UK: What’s In The Pensions Pipeline For 2014?

How the time flies. With 2013 having now drawn to a close, the attention of pension trustees and employers has turned to what pensions issues 2014 may bring. We have discussed some of the likely "agenda items" below.

GMP Equalisation

In January 2010 the DWP announced its conclusion that GMPs should be equalised regardless of whether or not a comparator can be identified.

Then, after two years of pensions practitioners nervously speculating on what this might mean in practice, in 2012 the DWP consulted on draft legislation and a methodology on how to equalise GMPs. However, the proposed methodology was criticised by many as being costly, administratively complex and failing to cover divorce, death and other cases. GMP conversion (i.e., a process whereby GMPs are simply converted to "normal" scheme benefits) seems to be the pension industry's preferred solution to the issue, on the assumption that steps need to be taken at all. Responding to this feedback, the DWP is considering publishing statutory guidance on how the GMP conversion process may be used alongside GMP equalisation.

In February 2013 the Pensions Minister, Steve Webb, announced that a pack of legislative changes on GMP equalisation would be put forward in Spring 2014, and that no further announcement would be issued until then.
Many of our pension trustee clients are adopting a "wait and see" approach, sensibly intending to implement GMP equalisation only once the legislation becomes clear. Spring 2014 is just around the corner, so we expect GMP equalisation to be a major discussion point for trustees and employers this year.

Pensions Tax Changes

With effect from 6 April 2014, the annual allowance will reduce from £50,000 to £40,000 and the lifetime allowance from £1.5 million to £1.25 million.

Two new forms of transitional protection – "fixed protection 2014" and "individual protection 2014" – will be available for affected individuals who have not already registered for primary, enhanced or fixed protection.

Claiming fixed protection 2014 will give an individual a lifetime allowance of the greater of £1.5 million and the standard lifetime allowance (i.e., £1.25 million on 6 April 2014), but this protection will be lost if the individual accrues any further pension benefits.

Claiming individual protection 2014 will give an individual a lifetime allowance equal to the value of his or her pension savings on 5 April 2014, subject to an overall maximum £1.5 million lifetime allowance. In contrast to fixed protection 2014, the individual will not lose this protection if he or she continues to accrue further pension benefits, subject to the £1.5 million cap.

The Impact of the 'Money Purchase Benefits' Definition Change

The new statutory definition of "money purchase benefits" included in the Pensions Act 2011 was introduced by the DWP to ensure that a funding deficit could not arise in relation to money purchase benefits, effectively, to negate the effects of the 2011 Supreme Court decision in Houldworth and another v Bridge Trustees Ltd. However, the new definition has not yet been brought into force.

In October 2013 the DWP opened a consultation on draft Regulations in relation to the new definition. If the consultation progresses as planned by the DWP, the Regulations will come into force on 6 April 2014 with retrospective effect (in many cases) from 1 January 1997.

In practice, the new definition will mean that some benefits previously treated by schemes as money purchase will now be re-classified as defined benefit. For example, schemes with any of the following features may be affected:

  • A guarantee in the accumulation phase (i.e., the period in which contributions build up in members' pension accounts) e.g., some form of guaranteed amount linked to salary, interest rate or investment yield on contributions
  • A pension in payment paid directly from the scheme derived from money purchase benefits, unless this is backed by a matching insurance policy
  • Where money purchase benefits are underpinned by a GMP (or any other defined benefit-type benefit)

If benefits formerly treated as money purchase are re-classified as defined benefit then there are far-reaching consequences. Such benefits will, for example, become subject to the employer debt, scheme-specific funding and PPF levy regimes.

The draft Regulations provide some comfort by introducing transitional provisions giving affected schemes time to comply with these resulting regulatory requirements. In some circumstances the retrospective nature of the amendments is also limited so that trustees will not need to revisit past decisions. For example, the draft Regulations provide that:

  • Schemes that commenced winding up on or before 27 July 2011 (the date of the Supreme Court decision) will not have to revisit past decisions
  • Schemes will not have to revisit historic section 75 employer debt calculations where the trigger event occurred on or before 27 July 2011
  • Schemes will not have to revisit transfers completed before 6 April 2014
  • The scheme-specific funding requirements will be disapplied in relation to periods before 6th April 2014.

Given the DWP's proposed 6 April 2014 implementation date, we would recommend that trustees and employers of potentially affected schemes consider the possible impact of the new definition and draft Regulations as soon as possible.

The Pensions Regulator's New Statutory Objective and Approach to Regulating Defined Benefit Schemes

On 2 December 2013, the Pensions Regulator published for consultation a draft revised code of practice on defined benefit funding, together with a draft funding policy and regulatory strategy for defined benefit schemes. The consultation runs until 7 February 2014 and the Regulator anticipates that the new code will be in force by July 2014, applying to schemes undertaking valuations from that time.

The consultation sets out how the Regulator intends to balance its proposed new statutory objective, applicable to the exercise of the Regulator's functions in a defined benefit scheme funding context only, "to minimise any adverse impact on the sustainable growth of an employer" against its other statutory objectives.

The existing code of practice on defined benefit funding is largely concerned with the process of agreeing scheme specific funding within the 15-month statutory deadline, whereas the draft revised code instead focuses on a more principles-based and outcome-focussed approach. A key theme of the revised code is that trustees should adopt an integrated approach to risk management. Key scheme risks, namely employer covenant, investment and funding, are interlinked and should be considered "in the round". The Regulator acknowledges that it has moved away from its old discrete triggers (such as recovery plan lengths and discount rates) and instead will adopt a "broad suite of risk indicators" built around these key risk areas.

The draft revised code states that trustees should ensure that any funding shortfall (on an appropriate funding basis) is eliminated "as quickly as the employer can reasonably afford". In doing so, trustees should seek balance so as not to (i) unreasonably impact on the employer's sustainable growth and investment plans and it ability to support the scheme; (ii) compromise the needs of the scheme; or (iii) take excessive or unnecessary risks.

Defined Ambition

At the end of 2013 the DWP consulted on proposals for a new category of "defined ambition" pensions as a way of sharing costs and risks more equally between employers and members. The DWP's intention is to consult on draft legislation in the coming months.

"Flexible Defined Benefit" Models

The DWP has proposed the following three new "flexible defined benefit" models:

  • Removing the statutory requirement for the indexation of pensions in payment
  • Allowing employers to convert a member's defined benefit pension to money purchase and transfer it to a nominated money purchase pension fund if the member leaves employment before retirement
  • Giving employers greater flexibility to adjust the normal retirement age under the scheme

These models are likely to attract those employers who still have a defined benefit scheme open to future accrual, particularly in the context of contracting out (and, therefore, the associated National Insurance contribution rebate) being abolished in 2016.
For each of these models the DWP's stated intention is that the accrued benefits of members would not be affected.

"Money Purchase Plus" Models

The DWP also considered different forms of guarantees within money purchase schemes that could provide greater certainty for members about their accumulated pension income while they are still saving, without adding to employer liabilities.
The paper also explored introducing a collective money purchase model, which is commonly used in the Netherlands. This "CDC" model offers an alternative approach to risk sharing as assets are pooled between members and should therefore create "more stable outcomes".

Scottish Independence

On 18 September 2014 the Scottish electorate will vote on whether Scotland should become independent of the UK.

As the law currently stands, if Scotland becomes independent any UK occupational pension scheme with members located in both (i) Scotland; and (ii) England or Wales, would likely become a "cross-border scheme" for the purposes of EU legislation. "Cross-border" schemes with defined benefits need to be fully funded (on a technical provisions basis) at all times; employers would therefore need to make good any funding shortfall immediately. In addition, such schemes would be required to have annual (rather than the usual triennial) valuations.

One way of avoiding these funding consequences would be to segregate existing schemes into separate Scottish and English sections. However, this is a complex and timely process.

It is possible that in practice the EU would legislate to introduce an exception to the cross-border requirements in the circumstances. However, there has been no indication to date that it intends to do so.

Another potential issue arising from Scottish independence relates to asset-backed contribution (ABC) structures. Several pension schemes have put in place ABC structures in the past few years. In practice, Scottish limited partnerships have often been used to exploit a loophole in the employer-related investment legislation. However, this loophole could be lost if Scotland leaves the UK. The documentation governing a particular ABC structure may already contemplate Scottish independence, but it is also possible that the issue was simply not addressed when the documentation was drafted.

If you are interested in exploring any of the issues raised in this alert further, we would be happy to discuss them with you.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Wedlake Bell
Wedlake Bell
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Wedlake Bell
Wedlake Bell
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions