Key pensions legal developments 2013

Posted: 06/12/2013

Pensions Bill 2013

The Pensions Bill 2013 was presented to Parliament on 9 May 2013 (sometime after the draft Bill was published on 18 January 2013). Key aspects include:

• Reform of the state pension system and the introduction of a flat rate single-tier state pension from 6 April 2016 (to replace the current basic state pension and the state second pension);
• The state pension age is set to increase to age 67 between 2026 and 2028;
• Abolition of the state second pension (S2P) and contracting-out on a salary related basis when the single-tier pension comes into effect. This will result in the loss of NIC rebates for schemes which may lead to funding implications. The Bill includes a statutory power for employers to amend the scheme rules of private sector pension schemes to offset these costs;
• Changes to DC schemes to introduce a system to automatically transfer members’ small DC pots (up to an initial limit of £10,000) to their new employer’s pension scheme when they change employment. The rationale for this change is to deal with the expected growth in the number of small pension pots following the introduction of auto-enrolment;
• Members of DC schemes will no longer be able to opt for a return of contributions paid to a DC scheme;
• Introduction of a new statutory objective for the Pension’s Regulator (TPR), to require TPR to “minimise any adverse impact on the sustainable growth of an employer”;
• Introduction of a regulation-making power to prohibit incentive exercises intended to induce a member to transfer his pension rights from a salary related occupational pension scheme to another arrangement. This power could lead to restrictions on transfer exercises which go beyond the current guidance set out in the voluntary industry code and contained in the statement issued by TPR on incentive exercises in July 2012;
• Adding a power in the Pensions Act 2008 allowing the government to exempt particular individuals from the auto-enrolment requirements. Employees within this exemption could include: those who have registered for tax protection against the lifetime allowance charge; those who have terminated their employments (and their notice period spans the auto-enrolment date) and those that have told their employer they intend to retire and draw on their DC pensions. The government will follow core principles in deciding which groups of employees to exempt – one being to ask whether pension saving will put the individual at financial or legal risk;
• TPR has wider prohibition powers, so that a corporate trustee is automatically prohibited from acting as a trustee where one of its directors is prohibited by TPR under section 3 of the Pensions Act 1995. The prohibition is removed where the director leaves the company board. TPR has the ability to waive the prohibition requirement;
• The requirements for filing scheme returns for small schemes having no more than four members, will be relaxed:- from three years to five years;
• Under the Pensions Act 2008, employers with DB or hybrid schemes could take advantage of a 5 year transitional period to put back their staging dates in relation to their auto-enrolment requirements, even where they used their scheme to provide benefits for new joiners on a DC basis. The Government has made changes under the Pensions Bill 2013, so that the transitional period only applies where employers provide a DB benefit to its employees. This change is retrospective to 19 December 2012, being the date the government announced this change – which means that affected employers will need to re-examine their auto-enrolment strategy and take corrective action; and
• The Pension Protection Fund (PPF) compensation cap is to be increased by 3 % for every full year of service above 20 years, with a maximum of double the standard cap (which is currently £34,867 per annum). Anyone covered by the change who is in receipt of capped compensation will get an increase from the date the legislation is in place. The revised cap will not be backdated.
  
  The revised cap will impact on any defined benefit or hybrid occupational scheme if it starts to wind up or enters into a PPF assessment period after the revised cap is introduced.

Finance Act 2013

The Finance Act 2013 received Royal Assent on 17 July 2013. Pensions aspects include:

• From the 2014/2015 tax year the allowance for tax-advantaged pension saving will be reduced:- the annual allowance will be reduced from £50,000 to £40,000 and the lifetime allowance will fall from £1.5 million to £1.25 million;

• A member of a registered pension scheme adversely affected by the reduction in the lifetime allowance will be able to claim fixed protection 2014 provided he has not already claimed primary protection, enhanced protection or fixed protection. This protection must be claimed on or before 5 April 2014. The Finance Bill 2014 will introduce another form of protection called individual protection 2014, to protect people with pension funds which exceed £1.25 m on 6 April 2014;

• The annual withdrawal limit for individuals in capped drawdown has risen from 100% to 120% of the value of the comparable annuity;

• Reporting and exclusion requirements relating to qualifying recognised overseas pension schemes have been tightened up.

Regulatory developments:

• TPR has published a three year corporate plan (2013-2016) focusing on the following themes; reducing risk to DB scheme members focused on funding and employer covenants (including annual funding statements) (1); improving outcomes for DC scheme members (including improved trustee knowledge and understanding) (2); improving governance and administration (3); maximising employer compliance with auto-enrolment (including a program of targeting employers most likely to have difficulties with auto-enrolment) (4) and delivering operational efficiency and effectiveness (5).

• TPR published its second annual funding statement published May 2013:- aimed at DB schemes due to undergo a triennial actual valuation between September 2012 and 2013. TPR is moving away from the application of rigid triggers (like the 10 year limit for recovery plans) to a more flexible, scheme specific approach. This statement mentions the new statutory objective of encouraging employer growth and future revisions to the code of practice on scheme funding.

• TPR’s revised code of practice 05, “Reporting late payments of contributions to occupational pension schemes” came into force in September 2013. The code contains guidance for trustees of occupational pension schemes on their reporting obligations where late payments have been made to the scheme (including examples of circumstances likely to be material where trustees ought to make a report to TPR).

• TPR has published its draft code of practice No 13 (13 July 2013):- Governance and administration of occupational DC trust-based pension schemes. The code was intended to come into effect in the autumn of 2013. The code is based around 6 guiding principles, being essential characteristics (1); establishing governance (2); people (3); ongoing governance and monitoring (4); administration (5) and communications to members (6). Personal pension schemes are not covered by the code.

• TPR has published guidance on pensions liberation and has joined forces with other government agencies. TPR has launched proceedings in the High Court against two major liberation schemes, which are expected to be completed later this year.

  Pensions liberation is the practice of transferring a member’s pension benefits to a scheme which allows access to their pension before age 55 – in breach of UK tax legislation. Such a transfer will be classed as an “unauthorised payment”, and will result in tax charges apply for the member and the scheme administrator.

  The fraud occurs where the “liberator” fails to disclose the tax consequences, the fees payable (typically 10-30 %) or of the effect on the member’s remaining pensions benefits left behind.

  Where trustees believe member funds may be liberated on a transfer request, this could be reason to delay the transfer request and make enquiries.

Government update:

• GMP equalisation:- in April 2013, the Government published its interim response to the draft regulations and possible equalisation method (further to its consultation process which closed on 12 April 2012). The response makes it clear that the government still regards unequal GMPs as discriminatory. The government has indicated it is considering the responses to the consultation in detail. In particular it is looking to provide statutory guidance on GMP conversion (converting GMPs into scheme benefits), which could be an alternative to equalisation of GMPs. The main attraction of conversion would seem to be that this route requires a one off equalisation calculation, as opposed to year by year analysis to equalise GMPs.

• Corporate restructuring changes:- the Government has issued a consultation on a draft amendment to the Occupational Pension Schemes (Employer Debt) Regulations 2005 (the Employer Debt Regulations). These changes focus on the two corporate restructuring easements which are available to prevent an employer debt arising. The consultation period closed on 7 June 2013 and regulations were due to come into force on 1 October 2013 to make the changes. The aim of the changes is to allow the corporate easements to be used more easily in the circumstances where organisations undergo restructuring to change their status (for instance from unincorporated charity to incorporated charity).

• Consultancy charges:- the Government has published draft regulations which prohibit employers from requiring jobholders to pay consultancy charges in DC automatic enrolment schemes. The changes mean that such charges cannot be recouped from jobholder’s contributions or benefits. Any legally enforceable agreement made before 10 May 2013 (when the pension’s minister first announced these changes) will not be affected. A further consultation will take place, which could lead to the ban on consultancy charging being extended to all qualifying schemes, not just automatic enrolment schemes.

• HM Treasury has published “Fair Deal for staff transfers: staff transfers from central government” (October 2013) (Fair Deal 2013). This follows on from indicative changes set out in the ministerial statement published on 4 July 2012.

  The changes set out in Fair Deal 2013 relate to the manner of how the Fair Deal protection is to be applied in the future – the current requirements to provide “broadly comparable” benefits to those set out under the relevant public sector scheme post transfer, will be replaced by a requirement for the contractor to participate directly in the public sector scheme on behalf of the transferring staff. This is much like the current approach for outsourcing from local authorities, where contractors have the option to participate in the Local Government Pension Scheme by way of an admission agreement.

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