EB News Service

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

1st October 2010, London:   


Update on Government pension reviews.

  • Restricting pensions tax relief. The outcome of a review into pension tax relief restrictions, which are due to take effect from next April, will not be announced until 11 or 12 October. A statement had been expected by the end of September.

    In consequence, it is still not known for certain whether the previous Government's 'high income excess relief charge' (on those earning more than £150,000) will be replaced by a reduced annual allowance (or, possibly, a reduced annual allowance and lifetime allowance).

    The Treasury's one-month consultation into the review generated around 250 responses.
  • Auto enrolment and NEST. In June, the Government commissioned an independent review of how best to support the implementation of automatic enrolment into workplace pensions. The review team [led by Paul Johnson of Frontier Economics, David Yeandle OBE of Engineering Employers Federation and Adrian Boulding of Legal and General Group PLC] have now presented their recommendations to Steve Webb, Minister for Pensions.

    The Government will study the review team's recommendations in detail before announcing its intentions later in the 'Autumn' (which could mean as late as November).

    According to media reports, the Government has decided the National Employment Savings Trust (NEST) will go ahead because there is no private sector alternative. It has also been suggested that the government may bring forward the date for the start of auto-enrolment, from its planned October 2012 launch, due to employer demand.
  • Spending Review and other pensions policy. The Spending Review settlement will be announced on 20 October. There will also be a number of announcements on the detail of pensions policy throughout the autumn, including Government responses to the following:

    o The Call for Evidence on 'When should the state pension age increase to 66?'

    o The consultation on Phasing out the Default Retirement Age

    Also, according to a leaked Cabinet Office document, the Pensions Ombudsman and the Pensions Protection Fund Ombudsman could be merged with the Pensions Regulator. Further, it is understood that the Pensions Advisory Service is under threat.

Regulator issues its third FSD, against Lehman Brothers.

The Pensions Regulator's Determinations Panel has issued a determination that six companies within the Lehman Brothers group - including the group's main operating companies in the UK as well as the US parent Lehman Brothers Holdings Inc - should provide financial support to the Lehman Brothers Pension Scheme

Following a hearing on 8 - 9 September 2010, the Determinations Panel (DP) decided that it would be appropriate to issue a Financial Support Direction (FSD). The DP did not uphold a request to seek financial support from several other smaller UK group subsidiaries.

The DP's detailed reasons will be published shortly. Previously, FSD determinations have been made in the Nortel and Sea Containers cases.

Latest press reports state that Lehman's and Nortel are jointly challenging the Pensions Regulator in the High Court over its issuance of the FSDs.


Protected Pension Lump Sums: draft Treasury Order.

HM Revenue & Customs (HMRC) have published a draft Treasury Order relating to changes to the rules affecting the tax treatment of protected pension lump sums (i.e. the right to take tax free cash of more than 25% of the value of benefits).

At present, where a pension scheme member was entitled, on 5 April 2006, to a lump sum exceeding 25% of their uncrystallised rights (that is any rights that still have to come into payment), one of the conditions that must be met for the lump sum to be paid tax free is that the individual must become entitled to all of their pensions (that were not in payment by 5 April 2006) under the scheme on the same day.

However this condition can cause scheme administrators practical difficulties. In particular a member of a final salary arrangement may have made additional contributions to a money purchase arrangement within the same scheme with a view to purchasing an annuity later to supplement their scheme pension. In these circumstances it is usually impossible to start both these pensions on the same day, which means the protection of the transitional rules for lump sums of more than 25% is lost.

The draft Treasury Order addresses this issue, retrospectively to April 2006, by allowing a period of up to three months between the entitlements to the scheme pensions and annuities to arise before the transitional protection is lost.

The draft Order (http://www.hmrc.gov.uk/pensionschemes/lump-sum-order.pdf) also ensures that where the member dies before the entitlement to the last of the pensions arises.


DWP 2009 employers' pension provision survey.

New research undertaken on behalf of the Department for Work and Pensions (DWP) reveals a low awareness of the auto-enrolment reforms among employers. During 2009, the National Institute of Economic and Social Research conducted telephone interviews with 2,519 private sector employers to examine the extent and nature of pension provision among private sector employers. Key findings (see - http://research.dwp.gov.uk/asd/asd5/rports2009-2010/rrep687.pdf) include:

  • 28% of all private-sector firms make some sort of pension provision. This is down from 41% in 2007 but the survey attributes most of the decline to a reduction in the number of firms providing contributions to employees' private personal pensions.
  • 72% of private-sector organisations did not provide a pension.
  • Only 9% of the firms that did not provide pensions expected to introduce pension provision by 2014. This seems to indicate that the majority of non-providers were not aware of the workplace reforms at the time of the survey.

Auto-enrolment will push up small employer costs.

The ACA 2010 Smaller Firms' Pensions Survey has found mixed views on the Government's auto-enrolment reforms with 53% saying they will add ‘significantly to costs' with a slim majority (54%) supporting the policy.

Also, only one in five of the country's smaller employers have begun to consider the financial impact of new statutory rules requiring them to auto enrol millions of extra employees into workplace pension schemes - employees who at present have not joined schemes. 29% say they are ‘likely' to level-down (reducing future pension contributions into existing and new schemes) to meet the additional cost of newly pensioned employees; although the scope for levelling-down is limited across the UK's smaller firms as a whole, as at least two-thirds do not offer any pension arrangements at present.

Whilst, overall, 54% of smaller firms say they support auto enrolment, they expect 35% of employees to ‘opt-out' from pension schemes.

The ACA survey gathered responses from 404 smaller employers with 250 or fewer employees. Across the UK, there are over 1.2 million of these smaller firms with 1 employee or more - all will be required to auto-enrol their employees into a ‘qualifying workplace pension scheme' under the Government's current pension reforms between 2014 and early 2016. Other key findings include:

  • 60% of smaller firms say they will auto-enrol current ‘non joiners' into existing schemes. However, 20% say they will close their existing scheme and auto-enrol all employees into NEST.
  • Around a fifth of smaller firms say they will auto-enrol employees into a new firm's scheme, or will restrict entry into an existing scheme placing the balance in NEST, or will use NEST as a foundation scheme.

UK has biggest individual pensions gap in Europe.

The UK has the largest pensions gap - the difference between the income needed to live comfortably in retirement, and the actual income individuals can currently expect - per person in the whole of Europe, according to new research.

The research, from Aviva, looks at the pensions gap across a number of European countries and defines the UK's pensions shortfall as £318 billion. This means UK adults need to put away an average of £10,300 every year in order to close the gap.

The UK gap of £10,300 is an average based on the 31 million UK adults who are due to retire between 2011 and 2051. However, the problem is even more acute for older people who have less time to make good their personal shortfall.

The research defined the pensions gap for Germany as being £9,700, whilst it is £7,600 for the Republic of Ireland, £6,600 for France and £5,900 for Spain.

OECD on default investment strategies.

The OECD has published a paper entitled 'Assessing Default Investment Strategies in Defined Contribution Pension Plans'. The paper looks at the relative performance of different investment strategies in light of the increasing use of default investment options. The authors note that in some countries where defined contribution plans are mandatory, default options may be regulated and a specific investment strategy may have been put in place. Key conclusions of the paper (http://www.oecd.org/dataoecd/19/25/46010869.pdf) are that:

  • Life cycle strategies do best when benefits are paid as life annuities rather than as programmed withdrawals.
  • There is not 'one size fits all' default investment strategy.
  • Life cycle strategies perform better than fixed portfolio strategies where the contribution period is short, for example 20 years.


Regulator outlines employer pension scheme responsibilities.

The Pensions Regulator has published an overview of the employer's role in running an occupational pension scheme. The overview covers 5 key areas and is intended to help employers to 'get to grips' with their role and responsibilities in running an occupational (trust-based) pension scheme. The 5 areas are - Administration, Governance, Communications, Retirement choices and Regulatory duties. See - http://www.thepensionsregulator.gov.uk/employers/employer-role-running-a-scheme.aspx.

PPF guide to the 2010/11 levy and new FAQs on GMP equalisation.

The PPF has published a guide to the pension protection levy for the 2010/11 levy year. The guide is to accompany the PPF levy invoices that schemes will start to receive from this month onwards and sets out when the levy must be paid, how it is calculated and how schemes can query their invoice.

The guide (http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/Levy_Guide_1011.pdf ) includes a new section on the PPF's power to charge interest on late levy payments from the 2010/11 year onwards.

The PPF has also added a number of new frequently asked questions and responses to its website including questions on the equalisation of guaranteed minimum pensions (GMPs) and interest charges on late levy payments. Key points (see - http://www.pensionprotectionfund.org.uk/FAQs/Pages/FAQDisplay.aspx?search=t&ListOrder=PD) are:

  • The PPF has confirmed that, until it issues guidance on how it will implement benefit equalisation for GMPs, schemes in an assessment period will not be expected to take any action to equalise GMPs.
  • From the 2010/11 levy year onwards, the PPF will charge interest on late levy payments that have not been received within 28 days of the invoice date. Interest will be charged at an annual rate of 5% above the Bank of England base rate.
  • The PPF will start issuing invoices for the 2010/11 levy from September 2010 and expects to send the majority of invoices within the first few months of invoicing. Trustees who wish to query the amount of the levy must register their challenge within 28 days of the invoice date.

PPF consults on 2011/12 levy.

The Pension Protection Fund (PPF) is consulting on the 2011/12 pension protection levy. The consultation document proposes a total levy of £600m (£120m less than the previous year). The reduction is partly a consequence of the move from RPI to CPI as the basis of pension indexation.

The paper proposes that the cap on the risk-based levy be increased from 5% to 10% of schemes to reflect the effect of the difficult economic climate. The taper is to be raised to 135% - 155% of funding, as maintaining the taper at current levels (120% - 140% of funding) would have increased the number of schemes subject to the taper and paying reduced levies or no levy as a result leading, in turn, to significantly increased levy bills for schemes with funding levels below the start of the taper.

Comments on the proposals must be submitted by 4 November, as the PPF intends to issue its levy determination in 2010. According to the consultation document, the PPF also plans to consult on the 2012/13 levy (including proposals for a new levy formula) this autumn. For further information, see - http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/Levy_consultation_Sep10.pdf

HMRC pension schemes reminder: End of Transitional Period.

HM Revenue & Customs has issued a reminder to registered pension schemes that the transitional period, introduced in the Registered Pension Schemes (Modification of the Rules of Existing Schemes) Regulations 2009, ends on 5 April 2011

The transitional period was introduced to prevent schemes from incurring additional liabilities or having to pay out unauthorised benefits following the introduction of the single tax regime in April 2006.

Any registered pension scheme which relies on this transitional period will need to amend their rules by 5 April 2011.

FAS: Updated valuation guidance.

New guidance has been issued on the methods and assumptions to be used when completing a valuation under regulation 22 of the Financial Assistance Scheme Regulations 2005. The new guidance applies to schemes with a calculation date on or after 30 September 2010. The current guidance will continue to apply to schemes with a calculation date before then.

The new guidance includes supplementary information on valuing increases in accordance with the Consumer Prices Index rather than the Retail Prices Index. Also, the section (in the existing guidance) on the treatment of underpin benefits has been removed and clarification has been provided on the treatment of money purchase benefits and on the Technical Actuarial Standards. See - http://www.dwp.gov.uk/docs/fas-guidance-on-valuation-under-reg22-from-30sept10.pdf.



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