EB News Service

A fortnightly summary of the important changes in employee benefits law & practice

15th October 2010, London:   


Restricting pensions tax relief.

The Government, on 14 October, published its response to an earlier consultation on restricting pensions tax relief starting from 6 April next year. Further detail is expected over the coming months and some elements of the new regime are subject to further discussion. Nevertheless the key, confirmed, measures are as follows -

  • The previous Government's proposal to restrict tax relief on pension contributions only for those earning more than £150,000 will be scrapped.
  • In its place -
    • the Annual Allowance - AA (on pension 'input') will be reduced from £255,000 to £50,000 from 6 April 2011 (with DB benefits valued using a factor of '16');
    • the Lifetime Allowance (on pension 'output') will be reduced from £1.8m to £1.5m, but probably not until 6 April 2012;
    • individuals will be able to 'carry-forward' unused annual allowance from up to previous three years, to offset contributions in excess of the AA in a single year; and
    • importantly, tax relief will still be available at an individual's marginal rate (i.e. up to 50%).

It is likely that the changes will impact far more on defined benefit schemes than on defined contribution arrangements. However, there are implications for sponsors and members of both. The first step for any organisation is to assess the impact on their workplace pension arrangements.  For further information, see - http://www.hm-treasury.gov.uk/press_52_10.htm.

DWP clarification on refund of surplus.

The has been considerable uncertainty over a provision in the Pensions Act 2004 (section 251) concerning the ability of schemes, which contain a rule to allow refunds of surplus assets to the employer, to continue making refunds after April 2011. In particular, it was not clear whether the provision, which may necessitate amendments to scheme rules, affected only ongoing defined benefits schemes or both ongoing schemes and schemes in wind-up. Also, the application to some defined contributions plans was unclear.

DWP have now published an announcement providing some clarification. Relevant extracts are reproduced below.

"A number of those who have contacted us believe that section 251 should only apply to those schemes and situations which are covered by section 37 of the 1995 Act [refunds of surplus in ongoing schemes].  They believe that the provision should not apply to schemes which are winding up ...; to money purchase schemes (with the exception of a small category known as "earmarked schemes"); or to any of the payments (including, for example, routine administrative payments) which are specifically exempted from section 37 of the 1995 Act.  It is not the Government's intention that section 251 should apply in these circumstances.

We acknowledge that there is now some uncertainty about the scope and application of section 251.  An amendment to clarify the position would require primary legislation, but I can confirm that we intend to amend the provision when a suitable opportunity arises, in order to ensure that it operates in a sensible and proportionate way.  In particular we intend to make it clear that the provision does not apply to payments that would not themselves be subject to the overriding provision of section 37 of the Pensions Act 1995, and we also propose to extend the deadline for action by trustees by five years, to 6 April 2016."  

DWP to consult on RPI to CPI change.

Pensions Week report that the DWP has said that it will consult "in the coming weeks" with regard to legislation to make it easier for schemes that use Retail Prices Index (RPI) for the purpose of indexation, but have no "rule modification powers", to switch to using the Consumer Prices Index (CPI).

Steve Webb, the Pensions Minister, indicated earlier this year increases to occupational pensions should be based on CPI rather than RPI. He had also suggested that legislation would be provided to make it easier for schemes to make the change.

Another major employer closes DB scheme to existing employees.

Asda has announced that it is to close its final salary scheme to existing members from early 2011, partly in response to a near doubling of its deficit from £210 million to £400 million.

The 3,800 affected staff in the final salary scheme, which closed to new entrants five years ago, will be offered membership of Asda's existing defined contribution scheme. They will also be given a one-off bonus of 25% of salary, to be taken as cash or invested in the DC scheme.

Hutton publishes interim report on public sector pensions.

Lord Hutton of Furness published, on 7 October, his interim report setting out his progress so far in his fundamental structural review of public service pensions. He has set out the case for change in public service pensions: longer lives, the unfairness of a system that rewards high-flyers disproportionately, the imbalance of risk between taxpayers and employees and contribution rates that do not reflect the value of benefits received - all these demonstrate the need for reform.

However, the accompanying press release demonstrates that he has not just taken a knee jerk reaction to all the one-sided commentary about unaffordability of public sector pensions. In the press release which accompanies his interim report on public sector pensions, Lord Hutton observes, in responses to all the hype over costs, that, while reform is needed -

"... it is wrong to say that public service pensions are gold plated. The average pension paid to pensioner members is about £7,800 a year. About half of pensioners receive less than £5,600 a year. And 90% of pensioners receive less than £17,000 a year. Although these figures are partly accounted for by part time or part career working these pensions provide a modest - not an excessive level of retirement income. I also reject the argument that the downward drift of pensions in the private sector is justification that pensions in the public sector must follow the same course. I have rejected a race for the bottom."

It is also worth noting that this paper is short on final conclusions and recommendations (other than a proposal that member contributions should rise). The Commission is, therefore, interested in gathering further views on public service pensions to inform the final report at Budget 2011. A second call for evidence will be made later this month, asking for contributions by the end of December. All documents are available at -


The Government Actuary's Department has also published a summary paper -


PPF Ombudsman and Pensions Ombudsman to merge; reprieve for TPAS.

Proposals for change in respect of the reform of public bodies have been published. From a pensions perspective, the following should be noted -

  • The Pension Protection Fund, Pensions Regulator and Pension Advisory Service (TPAS) are all to be retained on grounds of impartiality.
  • The Pensions Ombudsman is to merge with Pension Protection Fund Ombudsman to form a single tribunal Non-Departmental Public Body (NDPB).

See -


Impact of Postal Services Bill on Royal Mail pension scheme.

The government has confirmed that it would split the Royal Mail Pension Plan, reducing it to around one-tenth of its current size, in an effort to tackle the scheme's £8.4bn deficit.

The proposals, part of the new Postal Services bill, would see the Royal Mail partially or fully privatised, while the Post Office would be turned into an employee-owned mutual.

To address the pension fund deficit, the government would split off and take responsibility for most of the pension liabilities, with the aim of leaving Royal Mail with a fully funded scheme.

A spokesman for the Department for Business, Innovation and Skills confirmed that plans would reduce the new, funded pension scheme one-tenth of its current size. See -



Advocate General opinion on discrimination in annuity rates.

In a ruling in a case brought by a Belgian consumer organisation (Association Belge des Consommateurs Test-Achats ASBL), the Advocate General of the European Court of Justice (ECJ) has held that a derogation in the 2004 gender directive, allowing differences based on sex to be reflected in insurance premiums and benefits, is not compatible with overriding provisions in Article 6 of the EU Treaty, which states that the EU shall respect certain fundamental rights including the principle of equal treatment between men and women.

If the ECJ follows the opinion, there could be significant ramifications for the pensions industry; in particular, men may see the cost of annuities rise whilst costs for women may fall. Final judgment is not expected until 2011.

Two new ECJ decisions on retirement ages and age discrimination.

In Rosenbladt v Oellerking Gebäudereinigungsgesellschaft mbH, the ECJ held that a standard retirement age (in the case, 65), fixed by collective agreement with the authority of national legislation, was objectively and reasonably justified by a legitimate aim relating to employment policy and the labour market and that the means of achieving it were appropriate and necessary.

And, in Ingeniorforeningen i Danmark acting on behalf of Ole Andersen v Region Syddanmark, the ECJ decided that Danish legislation, granting a severance allowance to workers dismissed from employment after long service but excluding those who were entitled to an early retirement pension, breached the Equal Treatment Framework Directive because the legislation went beyond what was necessary to achieve its social policy objectives and so was not objectively justified.

Equalisation measures effective despite loss of records (Squires, 76420/2).

In this determination, the Deputy Pensions Ombudsman held that, if the accidental destruction of pension scheme records means trustees cannot prove a new member in 1991 was notified that her scheme's normal pension age had been equalised at 65, there is no loss if the member's retirement decisions were unaffected by the failure to notify the change.

Further, the Deputy Ombudsman decided that, in the absence of clear evidence, it was more likely than not that a rule amendment was made to equalise NPA at age 65 because "schemes in general and en masse were equalising their retirement ages around this time".


Consumer and Retail Price Indices.

The all items RPI is 225.3 for September 2010 (up from 224.5 in August). CPI annual inflation stands at 3.1%, unchanged from August. In the year to September, the all items RPI rose by 4.6%, down from 4.7% in August. The RPI for October 2010 will be published by the Office for National Statistics on 16 November 2010.

"Ending compulsory annuitisation: Quantifying the consequences."

This paper was published by Cass Business School as a companion to an earlier report "Ending compulsory annuitisation: What are the consequences?". The second report provides a quantitative assessment of the issues raised in the first, the aim of which was to stimulate the debate about the proposal to end the mandatory requirement to purchase annuities in pension schemes as formally announced in the Budget Statement on 22 June 2010 and subsequently expanded upon in the HM Treasury consultation document "Removing the requirement to annuitise by age 75" released on 15 July 2010. See -


Local Government Pension Scheme Funds for England 2009-10.

These statistics give details on the Local Government Pension Scheme in England for 2009-10. They include data from 2005-06 to 2009-10 and updates on those statistics previously released on 15 October 2009. They can be downloaded at -


The Pension Tracing Service: A quantitative research study.

This research sought to establish the customer profiles of service users and the outcomes of enquiries to find out how successful people were in recovering their missing pensions. It was carried out by IFF Research on behalf of the Department for Work and Pensions. See -


How Best to Present State Pension Information and Support Retirement Planning.

This research aimed to explore what understanding people had of the State Pension, what worked in terms of explaining elements of the State Pension, and what prototype information materials could be developed to effectively engage people, leading to better informed retirement planning. It was carried out on behalf of the Department for Work and Pensions by TNS-BMRB and the Futures Company. See - http://www.info4local.gov.uk/documents/publications/1738117


The Pension Protection Fund Levy - A new framework.

The Pension Protection Fund (PPF) has unveiled proposals for a new formula which will be used for calculating the pension protection levy from 2012/13 onwards. PPF Chief Executive, Alan Rubenstein, set out details of the new formula at the National Association of Pension Funds' annual conference being held in Liverpool. He said:

"With these proposals, we aim to have a robust levy that is fit-for-purpose and which, we believe, will be generally accepted by levy payers. We consulted widely, both formally and informally, on this issue and worked closely with senior industry figures to make sure we achieve that aim.

"We believe these proposals address key priorities highlighted by the industry about greater predictability and stability of levy bills - and provide an increased focus on factors levy payers can control, allowing them to plan more confidently for the future.

"Also, the levy plays a crucial role in helping us meet our target of becoming financially self-sufficient by 2030 and these proposals, we believe, will make sure we stay on track to achieve our funding aims."

Key points are:

  • the PPF plans to fix the levy rules for three years at a time to provide greater predictability, although these could be reviewed in exceptional circumstances;
  • to increase stability, it proposes to use average measures for both underfunding and insolvency risk. This means that any temporary changes in an employer's insolvency risk score, or pension scheme's funding position, would not disproportionately affect a pension scheme's levy bill;
  • the new levy formula will also focus more on factors in the levy payers' control, rather than those factors they have little influence over. So, there will be greater emphasis on funding positions and investment risk; and
  • the proposals are subject to a consultation which runs until 20 December 2010.

The first step for scheme sponsors should be to assess the potential impact of the changes on their PPF risk based levy. If necessary, further advice can then be sought on actions to mitigate any increase in the levy.

HMRC: Updates to the RPSM.

The Registered Pension Scheme Manual has been updated to reflect customer enquiries, introduce new definitions from the Finance Act 2010, provide updated and extra text on payments, make corrections, draw attention to new guidance on Finance (No 2) Act 2010, and to provide updates and relevant amendments following the change of relevant income from £150,000 to £130,000. A full list of changes is available at -


Pensions Regulator Determinations Panel declares retrospective scheme amendment void

The Determinations Panel, on behalf of the Pensions Regulator, has made an order declaring an amendment to the ELCB Pension Scheme to be void.

This scheme entered a PPF assessment period on 17 August 2007, but shortly before then an amendment had been made which, in part, reduced the accrual rate of the scheme retrospectively. To the extent that this change was retrospective, it had an adverse effect on the active members' accrued rights. For this reason, the amendment was caught by section 67 of the Pensions Act 1995. Neither the consent nor actuarial equivalence requirements under section 67 were met and, therefore, the Regulator declared the modification to be void.

This is the first instance of the Determinations Panel exercising its power to declare an amendment to be void under section 67. See -


Accounting Standards Board  guidance on how companies should address the switch from the retail price index (RPI) to the consumer price index (CPI).

This Information Sheet sets out, for comment, a proposed UITF Abstract 'Accounting implications of the replacement of the Retail Prices Index with the Consumer Prices Index for Retirement Benefits'. The draft Abstract proposes that where there is a change in the obligation to the member, there is a benefit change which is accounted for as a past service cost. Where the obligation to the member is not changed, any change in the Scheme liabilities arises from a change in assumptions applied to measure those liabilities. The key to the accounting is whether there is a change in the members' obligation. The comment period ends on 10 November 2010 and the Information Sheet can be found at: www.frc.org.uk/images/uploaded/documents/UITF%20Information%20Sheet%2090.pdf



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