The Commission reiterated its belief in the need for an integrated package of reforms covering four key areas:

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1 Pensions Bulletin Number 2006/14 6th April 2006 PENSIONS COMMISSION FINAL REPORT In its last act before disbanding, the Pensions Commission has published a third and final report responding to issues which have arisen in the debate since it published its main report last November (see Pensions Bulletin 2005/48). The Commission reiterated its belief in the need for an integrated package of reforms covering four key areas: State pension reform (coupling more generous benefits with a gradual rise in the state pension age) the Commission stands by its previous conviction that any failure to limit the spread of means-testing will undermine the success of its proposed new system of private pension saving. Automatic enrolment the Commission noted the wide consensus supporting this idea and acknowledging that a voluntary system will not work. Contingent employer compulsion of 3% of relevant earnings the Commission noted that this has proved more contentious, with concerns about the cost to business, particularly smaller firms. The Commission argued, however, that the minimum matching contribution is an essential element of its overall reform package without which participation rates will be significantly lower. But one new suggestion was that the gains made by the Treasury as the result of declining contracting out rates may be allocated to mitigate the costs of compulsory contributions for small employers. A National Pension Savings Scheme (NPSS) the Commission noted the alternatives proposed, but argued that the NPSS model offered the best model of choice and competition in order to produce the best combination of low cost and benefits of value to members. The Commission did, however, acknowledge that alternative models put forward might have advantages in that they build on existing infrastructure (IT systems, call centres and communication mechanisms) so that operational setup risks may be reduced. The Commission suggested that the government will need to make a trade-off between such setup risks and the likely significant long-term advantages of the NPSS approach. EMPLOYER CONTRIBUTIONS TAX TREATMENT GUIDANCE HM Revenue and Customs has finalised its main guidance on the deductibility of employer contributions to registered pension schemes. It contains some good news for those worried about the consequences of the ending of automatic deductibility on 5th April 2006 but fails to address the main concerns. Guidance in relation to investment companies is to follow shortly. In an expansion from the draft guidance issued in January (see Pensions Bulletin 2006/05), the Revenue has now made clear that the following contributions will be deductible:

2 an increased employer contribution as a result of a salary or bonus sacrifice; the payment of a section 75 debt including those after cessation of trading (although this was not in doubt section 199 of the Finance Act 2004 providing for such a deduction); contributions in respect of non-uk resident employees (in relation to cross-border schemes) including those in relation to deficit financing; and those required under contribution notices issued by the Pensions Regulator to the employer. The Revenue has expanded its guidance on contributions made by third parties. They are only deductible if they meet the principles of being revenue expenditure, made wholly and exclusively for the purpose of the third party s trade and deductible in accordance with generally accepted accountancy practice. Worryingly the Revenue is appearing to take the view that the subsequent payment of a guarantee under a withdrawal arrangement entered into by a departing employer (as an alternative to paying a section 75 debt) is not deductible. The guidance remains silent on the deductibility of payments made under a Financial Support Direction. The guidance is also silent on the deductibility of contributions made by the current employer that arise as a result of deficits in relation to departed employers something on which the NAPF is lobbying. The Revenue is holding to the line that the apportionment of employer contributions to a multiemployer scheme must be on a reasonable basis, informed by actuarial advice where appropriate. This may require some employers to reconsider their current approach to the funding of such schemes. Finally there is no news as to whether employer contributions made to consolidate unapproved unfunded promises within the three-month post A-day window are deductible. Comment: This is a bit of a curate s egg. One can only hope that the Revenue will reconsider on the big picture issues that have been put to them. Otherwise employers and their advisers may find that this piece of tax simplification results in their being dragged into completely avoidable negotiations over deductibility. PENSIONS TAX SIMPLIFICATION INHERITANCE TAX HM Revenue and Customs has published draft Finance Bill provisions that set out how the inheritance tax rules will apply to members of registered pension schemes from 6th April The proposed legislation is similar to that outlined in the Budget (see Pensions Bulletin 2006/11), but two important points of detail have now become clear: On death on or after age 75, with alternatively secured pension funds, any sums allocated for the provision of permissible benefits within six months of the member s death are deductible from the member s estate there is another six month period on the death of the dependant for residual funds to be paid to charity and escape the tax charge. On death before age 75, the general exemption of pension scheme death benefits will not operate where the member makes a pensions disposition within two years of his death and at the time of making this disposition had reason to believe that he would die within this period. So although choosing to defer a pension whilst in good health (and subsequently moving to bad health) should not result in an inheritance tax charge on death, choosing to defer a pension whilst in bad health could. Comment: It is a shame that the Revenue has not sought to apply a broader brush for deaths prior to age 75. It now appears that those who choose to take full advantage of the flexible retirement provisions of pension tax simplification will need to retain evidence that they were in good health at the time of pension deferral decisions in order to ward off a potential inheritance tax challenge from the Revenue on their early death. Page 2 of 7

3 HM REVENUE AND CUSTOMS PENSIONS UPDATES On 3rd April 2006 HM Revenue and Customs published three Pensions Updates as follows: Update 159 confirms the easements to the retained benefits test that have been flagged in the Registered Pension Schemes Manual and which are effective on 5th April Retained benefits can be ignored where earnings from a pensionable employment do not exceed 50,000 in the 2004/05 tax year (with earnings pro-rated where employment was not continuous throughout the year). They may also be ignored if earnings in the last complete tax year for the employment did not exceed 25,000. Where retained benefits do have to be taken into account an alternative method for their evaluation is set out in IR12. Update 160 amends the time of the surplus AVC test to the date of leaving pensionable service for those members leaving on the 3rd, 4th or 5th April 2006 (on 6th April the surplus AVC test fell away). The Update also reminds practitioners of the transitional provisions under which those who leave pensionable service prior to 6th April 2006 will have any surplus AVC refund taken on or after 6th April 2006 treated as if received under the old regime provided that they were entitled to the refund before 6th April 2006 and the payment is made before 6th July The Update concludes by stating that those with AVCs who have already left pensionable service (presumably prior to 3rd April 2006) but have not triggered the test, can now, with the consent of the trustees, specify a date when this test should be carried out this must be on the basis that they are either transferring out or taking immediate benefits. Update 161 summarises certain pension aspects of the Civil Partnership Act 2004, announces that appropriate amendments have been made to IR12 and IR76 and states that amendments are to be made to the Finance Act 2004 to reflect the Civil Partnership Act HM Revenue and Customs has updated its Practice Notes (IR12, IR12 Supplement and IR76) to incorporate the changes introduced by these Updates. Comment: These amendments are very late in the day and certainly the first of these appears to be a housekeeping exercise, driven by the fact that certain protections carried though into the new regime are dependant on how the discretionary approval system stood on 5th April PENSIONS TAX SIMPLIFICATION OVERSEAS TRANSFERS HM Revenue and Customs has added a list of nearly 50 questions about transfers to qualifying recognised overseas pension schemes (QROPS) to their FAQ section. Although many reflect just the legislation, anyone dealing with a potential transfer to a QROPS may benefit from reading them. On A-day the old discretionary requirements for overseas transfers fell away. Instead UK schemes and members may avoid an unauthorised payments charge on making a transfer to an overseas scheme if the overseas scheme satisfies certain conditions and registers with the Revenue (and hence is regarded as a QROPS). FAQ highlights include the following: Form APSS 251 will be used by the manager of an overseas scheme to notify the Revenue that it wishes to register as a QROPS. The Revenue has also published notes to assist with completing this. They intend to turnaround over 90% of QROPS applications within 15 working days, with all dealt with within 40 days. Overseas transfers started but not finished before 6th April 2006 will become subject to the new requirements there are no transitional provisions. IR12 Appendix VI and IR76 Appendix 22 will not apply for any transfers made after 5th April From 6th April 2006, UK schemes should not send cheques to an overseas scheme until it has received confirmation that it is a QROPS. UK scheme administrators will have to write Page 3 of 7

4 to the Revenue for this confirmation as the information will not be available on the Revenue s website. Overseas transfers of contracted-out rights still continue to be governed by DWP legislation. EXTENSION OF MIGRANT MEMBER RELIEF DRAFT REGULATIONS The draft Registered Pension Schemes (Extension of Migrant Member Relief) Regulations 2006 have been published. They implement changes to the migrant member relief (MMR) provisions of the Finance Act 2004 as previously announced by HM Revenue & Customs. The regulations address concerns that a migrant worker would be denied UK tax relief on contributions to his overseas pension scheme because of a restructuring of the scheme after his arrival in the UK. One of the current MMR eligibility conditions is that the employee must be UK nonresident when joining the overseas pension scheme. So if the employee is subsequently forcibly transferred to a new arrangement, after a sale or as the result of a scheme merger for example then this condition is not met. The regulations extend MMR in the following three situations: a block transfer between overseas schemes on or after 6th April 2006; a series of block transfers between overseas schemes the last of which occurred on or after 6th April 2006; and the closure of one scheme to future accrual with a further scheme being established to provide for future accrual to members of the old scheme. FINANCE BILL 2006 REVISED BRIDGING PENSION PROPOSALS HM Revenue and Customs has modified its bridging pension proposals that were announced only two weeks ago (see Pensions Bulletin 2006/12). In a revised draft schedule to the Finance Bill 2006 the Revenue now propose to allow for scheme pensions to be reduced as follows: no earlier than age 60 and no later than age 65 (the previous proposal restricted the reduction to when the member reached state pension age); and for contracted-out schemes by no more than the 125% of the single person s basic state pension; otherwise by no more than 250% of the single person s basic state pension (previously the proposals were 100% and 200% respectively). Comment: The Finance Bill clauses appear to do pretty much what they say on the tin and should simplify the administration of bridging pensions it will no longer be necessary to verify the amount of state benefits actually received by members. However, there is no transitional protection and so schemes with bridging pensions will be operating outwith the legislation until the Finance Bill obtains Royal Assent. PENSIONS TAX SIMPLIFICATION NEWSLETTER 11 HM Revenue and Customs has published its 11th simplification newsletter dealing with a number of issues. These include the following: confirmation that had the earnings cap been determined for the 2006/07 year it would have been 108,600; an explanation that the initial reference numbers issued on protection certificates will be temporary these will be replaced when the Revenue s new database goes live (they will not affect the level of protection recognised by the Revenue); Page 4 of 7

5 the number of decimal places and the rounding to which the percentage of the lifetime allowance should be determined; a reminder on the reporting of certain chargeable events in particular that 1SF forms will still be due for tax year 2005/06; in relation to the Revenue requirement that serious ill-health lump sums must extinguish the member s entitlement to benefits, a reference to the Government s response to consultation on certain contracting out requirements from which it appears that there may be some changes in the offing; and tips for getting postal queries dealt with quickly. SECTION 179 VALUATIONS BULK TRANSFER ADJUSTMENT FORMS The Pension Protection Fund has published forms which may be used to notify it of certain incoming and outgoing bulk transfers or insurance buyouts that took place after the last section 179 or MFR valuation and on or before 31st March They will enable the PPF to adjust the 2006/07 levy to reflect the impact of these transactions. Whilst the forms are not obligatory, the PPF encourages their use, pointing out that it has a statutory power to demand this and similar information where necessary. The forms may be used where the assets transferred (or received) or the purchase price of the insurance contracts are, for a single transaction or for a number of smaller transactions in aggregate, at least the lesser of 1.5m and 5% of the value of the assets shown in the latest section 179 valuation (or MFR valuation where no section 179 valuation has yet been submitted). The forms must be submitted by by 30th June 2006 in order to be taken into account in the 2006/07 levy. Comment: Post-effective date bulk transfers are currently ignored in the PPF s post-valuation adjustment methodology. It appears that in future levy years the PPF Board will use the large transfer notifiable event trigger to request that such forms are completed where they have not been supplied voluntarily thus limiting the scope for moral hazard. PENSION PROTECTION FUND SECTIONALISED SCHEME FORM The Pension Protection Fund (PPF) has published a Sectionalised Scheme Parent Form in order to facilitate a data collection exercise for such multi-employer schemes. This is because each section of a sectionalised scheme (see the FAQs) is treated as if it were an individual scheme for levy purposes. For the 2006/07 levy year, a sectionalised scheme must provide information on the individual sections of the scheme via a two part form process. The first form is the new Parent Form on which schemes are asked to provide information regarding their structure, including the number of sections within the scheme and each section s name. All sectionalised schemes the PPF is aware of should have already been sent this. If a scheme is sectionalised and has not received this form it should download it from the PPF website and submit it electronically. Once the PPF has received a completed Parent Form back from a scheme (and from 17th April) it will progress to the second part of the process. The scheme will be provided with the required number of Sectionalised Scheme Child Forms (ie one per section). The Child Form will collect both under funding and employer information. The intention is that this exercise will be completed by the end of May. REGULATORY REGIME FOR SIPPS AND OTHER PERSONAL PENSION SCHEMES Page 5 of 7

6 The Financial Services Authority (FSA) has published a consultation paper setting out its proposed regulatory regime for SIPPs and all other personal pension arrangements, with SIPPs coming under the FSA s regulatory umbrella for the first time. This follows last week s government announcement (see Pensions Bulletin 2006/13). From April 2007, all who operate a SIPP scheme will need to apply for additional permission or authorisation if not already authorised. In addition, there will no longer be any restriction on the type of firm that may operate a personal pension scheme. Any firm wishing to establish, operate or windup a personal pension scheme may apply for authorisation to do so, and must obtain permission from the FSA before proceeding. Prior to April 2007 the FSA has announced that it intends to encourage all firms to adopt these regulatory standards, will monitor the way that SIPPs are promoted and will liaise with trade bodies to encourage member firms to behave appropriately. US GAAP PROPOSED STATEMENT ON ACCOUNTING FOR DEFINED BENEFITS The US accounting standards board, the FASB, has published an exposure draft of some planned major revisions to US GAAP pensions accounting. The key change is that the full surplus or deficit is to be shown on the balance sheet, as under FRS17. However, unlike FRS17, gains and losses recognised outside profit and loss will be "recycled" into profit and loss through the existing "10% corridor" mechanism. This change is due to come in for the December 2006 year end, i.e. this year's accounts. There are also a number of other changes, including the removal of the option for having the measurement date in advance of the accounting date, and changes to disclosure requirements. RESEARCH REPORT 329 EMPLOYERS' PENSION PROVISION SURVEY 2005 The Department for Work and Pensions has published new research examining the extent and nature of pension provision among private sector employers in Great Britain. The main findings were that: the proportion of private sector employers offering any pension to their employees has declined from 52% to 44% since 2003; the proportion of employees who are active members in some form of occupational pension scheme has declined from 38% to 34% since 2003; 45% of small employers (5-12 employees) do not offer access to a pension scheme; the average employer contribution to an open DB scheme is 10% of employees salaries, 5% for an open DC scheme and 5% for group personal pensions; and only 4% of employers (covering 16% of employees) use auto-enrolment as a joining mechanism. TURNER REPORT ACTUARIAL PROFESSION PROPOSALS Following on from its publication of two papers in response to the Pensions Commission s second report (see Pensions Bulletin 2006/12) the Actuarial Profession has published its response to the House of Commons Select Committee inquiry into pensions reform which included the following points: the Pensions Commission proposals introduce more complexity into the retirement savings arena, and it is not certain that the advantages of its proposed reforms merit this; Page 6 of 7

7 any reform must be sensitive to existing retirement saving, particularly occupational provision, and not undermine it; if a quasi-compulsory savings scheme is to be introduced, state retirement provision must be such that it does not devalue that saving; and there needs to be clarity about the purpose of the state pension. NATIONAL INSURANCE CONTRIBUTIONS ACT 2006 The National Insurance Contributions Act 2006 received Royal Assent on 30th March The Act is designed to enable HM Revenue and Customs to make regulations to close down tax and national insurance avoidance schemes as soon as it becomes aware of them. This fulfils the pledge made in the Pre-Budget Report in December REGISTERED PENSION SCHEMES MANUAL CHANGES TO CHAPTERS 3 AND 20 HM Revenue and Customs has updated Chapter 3 (Protecting pension rights from tax charges) of the downloadable version of the Registered Pension Schemes Manual to clarify procedures and reflect regulatory changes. Minor changes have also been made to the Glossary. BOARD OF ACTUARIAL STANDARDS BOARD MEMBERS The Financial Reporting Council has announced the complete set of appointments to the Board of Actuarial Standards. The Board was established to set actuarial standards independently of the actuarial profession following the recommendations of the Morris Review last year (see Pensions Bulletin 2005/11). PENSION PROTECTION FUND COMPENSATION CAP FROM 1ST APRIL 2006 The Pension Protection Fund has now published compensation cap factors allowing for the increase in the level of the cap as specified in the Pension Protection Fund (Pension Compensation Cap) Order 2006 (see Pensions Bulletin 2006/08). PENSION PROTECTION FUND LEVIES The Occupational Pension Schemes (Levies) (Amendment) Regulations 2006 (SI 2006/935) have been laid before Parliament and are concerned with the PPF Ombudsman and the Administration levies. See the explanatory memorandum and Pensions Bulletin 2006/07 for their contents. CONTRACTING OUT REBATES FOR 2007 TO 2012 SETTLED The Social Security (Reduced Rates of Class 1 Contributions, Rebates and Minimum Contributions) Order 2006 (SI 2006/1009) has been laid before Parliament and comes into force on 6th April 2007 (see also the explanatory memorandum). It brings into being the contracting out rebates for the next quinquennium (see Pensions Bulletin 2006/10). PENSIONS ACT EXEMPTION NON-EUROPEAN SCHEMES The Department for Work and Pensions has decided not to proceed with the draft Occupational Pension Schemes (Exemption) Regulations These would have sought to exempt occupational pension schemes with their main administration outside the EU that are not tax registered from the provisions of UK pension legislation. Responses to its consultation on the draft regulations (see Pensions Bulletin 2005/43) suggested that the regulations were unnecessary. This Pensions Bulletin should not be relied upon for detailed advice or taken as an authoritative statement of the law. For further help, please contact Chris Gubby at our London office or the partner who normally advises you. The firm is regulated by the Institute of Actuaries in respect of a range of investment business activities. Lane Clark & Peacock LLP Page 7 of 7