This month, our reports include:
- HMRC’s reminder that those wishing to elect for fixed protection must do so before 6 April 2012;
- Budget changes affecting pensions; and
- a High Court decision on the date for the calculation of a section 75 debt.
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Budget News 21 March 2012
In his Budget speech this afternoon, Chancellor George Osborne made the following pensions-related announcements:
- The State Pension Age will be reviewed automatically in future to take account of longevity.
- The existing age-related allowances will be frozen from 6 April 2013 at 2012/2013 levels until they align with personal allowances. From April 2013, age-related allowances will no longer be available except to those born on or before 5 April 1948. The higher age-related allowance will only be available to those born before 6 April 1938. A new single personal allowance irrespective of age will be introduced, and the Chancellor has stated that no pensioner will lose “in cash terms”.
|2012||£8,105||£9,940 (age 65 to 75)||£10,090 (age 75 and above)|
|2013||£8,105||£10, 500 (age 65 to 75)||£10,660 (age 75 and above)|
|2014||£10,000||£10,500 (age 65 to 75)||£10,660 (age 75 and above)|
- Instead of the Basic State Pension and State Second Pension, there will be a new single tier pension of approximately £140 a week, based on contributions, for future pensioners. More detail on this proposal will be published at a later date.
- The Government is working with a number of the UK’s largest private pension funds with a view to attracting their investment in infrastructure projects. No additional detail has yet been released.
Contrary to expectation, the Chancellor has made no changes to the tax-free annual allowance in respect of pensions contributions, which remains at £50,000.
Publications relating to the Budget 2012 are available via links on HMRC’s Budget 2012 updates page.
View our full Budget report here.
TPR publishes auto-enrolment strategy
On 29 February 2012, the Pensions Regulator (TPR) published its approach to maximising employer compliance with new automatic enrolment duties and encouraging the provision of effective defined contribution (DC) benefit schemes.
TPR’s strategy document, “Delivering successful automatic enrolment: The Pensions Regulator’s approach to the regulation of employers and schemes”, sets out how TPR intends to support the Government’s pension reforms by ensuring that as many employers as possible comply, and encouraging those providing workplace pension schemes to achieve this via safe, durable and value for money vehicles.
The strategy document highlights that TPR intends to maximise employer compliance with the new automatic enrolment duties by:
- providing employers, intermediaries and advisers, with the information, tools and support they need to get to grips with the new duties;
- establishing a culture under which employers understand that the law is being applied fairly, that employers as a whole are complying, and that wilful or persistent non-compliance will result in a fine; and
- ensuring that effective systems are in place for detecting and tackling non-compliance.
The document also explains how TPR will work with the pensions industry in a joint objective to ensure that members are auto-enrolled into pension products that are well-governed, durable and offer value for money by:
- encouraging the market to deliver schemes that encompass TPR’s six principles for good design and governance of DC schemes, as published in December 2011; and
- taking a segmented approach to regulating the DC landscape, recognising that some segments are more likely than others to deliver good outcomes.
View the strategy paper.
DWP consults on revised auto-enrolment staging dates
On 23 March 2012, the Department for Work and Pensions (DWP) published a consultation paper and draft Employers’ Duties (Implementation) (Amendment) Regulations 2012, which set out proposed amendments to the Employers’ Duties (Implementation Regulations 2010.
The amending regulations include the following proposed changes:
- the extension of the full implementation of auto-enrolment from September 2017 to February 2018. Revised staging dates are set out in the amending regulations;
- a delay in the increase in minimum contribution rates from 1 per cent to 2 per cent until October 2017;
- later staging dates for the majority of employers with up to 249 employees.
Employers with existing staging dates on or before 1 February 2014 will retain those dates.
The consultation period ends on 4 May 2012.
View the consultation paper and draft amending regulations.
DWP publishes response to consultation on revised auto-enrolment earnings thresholds
On 26 March 2012, the DWP published its response to the consultation on earnings thresholds for auto-enrolment.
An order will be laid before Parliament setting out the following thresholds:
- £8,105 for the auto-enrolment earnings trigger;
- £5,564 for the lower limit of the qualifying earnings band; and
- £42,475 for the upper limit of the qualifying earnings band.
The consultation does not address what will happen in 2013/14 when the upper earnings limit is due to fall to £41,450 as a result of the Budget last week.
View the consultation response.
PPF sets out details of its certification requirements for contingent assets
The Pension Protection Fund (PPF) has published a Q&A paper following a presentation made to the Association of Pension Lawyers on 27 February, 2012. As we reported in our briefing on the contingent asset regime published earlier this month, the revised certification test for contingent assets is less onerous than the original proposal under last year’s consultation for trustees to certify that “Each Guarantor could be expected to meet full commitment if called upon to do so at the date of the certificate”, but it still requires affirmative action from trustees wishing to submit a Type A Guarantee for recognition.
Failure to take, as a minimum, the steps recommended by the PPF in the Guidance could ;be onerous for trustees, given that criminal liability may result should they be found guilty of providing misleading information. In our consultation response, we raised with the PPF the point that this requirement could lead to additional cost for trustees who may feel obliged to conduct covenant reviews specifically to meet this requirement. Indeed, there should be sufficient statutory protection for the PPF against provision of ‘empty guarantees’ under company law, which requires directors of corporate entities to act at all times in good faith and to promote the success of their companies. We also proposed that, in this context, a more appropriate solution to give the PPF comfort about the value of guarantees may have been to seek a declaration from the guarantor’s directors, rather than from the trustees, who are not ordinarily in a position to control this risk. We wrote to the PPF to express our concerns and to ask for clearer parameters in this regard. The PPF responded that, although they are aware that the new requirement in respect of guarantor strength represents an additional responsibility for trustees, the introduction of measures to test guarantor strength is a response to stakeholder concerns and protects all stakeholders. The PPF is not of the view that the revised requirement is overly burdensome and it recommends that trustees do not interpret the certification of contingent assets in an unduly cautious manner.
The PPF has stated that the intention of the new requirement is to weed out the clearest weak guarantees rather than to impose wholesale new requirements and is clear that it does not expect a full covenant review in most circumstances. Rather than simply refusing to certify, the PPF expects, in areas of doubt, that trustees will use the new powers to impose notional caps or ignore weaker guarantors.
The deadline for providing documentation to the PPF for certification or re-certification of contingent assets is 5pm on 30 March 2012.
View the PPF’s Q&A paper.
FSA consults on pension transfer value analysis assumptions
On 28 February 2012, the Financial Services Authority (FSA) published a consultation paper on pension transfer value analysis (TVA) assumptions.
The consultation paper contains proposals for changes to the FSA's rules and guidance which are intended to update the assumptions used when a firm compares the benefits likely to be paid under a defined benefit (DB) pensions scheme with the benefits provided by a personal pension scheme or stakeholder pension scheme. In particular, the FSA is consulting on the following TVA assumptions and requirements:
- the proposal to update the mortality basis to be consistent with the Board for Actuarial Standards' (BAS) Statutory Money Purchase Illustration (SMPI) mortality basis, so that the cost of replicating benefits in a personal pension scheme will allow for both general updating of the basis and implementation of gender equal rates. This follows the Court of Justice of the European Union's (ECJ) judgment in Association Belge des Consommateurs Test-Achats and others.
- the introduction of an explicit consumer prices index (CPI) assumption for revaluation of pensions in deferment, at a rate to be determined when the FSA next considers the continuing validity of its projection rates;
- a proposal to require CPI-linked benefits to be valued using the same interest rate assumption as is used for retail prices index (RPI) linked annuities;
- the proposal that limited price indexation (LPI) annuities be valued on the same assumptions as RPI annuities; and
- TVA comparisons should be illustrated using a growth assumption that takes account of a member's attitude to risk and the recommended personal pension assets, as well as being conservative enough to reflect that a member has taken on the investment and longevity risks.
The consultation period ended on 27 March 2012.
HMRC publishes newsletter no. 52
HM Revenue & Customs (HMRC) has published issue 52 of its pensions newsletter. The contents of this edition include:
- a warning against early release pension offers, otherwise known as pension release schemes;
- a reminder that individuals wishing to elect for fixed protection must do so before 6 April 2012, and providing a link to the relevant form. The form however, cannot be submitted online and applications received by HMRC after 5 April 2012 will not be accepted;
- some guidance on the technical question of whether fixed protection may be lost if deferred pensions are revalued by a limited price indexation mechanism contained in the scheme rules; and
- a benefit crystallisation event (BCE) is an event that triggers a test against the lifetime allowance available to a member of a registered pension scheme. BCE 3 occurs when the member's scheme pension is increased by an amount that exceeds a prescribed limit. The newsletter sets out some guidance on the circumstances in which pension increases granted to scheme members under a pension increase exchange exercise are likely to count as a BCE 3 and trigger a test against the member’s available lifetime allowance.
View the newsletter.
HMRC publishes Countdown Bulletin no. 6
HMRC has published the final issue of its Countdown Bulletin on the abolition of contracting-out on a defined contribution basis. This edition includes information on contracted-out mixed benefit schemes and the return of incorrectly paid age related rebates.
View the Bulletin.
HMRC publishes technical note on employer asset-backed pension contributions
In our February update, we reported that further legislation had been announced on 22 February 2012 in respect of employer asset-backed pension contributions. The aim of the legislation was to limit the circumstances in which upfront tax relief can be given to asset-backed arrangements. Further amendments, effective from 21 March 2012, will be made to the February legislation in order to close additional taxation loopholes. The amended legislation will be published as part of the Finance Bill 2012 on 29 March 2012. The details are set out in a technical note published by HMRC.
View the technical note.
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The Occupational Pension Schemes (Contracting-out and Modification of Schemes) (Amendment) Regulations 2012
These regulations increase from 4 per cent to 4.75 per cent the amount of fixed rate revaluation of guaranteed minimum pension for early leavers from 6 April 2012. They also allow trustees of formerly contracted-out defined contribution occupational pension schemes to change their scheme rules as a result of the abolition of “protected rights” from 6 April 2012.
The Pensions Act 2008 (Abolition of Protected Rights) (Consequential Amendments) (No.2) (Amendment) Order 2012 No. 709
This Order is made under the Pensions Act 2008 and it provides that pension schemes contracted-out on a defined contributions basis will not be required to make special provision in relation to the protected rights of members, from the contracting-out abolition date, 6 April 2012.
The Order amends provisions under existing regulations which deal with pension payments which give effect to a member’s protected rights, as they existed before the abolition date. The amendments remove the protection given to protected rights payments in bankruptcy proceedings and remove the prohibition on assigning protected rights payments, as such payments will no longer be identifiable after the abolition date.
View the regulations and explanatory memorandum.
The Occupational and Personal Pension Schemes (Levies - Amendment) Regulations 2012
The above regulations come into force on 1 April 2012 and specify the new amounts to be used in calculating the amount payable in respect of:
- the administration levy for occupational pension schemes. The administration levy meets the running costs of the PPF and has remained unchanged since 2008/9. From 2012/13, the administration levy rates will be reduced by at least 25 per cent; and
- the general levy for occupational and personal pension schemes. The general levy meets the costs of running TPR, the Pensions Advisory Service and the Pensions Ombudsman and has remained unchanged since 2008/9. From 2012/13, the general levy rates are to be reduced by at least 12 per cent.
View the regulations and explanatory memorandum.
The Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling and Compensation Cap) Order 2012
This order specifies the levy ceiling and the amount of the compensation cap (£34,049.84) for use in relation to the PPF in the financial year beginning 1 April 2012.
View the order and the explanatory memorandum.
The Registered Pension Schemes (Authorised Payments) (Amendment) Regulations 2012
These regulations add a further category of payment to the list of authorised payments that a registered scheme can make without attracting an unauthorised payments charge.
When funds in personal pension schemes are too small to purchase an annuity, but the conditions allowing for trivial commutation are not met, commutation of these funds will now be treated as an authorised payment where the individual concerned is aged 60 or over, and commutation applies to a maximum of two personal pension funds each with a value of £2,000 or less.
The regulations come into force on 6 April 2012.
View the regulations and the explanatory memorandum.
The Pensions (Institute and Faculty of Actuaries and Consultation by Employers - Amendment) Regulations 2012
The above Regulations amend the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 by extending the “listed changes” under which employers are required to consult on changes to scheme provisions. The Regulations oblige employers with occupational pension schemes to consult with affected members in advance if they want to change a scheme’s revaluation or indexation rules. There is no requirement for employers to consult if that change is beneficial for employees. The consultation is required only if the employer has any employees who are active or prospective members of the scheme in question.
The remaining provisions in these Regulations amend references in secondary legislation to the Faculty of Actuaries and the Institute of Actuaries, as these two bodies merged into a single entity from 1 August 2012 to form the Faculty and Institute of Actuaries.
The Regulations come into force on 6 April 2012.
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Case law update
In our December 2011 update, we reported that leave had been granted for an appeal to the Supreme Court.
We now understand that the Supreme Court has taken the appeal, and a three-day hearing has been listed to start on 14 May 2013.
R (FDA and others) v Secretary of State for Work and Pensions and another  - Unions' appeal against public sector pension switch to CPI fails
On 20 March 2012, the Court of Appeal (CA) dismissed an appeal against the High Court's rejection of a challenge to the government's decision to use the Consumer Prices Index (CPI) instead of Retail Prices Index (RPI) as the basis on which public service pensions are annually adjusted to take account of inflation.
Two grounds of appeal were put to the CA:
- the Social Security Administration Act 1992 does not allow the Secretary of State (SoS) to use CPI. The CA rejected this argument holding that the Act gives the SoS discretion to select the method used, provided he acts rationally and takes all appropriate (and no inappropriate) matters into account; and
- by taking account of the impact of the decision on the national economy, the SoS had taken into account an irrelevant consideration. The CA also rejected this argument holding that the SoS was entitled to take the state of the national economy into account when selecting the applicable index provided that this was done in a proportionate manner.
The CA also went on to state that even if taking account of the state of the national economy had been unlawful, the facts of this case made it clear that the decision to use CPI would still have been made by the SoS, even if he had put out of his mind any consideration of the benefit to the national economy of that decision.
Uniq plc - High Court approves scheme of arrangement in pension debt-for-equity swap
In our update for April 2011, we reported that a ground-breaking scheme of arrangement, in which Norton Rose LLP advised, had been approved by the High Court. The innovative restructuring of the pension liabilities of Uniq plc, allowed the company to dispose of its defined benefit pension liabilities in the first pension debt-for-equity swap of a listed company in the UK.
TPR has now published a formal report detailing its involvement in the Uniq deficit-for-equity swap. A restructuring exercise was undertaken by the trustee of the Uniq plc pension scheme and its sponsoring employers, in conjunction with TPR and the PPF. As a result of the restructuring exercise, employer insolvency and PPF entry were avoided.
TPR’s report is prepared under section 89 of the Pensions Act 2004, which allows it to publish details about “the consideration given by it to the exercise of its functions” if it thinks this appropriate in a particular case. In addition to a step-by-step explanation of the restructuring, the report remarks that the restructuring is "a good illustration of a trustee and sponsoring employer working closely and collaboratively with the Regulator and the PPF" to achieve the best possible outcome for members, in a situation where the employer covenant was so weak there was "little or no reasonable chance of paying the benefits promised with acceptable levels of risk".
View the report.
Danks & Others v Qinetiq Holdings Ltd & Another  - High Court: trustees’ decision to switch to CPI not a “detrimental modification”
A decision by the trustees of the QinetiQ pension scheme to switch the basis for calculating pension indexation and revaluation would not be a "detrimental modification" under section 67 of the Pensions Act 1995 (PA 1995), as the scheme rules allow the use of the retail prices index (RPI) "or any other suitable cost-of-living index selected by the Trustees".
The trustees asked the High Court to confirm whether the selection of an index other than RPI would, or might, affect members' subsisting rights (as defined by section 67A(6) of the PA 1995) in relation to increases to pensions in payment and the revaluation of deferred pensions. In addition, the trustees asked whether they could use their power to apply different indices either for different purposes or in relation to different periods of a member's service.
Vos J confirmed that:
- in respect of pensions in payment, the member only had a right to a future increase, at a rate that the trustees had the power to change provided they "adhere to the requirements for the exercise of such a fiduciary power". The right to an increase was not an entitlement or an accrued right until the calculation had been done;
- a deferred member did not have the right to have his pension revalued at a set rate until the normal pension date, when the calculation was done. The fact that RPI was the "default rate" when pensionable service was accrued could not affect the index used for revaluation; and
- "Index" could refer to RPI in respect of some periods of pensionable service and the consumer prices index (CPI) in respect of other periods. The trustees' decision could be reversed or altered at any time before the calculation was carried out.
This decision shows that the courts are willing to adopt a commercial and purposive approach in the interpretation of scheme rules. The decision will have an immediate impact for the scheme in question, as funding negotiations between the trustees and the employer have now been concluded and the decision to switch from RPI to CPI has had a significant impact on the scheme's funding position.
View the judgment.
High Court rules s75 debt should be calculated using date of insolvency of employer - Bestrustees Plc v Kaupthing Singer & Friedlander
In a case concerning the pension scheme of Icelandic bank Kaupthing Singer & Friedlander (KSF), the High Court has held that pension scheme liabilities calculated in accordance with section 75 of the Pensions Act 1995 (the section 75 debt), should be calculated at the date of the sponsoring employer’s insolvency and not at the later date of finalising the claim.
The independent trustee of the KSF scheme had asked the court to rule on whether the applicable date for the calculation of annuity costs was the date of insolvency or the date the debt was certified, since the difference in the price of annuities between these two dates was £66 million.
The decision has been welcomed as sensible, since problems would arise if the date for estimating pension annuity rates differed from the date when both the scheme’s assets and the level of benefits to be provided become fixed (the insolvency date). Common practice by actuaries has been to certify the section 75 debt using annuity rates at the insolvency date.
View the judgment.
Blight and others v Brewster  - Judgment debts may be enforced against pension funds
The High Court has granted an order to assist the enforcement of a judgment debt against part of the debtor's pension fund. The order has the effect of requiring the debtor to exercise his right to withdraw a lump sum from his pension fund. The court also granted a third party debt order to take effect when the right has been exercised.
The court followed a recent Privy Council decision concerning the court's jurisdiction to grant injunctions and appoint receivers under section 37 of the Senior Courts Act 1981 (Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Company (Cayman) Ltd and others (Cayman Islands)  ). This jurisdiction can be developed incrementally to apply existing principles to new situations. The overriding consideration is the demands of justice.
The judgment reflects the view that debtors should not be allowed to hide their assets in pension funds when they have a right to withdraw monies needed to pay their creditors. The High Court considered that it should exercise its discretion in this case to, in effect, release certain funds held in a pension scheme for the benefit of the judgment creditor. While the appointment of a receiver might have achieved a similar result for the claimant, the court held that this could have resulted in disproportionate trouble and expense.
The position in bankruptcy
This decision provides a contrast with the position in bankruptcy cases where pension funds are afforded special statutory protection. In this case, the judge rejected the defendant’s argument that, because of this protection in bankruptcy, public policy requires pensions to be treated as exceptional when it comes to execution of judgments. Moss QC commented that a bankrupt individual:
- surrenders all of his assets to a trustee in bankruptcy (although there are exceptions for certain assets, including the tools of the debtor’s trade and assets necessary for basic domestic needs); and
- becomes subject to certain disadvantages and restrictions in relation to his financial affairs
and that a judgment debtor could not have the benefits of bankruptcy without its burdens. Where a debtor fails to pay his debts and does not go into bankruptcy, his assets will be susceptible to the enforcement of judgments by individual creditors.
View the judgment.
Possible future developments
Another case currently before the High Court is that of Raithatha v Williamson in which judgment is due imminently. The issue under consideration is whether a bankrupt of scheme pension age, who is still employed and working, should be forced to access pensions savings to pay off creditors where he is entitled to draw benefits but chooses not to.
Pensions Ombudsman - Parizad (82720/2): death benefits - breach of trust in deliberately waiting for end of two-year payment period
A breach of trust occurs if a pension trustee deliberately fails to exercise a discretion to pay a lump-sum death benefit within the 24-month period prescribed in the scheme rules. If the trustee knows that paying the benefit outside this period will attract significant tax charges as an unauthorised payment, a decision to do so is perverse. Instead the trustee should take appropriate steps to pay the benefits in a timely manner and failure to do so amounts to maladministration.
The Pensions Ombudsman upheld a complaint on behalf of a member to whom the trustees initially decided to pay half of a lump-sum death benefit. Due to problems in locating the complainant, the trustees later decided to instead allow the 24-month period to lapse and to pay the money to the member's personal representatives, attracting nearly £22,000 in tax.
The Ombudsman directed the trustees to establish a trust for payment of the death benefit into which they should pay an amount equal to the complainant's untaxed share (£31,375), an option that always had been available under the scheme rules.
View the Determination.
To view update as a pdf.
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