR fixed rate debt cannot identify as the hedged risk component a LIBOR component larger than the contractual cash flows.

The Exposure Draft also has new guidance dealing with the eligibility of hedging net positions and groups of items as hedged items. The former are not permitted to be hedged items under IAS 39. In contrast, the proposals permit net positions, subject to certain restrictions, to be eligible hedged items in the case of both financial and non-financial items.

With respect to hedging instruments, there is one proposed change compared with IAS 39. The proposals will permit cash instruments (i.e. non-derivatives, such as bonds) measured at fair value through profit or loss to be a hedging instrument. Under the current standard this allowance was only made with respect to foreign currency risk. In practice, this is unlikely to extend hedge accounting greatly as cash instruments are generally regarded as the item that is hedged, not the instrument that is used to hedge.

Fair value hedging: new mechanics

Whereas the mechanics behind cash flow hedging and net investment hedging remain unaltered, the proposed accounting for fair value hedges is set to change. At present under IAS 39 in a fair value hedge, the change in fair value of the hedging instrument is recorded in profit and loss. The change in fair value of the hedged item due to the hedged risk is also recorded in profit and loss, with the carrying value of the hedged item itself being adjusted. The proposals would change this by instead recognising the fair value changes of the hedging instrument and the hedged item attributable to the hedged risk in OCI, with hedge ineffectiveness (i.e. any difference between the two amounts) being transferred immediately to profit or loss. This is the same mechanics as currently employed for cash flow hedges. Further, the change in fair value of the hedged item is recorded on the balance sheet, not as an adjustment to the carrying value of the hedged item itself, but instead as a separate line item. This proposal will not alter the net amounts recognised in profit or loss and therefore can be regarded more as a change in presentation, rather than a fundamental change to fair value hedging.

Assessing hedge effectiveness: less rules, less statistics

IAS 39 currently requires a quantitative test for the assessment of effectiveness that is based on a set threshold, known as the 80% to 125% test. Only when a hedge relationship is within this band is it regarded as 'highly effective' and therefore eligible for hedge accounting in the period. In contrast, the Board proposes to drop the highly effective concept and in doing so, drop the quantitative test. Instead, the focus will be to ensure that the hedging relationship results in an unbiased or neutral hedge (e.g. is not intentionally designed to over or under hedge) and achieves more than accidental offsetting. The change is intended to align risk management with hedge accounting and in doing will reduce the burden of testing currently applied by many entities. This change could mean that some hedge relationships that under the current Standard are not assessed as effective enough would, going forward, be eligible for hedge accounting. Time value of options: a radical change One area where the Exposure Draft proposes a significant departure from IAS 39 is the treatment of changes in the fair value of time value of options designated in certain hedging relationships. Under IAS 39, the hedged item can be a one sided exposure, i.e. a hedge of market prices increasing (but not decreasing), which can be hedged by purchasing an option. However, the time value of the option cannot be regarded as part of the hedged item and therefore changes in time value of the option would be a source of ineffectiveness if the option was designated in its entirety. In practice, entities therefore do not include the time value of the option as part of the relationship and it is instead immediately recognised in profit or loss. In contrast, the Exposure Draft proposes that the time value of the option can be deferred in OCI and recycled at a later time. This is likely to be attractive to preparers, some of whom have long argued that the time value is a measure of the cost of hedging and therefore logically should be eligible for deferral rather than immediate recognition in profit and loss.

When hedge accounting ends ...

The Exposure Draft is consistent with the current guidance in requiring discontinuance of hedge accounting treatment when the relationship ceases to meet the eligibility criteria. However, in a parallel with proposals on hedge accounting issued by the US standard setter, the Financial Accounting Standards Board, the IASB have proposed that if a hedge, once designated, continues to be assessed as effective it cannot be de-designated. This is in marked contrast to the current ability under IAS 39 to voluntarily switch off hedge accounting treatment at will. This may prompt reporters to consider more carefully their use of hedge accounting.

Telling the story: disclosure

The disclosure requirements in the Exposure Draft focus on presenting information on:

  • an entity's risk management strategy;
  • the effects of an entity's risk management strategy activitites on the amount, timing and uncertainty of future cash flows; and
  • the effect that hedge accounting has on the primary financial statements.

It is proposed that disclosures will be disaggregated by risk category on the basis of risks that an entity decides to hedge and for which hedge accounting is applied. The proposals require quantitative disclosures of risk exposures and amounts hedged. The Exposure Draft also includes a requirement for disclosures, in a tabular format, that provide information about the amounts included in the primary financial statements that are a result of hedge accounting. One point worth noting is that under the proposals, the effects of hedge accounting on the financial statements will be more prominent and transparent.

Making the leap: transition

Given the scale of the proposed changes to the hedging model, it is understandable that the IASB in their deliberations have decided to require prospective application of the proposed amendments (although applied to all hedging relationships and not just those designated subsequent to initial application). Current hedge accounting relationships under IAS 39 that qualify under the new model would be considered continuing hedges (i.e. there would be no start of a new relationship). However, hedge accounting relationships under IAS 39 that do not qualify under the proposed model would be subject to the guidance regarding discontinuation of hedge accounting. The IASB have also proposed transition guidance similar to that of IFRS 9 with the proposed effective date of annual periods beginning on or after 1 January 2013 with earlier application permitted so long as the entity also adopts all other IFRS 9 requirements that were finalised earlier.

Still to come in 2011: portfolio hedging and final standard

One element that does not feature in the Exposure Draft released at the end of 2010 are proposals on portfolio fair value hedging. This will be relevant for certain financial institutions that fund and/or lend at fixed rates. The IASB has started its work on this and this will continue into 2011.

The Exposure Draft has a 90 day comment period which closes on 9 March 2011. The IASB has committed to having the final version of IFRS 9 (including the final requirements on hedge accounting and impairment) released by the end of June 2011, Sir David Tweedie's retirement as IASB Chairman. No doubt there will be a wide range of comments and requests for the IASB to consider over the period. Completion of the project by next summer will be a major challenge.

UK Bank Levy – An update

The government has now published final draft legislation on the UK Bank Levy for enactment in next year's Finance Act. In summary, the Levy applies from 2011 to UK banks (including branches of foreign banks) at a rate of 0.075% on liabilities and equity at the yearend balance sheet date.

There are a number of exclusions, including for tier 1 capital (but not tier 2) and insured deposits, as well as a half rate for long term funding. These reflect the policy objective of encouraging safer funding profiles for banks, aside from raising the estimated £2.6bn per annum from 2012.

The Levy only applies to equity and liabilities in excess of £20bn and therefore the Levy is expected to affect between 30 and 40 bank and building societies.

The Draft Legislation

The draft legislation is broadly in line with the proposals outlined in the July consultation document, with the Government reiterating its view that the design of the Levy should be kept relatively simple, and based as far as possible on existing accounting and regulatory reporting requirements in order to minimise the compliance burden for banks. Specifically:

  • In terms of scope, the Levy applies to the consolidated balance sheets of UK banking groups and building societies, and the aggregated balance sheets of the subsidiaries and branches of foreign banks operating in the UK.
  • The Levy will be based upon the total chargeable equity and liabilities as reported at the relevant balance sheet date, less a number of specific exclusions. UK branches of foreign banks will be expected to compute their liabilities on a UK GAAP or an IFRS basis.
  • The main exclusions continue to include Tier 1 capital (before deductions), protected deposits (such as those covered by the Financial Services Compensation Scheme or similar non-UK scheme) and certain protected insurance liabilities.

The key changes incorporated into the draft legislation coming out of the industry consultation are:

  • The final tax rates are 0.075% with a half rate of 0.0375% for longer maturity funding (greater than 1 year). There are introductory rates of 0.05% and 0.025% per cent for 2011.
  • Payment of the Levy will tie into the existing corporate tax quarterly instalments payment arrangements. Banks will need to estimate their levy payments based on their expected year-end balance sheet profile.
  • The £20bn threshold has been replaced by a £20bn allowance to avoid a "cliff edge" so that only chargeable equity and liabilities over £20bn will be taxable.
  • Netting of derivative asset and liability balances will be possible where there is a legal right of set-off under a master netting agreement with a particular counterparty. Such netting will also be extended to other assets and liabilities where a similar principle applies.
  • To reduce the compliance burden for those institutions that do not prepare consolidated financial statements for all UK businesses, a de-minimis limit will apply whereby a group can disregard from the aggregation process a subsidiary with equity and liabilities of less than £50m, subject to a maximum of £200m for all disregarded liabilities.
  • A deduction for High Quality Liquid Assets (HQLAs) has been included to reflect the fact that it is desirable for banks to maintain high levels of liquidity. These are defined as assets that are or would be included in the FSA's liquidity buffer. HQLAs held as part of a reverse repo transaction (i.e. a secured loan) are also deductible.
  • An exemption for repo liabilities has been reintroduced where the underlying debt securities would qualify as High Quality Liquid Assets. There are also deductions for retirement benefit and tax accruals.
  • Non-protected deposits from non regulated entities which may be "stickier" are subject to the levy at the half rate, and effectively treated as long term.
  • Anti avoidance rules have been improved so as not to catch commercial transactions which improve the funding profile of the bank with a consequent reduction in the Bank levy payable.

What issues remain?

The significant area where the government has still to provide detailed legislation is in relation to double taxation. The Levy is not covered by existing tax treaties and therefore enabling powers are introduced so that detailed regulations can be implemented once bilateral agreements with foreign jurisdiction are reached (for instance via a treaty or exchange of letters). The precise relief mechanism may vary depending upon the specific agreement reached.

With Germany and France well into the development of their own bank levies, there is a risk that banks with foreign activities will be taxed twice, with the mechanism for relief still unclear. Retrospective regulations in this area may be needed and are provided for. In this regard, there has been a welcome announcement that the UK and French governments have recently agreed on a mechanism that will ensure that there is no double taxation of banking groups subject to both the UK and French bank levies. No detailed information has been released on the intricacies of the agreement but the legislation giving effect to the agreement is to be enacted once the Bank Levy legislation receives Royal Assent.


The Bank Levy is a brand new tax and after a detailed consultation process between HMRC and the banking industry, many of the policy and technical issues have been ironed out.

The legislation however is fairly cumbersome and difficult to implement in practice, particularly for US and Japanese bank branches which will have to use IFRS.

Whilst use of the GAAP balance sheet as the basis for the levy is helpful, to minimise liability to the levy, banks will need to ensure all possible exclusions are taken into account and that adequate systems are in place to capture the necessary balance sheet information.

Pension schemes and the ''alternative approach"

HMRC's publication "Restriction of pensions tax relief: a discussion document on the alternative approach" sets out in more detail the proposal made in the emergency Budget that the Higher Income Excess Relief (HIER) charge (enacted in FA 2010) should be abandoned in favour of a simpler system, so long as the tax yield promised by the HIER could be matched by any alternative solution. The favoured alternative involves a number of changes, including: a reduction in the annual allowance (AA) from £255,000 to somewhere between £30,000 and £45,000; a more realistic accrual rate factor for calculating the value of pension inputs in defined benefit (DB) schemes and a probable modest reduction in the lifetime allowance (LTA) which is currently £1.8m; and the removal of some current exemptions.

The HIER charge presented two distinct challenges to employers. Firstly, higher earners (those in the 50% tax bracket) would feel pensions saving was no longer attractive, so use of registered schemes would decline and there would be pressure on employers to develop alternative schemes, although the carefully drafted antiavoidance rules in FA10 would mean delicate footwork might be called for, and some risk of HMRC challenge involved, were they to do that. Second, the volume of information a taxpayer would need to correctly calculate their own tax would push either employers or scheme providers, or both, to time and expense they did not want to incur. Not all employers had realised this but some had, and lobbied strongly for a change to the system.

The alternative approach means everyone, no matter how much they earn, will still be able to make some tax-efficient pension contributions. So, whilst some high earners may want to see their employers offer attractive top up schemes, there will no longer be the same pressure to replace a pension because it has simply become unworkable for higher earners. However, it is possible that members of DB schemes will find the changes steeper in effect than defined contribution members. The accrual rates used will be tougher, and some residual complexities remain e.g. spikes in valuation of accrual and concerns over ways in which correspondingly large tax liabilities might be collected. This may further encourage employers who are looking to close such schemes to take the final step to do so.

HMRC's discussion document still raises the prospect of more reporting, and so cost, for employers and scheme providers than now. One suggestion is to limit all pension tax relief to 40%. However, the administration involved in restricting relief to 40% for 50% taxpayers would be no different to restricting it to 20% as was proposed under the HIER charge, so that would be a significant step backwards. The paper also suggests that schemes might provide more information than at present to members about pension inputs, and possibly require reports to go to HMRC where defined limits are exceeded. Having to consider individual members' requirements is probably even more burdensome than a blanket requirement to provide relevant details to all members, particularly given that a single pension scheme will have no knowledge of other pension schemes to which a member may belong. It is the aggregate of all pension inputs that will be subject to the charge.

The economics of different schemes

Under the HIER charge, from 2011, every pound of pension input for a higher earner within the rules would attract the HIER charge of 30%. The protected amounts, which were never less than £20,000 pa under the transitional rules in operation between 2009 and 2011, would have ceased to apply from April 2011.

In some cases, even under the HIER regime, pension savings could still be attractive to high earners, but as a rule that would be where the saver thought the time money was left in the scheme, or the prowess with which it was invested, would produce a very high return. But because pension savings are taxed even if there is no growth, more modest levels of return would very early make one worse off.

It's worth looking at an example, because it is not yet definite that the HIER regime will be replaced: Executive A contributes £100 to a pension which is grossed up at 20% to produce £125 in the fund. If the fund does not grow at all, one quarter of that will eventually be paid out tax free and the other three quarters taxed at – let us say – 50% (it could be 40%, if A's income is lower in retirement, but the same principles apply). The 'post tax value' of the fund is therefore £78. A has a 'day 1 loss' of 22% of his contribution. Had A invested the money himself, equally unsuccessfully, he would still have had the original £100.

Now let's look at the case where full tax relief is given at the beginning. To get a fund of £125 would cost the individual only £62.5 – so the fact the fund is only worth £78 on day 1 (post tax) does not worry him. He has a day 1 profit of 25%, in fact. Of course, if the AA is set at £30,000, for example, fully relieved contributions could only be made up to that limit. However, this example still serves to show the efficiency of such a scheme compared to one where only basic rate relief is available, as would be the case under the HIER regime.

An Employer Financed Retirement Benefits Scheme (EFRBS), or other deferral method, where essentially inputs are not taxed, but outputs are, with no tax-free 25% lump sum as with a pension, would have disappointing returns at lower levels of growth too. The employer would not (as he would for a pension contribution or payment of salary from which the employee makes his own pension contributions) get a corporation tax deduction at the beginning. Almost universally, employers would deal with this by paying a smaller amount into the scheme, to compensate for that lost relief. So if £82 was paid into the scheme instead of £100, and there is no growth, on distribution (assuming a 50% tax rate is still appropriate) the member would have only £41. Had he been paid cash at the beginning, he would have had the net of tax £50 instead. For simplicity, these figures ignore National Insurance Contributions.

Therefore, assuming the alternative approach is adopted and full relief given (or close to full relief), members will feel that the benefits of pension contribution are still there, albeit it will take longer term and more consistent saving patterns to achieve the LTA. Whilst there may be pressure for 'top up schemes', there will not be the same sense that pension provision for higher earners is bust.

Top up schemes

Someone may now have a contractual right to company pension contributions at say 20% of salary. If the salary is large, this will exceed the likely level of the AA under the alternative approach. The discussion document records the purpose of the charge that applies once the AA is exceeded as to both ensure fiscal neutrality and also to discourage somewhat the making of excessive contributions. The charge at the moment is 40%, but this will likely increase for 50% taxpayers. Our executive would probably not want a self-assessment charge of 50% on amounts of his contribution in excess of the AA, so his contract will have to be varied to give him that value in some other way.

If two of the more obvious choices are cash or EFRBS, the following issues will need to be thought about:

  • If an arrangement similar to an EFRBS is to be used, then the exposure to risk of being in a worse position than if just cash were used needs to be recognised. As noted above, this will be an issue at lower or more modest levels of return.
  • Given that one of the aims stated in the document is to discourage savings above the AA, it would be inconsistent and arguably unfair for an antiavoidance tax charge to kick in, in relation to making alternative investments with amounts in excess of the AA. However, alternative arrangements that have some similarities to pensions, such as EFRBS, will be subject to a separate and more general review of trusts and it cannot be ruled out that investing in such vehicles in the future will be less attractive. In fact this will be a really critical point to what employers feel able to do, and we comment further on this specifically below.
  • It may be (and this would echo experience in 2006 after the last major pension reforms went live) that the majority of top-up solutions do indeed use cash.


The anti-forestalling, anti-avoidance rule was stated to be applicable only where 'obvious' avoidance was identified, for example, removing value from a pension only to replace that value in it later. The language of the FA10 rule was much more difficult and raised the prospect of the HIER charge being applied to, say, an EFRBS as well as a pension if that EFRBS was being used instead of an existing pension.

There might be two views of the future anti-avoidance regime. One would be that the AA charge has always been optional, you incur it if you want to, although not incurring it is in fact more the expected state of affairs. Arranging matters so that you do not incur it is no more offensive now than it ever has been, and there is no need for anti-avoidance rules. The other would be that the Government has so closely linked the AA charge with a particular expected tax yield that it would have to tax money that would until now have gone into pensions (and been relieved), but under the HIER regime would have led to significant tax charges, either because the HIER applied or cash was paid instead. In the future, employer contributions to deferral vehicles like EFRBS would be taxed, because otherwise the current tax yield would not go up at all. It will go up, to the extent that corporation tax receipts go up, where deferral mechanisms are used, but as we do not know exactly what underlies the Office for Budget Responsibility forecasts, it is not known whether this will be regarded as sufficient. The view of the writers is that some change to deferral rules is likely. The practical implication will be that replacing current pension provision above the new AA limit with deferral mechanisms of various kinds (EFRBS being a prime example) may not be allowed to happen on any large scale. This might be addressed by a targeted antiavoidance rule. But, bearing in mind the coming review of trusts, including EFRBS, it seems more likely that the rules relating to those alternatives will change, or perhaps we might see a combination of both.

The 'post tax' alternative

Wealth provision over lifetime is not all about pension provision, with the quite considerable rigidities that entails. We must note, of course, very recent announcements suggest those rigidities will probably be relaxed to some extent, to allow income drawdown for example in a more flexible way than under a lifetime annuity. How much extra flexibility will be allowed is not yet clear. But so long as there is enough basic provision for old age, a scheme that is flexible has merit. Can this flexibility be combined with a robust position on anti-avoidance, but still be tax efficient? And importantly, can it be efficient even with potentially low returns?

We believe the answer is yes. In a 'post tax' scheme, employees would pay tax on input (with money to do that) and hold an interest in a fund that would provide similar investment choices to a pension, and ideally with similar fee structures that reflect the employer's purchasing power. The effect of costs on long-term investment returns are considerable, so making schemes cost efficient will have real long-term benefits. There are a number of ways to make this fund sensibly and robustly tax efficient, too. Employers (and other potential users of this solution such as partners of professional or other partnerships, for whom deferral as a planning idea is not usually possible) can design the characteristics they want to have into any scheme with few constraints, so that for example retirement provision can be assured but in addition flexible lump sum withdrawal will also be possible before retirement as well. The view of the writers is that 'post tax planning' will become the solution that most closely marries up the objectives of employers (or other firms), the Government, and scheme members. And, because it will not undermine the tax yield forecasts associated with the alternative approach to pensions, it stands a good chance of longevity, so is worth the investment employers would make in it.

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.

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You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.