UK: Pensions Update - January 2012

Flexible Apportionment Arrangements are on the way!

Amendments to the Employer Debt Regulations introducing Flexible Apportionment Arrangements ("FAA") were laid before Parliament on 15 December. They are due to take effect from 27 January 2012.

The amended legislation follows the Government's consultation on FAAs which was reported in our June newsletter. As we discussed then an FAA can be used where: the funding test is met; all of the pensions liabilities of the "leaving" employer are reapportioned to another employer or employers "staying" in the scheme; the trustees and the employers who are parties to the FAA agree; and, where an employment-cessation event has already occurred, no part of the debt must have been paid.

These remain the requirements for an FAA. However, changes from the initial legislation include allowing a cessation employer the option to make a partial payment of Section 75 and FAAs will become a notifiable event. The issue of cessation arrangements for charities/not-for-profit organisations or for non-associated employers is still not addressed despite our writing to the DWP specifically pointing out the issues. Revised Pensions Regulator guidance dealing with FAA is expected next year.

The grace period (during which no debt is triggered if the employer intends to employ another active member) is to be extended from 12 to 36 months. However, the extension beyond 12 months is only with trustee consent, if trustees have concerns about the employer's financial circumstances.

The Government confirmed that the existing "scheme apportionment arrangements" and "regulated apportionment arrangements" are being retained. However, to apportion liabilities, (rather than fixed or floating amounts of debt), the Government is of the view that only an FAA is appropriate.

An FAA is a welcome addition to the options available to corporate groups looking to restructure their business without triggering unnecessary debts. From the trustee perspective, as consent is required, they will retain control over their use.

Auto Enrolment changes

The DWP has published its consultation paper entitled "Automatic Enrolment Earnings Thresholds Review and Revision 2012/2013".

As you will be aware, from October 2012 the phasing in of the requirement for all employers to auto-enrol eligible employees into pension scheme commences. There are two relevant financial triggers involved in the process: (i) the auto enrolment earnings threshold, which is relevant as to the annual earnings an employee must have to be caught by auto enrolment, and; (ii) the qualifying earnings band, being the band of earnings on which contributions are calculated.

Originally the auto enrolment earnings trigger was set at £7,475 and the qualifying earnings band was between £5,035 and £33,540. The Government has a duty to review these figures annually, taking into account various factors. The consultation asks whether the auto enrolment earnings trigger (£7,475) should be linked to: the PAYE personal tax threshold (£8,105 for 2012/13), the NI primary threshold (£7,605 for 2012/13) or the CPI increase on the original figure (£7,864 for 2012/13) or any other factors.

In looking at the qualifying earnings band the Government is asking whether the lower limit should continue to be calculated by reference to the minimum threshold for NICs and the upper limit set by reference to the NIC upper limit in 2008 and then revalued by rise in average earnings (as recommended by the Making Automatic Enrolment Work review) or other factors. In particular, for the lower level the Government are considering taking the £5,035 figure and increasing/replacing it with: the rise in NIC lower limits (£5,564 for 2012/13); NIC paid contributions for basic state pension (£7,605 for 2012/13); the rise in average earnings (£5,983 for 2012/13) or; CPI rises (£6,055 for 2012/13).

For the upper limit they are looking at: the actual NIC upper limit (£42,475 for 2012/13); or increasing the £33,540 figure by either: the rise in average earnings (£39,853 for 2012/13) or CPI (£42,332 for 2012/13).

The consultation looks at the impact of all these options on employer and employee costs. The Governments recommendations are: an auto enrolment earnings trigger of £8,105 (i.e. the actual PAYE tax threshold) and; a qualifying earnings band of £5,564 (actual NIC lower limit) to £39,853 (i.e. the rise in average earnings). These figures would then increase each year.

Having a known increase mechanism would at least give employers some degree of certainty. Whether the increase mechanisms being considered are appropriate is a point for consultation. The consultation runs until 26 January 2012.

HMRC make changes to reduced annual allowance and carry forward provisions

HMRC have announced changes relating to the reduced annual allowance and the three-year carry forward provisions for 2008/9, 2009/10 and 2010/11. This will allow some individuals a short-term opportunity to make higher pensions contributions for 2011/12, and possibly 2012/13, without triggering an annual allowance charge.

This change will be particularly relevant to employees who want to make full use of their carry forward, especially those planning to register for the new fixed protection from 6 April 2012 and who therefore only have until 5 April 2012 to make further pension contributions, or to employers who have made special arrangements to restrict pension contributions for certain employees to avoid triggering annual allowance charges.

How will it work?

Individuals are allowed to carry forward unused allowance from the previous three years to add to the standard annual allowance of £50,000. The HMRC policy for 2011/12 was previously that if there is unused relief in an earlier year but in a year between then and now the pension input amount exceeded £50,000 then the excess contribution above the £50,000 would eat up part or all of the unused annual allowance being carried forward. The effect was to reduce the amount of unused annual allowance that survived to be available for use in 2011/12.

Since there was no such charge on accrual between £50,000 and £255,000 over the tax years 2008/09, 2009/10 and 2010/11, it has been argued that unused relief is not used up by contributions over £50,000 for these particular tax years. The result is that for this tax year some employees may have higher carry forward allowance than previously expected.

Who will be affected?

• Employees who make pension contributions below £50,000 for either 2008/09 or 2009/10 followed by a year of contributions above £50,000.

Important points to note

• Pension "contribution" is measured across all schemes, so employers should make sure they carefully identify all employees affected by this change.
• Individuals who wish to maximise their pension saving for 2011/12 should confirm what their pension input period is. It could be that savings made into an existing arrangement now actually count towards the 2012/13 year. If so, these individuals may need to set up a new arrangement to ensure that the contributions fall into 2011/12 and so make full use of the carry forward from 2008/09.
  
  

HMRC guidance on Fixed Protection

The Finance Act 2011 (FA 2011) reduces the lifetime allowance from £1.8 million to £1.5 million with effect from the 2012/13 tax year. Transitional relief in the form of fixed protection is available for individuals who have planned their retirement savings on the assumption that the lifetime allowance would remain at its previous level.

By claiming fixed protection, an individual will continue to be entitled to a protected lifetime allowance of £1.8 million provided he registers with HMRC before 6 April 2012 and meets the necessary requirements.

HMRC have published the following key points about the new rules:

• Deadline: Unlike with primary and enhanced protection, there is no provision in the FA 2011 or underlying regulations allowing HMRC to accept late applications for fixed protection. Applications must therefore be received by HMRC in the appropriate form before 6 April 2012 and online applications will not be accepted.
• Losing fixed protection: A member must tell HMRC if he loses fixed protection. This will be for one of the following reasons:
• • he accrues further benefits beyond a stipulated level;
  • he joins a new arrangement (except for the transfer of existing pension rights);
  • he makes an impermissible transfer into an arrangement; or
  • he makes a transfer out of an arrangement that is not permitted.

If any of the above events occurs, fixed protection is lost with effect from the date the event occurs.

"Equity looks on that as done which ought to be done"

A recent High Court decision has looked at the legal maxim that equity looks on "that as done which ought to be done" in a pensions context. The High Court considered the matter in HR Trustees Ltd v Wembley plc (in liquidation) and another [2011] which concerned the validity of an amendment made to a trust deed governing an occupational pension scheme.

An amendment that changed the basis on which pensions in payment were increased each year from "5% fixed" to "5% LPI" was held to be valid by the High Court. The scheme's amendment power required the trustees to "forthwith declare" an amendment in writing, but the declaration was signed by only four of the five trustees, calling into question its validity. The court ruled that this omission amounted to an administrative oversight and that the trustees had validly exercised their discretion to make the amendment.

This decision highlights that equitable maxims still have a role to play in modern pensions law. The amendment provision in question is unusual, although it was standard Legal & General wording used in a large number of insured schemes. There may therefore be some application in other schemes. Whether this decision has wider implications where there has been a defective amendment is more questionable. We would doubt, for example, that it could be used to solve many of the equalisation issues still being address by schemes where parties have failed to make actual decisions/pass resolutions required to make the amendment valid.

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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