REGULATOR'S STATEMENT ON CURRENT MARKET CONDITIONS
The Pensions Regulator has issued a statement on current market conditions. It has reviewed its codes of practice and guidance and come to the view that no changes are required at present and that the codes are "fit for purpose".
The two main areas covered by the statement are scheme funding in defined benefit schemes and member communications in defined contribution schemes.
In relation to scheme funding trustees should be following the current code and keeping matters under review. For future valuations the Regulator would expect larger deficits and weaker employer covenants to lead to higher technical provisions. This in turn could mean that recovery plans have longer recovery periods. There is no immediate plan to change the "triggers" on scheme funding which would lead to Regulator intervention, but this will be kept under review.
In relation to defined contribution schemes trustees should be giving careful consideration to member communication - this may include suggesting members nearing retirement take independent advice (for example from TPAS) and reminding members to keep their investment choices under review (especially those in lifestyle funds).
TRUSTEES STRUCTURE WIND UP TO MAXIMISE DEBT
The High Court judgment in Easterly -v- Headway is a very interesting case on section 75 debts - particularly for schemes where the debt is not calculated on a pure buy-out basis. It confirms that trustees can increase the value of the debt by partially buying out benefits before setting the applicable time for calculating the debt. The decision does turn on the express Scheme Rules (as well as statutory provisions) but may be relevant to other schemes.
Headway (H) was the principal employer of the Scheme, and Easterly the trustee. Winding up was triggered in May 2001, this meant that would mean the s75 debt would be calculated on the basis of full buy-out for pensioners and MFR for other benefits. E decided to do a "partial buy-out" which consisted of:
- using all available assets to purchase annuities for members;
- then fixing the applicable time for calculating the s75 debt; and
- then using any monies recovered under s75 to secure a further tranche of benefits.
The trustee argued that by removing assets and liabilities (on a buy out basis) at the first stage from the debt calculation it effectively increased the debt which meant that the balance available at stage 3 is greater than it would otherwise have been. Essentially the question is whether the liability from which the Trustee was released on buy-out was ascertained by reference to the benefit it would otherwise have to provide (Trustee argument) or the underlying MFR value of that benefit (H argument). The second question was whether, following the partial buy-out the Trustee could still set the applicable time (i.e. was the Scheme still being wound up)?
The Vice-Chancellor found in favour of the trustee on both questions. The partial buy-out bought out the full value of that part of the benefit (rather than the MFR equivalent value), leaving a larger portion of benefit remaining to be considered as a liability for the s75 debt. It was also held that so long as assets remain uncollected or unapplied then the winding up is continuing. Following the partial buy-out the Trustee still has the benefit of a s75 claim and so the wind up is not complete. It is still therefore open to the Trustee to set the applicable time.
In conclusion:
- the partial buy-out route was permissible (under the Rules and statute) and the Trustee could fix the applicable time after the buy-out;
- the subsequent s75 calculation will be based on the remaining liability of the Trustee to provide benefits in full (not on the underlying MFR value).
This case will be less relevant for schemes commencing winding up on or after 6 April 2005 as their s75 debts will be calculated on the basis of full buy-out for all members.
PPF LEVY PROPOSALS
The PPF has issued consultation on the development of the levy for 2011/20012 onwards.
The key proposed changes to the formula are:
- a new component to reflect long term risk (employer insolvency within five years);
- introducing investment risk as a factor in measuring underfunding; and
- changing the proportion of scheme based levy to reflect the new long term risk component.
These changes, if adopted, would change the distribution of the levy, not the total to be collected (this remains at £675m indexed to wage inflation). The PPF says that if the new formula had been used in 2008/2009 half of schemes would have had a higher levy - and half a lower levy. The PPF sees this reallocation as more accurately reflecting the risk schemes pose to the PPF. Responses to the consultation are invited before 13 February 2009.
The final version of the levy determination for 2009/2010 has also been published.
CHANGES TO EMPLOYER DEBT - INFORMAL CONSULTATION
As reported in our recent briefing, the Department for Work and Pensions has issued an informal consultation on making changes to the employer debt regime. Contrary to some press reports, the stated intention is not to weaken the protection for pension schemes under section 75 of the Pensions Act 1995 but rather to relax the requirements only in the context of corporate restructuring where the employer covenant was strong before the restructuring and there is no detrimental effect or weakening of the covenant afterwards. A formal consultation may follow if changes are to be proposed.
PRE-BUDGET REPORT 2008
The Chancellor delivered the 2008 Pre-Budget Report on 24 November 2008.
Lifetime Allowance And Annual Allowance
The lifetime allowance (LTA) and annual allowance (AA) are laid down by the Finance Act 2004 until 2010/11 (2009/10: LTA £1.75m and AA £245,000; 2010/11: £1.8m and £255,000). Thereafter, "to ensure fairness, affordability and sustainability of tax reliefs", both will remain at their 2010/11 rates for a period of five years, up to and including 2015/16.
National Insurance Contributions
The rates for the tax year 2009/10 are shown in the table below. Employee, employer and self-employed rates of National Insurance Contributions will increase by 0.5 per cent from April 2011.
National Insurance Contributions (£ Per Week Unless Otherwise Stated)
|
|
2008/09 |
Change |
2009/10 |
|
Lower earnings limit, primary Class 1 |
£90 |
+£5 |
£95 |
|
Upper earnings limit, primary Class 1 |
£770 |
+£74 |
£844 |
|
Upper Accruals Point |
N/A |
N/A |
£770 |
|
Primary threshold |
£105 |
+£5 |
£110 |
|
Secondary threshold |
£105 |
+£5 |
£110 |
|
Employees' primary Class 1 rate between primary threshold and upper earnings limit |
11% |
- |
11% |
|
Employees' primary Class 1 rate above upper earnings limit |
1% |
- |
1% |
|
Employees' contracted-out rebate - salary-related schemes |
1.6% |
- |
1.6% |
|
Employees' contracted-out rebate - money purchase schemes |
1.6% |
- |
1.6% |
|
Employers' secondary Class 1 rate above secondary threshold |
12.8% |
- |
12.8% |
|
Employers' contracted-out rebate, salary-related schemes |
3.7% |
- |
3.7% |
|
Employers' contracted-out rebate, money purchase schemes |
1.4% |
- |
1.4% |
A Charter For HMRC
The Government will begin consultation in January on the wording of a Charter for HMRC, "as an important contribution to its relationship with individuals, businesses and tax agents". This follows a consultation over the summer on the scope of a Charter. In the light of responses, published alongside the Pre-Budget Report, the Government has decided to include in next year's Finance Bill a clause giving the Charter explicit legislative authorisation. A new consultation will begin in January on the wording of the Charter, and HMRC and the DWP will work towards a joint launch for their respective charters in 2009.
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.
Pensions Legal Update - Spring 2017 (Video)
