UK: Pensions Ready Reckoner - December 2014

Last Updated: 2 January 2015
Article by Clive Weber

A quick overview of some key pension developments in Parliament, from the Pensions Regulator, the FCA and from the Courts:

PARLIAMENT

Topic Developments in outline
DC flexibility from April 2015 for those aged 55 and over The Taxation of Pensions Act 2014 amends the Finance Act 2004 to introduce DC flexibility from age 55 onwards from April 2015. The practical effect will depend on scheme rules and trustee decisions. Accessing DC funds flexibly is by way of drawdown from the member's "flexi-access drawdown fund", or by receiving a new type of authorised lump sum namely an "uncrystallised funds pension lump sum" ("UFPLS"). Activating flexi-access or UFPLS triggers the new limited annual allowance of £10,000 for future money purchase contributions.

Member communications should be suitably caveated as (1) the Act is subject to numerous Regulations, expected during January - March 2015, and (2) the Act merely sets the tax parameters – individuals' actual benefits, including any options for DC flexibilities, depend on what trustees allow. The Act does not involve the employer in the design of schemes' DC flexibility options.

The Act 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 Act.

Note the "lifetime allowance" tax rules continue notwithstanding the new DC flexibilities introduced by the Taxation of Pensions Act.
Framework for new DC flexibilities 25 November 2014 – the Pension Schemes Bill is expected to receive Royal Assent during January 2015 soon. The Bill now contains:
  1. the framework for delivery of the "guidance guarantee" by the Treasury designated delivery partners, TPAS and CPAS, for DC members considering using the new DC flexibilities; Treasury powers to monitor the delivery partners; and provisions making it a criminal offence to pretend to be a designated delivery partner;
  2. the requirement on trustees to check DB members have obtained FCA authorised advice before transferring to a DC arrangement or converting DB rights to DC; and
  3. amendments to the statutory transfer legislation to allow for the new DC flexibilities including DC members new statutory right to transfer at any point up to their retirement. DB members statutory right to transfer will, as now, cease 1 year before their normal pension date and so transfers within a year of NPA will continue to be non-statutory and dependent on scheme rules.
Ancillary changes to the "DC flexibility" changes from April 2015 The following Financial Conduct Authority ("FCA") Consultations 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, see above. The FCA's policy statement issued in November 2014 contains almost final standards for guidance providers. Surprisingly, DC members are not required to supply any information before their guidance session.
  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 in 2015 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. The Pension Schemes Bill 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. 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.

PARLIAMENT

Topic Developments in outline
Pooling of risk - Collective DC arrangements Provisions are also included in the Pension Schemes Bill to enable members' DC benefits to be pooled and hence investment and longevity risks shared. These "collective benefits" arrangements will be available under both shared risk and defined contributions schemes. However tax changes will also be needed and these have yet to appear. Collectives are unlikely to be operational until April 2016 at the earliest.
Direct access to DB benefits The Government has said it will consult on DB schemes offering direct access to DB benefits to members. At present DB members wishing to operate the new DB flexibilities first have to transfer to a suitable DC arrangement. Given the Consultation has yet to be issued, the proposal seems to have been kicked into the long grass.
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.
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 soon. Regulations will also be made automatically amending 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 Bulletin.
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.
Corporate directors Corporate directorships (often used by independent trustees) will probably still be allowed: see the Government's Consultation on Corporate Transparency issued in November 2014.

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 Bulletin – 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.
VAT:
ATP Pension Services AIS (March 2014,Court of Justice of the European Union)
We reported on "ATP" in our May 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. On 25 November 2014 HMRC issued its views on VAT recovery in DB and DC schemes – see our separate article in this Bulletin.
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.
Commission and overtime:
Lock v British Gas (European Court, May 2014)
Bear & Others (Employment Appeal Tribunal, November 2014)
In the employment law context in certain circumstances types of variable pay need to be included in calculating an employee's entitlement to "paid annual leave". Schemes which provide for more than basic annual pay to be pensionable may need to take these recent decisions into account.
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 statutory 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).

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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