EB News Service
A fortnightly summary of the important changes in employee benefits law & practice 27/06/2011 - 17/07/2011
18th July 2011, London:
NEWS
Government hints at changes to short service refund rules
In its response to the call for evidence to assist the review of the regulatory differences between occupational and workplace personal pension schemes, the government indicates that legislation will be introduced to change the rules on short service refunds under occupational schemes. It states - "Since our priority is to help more people save more for their retirement, we would encourage employers not to make their decisions about scheme type on the assumption that short service rules will continue to exist in their current form". However, the response also proposes that any change should only affect DC schemes - "We agree that any changes to short service refunds would disproportionately affect DB schemes. Therefore, any consideration of possible changes to existing short service refund rules would be for defined contribution occupational pension schemes only".
The response covers other aspects of differences between occupational and personal pension schemes too. In particular, it states -
- In relation to disclosure of information, "our aim is to consolidate the main disclosure regulations, and harmonise the requirements where possible. We intend to consult on draft regulations later this year".
- On trivial commutation, "in the summary of responses to HM Treasury's call for evidence on early access to pension savings, the Government committed to exploring ways to implement an alignment of the small pot commutation rule for occupational pensions to cover personal pensions, taking into account the need to balance flexibility with managing fiscal risks. Further details on this will be announced by HM Treasury in due course".
See - http://www.info4local.gov.uk/documents/publications/1931849.
Court freezes 'early access pension plans'
Following recent warnings from the FSA and Pensions Regulator on schemes that allegedly grant under-55s access to their pension funds without the usual tax penalties, a group action has won a freezing injunction against promoters of the schemes. Dalriada Trustees had been appointed just over a month ago by the Pensions Regulator in response to concerns about the running by Ark Commercial Retirement Planning.
So far Ark have not fought the freezing injunction, although they might in the future. The injunction was granted due to the ‘risk of dissipation' given the spread of assets to foreign jurisdictions and the questioned legality of the scheme itself.
NEST requires two million members to be viable
FT Adviser reports that Tim Jones, the NEST Corporation chief executive, has said that NEST needs at least two million members by the end of the staging process in 2016 in order to be viable. He stressed, however, that it would be "very pessimistic" to believe that the scheme would not achieve this level and suggested that an optimistic estimate was five million members.
Regulator will not issue FSD in 'Great Lakes' case
The Pensions Regulator is not pursuing anti-avoidance proceedings in the Great Lakes case, following the agreement of a funding package.
The trustees of the Great Lakes UK Limited Pension Plan, sponsored by solvent UK business Chemtura Manufacturing UK Limited (CMUK), approached the Regulator in 2009 when CMUK's US parent filed for Chapter 11 bankruptcy protection. The scheme's deficit on a buyout basis was estimated at £95 million at the time. The Regulator went on to issue a warning notice against target companies, including CMUK and its US parent. This explained that the Regulator's Determinations Panel could in due course decide whether it would be reasonable to issue financial support directions.
However, in the third-ever "section 89 report", the Regulator said the companies agreed a funding package with the trustees. Under this, £30 million has been paid into the scheme, with a further £30 million due over the next three years. Group companies, including the US parent, have also entered into security arrangements that protect the scheme in relation to its further liabilities.
Interim executive director at the Regulator, Stephen Soper, said: "In my view, as in the 2007 Sea Containers case, this is another example of the use (or potential use) of the FSD power assisting in securing additional financial support for a UK scheme from an overseas parent company. That's good news for the 1,270 members of this scheme as well as Pension Protection Fund levy payers."
See - http://www.thepensionsregulator.gov.uk/press/pn11-16.aspx.
LEGISLATION
Draft regulations on Employer Debt issued for consultation
The Department of Work and Pensions has issued a consultation document proposing changes to the employer debt legislation. The proposals fall under two main headings:
- flexible apportionment arrangements; and
- periods of grace.
The changes, if enacted, will come into force on 1 October 2011.
Flexible apportionment arrangements
This is different from the current scheme apportionment arrangement because it will be the scheme liabilities (as opposed to the debt) that are apportioned. The stated advantage of this is that an employer debt need not be calculated for each occasion when an employer ceases to employ active members.
The government has abandoned proposals regarding group guarantees that were previously under consideration in an earlier informal consultation.
Periods of grace
The purpose of this is to provide some protection from an employer debt being triggered where an employer who ceases to employ active members intends to recommence doing so in the next 12 months (and does so). The amendments proposed to this are -
- extension of 12 month grace period to 36 months at trustees' discretion (the trustees' discretion would cover whether the 12 months should be extended and, if so, by how long); and
- whether to renew an existing extension (subject to the maximum of 36 months in total).
The consultation document and the draft regulations are on the Department's website at http://www.dwp.gov.uk/consultations/2011/.
The Pensions Act 2008 (Abolition of Protected Rights) (Consequential Amendments) (No.2) Order 2011, SI 2011/1730, and The Pensions Act 2007 (Abolition of Contracting-out for Defined Contribution Pension Schemes) (Consequential Amendments) (No. 2) Regulations 2011, SI 2011/1724
SI 2011/1730 makes consequential amendments to provisions on protected rights after the abolition of contracting-out for occupational, personal and stakeholder pension schemes.
SI 2011/1724 makes consequential amendments to schemes which are contracted-out on a defined contribution basis after the said abolition.
CASES
Overseas pension schemes - Equity Trust (Singapore) Ltd v HMRC
In this case, a Singapore company (E) was the trustee of a pension scheme (R). In November 2006, HMRC recognised R as a 'qualifying recognised overseas pension scheme' within FA 2004 s 150(8). However, in January 2008, HMRC withdrew that recognition. E subsequently took proceedings in the High Court but these were dismissed and judgment was given for HMRC.
It was held that the Singapore Income Tax Act 1948 s 5 provided a system for the approval or recognition of Singapore pension schemes by the Singapore Inland Revenue Authority. It appeared that R failed to meet the requirements of that system, because R's marketing literature appeared 'to proceed on the footing that Singapore residents will not be admitted', and E and R seemed to have been involved in 'persuading the Singapore Revenue authorities that the trust qualified for the fiscal advantages available to a foreign trust in Singapore'. Accordingly R was not entitled to recognition as a 'qualifying recognised overseas pension scheme' within s 150(8), and HMRC had been entitled to withdraw their recognition.
The case is of relevance due to the fact that it is the first reported case on the definition of a 'recognised overseas pension scheme' within FA 2004 s 150(8).
RESEARCH
Pensions Policy Institute (PPI) - 'The implications of government policy for future levels of pensioner poverty'
This report was commissioned by Age UK and projects future levels of pensioner poverty under the current state pension system and under a range of alternative Government policies. Policies considered in the research include changes to the level of existing means-tested and other benefits paid to pensioners, and the introduction of a single-tier state pension of £140 a week as proposed by the Government in a recent Green Paper.
Chris Curry, PPI Research Director, said: "The introduction of a single-tier state pension of £140 a week, as set out by the Government in a recent Green Paper, is projected to reduce the proportion of pensioners living in households with income below the poverty line from 16% of pensioners in 2009, to 10% of pensioners by 2025."
An assessment of the Government's options for state pension reform
This report, also by PPI, provides an independent assessment of the potential impact of the state pension reforms set out in the Government's Green Paper: A State Pension for the 21st Century. The research was commissioned by the National Association of Pension Funds (NAPF). Key findings include -
- Introducing a flat-rate single-tier pension at a level of £140 a week (2010 earnings terms) introduced for pensioners who reach State Pension Age from 2016 could lead to an increase in the state pension income for some pensioners, but a decrease in state pension income for others.
- A single-tier pension could lead to higher state pension incomes for:
- Some women and carers, particularly those who have taken time out of the labour market before 2002 or have had very low earnings and didn't qualify for the current state pension.
- The self-employed, although the self-employed may have to pay higher National Insurance contributions in the future.
- The unemployed claiming Job Seekers Allowance.
- Older pensioners and those pensioners who do not claim the means-tested benefits they are entitled to.
- Pensioner couples.
- A single-tier pension could lead to lower state pension incomes for:
- Individuals who would have qualified for more than 30 years of S2P under the current system.
- Individuals who have less than seven years of National Insurance contributions.
- Individuals who would have been eligible for Savings Credit.
OTHER
Work and Pensions Committee inquiry into auto-enrolment and NEST
The Work and Pensions Committee have launched an inquiry into automatic enrolment in workplace pensions and the National Employment Savings Trust (NEST). The Terms of Reference for the Work and Pensions Committee's inquiry are as follows:
- DWP's communication strategy for introducing auto-enrolment and provision of advice and support to employers and employees
- Arrangements for phasing and staging the introduction of auto-enrolment
- Likely impact of auto-enrolment on business, especially small and micro-businesses
- Role of The Pensions Regulator, including in certification of schemes
- Estimated opt-out rates, including the possible impact on NEST if the numbers auto-enrolled are significantly lower than predicted
- NEST's potential market share and the possible effects on other providers
- Whether auto-enrolment is likely to attract new providers and encourage new models of provision
- Likely impact of the limitations placed on NEST, including the contributions cap and the ban on transfers
- NEST's investment strategy
- Possible measures to reduce the proliferation of small pension pots
- How self-employed people, and part-time, temporary, casual and agency staff, will be treated under auto-enrolment; and the equality implications
- The extent to which auto-enrolment is likely to achieve the desired behavioural change in terms of encouraging people to make provision for retirement.
The impact of using the Consumer Prices Index as the measure of price increases on private sector occupational pension schemes
The government has updated the impact assessment on the RPI to CPI change in order to take account of research into private pension schemes rules published on 16 June 2011 and the latest Office of Budget Responsibility estimates of RPI and CPI inflation rates. The assessment confirms the DWP's long term assumptions that RPI will exceed CPI by 1.2% and that the change will reduce the expected value of liabilities for affected schemes by £73.2 billion in the long term. See - http://www.dwp.gov.uk/docs/cpi-private-pensions-consultation-ia-120711.pdf.
HMRC: Disguised Remuneration legislation
A revised question and answer document to replace the one issued on 31 March has been published.
HMRC have also issued for comment draft regulations relating to disguised remuneration. The changes are being introduced to prevent unregistered pension schemes from benefiting from more favourable tax treatment than registered schemes following the reduction in the annual and lifetime allowances.
See - http://www.hmrc.gov.uk/budget-updates/march2011/drl-faq.pdf and http://www.hmrc.gov.uk/pensionschemes/dis-rem-draft-reg.htm.
OTS to review pensioner taxation
The Office of Tax Simplification (OTS) is to turn its attention to pensioner taxation and employee share schemes in two new projects. These will run alongside the OTS's ongoing review of small business tax administration and will continue its work to simplify the UK's tax system.
The review of pensioner taxation will gather evidence from pensioner groups and other interested parties in order to identify and examine the parts of the tax system that cause taxpayers the most difficulties, look at how this varies across the pensioner population, and propose ways to improve the situation.
The employee share schemes project will initially examine the four tax advantaged, or Government approved, schemes to identify where they are complex and place unnecessary administrative burdens on their users, and to suggest ways they could be simplified. The OTS will go on to look at unapproved share schemes later in 2012.
See - http://nds.coi.gov.uk/Content/detail.aspx?NewsAreaId=2&ReleaseID=420347&SubjectId=2
Enabling good outcomes in DC pensions: the next steps
The Pensions Regulator has published a response to its industry discussion paper 'Enabling good member outcomes in work-based pension provision' about the regulation of defined contribution (DC) pensions.
The response reflects opinions from across the industry and sets out next steps in each of the 9 key areas raised. Consensus was reached on a number of key issues and suggestions made about possible mitigations -
- Disclosure of scheme charges should be transparent and comparable in order to help employers and members to better judge value for money. This may involve changes to the requirements around disclosure of costs and fees
- Employers may need support when they choose a suitable pension scheme for automatic enrolment. To signpost ‘good' provision, the regulator will consider the establishment of a kite-marking initiative for DC schemes
- Accountability for decision-making in DC schemes should be clear and recorded throughout the lifecycle of the scheme. This could be achieved through the introduction of an accountability framework.
The response, including more details about the proposed next steps, will follow in the autumn.
Enabling good member outcomes in work-based pension provision - a discussion paper response is available for download on the regulator's website - http://www.thepensionsregulator.gov.uk/doc-library/consultations.aspx.
Regulator publishes its annual report and accounts
The Pensions Regulator has published its annual report and accounts for 2010-11, which focuses on its continued action to protect retirement savers and promote high standards across the pensions sector. The report details the regulator's work during 2010-11, which includes:
- Reducing risks to members of defined benefit (DB) pension schemes - such as raised awareness of the risks associated with Enhanced Transfer Values (ETVs) and similar exercises.
- Reducing risks to members of defined contribution (DC) pension schemes - such as initiated a dialogue with the pensions sector on what good DC pensions look like and how our regulatory approach can support good outcomes for members.
- Improving governance and administration - such as set robust standards for record-keeping to ensure that members receive correct retirement benefit.
- Preparing for 2012 - such as continued working to build a robust employer compliance framework in order to maximise compliance with automatic enrolment duties.
The annual report and accounts 2010-11 is available for download on the regulator's website - http://www.thepensionsregulator.gov.uk/press/pn11-14.aspx.
Recovery plan analysis
An analysis of recovery plans submitted to the Pensions Regulator by DB schemes with valuation dates between 22 September 2008 and 21 September 2009 has revealed a significant increase in the number of contingent asset arrangements used by schemes to plug funding shortfalls in comparison with previous periods. The report complements analysis published in December 2010 which focused on the nature of events triggering further scrutiny by the Regulator.
Of 1,849 recovery plans submitted before 1 February 2011, 311 included contingent assets. In 191 cases, schemes included PPF-compliant contingent asset arrangements, with group or parent company guarantees (so-called "type-A" contingent assets) being used in 166 cases. However, type-B(i) and C arrangements continued to be barely used among the schemes analysed.
In terms of the funding positions of schemes, the average funding level was 71.3% on a technical provisions basis and only 51.6% on a buyout basis. The Regulator attributes these funding levels to the economic conditions of the period, which saw poor equity returns and falling gilt yields.
See - http://www.thepensionsregulator.gov.uk/docs/recovery-plans-scheme-funding-2011.pdf.
Pensions Ombudsman annual report
Early retirement through ill-health was the most common source of complaints received by the Pensions Ombudsman last year, according to the latest annual report (the twentieth year the Pensions Ombudsman has been in existence). Other findings are -
- Expenditure in the year to 31 March 2011 was £2.68 million, representing a budget underspend of 12%, largely due to public-sector financial constraints introduced in 2010.
- The number of written enquiries to the Pensions Ombudsman fell by 16% to 3,066, as did the number of cases taken on for investigation, down 4% to 915. But the report noted that 2009/2010's figures were "unusually high", so 2010/2011 was a "shift back to the normal levels".
- More than 40% of cases were dealt with by investigators without referral to the Pensions Ombudsman. Over a third of complaints decided by the Pensions Ombudsman were upheld in whole or in part.
- The report said that it was too early for complaints resulting from incentivised transfers or changes in the public sector to come through. It also noted that with 45% of complaints grouped as "other" the classification system needed updating.
- Though the hearing has not yet taken place, the Pensions Ombudsman is for the first time to use the power under section 150(7) of the Pension Schemes Act 1993 to refer a question of law to the courts.
As to the PPF Ombudsman, during the 2010/2011, year it received 36 new applications. It accepted 31 for investigation and declined jurisdiction in five because they had not been previously dealt with by the PPF Reconsideration Committee. A total of 42 applications were closed following investigation.
See - http://www.pensions-ombudsman.org.uk/News/.
DWP publishes pensions language guide in advance of auto-enrolment
The Department for Work and Pensions has published a guide to pensions terminology in an attempt to strip away "unintelligible language and confusing jargon". It can be downloaded at -
http://www.dwp.gov.uk/policy/pensions-reform/workplace-pension-reforms/.
Integrating the Operation of Income Tax and National Insurance Contributions: A call for evidence
This call for evidence seeks views on the operation of the income tax and National Insurance contributions systems.
This is a preliminary stage of consultation, and aims to build a strong evidence base on the burdens to employers of having to operate two different systems. Responses to this call for evidence will inform the Government's proposals for reform, on which it will consult in the autumn.
The two systems are currently operated separately and the Government believes that greater integration of the two has the potential to remove economic distortions, reduce burdens on business, and improve fairness for individual earners.
See - http://www.hm-treasury.gov.uk/consult_income_tax_national_insurance_contributions.htm.
The Commission on Funding of Care and Support submits report to Government
The Commission on Funding of Care and Support has presented its findings to the Government in its report Fairer Care Funding, published on 4th July 2011. It suggests individuals' contribution to their long term care (LTC) costs should be capped at about £35,000, after which they will be eligible for full State support. It also suggests the means-tested threshold, above which people are liable for their full care costs, should be increased from £23,250 to £100,000. The current adult social care funding system, conceived in 1948, means that those with assets of more than £23,250 are liable for the full cost of their social care needs.
The report also proposes that government should incorporate an awareness campaign on the cost of care into pension industry campaigns trying to get more people to save into pensions.
See - http://www.dilnotcommission.dh.gov.uk/
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