This month, we report on:
- The High Court’s first consideration of pensions liabilities which may transfer on an asset sale under TUPE in Procter & Gamble v Svenska SCA ;
- An issue for schemes which previously contracted-out on a defined contribution basis and a potential unauthorised payments issue in connection with short service refund lump sums;
- TPR’s scheme funding statement in the light of current economic conditions and the related publication of illustrative case studies; and
- possible tax rebates for UK pensions funds following ECJ decision.
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Pensions implications of the Queen's Speech 2012
The Queen's Speech on 9 May 2012 outlined the Government's plans for new legislation, with 19 new bills promised. Amongst these are two new pensions bills:
- State pension - the Pensions Bill will "bring forward measures to modernise the pension system and reform the state pension, creating a fair, simple and sustainable foundation for private saving". It confirms measures to replace the current system with a single tier state pension, previously mentioned in the 2012 Budget. In addition, the Bill will include provisions to bring forward the increase in the state pension age to 67 between 2026 and 2028, announced in the 2011 Autumn Statement.
- Public-sector pensions - the proposed changes to public-sector pension schemes will also go ahead, with the speech confirming that these will "provide a fair balance of cost and benefits between public service workers and other taxpayers". The Public Service Pensions Bill follows the final proposed agreements reached with trade unions for the three largest pension schemes, announced on 15 March 2012.
We will report further on these Bills as they progress through Parliament.
The Abolition of Contracting-out on a Defined Contribution basis and Short Service Refund Lump Sums
In previous monthly news updates, we have reported on the legislative changes which came into force on 6 April 2012, whereby contracting-out of the state second pension on a defined contribution (DC) basis (a protected rights basis) was abolished.
Where a member of a registered pension scheme leaves that scheme and receives a refund of his member contributions, the repayment is known as a short service refund lump sum (SSRLS). One of the conditions that must be satisfied in order for the refund not to attract tax charges as an unauthorised payment is that the payment must extinguish all of the member’s entitlements to benefits from the scheme. An exception to this existed prior to 6 April 2012 under the Pension Schemes Act 1993. Where benefit entitlements could not be wholly extinguished by a SSRLS because legislation prevented this by requiring protected rights to be retained in the scheme, a “partial” SSRLS could be made.
However, legislation abolishing contracting-out on a defined contribution basis came into force on 6 April 2012. This means there is no longer any legal requirement to differentiate within a scheme between protected rights and non-protected rights. The result is that any payment made which represents only part of the member’s benefits under the scheme (because the rules preclude the payment of what was the protected rights element) will no longer constitute a SSRLS for tax purposes and will incur an unauthorised payments charge.
HM Revenue & Customs (HMRC) intends to introduce new regulations allowing schemes with hard-coded protected rights restrictions to pay SSRLSs representing partial refunds without incurring unauthorised payment tax charges. The regulations will apply for a transitional period, allowing affected schemes to make the required rule changes to allow a full refund and reflect the abolition of protected rights. However, it is unlikely that the regulations will be in force before summer 2012.
Our advice to trustees and administrators is to check their scheme’s rules to see if they are affected and an amendment is required.
View our full Stop Press on this issue.
View the DWP factsheet
View the HMRC note on SSRLS
View the Countdown bulletin no. 6
TPR publishes statement: “Pension scheme funding in the current environment”
On 27 April 2012, the Pensions Regulator (TPR) published the above statement which is aimed at the trustees and employers of defined benefit (DB) schemes in respect of which valuations are being undertaken with effective dates in the period September 2011 to September 2012.
The statement sets out TPR’s views on acceptable approaches to the valuation process in the current economic climate in order to protect members’ benefits. Trustees are encouraged to ensure existing deficit-repair contributions are maintained in real terms. TPR is of the view that the majority of schemes should be able to manage ongoing deficits without making changes to existing recovery plans, although it accepts that “modest” contribution increases or extensions to recovery periods may be necessary in some cases. TPR has also dismissed calls that schemes should be able to reduce their liabilities by making allowances for low gilt yields and the effect of quantitative easing in their assumptions.
TPR has also published some case studies in an additional paper: “Scenarios for scheme funding plans in the current economic conditions”.
For in-depth comment on TPR’s statement, see our recent Stop Press.
View the full statement.
TPR publishes its sixth Corporate Plan
TPR has set out its key areas of strategic focus for the next three years in its sixth Corporate Plan.
Priorities include helping employers to prepare for auto enrolment, working with the pensions industry in the DC market to deliver “good outcomes for members”, and helping sponsoring employers and trustees of DB schemes to work through the particular challenges their schemes face in the current economic environment.
The Corporate Plan sets out the regulatory approach and covers TPR’s Strategic Plan for 2012-2015 and its Business Plan for 2012-2013. The key elements are:
In protecting members of DB schemes TPR will:
- help make trustees and employers facing valuation dates between December 2011 and March 2012 aware of the key issues;
- target resources proactively at higher risk schemes ;
- provide support and guidance to DB scheme trustees on holistic risk management by looking across investment, funding and covenant risk areas to create a more comprehensive view of member security in schemes. It is likely that TPR will revise the code of practice on scheme funding in future; and
- remain fully engaged in the discussions currently underway in Europe on the reform of the Institutions for Occupational Retirement Provision (IORP) Directive and be fully involved in the impact assessment being undertaken on the funding proposals contained in the IORP review.
In protecting members of DC schemes, TPR will:
- explain to the supply and demand sides of the pensions industry how they might demonstrate that TPR’s six key principles for delivery of DC pensions are present in their arrangements;
- work with trust-based schemes in particular to ensure that schemes are sufficiently robust and durable; and
- work to embed TPR’s six DC principles with providers and advisers.
In maximising employer compliance with automatic enrolment duties, TPR will:
- raise general levels of awareness and understanding of the duties among employers and advisers so that the requirements of automatic enrolment are properly anticipated and preparations start in good time;
- send specific communications at 12 months and 3 months to employers subject to the duties and work closely with these employers, their advisers and suppliers in the first tranche of automatic enrolment to anticipate and resolve issues; and
- start to build intelligence, investigation and enforcement capabilities in preparation for small and micro employers being brought into the programme in later years.
TPR sets out five strategic principles which will guide its approach:
- to engage the market at the most appropriate part of the value chain;
- to adopt an evidence-based approach to segment the market according to the risk presented to member benefits;
- to ensure TPR's approach will be proportionate to the risks;
- to ensure that there is clear accountability for member outcomes and
- to work closely with Government and other regulators to maximise the overall effectiveness.
The Strategic Plan sets out the following themes:
- Theme 1 - Reducing risks to DB members: to protect the benefits of members of work-based pension schemes, to reduce the risk of compensation being payable by the PPF and to promote good administration of work-based pensions schemes.
- Theme 2 - Reducing Risks to DC scheme members: to protect the benefits of members of work-based pension schemes and to promote good administration of work-based pensions schemes.
- Theme 3 - Auto-enrolment: TPR is to maximise compliance with the employer duties and employment safeguards in the 2008 Act, as well as protecting the benefits of members of work-based pension schemes once they have been enrolled.
- Theme 4 - Better Regulation: since TPR’s launch in April 2005, it has been committed to being risk-based and aligned with the principles of good regulation. It aims to be proportionate, accountable, consistent, transparent and targeted, with economy, effectiveness and efficiency as its guiding principles.
The Business Plan includes:
- TPR’s deliverables for 2012-2013.
- TPR’s performance measures for the period 2012-2013.
- TPR’s resource requirements for delivering its priorities for 2012-2015.
- TPR’s workload assumptions for 2012-2013.
View the Corporate Plan.
PPF publishes user guide on block transfers and their certification
The deadline for providing certification of block transfers to the Pension Protection Fund (PPF) this year is 29 June 2012. The PPF levy rules specify each year how block transfers should be certified to the PPF, and the rules for 2012/13 require schemes to report the details of any full transfer that impact the period finishing at the end of March 2012 by the end of June this year. The primary purpose of reporting block transfers is to ensure that schemes transferring all their liabilities are not charged a levy, and that the liabilities are correctly recorded within the receiving scheme so that the levy can be correctly attributed.
The new guide illustrates the steps schemes need to take for entering the information on the online Exchange system.
View the guide.
PPF publishes its Strategic Plan for 2012
On 15 May 2012, the PPF published its Strategic Plan 2012.
The Strategic Plan sets out the PPF's key activities, targets and budget for 2012/13, and the strategic priorities for the years ahead.
It includes the PPF’s “Vision for 2015”, which describes how the PPF will operate as a customer- focused financial institution in three years' time, when it expects to have almost 500,000 PPF and Financial Assistance Scheme members, and an investment portfolio of £17 billion.
The PPF's strategic objectives are to:
- manage schemes through the assessment and wind-up processes in a timely and efficient manner;
- meet its funding target through prudent and effective management of its balance sheet;
- set and collect an appropriate levy and allocate it fairly;
- maintain its reputation by communicating clearly what it does and why;
- be an efficient and effective organisation where staff are recognised and valued; and
- maintain effective risk management in all areas of PPF business.
View the PPF Strategic Plan.
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The Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2012 - now finalised
Further regulations amending existing legislation relating to auto-enrolment have been finalised, after being laid before Parliament earlier this year. They come into force on 1 July 2012.
As we reported in our February update, the amending regulations introduce among other changes, the planned self-certification regime for employers that use DC schemes for auto-enrolment. They also insert a "sunset" provision which will mean offshore workers will cease to be subject to the auto-enrolment regime on 1 July 2020. A review will be conducted before that date to decide future policy for offshore workers.
The draft Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) (No. 2) Regulations 2012.
The DWP is planning a minor relaxation of the criteria governing whether a career-average revalued earnings (CARE) scheme will count as a qualifying scheme that an employer can use for auto-enrolment.
Currently, regulation 36 of the Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010 provides that a CARE scheme will not generally count as a qualifying scheme unless it revalues accrued benefits in accordance with a limited price indexation (LPI) formula of the lower of the annual increase in the consumer prices index and 2.5 per cent (LPI 2.5 per cent). A CARE scheme in which revaluation is entirely discretionary can also qualify, however, if the scheme's funding reflects minimum revaluation of LPI 2.5 per cent and this is referred to in the statement of funding principles.
Under proposed amendments to regulation 36, a CARE scheme whose rules provide for annual revaluation below LPI 2.5 per cent but contain a discretionary power to revalue at or above LPI 2.5 per cent will also count as a qualifying scheme. As with schemes that contain a fully discretionary power, this revaluation rate must be reflected in the scheme's funding.
Consultation on the above draft amending regulations closes on 11 June 2012, with the regulations expected to come into force on 1 November 2012.
View the consultation paper and draft regulations.
The draft Pensions Schemes (Application of UK Provisions to Relevant Non-UK Schemes) (Amendment) Regulations 2012: relaxation of age 75 restrictions to apply to non-UK pension schemes
Members of non-UK pension schemes with funds that have received UK tax relief will be able to benefit from the removal of age-75-related restrictions on paying lump sums and the introduction of new drawdown pension rules. For UK-registered pension schemes, these restrictions were removed with effect from 6 April 2011 by amendments to the Finance Act 2004 made by the Finance Act 2011.
The above draft regulations contain changes that were originally announced in a Tax Information and Impact Note (TIIN) published on 9 December 2010 concerning the removal of the requirement to annuitise by age 75. The TIIN stated that the changes made in respect of registered pension schemes would also extend to non-UK schemes. Although the changes were not formalised until now, when enacted, the draft regulations will have retrospective effect to 6 April 2011.
The consultation period ends on 30 May 2012.
View the draft regulations and the explanatory memorandum.
NEST: employer-related investment tax restrictions relaxed - Finance Act 2004, Section 180(5) (Modification) Regulations 2012
Regulations have been laid before Parliament that will relax tax restrictions on employer-related investment by NEST. Currently, the Finance Act 2004 imposes unauthorised payment charges when a registered pension scheme buys shares in its participating employers beyond statutory limits. HMRC published draft regulations in February 2012 that will exempt NEST and its participating employers from these restrictions.
The regulations have now been finalised, with no changes made to the draft version. They come into force on 1 June 2012 and have retrospective effect since 6 April 2012.
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Beckmann rights: High Court considers scope of pension liabilities transferring under TUPE - The Procter & Gamble Company v Svenska Cellulosa Aktiebolaget SCA and another  EWHC 1257 (Ch).)
The treatment of so-called Beckmann liabilities on an asset sale has been considered by the High Court for the first time. The High Court concluded that:
- if the rules of a pension scheme provide for early retirement to be available subject to the consent of the employer, then an employee's right to be considered for early retirement benefits in good faith transfers to the buyer under TUPE;
- the buyer assumes liability only for enhancements to an early retirement pension that are no longer available to a transferring employee following the TUPE transfer, not for the full amount of an early retirement pension. Where transferring employees become deferred members in the seller's scheme on the TUPE transfer, they cannot make a double recovery by claiming entitlement to a full early retirement pension from the buyer too; and
- liability for an "old-age benefit" - which does not pass to the buyer under TUPE - includes pension instalments paid to a member after he passes normal retirement age (NRA), if the sole purpose of the pension is to support the recipient after retirement. This is the case even if the pension first comes into payment before NRA.
We understand the decision is likely to be appealed. For a detailed analysis of the judgment, see our May briefing.
View the judgment.
Seldon v Clarkson Wright and Jakes (a partnership)  UKSC 16: Partner's retirement at age 65 had legitimate aims but tribunal will reconsider proportionality
The Supreme Court has held that a law firm had identified legitimate aims (staff retention, workforce planning and dignity) which could potentially justify its compulsory retirement of a partner at the age of 65. The Court acknowledged that under the Equal Treatment Framework Directive, direct age discrimination must be justified by reference to social policy objectives, although the individual aims of a firm are not necessarily sufficient. However, in deciding that the three aims identified by the firm amounted to social policy objectives for this purpose, it dismissed Mr Seldon’s appeal that he had been discriminated against on grounds of age and held that the firm had legitimate aims for insisting that he retire.
The case will now return to the employment tribunal for it to consider whether the firm's chosen retirement age of 65 was a proportionate means of achieving the aims identified.
Although the case has generated a great deal of comment in the press, it has limited direct relevance for pension schemes. Employers, however, should note that the judgment makes it clear that the dismissal of an employee on the grounds of age alone will be very difficult to justify.
View the judgment.
High Court rules bankrupt must draw pension to pay creditors: Raithatha v Williamson 
In a recent stop press, we reported on a landmark judgment in Raithatha v Williamson, in which the High Court ruled that an income payments order (IPO) could be made where the bankrupt had an entitlement to elect to draw a pension but had not exercised it at the time of the application.
Previously, pension benefits were regarded as protected from creditors. However, the court held that as the respondent, Mr Williamson, (Williamson) had reached the scheme’s pension age, although he continued to work, the pension could be considered as income and therefore used to repay creditors.
The decision resulted in a successful application by Mr Raithatha, as Williamson’s trustee in bankruptcy, (the Trustee), for a court order compelling Williamson, the bankrupt, to draw his pension and apply that income towards satisfying his bankruptcy creditors.
Leave was granted for Williamson to appeal and it has now been confirmed that the appeal is due to be heard between 3 September and 2 November 2012.
Tax rebate possible for UK pensions funds following ECJ decision
A ruling by the European Court of Justice (ECJ) that a French withholding tax levied on dividend payments to foreign investment funds contravenes EU law could allow UK pension funds to claim substantial tax refunds. Under French tax law, dividends paid to approved investment funds which are not resident in France are taxed at source at the rate of 25 per cent. However, these dividends are exempt from tax when paid to a French resident.
The ECJ confirmed that the French legislation constituted a restriction on the free movement of capital, which is prohibited under EU law, and cannot be justified.
Financial commentators estimate that total claims against France and other EU Member States that have similar rules could total up to EUR20 billion (about £16 billion). Following the ECJ ruling, the cases will return to the French courts for the decision to be implemented.
Santander Asset Management SGIIC SA v Directeur des résidents à l’étranger et des services généraux and others (C-338/11 to C-347/11).
Nortel progress - trustees appeal to US Supreme Court
The Nortel Networks UK Pension Plan trustee has asked the US Supreme Court to review, on the basis of international comity (the legal doctrine under which courts recognize and enforce each others' legal decisions as a matter of courtesy), a ruling by the US Third Circuit Court of Appeals that neither it nor the PPF are "governmental units". A governmental unit would be able to claim the benefit of the "police power exception" to circumvent an automatic stay imposed under US insolvency law.
In the petition, the trustee contends that the earlier ruling "is at odds with established notions of international comity, which counsel against US courts issuing orders that unnecessarily interfere with the rights of a foreign sovereign". It also suggests that a "failure by US courts to accord due deference to foreign regulatory proceedings in the bankruptcy context will likely invite a similar response by English, and potentially other foreign, insolvency courts to the detriment of US governmental interests." Nortel Networks' response to the petition is due by 24 May 2012.
To view this update as a pdf
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