EB News
A fortnightly summary of the important changes in employee benefits law & practice 24/10/2011 - 06/11/2011
7th November 2011, London:
News
Enhanced public sector pensions offer 'far from being accepted'
On 2 November, the Government set out details of a new offer to workers on public service pensions. This offer will mean that, while most workers will still have to work longer and pay more, the pension that most low and middle earners working a full career will (according to a Treasury spokesperson) receive will be at least as good, if not better, than they get now.
The offer includes a more generous ‘accrual rate' - the rate at which annual benefits are earned - increasing from the 1/65ths offered in October to 1/60ths. This is an eight per cent increase.
The Government also announced its objective that anyone within ten years of their pension age on 1 April 2012 will be protected, meaning they will see no change in when they can retire nor any decrease in the pension they receive at their normal pension age. This will benefit over a million people.
Others very close to being ten years from retirement age may also see some additional protection, the details of which will be subject to further discussions.
Following the announcement, union leaders said the package was far from being accepted and preparations for strike action later this month would continue. See - http://www.hm-treasury.gov.uk/press_120_11.htm.
Think tank imposes tax on retirement lump sums
The Telegraph reports that middle-class workers could have to pay more than £500 million extra in tax every year under plans drawn being considered by senior Liberal Democrats.
This is due to proposals to impose tax on pension commencement lump sums by future retirees, which are contained in a report by a think tank linked to the party leadership.
The change would affect anyone taking out more than £42,000 as a lump sum on retirement.
The Centre Forum think tank suggests that taxing lump sums would push people to put more of their pension pot into an annuity.
Legislation
Pensions Bill now an Act
On 3 November 2011, the Pensions Bill received Royal Assent and is now the Pensions Act 2011 (the sixth Pensions Act since 1993). Key measures in the Act are:
- Changes to the auto-enrolment provisions of the 2008 Pensions Act -
- o An optional waiting period of up to 3 months, allowing the automatic enrolment date to be deferred to assist organisations employing short-term and seasonal staff,
- o Simplification of the process for employers to certify that their schemes meet 'qualifying requirements',
- o More choice around automatic re-enrolment dates, and
- o a new, higher earnings threshold for automatic enrolment (£7, 475 for 2011/12 and reviewed every year);
- acceleration of the increase in State Pension age to 66 by 2020, and women's State Pension age in line with men's to 65 by 2018 (although, the Government tabled a late amendment to ensure no women would experience more than an 18 month increase to their State Pension age);
- a new definition of "money purchase scheme", overruling the 'Bridge Trustees' case and making it clear that a MP scheme cannot have a deficit;
- the switch to CPI for pension increases and revaluation;
- the power to repay surplus contained in section 251 of the Pensions Act 2004; and
- changes to the Pension Protection Fund, providing greater flexibility in relation to, for example, PPF assessment periods.
See - http://services.parliament.uk/bills/2010-11/pensionshl.html.
Cases
Court upholds defective amendment
In HR Trustees Ltd v Wembley plc (in liquidation), the High Court upheld a pension scheme amendment, notwithstanding a technical deficiency, by applying the maxim "equity treats as done that which ought to have been done".
The case concerned an amendment in respect of lowering limited price indexation (LPI) for pensions in payment, where the amendment rules contained an unusual requirement for the trustee to "forthwith declare" amendments in writing. The issue for the court was whether there had been a proper declaration in respect of the change (where one of the trustees did not sign the amendment).
Research
Pension scheme membership falls to its lowest level in 60 years
Active membership of occupational schemes has fallen to its lowest level in almost 60 years, according to the Office for National Statistics.
Its Occupational Schemes Survey 2010 found the number of active members had dropped to 8.3 million - down by a third on the high of 12.2 million in 1967 - with almost two-thirds working in the public sector.
For private sector defined benefit schemes, the average contribution rate was 5.1% for members and 15.8% for employers, while for defined contribution schemes, the average contribution was 2.7% for members and 6.2% for employers.
Total membership of occupational pension schemes was estimated to be 27.2 million - 31% active, 33% pensioner and 36% deferred.
The survey also found that more than half of occupational pension funds in the UK already use auto-enrolment for new members. See - http://www.ons.gov.uk/ons/rel/pensions/occupational-pension-scheme-survey-annual-report/2010-annual-report/art-opss2010.html
More women will receive BSP in future
The Office for National Statistics has published Pension Trends Chapter 5, which shows that, whilst women's State Pension Age is rising, more women will receive the full Basic State Pension in future and its purchasing power will strengthen.
Pension Trends Chapter 5 reveals that in September 2010 only 48 per cent of female pensioners received a full Basic State Pension (BSP), compared with 87 per cent of male pensioners. Many women in the current generation of pensioners failed to build up full or near-full BSP entitlement under the system in place before 6 April 2010, mainly because of broken work histories and part-time work patterns.
However, as a result of legislative changes, 95 per cent of women reaching State Pension Age in Great Britain in 2030/31 are expected to receive a full BSP.
The purchasing power of the BSP is also set to rise. This is because the Pensions Act 2007 re-linked BSP increases with earnings and in 2010 the Government introduced the ‘triple lock' policy guaranteeing that BSP will be increased each year by average earnings growth, inflation or 2.5 per cent, whichever is higher. Modelling by the Department for Work and Pensions (DWP) suggests that by 2030 the purchasing power of BSP would increase by almost half.
Nevertheless, DWP modelling suggests that 60 per cent of women reaching SPA in 2016-20 will have state pension entitlements of less than £140 per week in 2011/12 earnings terms.
Economic climate could force retirement rethink
Research published by Standard Life shows that 21% of 45-65 year olds who have financial plans in place to provide for their long term future no longer feel that their financial plans will support them into the future. 6% in this age group who aren't already retired don't think they will ever be able to retire, equating to over three quarters of a million people.
Of those who have financial plans in place to provide for their long term future, 64% of 45-65s feel confident that their financial plans will support their future post retirement. 21% of these adults no longer feel their plans will support them into the future, with a further 10% having never felt confident. 37% of 45-65s have no financial plans in place for their long-term future. And yet 72% of people currently aged between 45 and 65 who aren't retired think they will retire between 61 and 70 years old.
'Other'
Pensions Regulator and Hybrid schemes
The Pension Regulator has published a statement to help trustees and their advisers understand the structure of their ‘hybrid' scheme - schemes with defined benefit (DB) and defined contribution (DC) elements.
The regulator has warned trustees that governance failings in complex 'hybrid' schemes risk impacting members' retirement benefits. Trustees must take action to address these risks.
The statement includes a series of checklists which summarise the actions trustees, administrators and employee benefits advisers should take to ensure they are able to properly manage their scheme.
From November 2011, the regulator will include additional questions in the scheme return for DB and hybrid schemes. See -
Pensions Regulator issues report on Polestar Pension Scheme
The Pensions Regulator has issued a report under Section 89 of the Pensions Act 2004 on the Polestar Pension Scheme following the trustee's announcement to members that the scheme is to be wound up.
The company that had supported the scheme changed hands in April 2011, meaning the payments upon which the trustees were depending were no longer available. The trustee submitted a 40-year recovery plan reliant upon a substantial degree of investment outperformance.
Based on this information, the regulator concluded that full funding of the scheme over any reasonable period was unlikely and that the scheme should be wound up in the interests of the generality of its members and the Pension Protection Fund (PPF). After receiving professional advice, the trustee agreed with the regulator's view. The trustee has now written to members informing them of its decision to wind up the scheme.
HMRC confirms its guidance in relation to 'disguised remuneration' rules
HMRC has published finalised guidance on the disguised remuneration rules in its Employment Income Manual. This contains some further clarifications to its earlier draft guidance and additional examples of how HMRC will apply the rules. The material covers EFRBS and s615 schemes and share schemes. See - http://www.hmrc.gov.uk/news/emp-income-third-parties.htm
NEST launches employer automatic enrolment guide
NEST Corporation has published its automatic enrolment guide for employers, which sets out what organisations need to consider ahead of the Government's changes to workplace pensions with indications of when they might need to take action
The guide is entitled "Employers' guide to automatic enrolment, How NEST can help you meet your duties" and can be downloaded from the NEST website - www.nestpensions.org.uk/schemeweb/NestWeb/includes/public/docs/Employers-guide-to-automatic-enrolment,PDF.pdf.
Good practices for disclosure and selling of variable annuities
The European Insurance and Occupational Pensions Association (EIOPA) has opened a consultation on its draft Report on Good Practices for Disclosure and Selling of Variable Annuities.
The main findings of the Report are that good practices, in relation to disclosures, should provide general information on the insurance undertaking and the legal and supervisory regime it operates under; and should also include product-specific information.
In relation to selling practices, good practices should ensure that variable annuities are always sold on an advised basis, even when they are sold directly by the company; and should focus on the customer's objectives to determine their demands and needs.
The consultation is open until 3 January 2012.
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