Pensions and Employment: Pensions Bulletin

Transcription

1 Pensions and Employment: Pensions Bulletin 28 NOVEMBER 2013 ISSUE 19 Legal and regulatory developments in pensions In this issue TAX Update on reduced allowances CASES Compensation for incorrect benefits quotation: Pensions Ombudsman s determination in relation to Tuttle Failure to pay over death benefits within 2 year period: Pensions Ombudsman s determination in relation to Ms. Browne...more...more...more NEWS FROM THE REGULATOR DC regulatory framework takes effect Regulator s guidance on asset backed contributions POINTS IN PRACTICE DWP Consultation on Defined Ambition Client seminar: packs available Client seminars 2014: save the dates...more...more...more...more...more To access our Employment/Employee Benefits Bulletin click here. Contents include: TUPE: Dismissals by football club administrator were not automatically unfair Right to RPI pay rises had crystallised following TUPE transfer Withdrawal of information during garden leave was not repudiatory breach of contract Revised GC100 and Investor Group Guidance New NAPF Guidelines and Remuneration Principles John McCririck loses age discrimination claim against Channel 4 Back issues can be accessed by clicking here. To search them by keyword, click on the search button to the left. Find out more about our pensions and employment practice by clicking here. For details of our work in the pensions and employment field click here. For more information, or if you have a query in relation to any of the above items, please contact the person with whom you normally deal at Slaughter and May or Rebecca Hardy. To unsubscribe click here.

2 Tax Update on reduced allowances 1. With Royal Assent having been given to the Finance Act 2013 in July, we now have the legislation in place that makes two further changes to the tax allowances: 1.1 the reduction of the annual allowance to 40,000, applying to pension input periods ending on or after 6th April, 2014, and 1.2 the reduction of the lifetime allowance to 1.25 million, having effect on 6th April, The focus accompanying this Bulletin provides a recap of the main features of the reduced allowance together with some action points and reminders. Cases Compensation for incorrect benefits quotation: Pensions Ombudsman s determination in relation to Tuttle A. Overview 1. On 3rd September, 2013, the Deputy Pensions Ombudsman decided in this case (86135/1) that providing an incorrect quotation was maladministration on which the member had reasonably relied, to her detriment, despite the fact that the quotation was described as an estimate. 2. T, a member of the NHS pension scheme with a normal pension age ( NPA ) of 55, had received a benefits quotation for retirement at age 54 which was wrongly unreduced for early retirement. T claimed she would have delayed retirement until her NPA had she not received the quotation. The Ombudsman decided that, in the circumstances, the compensation had two distinct elements: 2.1 to provide the equivalent pension that would have been payable had T taken her benefits at NPA, and 2.2 to compensate T for the net income lost through no longer working for the sponsoring employer from the date of her early retirement to her NPA. B. Facts 1. T was employed by an NHS Trust as an auxiliary nurse working 2 nights a week. In August, 2010 she asked the scheme for 2 quotations, one for retirement at age 54 and one for retirement at age 55, her NPA. The yearly pension and lump sums quoted for each date differed by only a few hundred pounds and T decided to retire a year early at age The benefits that T actually received were significantly lower than those quoted, with her pension being 60% of the quoted figure. When T queried the disparity, NHS Pensions admitted that the quotation for age 54 had wrongly been unreduced for early retirement. 3. T complained to the Pensions Ombudsman that she had relied on the incorrect retirement benefit quotation when deciding to retire a year early. She claimed that, in order to mitigate her loss, she had taken another part-time job. 4. NHS Pensions argued that the quotation stated it was an estimate and did not say that it was guaranteed. The covering letter also stated Member booklets giving additional information can be obtained via our website. This online guide made clear that the benefits should have been reduced. NHS Pensions also argued that T s earnings after her NPA, as well as before, should be taken into account in any award as she was under a continuing duty to mitigate her loss. 2

3 C. Determination 1. The Deputy Pensions Ombudsman upheld T s complaint. 2. Providing the incorrect quotation had amounted to maladministration. The fact that the quotation was described as an estimate did not justify the significant changes made to T s benefits and it was not enough for NHS Pensions merely to direct members to an online guide for such important information. 3. T s request for 2 quotes made it clear that she was considering which age to retire at and would rely on the information. This placed the onus on NHS Pensions to provide accurate guidance. T had no means of knowing that the incorrect age 54 quote, which was still lower than the NPA quote, was not actuarially reduced. 4. The Deputy Ombudsman was satisfied that T had acted in good faith in reasonable reliance on the incorrect quotation when she decided to retire. 5. Compensation should put T, as far as possible, in the position she would have been had accurate information been given. The Deputy Ombudsman found that she would have continued working and received her full pension at age 55 as of right. 6. T was entitled to payments under 2 distinct heads: 6.1 to provide the equivalent pension that would have been payable if T had taken her benefits at age 55 from January, 2012, and 6.2 to compensate T for the net income lost between her actual retirement in January 2011 and the date she would have retired at NPA, January, The Deputy Ombudsman rejected NHS Pensions argument that T s earnings beyond January 2012 should have been taken into account. 8. The Deputy Ombudsman additionally directed NHS Pensions to pay T 1,000 for distress and inconvenience. Comment: In order to succeed in claims for financial loss caused by mistake, claimants need to show that the mistake amounted to maladministration and that they suffered financial loss in reliance on it. In deciding whether the mistake was the cause of the financial loss, the Ombudsman has to decide what would have happened had the mistake not been made. In this case it was clear that T had changed her position (retired early) in reliance on the incorrect quotations. Action point: To avoid similar claims: check all member communications carefully before they are sent and include wording telling members who to contact if something is unclear, include boilerplate wording in all member communications, and if an error is discovered, apologise to the member and offer an adequate explanation of the consequences. Failure to pay over death benefits within 2 year period: Pensions Ombudsman s determination in relation to Ms. Browne A. Overview 1. On 18th September, 2013, the Pensions Ombudsman decided in this case (PO 220) that the Trustees of the Wrigley Pension Plan failed in their obligation, arising from the Scheme rules, to pay a lump sum death benefit within 2 years of a member s death. The payment of the benefit after the 2 year period resulted in an unauthorised payment tax charge and surcharge due to HMRC totalling 55% of the gross benefit. 2. The Ombudsman noted that the rule placed a substantial burden on the trustees and that their 3

4 half hearted enquiries of the member s mother regarding information needed to award the benefit, and their failure to seek the information elsewhere, failed to match this burden, and constituted maladministration. 3. The Ombudsman directed the trustees to pay the executors of the member s mother a sum equal to the unauthorised payment charge and surcharge (over 23,000) plus interest and the net death benefit previously paid. B. Facts 1. The Wrigley Pension Fund provided: The death benefit will be held by the trustees on trust to pay it or use it within a period of 24 months from the date of death of the member to or for the benefit of one or more of the member beneficiaries and legal personal representatives in whatever shares and in whatever manner the trustees in their absolute discretion decide. In the event of the failure of these trusts the death benefit will be held for the general purposes of the scheme. 2. The member, B, died on 15th December, Although the trustees claimed to have sent B s mother a standard information form requesting the death certificate and information to identify the potential recipients of the lump sum death benefit, and to have chased the mother on 3 occasions prior to expiry of the 2 year period, they were unable to provide any evidence of this. 3. One of the trustees who knew B visited his mother in April, 2008 at the trustees request, obtaining the death certificate and enough information for the trustees to proceed. On 22nd October, 2008, a sum was paid to the mother, being the product of the gross lump sum less an unauthorised payment charge and surcharge that HMRC had confirmed was payable to it. 4. The mother died in April, The co executor of her estate complained to the Ombudsman that the trustees had unduly delayed payment of the lump sum death benefit. C. Determination 1. The Ombudsman upheld the complaint. 2. The trustees obligations were set out in the scheme rules. These placed a substantial burden on the trustees to exercise their discretion within 2 years of B s death and avoid the failure of the trust. The trustees enquiries and efforts to make the payment had failed to match this burden. They had treated the mother as the only source of information and the only possible beneficiary. Their attempts to elicit the information, even assuming the mother had received the form and phone calls, had been half hearted and, together with the payment to the mother in 2008, indicated that they did not understand that the rules did not allow for a payment to a beneficiary outside 2 years. 3. In this connection the Ombudsman noted that the trustee s procedures were not apparently designed to identify claims running close to the 2 year limit. The trustees failure amounted to maladministration. Comment: This decision highlights that trustees should have in place proper procedures for flagging outstanding death benefits that remain unpaid towards the end of the 2 year period so payment can be arranged before tax charges become due. News from the Regulator DC regulatory framework takes effect A. Overview 1. The Regulator s framework for regulation of DC Schemes took effect on 21st November,

5 2. The framework comprises: 2.1 Code of Practice No. 13: Governance and administration of occupational DC trustbased pension schemes (the DC Code ), 2.2 regulatory guidance, and 2.3 the Regulator s compliance and enforcement policy. 3. The DC Code contains the DC quality features that emanate from pensions legislation and practical guidance on how trustees can meet these legal requirements. The regulatory guidance provides practical information on the DC quality features not addressed in the Code i.e. those not directly connected to pensions legislation. 4. The Regulator has also published a brief introduction to the DC Code and regulatory guidance. 2. All of the above are on the Regulator s website, along with separate web-pages for trustees, pensions professionals and employers respectively. The Regulator has also updated its trustee toolkit to reflect the framework. 3. The framework takes immediate effect. B. Code of Practice 1. The Code is built around the Regulator s 6 DC principles (published in December, 2011) (Pensions Bulletin 11/19) and 31 DC quality features which represent the standards and behaviours the Regulator expects trustees to attain (Pensions Bulletin 12/10). The Regulator expects all DC Schemes voluntarily to disclose how they comply with the DC principles and quality features. 2. The Code applies to trustees of all occupational DC trust-based schemes with 2 or more members which offer: 2.1 money purchase benefits, including AVCs under occupational DB schemes or sections and the DC element of hybrid schemes, and 2.2 money purchase benefits with a DB underpin. 3. The Code does not apply to: 3.1 schemes providing DB benefits only or to DB benefits in hybrid schemes, or 3.2 work-based personal pensions, stakeholder schemes or other contract-based schemes. 4. The Code is split into 5 core sections: 4.1 know your scheme, 4.2 risk management, 4.3 investment, 4.4 governance of conflicts of interest and advisers/service providers, and 4.5 administration. 5. Each section of the Code refers to DC quality features that arise out of existing legislation, setting out the legal requirements and providing practical guidance on how trustees can comply. The Code notes that trustees do not need to follow all the practical guidance in every circumstance. C. Regulatory guidance 1. The guidance follows the same format. The Regulator suggests that trustees read each section alongside the relevant section of the DC Code. 2. Points to note are: 2.1 on investments: the guidance says trustees should recommend that members consider 5

6 taking financial advice when making investment decisions. Trustees should ensure that communications make it clear to members that they may a incur a loss by being out of the market when switching funds, 2.2 on governance: the Code requires that trustees ensure that all members receive value for money ( VFM ). The guidance suggests that trustees should undertake a VFM evaluation exercise, paying particular attention to the investment return delivered to members. Trustees should act as demanding consumers. VFM should be included as an item on the scheme s risk register. Trustees should carry out a periodic strategic review, (the Regulator suggests every 3 years) and the guidance includes a model process for such review, 2.3 on costs and charges: the guidance recommends that trustees disclose information about all costs and charges to members on joining, annually thereafter, before members carry out transactions that incur costs, on request from the member, on leaving the scheme/employer, and before charges or funds change, 2.4 on retirement processes: the guidance sets out in detail when schemes should provide information to members approaching retirement and includes a model retirement process that it suggests trustees adopt, and 2.4 on member communications: the guidance says trustees should ensure that the quality of member communications is included as an item in the scheme s risk register. Trustees should periodically (the guidance suggests annually) review standard scheme communications to members to assess their effectiveness. D. Compliance and Enforcement Policy 1. The Regulator s monitoring activity will be split into reactive (responding to whistle blowing complaints) and proactive work. 2. The proactive process will involve collecting a sample of schemes to review. Those which have not met the expected standards will be subject to a further detailed review and possible further action. 3. Once an investigation is complete, the Regulator will decide what enforcement action should be taken. It will take into account factors such as the immediacy and materiality of the risk or issue and the behaviour of the parties involved. 4. Enforcement options include: 4.1 formal action (engagement by telephone, , letter and in person), 4.2 statutory notices (such as improvement notices or third party notices), and 4.3 imposition of civil penalties. E. Introduction to the Code 1. Alongside the Code, the Regulator has published a useful summary document which: 1.1 lists in a table the DC quality features addressed in the Code and the Regulatory guidance, 1.2 states where further guidance on each quality feature can be found in the Code, and 1.3 summarises some of the key trustee tasks relating to each DC quality feature. Comment: The introduction, through a useful overview, is no substitute for reading the DC Code. 6

7 Comment: The Code and guidance should be required reading for all trustees of all DC schemes, and for trustees of DB Schemes with money purchase AVCs. Appropriate training should be considered. But remember that trustees powers may be constrained by the terms of the trust deed and rules and the Regulator s Code and guidance needs to be read with that in mind. Regulator s guidance on asset backed contributions A. Overview 1. On 19th November, 2013, the Pensions Regulator published guidance for trustees on asset backed contribution ( ABC ) arrangements 2. The guidance expands on the statement published by the Regulator in November, 2010 entitled Employer related investments (Pensions Bulletin 10/17), in which the Regulator advised trustees involved in what it described as complex funding arrangements to proceed with due care. 3. The new detailed guidance explains what ABC arrangements are and the risks involved with them, and sets out the practice that the Regulator expects trustees to follow when considering a proposal to enter an ABC arrangement. 4. An ABC arrangement is a contractual agreement for the securitisation of an asset (examples include real estate and whisky) to create a regular income stream over time. The employer transfers the asset to a special purpose vehicle ( SPV ) (commonly a Scottish limited partnership) owned jointly by the pension scheme and the employer. The pension scheme has a right to a share of the profits in the SPV and its interest in the SPV is a scheme asset. B. Advice to trustees 1. The Regulator notes that, since in ABC arrangements the scheme can face increased risks if the ABC provides funding over a longer period than would be the case under a normal recovery plan, trustees should examine any proposed ABC arrangement critically and carefully. They should consider whether there are any less risky alternatives to support the scheme, such as an appropriate recovery plan, or an appropriate recovery plan coupled with contingent assets to provide additional security. 2. If trustees choose to enter into an ABC arrangement, the Regulator advises they should take care that any capitalisation of the payment stream does not give a distorted view of the scheme s funding position and its overall risk profile. Trustees should unpack the ABC arrangement and clearly identify the extent to which the value attributed to the ABC in the scheme s accounts is reliant on payments being made in the future, and assess the likelihood that those payments will be made in relevant scenarios. 3. In order to evaluate a proposal, the Regulator suggests that trustees will generally need to obtain extensive legal, actuarial, asset valuation and covenant advice. Before entering into an ABC, trustees will also need to take investment advice and consider whether the decision to make the investment needs to be delegated to a fund manager. 4. The guidance lists the matters to be considered by trustees and notes that, in comparing available alternatives, trustees should ensure they consider the costs of establishing, maintaining and monitoring the ABC structure, including the costs to the sponsoring employer and the ongoing costs of running the complex structure for the entirety of the payment term. 5. The Regulator suggests trustees should consider whether there is a benefit to using an ABC arrangement instead of conventional funding methods. Trustees should require any structure to include a separate underpin agreement. The Regulator says that existing arrangements without underpins should put them in place as soon as practicably possible. 7

8 5. If trustees decide to enter into an ABC, the Regulator expects them to explain the decision to members in the next available communication. Trustees must also report any investments in an ABC to the Regulator in the annual scheme return. The Regulator says it is likely to ask trustees for further details where it receives any such notification. Comment (1): Slaughter and May has advised on a substantial number of ABC arrangements including advising Marks and Spencer in relation to the first real estate arrangement back in Comment (2): The Regulator rightly emphasises the need for trustees to take proper advice and to examine carefully whether the ABC arrangement achieves its objective. It is, though, important to remember that the guidance is just that. What the Regulator may expect from trustees is not necessarily what trustees are required to do in the proper discharge of their duties. The guidance should be read with that in mind. Comment (3): It is not unknown for the Regulator s guidance, although well intentioned, to be incorrect in law. Know-How DWP Consultation on Defined Ambition A. Overview 1. On 8th November, 2013, the DWP published its consultation on proposals to reinvigorate workplace pensions, entitled Reshaping workplace pensions for future generations. 2. In its November, 2012 paper on the subject, the DWP looked at whether there was scope for a new category of Defined Ambition ( DA ) pensions to complement the DB and DC structures that currently dominate the market. 3. The drivers for DA pensions are the assumptions that: 3.1 some employers would like to provide employees with more than individual DC but find traditional DB too costly, and current options in between too complex to set up and run, and 3.2 there is demand from individuals for more certainty about what they get back for the money they put into their pensions compared with what DC currently offers. 4. The DWP is consulting on 3 potential structures for DA pensions. B. Defined benefit schemes 1. The DWP believes that, without Government intervention to allow more flexibility and reduce constraints for employers sponsoring DB pensions, DB is likely to disappear almost completely from future pension arrangements. Regulatory constraints must be reduced as far as possible. 2. Although reform of DB pensions is of interest to a limited number of employers, such employers are likely to have pension schemes with large numbers of members. 75% of the 1.6m current active members of private sector DB schemes are in fewer than 5% of schemes. The DWP has focussed on proposals to enable these employers to continue to provide schemes with a DB element. 3. The proposed changes will apply to future service only. 4. The DWP proposes to build on the abolition of DB contracting out by removing, for future accruals only, 4.1 the requirement to provide survivors benefits, and 8

9 4.2 the statutory requirements for the indexation of pensions in payment. 5. Employers could additionally choose to provide benefits above the simplified DB level when the scheme funding position allowed, for example choosing to provide indexation on a purely discretionary basis which could fluctuate in payment from year to year. 6. This would involve changing the legislation on requirements such as preservation, revaluation, scheme funding, employer debt and the PPF levy so they would apply only in respect of statutory provisions and benefits required to be paid under scheme rules, and not in relation to any benefit paid on a fluctuating discretionary basis only. 7. For existing DB schemes that have provisions relating to survivor benefits and indexation hard wired into the rules, the DWP is considering whether to provide a statutory override to enable schemes to change their rules in relation to future accruals more easily. 8. Another possible approach is automatic conversion to DC when an employee leaves employment before retirement (the automatic conversion model). Legislative changes would be required to enable employers to adopt this model: there is likely to be some need for regulatory protection for members and to address risks of avoidance activity. 9. The DWP proposes to provide employers with greater flexibility to manage their risks in relation to longevity by adjusting their scheme s normal pension age. This would enable future pension provision to be based on the projected number of years in retirement, rather than being tied to a fixed date that does not take into account changes to longevity. 10. From the date the model is implemented, the age at which members are entitled to a full scheme pension could be adjusted in line with changes to longevity assumptions so that members would be expected to spend broadly the same length of time in retirement. To achieve this, the DWP proposes to require the Government Actuary s Department to publish, at pre-determined intervals, an objective index of pension ages based on the latest longevity assumptions. Schemes would then be able to increase their NPA in line with any increases in this index. 11. The DWP proposes that employers would not be able to adjust the NPA of anyone within 10 years of the existing NPA in the scheme. Only accruals after the date the scheme implemented the adjustment would be affected. 12. The DWP will consider whether there is a need for a statutory override to enable schemes to change their rules going forward to take advantage of this proposal without requiring member or trustee consent. Comment: In fact it is already possible to provide, subject to appropriate drafting and careful communication, for an automatic adjustment to the date from which members pension may be paid as part of the scheme design without infringing Section 67. C. Defined Contribution 1. The consultation paper primarily focuses on the provision of hard guarantees in DC schemes. Although it recognises that targets and appropriate use of investment strategies can be used to manage risk, no legislative changes are required to enable them to be delivered so the paper does not deal with them. 2. The DC models may be of interest to employers who would like more certainty for their employees but do not want to take on any risk. DWP notes that the ending of the employer s right to compel a specific retirement age is leading employers with DC schemes to focus on ensuring employees can afford to retire. 9

10 3. The consultation paper explores 4 different guarantee models, noting that new or amending legislation may be needed to enable the market to deliver these guarantee models. D. Collective Defined Contribution ( CDC ) Schemes 1. In a CDC scheme, the employer pays a fixed rate of contributions. It has no further liability to the scheme and no balance sheet risk. Scheme assets are pooled. When members retire, they do not select an individual retirement income product, rather the income is paid from the asset pool. CDC schemes perform better on a larger scale. Individuals are generally provided with a target pension income they might reach in retirement, often including fluctuating conditional indexation payment. The actual pension income received is dependent on the available assets in the scheme. 2. The DWP proposes to explore further the changes to the legal framework that would be required to enable CDC schemes to operate in the UK. The consultation paper, on which comments are invited by 19th December, 2013, is on the DWP website Comment: The paper does convey a real sense of urgency. We encourage you to read, and respond to, it. The DWP proposals for DB lite schemes appear to stem from a genuine desire to avoid the abolition of DB contracting-out in April, 2016 being a catalyst for a wholesale switch to DC. Whether the proposals will be seen as too little too late remains to be seen. A point that is likely to become of increasing importance to employers with DC schemes is whether their employees will be able to afford to retire. If the employee cannot afford to retire there will be issues over whether the employee can be forced to retire without triggering an age discrimination claim (as well as internal and external reputational issues to consider). Our teleconference for clients on the DWP consultation paper was held on 28th November, The presentation is available for replay until 5 pm on Wednesday, 4th December, Further details are attached. Client seminar packs available 1. The handouts from our latest client seminar, on 13th November, 2013, are available from Helen Mulligan at Helen.Mulligan@slaughterandmay. com in electronic or hardcopy format. 2. Topics covered include: 2.1 tax update, 2.2 VAT, FATCA, EMIR, FTT, and authorised contractual schemes, 2.3 auto-enrolment: Where are we now?, and 2.4 same sex marriage, Regulator s DC Code of Practice and defined ambition. Client seminars 2014: Save the dates Our Pensions Update client seminars will take place on the following dates in 2014: Wednesday, 12th February, 2014, Wednesday, 11th June, 2014, and Wednesday, 19th November,

11 Client Focus: Update on reduced allowances A. Background 1. With Royal Assent having been given to the Finance Act 2013 in July, we now have the legislation in place that makes two further changes to the tax allowances: the reduction of the annual allowance to 40,000, applying to pension input periods ( PIPs ) ending on or after 6th April, 2014, and the reduction of the lifetime allowance to 1.25 million, having effect on 6th April, This focus provides a recap of the main features of the reduced allowance together with some action points and reminders. B. The reduced annual allowance 1. When will the reduced annual allowance have effect? The annual allowance is 40,000 for PIPs ending on or after 6th April, It is therefore possible that PIPs are already running that will be affected by the change. For example, a PIP that started on 1st September, 2013 and runs from 1st September to 31st August in each year will end on 31st August, 2014 and will already be caught by the change. 2. Is carry forward affected by the reduced annual allowance? The reduction in the annual allowance does not affect tax years before 2014/15. So, to the extent that the 50,000 annual allowance was not fully used in the 3 tax years ending 2013/14, any unused part of that allowance can still be carried forward to the appropriate later tax years. For example, Member A has the following pension input amounts: 2011/12 input 45, /13 input 50, /14 input 50,000 5,000 can be carried forward to 2014/15, giving Member A annual allowance capacity of 45,000 ( 40, ,000) for that tax year. 3. Dealing with the reduced annual allowance 3.1 Many employers have employees who are already affected by the first reduction to the annual allowance to 50,000, which was effective from 6th April, Often benefits provided under registered pension schemes will have been limited to avoid an annual allowance tax charge (whether under a Slaughter and May tax simplification amending deed or otherwise), and affected employees will have been compensated with either a cash supplementary payment or an unfunded unregistered top-up pension promise. 3.2 Where a scheme has the benefit of a Slaughter and May tax simplification amendment deed which includes a provision capping benefits by reference to the available annual allowance, the further reduction in annual allowance to 40,000 should automatically apply to scheme members for PIPs ending in the tax year 2014/15 and onwards. However, this should be checked. 3.3 Employers will need to consider how to respond to the further reduction in the annual allowance, both for employees who were already affected by the 50,000 annual allowance, who will now see a further reduction in their capacity for building up tax efficient registered pension scheme benefits, and for members who will be affected for the first time. 11

12 3.4 Action points: Where a scheme has the benefit of a Slaughter and May annual allowance capping provision, check that the further reduction in annual allowance applies automatically. For members who are already affected by the 50,000 annual allowance, some checkpoints are: will the remuneration solution applied when the annual allowance reduced to 50,000 automatically pick up the further reduction to 40,000, or will further decisions and/or documentation be required? will non-pension benefits (e.g. cash supplement) be adjusted to compensate for the further reduction in the annual allowance? For members who are newly affected, a decision will be needed as to whether to apply the same remuneration solution to this group, and appropriate documentation will need to be put in place. 4. What happened to the draft Order proposing changes to the detailed workings of the annual allowance? 4.1 We are still waiting for the promised improvements to the annual allowance provisions. A draft Amending Order 1 was first published for consultation in November, The purpose of the Order was to help ensure that the annual allowance rules work as intended. 4.2 A number of the proposed amendments envisage helpful changes to provisions such as the deferred member carve-out, which should clarify when and how those provisions apply. However, one of the proposed changes provides a fix to what, until the draft Order was published, had not been perceived as a problem. 4.3 The proposed fix ensures that an annual allowance charge is not inadvertently triggered on an underfunded block transfer. This reflects HMRC s view that an underfunded transfer gives rise to a pension input for annual allowance purposes if transfer credits in the receiving scheme cannot be actuarially justified by reference to the transfer-in. 4.4 As a number of advisers have taken issue both with this view and the proposed solution, the second draft of this Order has been delayed for a considerable period of time and none of the proposed improvements have, as yet, been made. Comment 1: It is to be hoped that the changes, when made, will all now be made with retrospective effect, so that the unintended workings of the current annual allowance provisions are rectified for all PIPs ending after 5th April, Comment 2: As reported in our Pensions Bulletin of 1st August, 2013 HMRC has attempted to give some comfort that pension input amounts will not arise on underfunded block transfers where mirror image benefits are granted in the receiving scheme. However, there will be no complete answer until the draft Order is finalised and laid. 5. What are the new reporting requirements relating to the annual allowance? 1 The draft Annual Allowance Charge (Amendment) Order There is a new requirement to inform HMRC when a member has a pension input amount 12

13 that exceeds the standard annual allowance for a particular tax year (so 50,000 for 2013/14). 5.2 Scheme administrators (for Finance Act 2004 purposes, usually the trustees) are already required to give a member a pension savings statement when that member s pension input amount in a scheme exceeds the standard annual allowance for a particular tax year. This gives the member information on his pension input amounts under the scheme, both for that tax year and for the 3 previous tax years (to assist with working out carry forward). Comment: This obligation can apply where a scheme operates a Slaughter and May style annual allowance limit provision, if a member has been able to use carry forward. 5.3 Action point: Where the scheme administrator is required to provide a pension savings statement, this must now be reported on the scheme s annual event report. This new requirement applies to PIPs ending in 2013/14 and later tax years. Pensions savings statements should have been provided to members with inputs in excess of 50,000 for PIPs ending in 2011/12 or 2012/13 on or before 6th October, If this has not already been done, the statements should be provided to affected members as soon as possible. The deadline for providing a pensions savings statement to a member for PIPs ending in 2013/14 is 6th October, HMRC has said that the event report which these pension savings statements relating to 2013/14 must be reported on is the event report for 2014/15, with a deadline for making the report of 31st January, A point to be checked is whether this is on the basis that the pension savings statement is actually provided in 2014/15 although it relates to PIPs ending in 2013/ The information required to be reported on the event report includes the tax year for which the standard annual allowance was exceeded, the name and national insurance number of the member and the pension input amounts under the scheme for that tax year. 5.5 Where a pension savings statement is provided because it is requested by a member, there is no need to report this to HMRC. C. The reduced lifetime allowance 1. When will the reduced lifetime allowance have effect? 1.1 The lifetime allowance will reduce to 1.25 million on 6th April, All benefit crystallisation events occurring on or after that date will be tested against the reduced lifetime allowance. 1.2 Care will be needed where retirements are due shortly before 6th April, A benefit entitlement for tax purposes (and so a benefit crystallisation event) will not usually arise until all steps have been taken to ensure that the benefits can be paid. In practice, the date of entitlement for tax purposes can therefore slip. 1.3 Action point: Where retirements are likely to happen close to 5th April, 2014, and the member is close to the current 1.5 million lifetime allowance, IT MAY BE ADVISABLE FOR THE MEMBER TO APPLY FOR FIXED PROTECTION 2014 AS A PRECAUTIONARY MEASURE, IN CASE THE ENTITLEMENT FOR TAX PURPOSES IN FACT ARISES LATER THAN EXPECTED. 13

14 Comment: This is a means of protecting against the member being inadvertently caught by the reduced lifetime allowance. 1.4 More details about fixed protection 2014, which is simple to apply for, are included at 2. below. 2. What protections are available against the reduced lifetime allowance? 2.1 There will be two protections available against the reduced lifetime allowance: fixed protection 2014, which will protect a lifetime allowance of 1.5 million, and otherwise replicates the fixed protection introduced in 2012 when the lifetime allowance reduced from 1.8 million there are some technical improvements in fixed protection 2014 that have also now been made to fixed protection 2012, and individual protection, which will protect the value of a member s pension savings at 5th April, 2014 with a value of between 1.25 million and 1.5 million by attributing the member with an individual lifetime allowance of that amount. 2.2 The table below compares various features of these two protections: 1. LTA protected after 5th April, Future pension accrual 3. Threshold for application 4. Government legislation 5. Date protection has effect from 6. Timing for application 7. Application process FIXED PROTECTION 2014 Retain lifetime allowance of 1.5 million Cannot usually accrue further benefits after 5th April, 2014 No threshold benefit amount Finance Act th April, 2014 Apply before 6th April, 2014 Simple application process INDIVIDUAL PROTECTION (expected shape) Individual lifetime allowance based on pension savings at 5th April, 2014 maximum 1.5 million Can accrue further benefits (but this can lead to LTA tax charges and/or annual allowance tax charges) Pension savings must exceed 1.25 million Finance Bill th April, years to apply to 5th April, 2017 earliest Summer 2014 Need to know benefit values at 5th April, 2014 will require calculations to be provided by schemes 2.3 The exact shape of individual protection is yet to be settled. HMRC has published a consultation document, and a further draft of the proposed legislation is expected later this year, with final legislation expected to be included in the Finance Bill Action point: Be prepared to provide benefit values as at 5th April, 2014 for members who are thinking about applying for individual protection, especially money purchase values. Comment: The cohort who may be interested in individual protection may include deferred members as well as current employees with significant pension benefits. 3. What are the rules about applying for more than one protection? 3.1 A member will be able to apply for both fixed protection 2014 and individual protection. 3.2 If a member were to have benefit accrual after 5th April, 2014, this would usually cause loss of fixed protection 2014, but would not cause loss of individual protection, so the latter can be a useful back up. 3.3 A member who already holds fixed protection 2012 will be able to apply for individual 14

15 protection but the maximum individual lifetime allowance that can be protected will be 1.5 million. This may be a useful back-up in case fixed protection 2012 is lost after 5th April, Members with enhanced or primary protection cannot apply for fixed protection Under the current proposals, they cannot apply for individual protection either, but the Government is consulting on whether to allow members with enhanced protection to apply for individual protection. 4. How do members apply for fixed protection 2014? 4.1 Members will need to complete Form APSS 228: For individuals with National Insurance numbers, this can be completed and filed online, in which case an receipt will be given. Alternatively it can be filled in on screen, then printed off and sent to HMRC, or printed off, filled in manually and sent to HMRC. 4.2 The form must be received by HMRC by 5th April, 2014 at the latest. 4.3 Where applications are made close to the deadline, it will be advisable to use the online system (which requires a national insurance number to be given but does not require any pre-registration process). Alternatively, if a hard copy form is used, this should be sent by recorded delivery, or another monitored form of delivery, to ensure that there is a record of HMRC having received the form in time. 4.4 The form is simple and does not require any input from the schemes in which the member holds benefits. 4.5 The earliest time at which HMRC will have sent out fixed protection 2014 certificates to members is 1st November, How can fixed protection 2014 be lost? 5.1 The triggers for losing fixed protection 2014 are the same as those for fixed protection These are modelled on the triggers for losing enhanced protection (but with a different test for defined benefit benefits). 5.2 The triggers for losing fixed protection 2014 include: any contributions being made to money purchase arrangements after 5th April, 2014 (with limited exceptions), excessive increases in value for defined benefit or cash balance arrangements after 5th April, 2014 usually accrual must cease on or before that date, a new arrangement being made, unless an exception such as a permitted transfer applies, and a transfer out, other than in permitted circumstances. Permitted circumstances include transfers to a money purchase arrangement or to a defined benefit/cash balance arrangement on a wind-up, so long as certain conditions are met. 5.3 Action points: For existing employees who claim fixed protection 2014, ensure that benefit accrual/contributions stop before 6th April,

16 For new hires after 5th April, 2014, make sure that fixed protection 2014 is not inadvertently lost see the trip points at 6. below. Ensure that the onboarding team are aware of the potential trip points (which also apply to new hires with fixed protection 2012 or enhanced protection). 6. What are trip points to be aware of? 6.1 Auto-enrolment: Members with fixed protection 2014 (or fixed protection 2012 or enhanced protection) are subject to the autoenrolment requirements. These members must exercise their statutory right to opt-out of the auto-enrolment process within the 1 month period permitted, or they will lose their protection. Comment: The Government has taken a power to be able to exclude certain individuals from the auto-enrolment requirements but has not yet decided whether to use it to exclude protected members. 6.2 Life cover: Life cover can continue under a registered pension scheme for a person who is already a member who claims fixed protection 2014 (or who has fixed protection 2012 or enhanced protection) so long as: no new arrangement is created (after 5th April, 2014, in the case of a member who claims fixed protection 2014) and the death benefits provided can all be categorised as defined benefit in nature (so funding can continue). However, protection may be inadvertently lost if a new arrangement is created (for example, on setting up or replacing a stand alone registered life cover only scheme). Also, there can be fine distinctions in determining whether a benefit is defined benefit or not. 6.3 A possible way of managing the position is to provide life cover for members and new employees with these protections via a nonregistered life cover scheme. 6.4 If correctly structured, under non-registered life cover schemes: there is no benefit-in-kind charge on the member, there is no income tax on the lump sum death benefit, the risk of IHT 10 year and exit charges can be managed by replacing the trust at regular intervals, and there is no IHT on lump sum death benefits paid under discretion. However, there may be no employer deduction for the cost of insurance unless and until a death benefit is paid out. 6.5 Care needs to be taken with new hires, both in relation to auto-enrolment and life cover. 6.6 A point we have come across in practice in relation to fixed protection 2012 and enhanced protection is where the onboarding team does not join up the concept of life cover with the concept of creating an arrangement under a registered pension scheme. It is important to ensure that the onboarding team is aware that giving membership of a registered life cover only scheme will cause fixed protection 2014 (and these other protections) to be lost. 6.7 We strongly recommend amendments to the eligibility rules for registered life cover schemes, or registered schemes that provide life cover only benefits for certain categories of member, to exclude individuals with fixed 16

17 protection 2014 (or fixed protection 2012 or enhanced protection). The purpose of the amendment would be to ensure that a person with protection could not become a member of the scheme. 7. Dealing with the reduced lifetime allowance 7.1 Action point: Employers/trustees may want to send out information on the reduced lifetime allowance, and the protection options available, to all or some of the pension scheme membership. 7.2 Action point: Employers and trustees may consider including protective provisions in the Trust Deed and Rules to guard against the inadvertent loss of fixed protection 2014 (similar to the provision that may have been included for fixed protection 2012). This could also cover exclusion from eligibility for life cover only benefits (see 6.7 above). 7.3 We have model wording available that can be included in a deed of amendment. This type of provision, when used in the context of fixed protection 2012 and enhanced protection, has on occasion saved the pension manager from having to have a difficult conversation with a senior employee, explaining how a protection has been lost. D. Reminder of action points 1. Where a scheme has the benefit of a Slaughter and May annual allowance capping provision, check that the further reduction in annual allowance applies automatically (see B.3.4 above). 2. Check how remuneration solutions work through for members who are already affected by the 50,000 annual allowance, once the further reduction to 40,000 has effect (see B.3.4 above). 3. Decide on remuneration solution for members who are newly affected by the further reduction in the annual allowance to 40,000 (see B.3.4 above). 4. Where the scheme administrator is required to provide a pension savings statement, this must now be reported on the scheme s annual event report (see B.5.3 above). 5. Send out pension savings statements for PIPS ending in 2011/12 and 2012/13 if not already done (see B.5.3 above). 6. Where a retirement is due close to 5th April, 2014, and the member is close to the current 1.5 million lifetime allowance, the member should consider applying for fixed protection 2014 as a precautionary measure (see C.1.3 above). 7. Be prepared to provide benefit values as at 5th April, 2014 for members who are thinking about applying for individual protection (see C.2.4 above). 8. Where an existing member claims fixed protection 2014, ensure that benefit accrual/contributions stop before 6th April, 2014 (see C.5.3 above). 9. For new hires after 5th April, 2014, make sure that fixed protection 2014 is not inadvertently lost ensure the onboarding team are aware of the potential trip points (which also apply to new hires with fixed protection 2012 or enhanced protection) (see C.5.3 and C.6 above). 10. Consider whether to send out information on the reduced lifetime allowance and the protection options available to all or some of the pension scheme membership (see C.7.1 above). 11. Consider amending pension scheme to insert protective provisions against the inadvertent loss of fixed protection 2014, including exclusion from eligibility for life cover only benefits (see C.7.2 above).. 17

18 This Bulletin is prepared by the Pensions and Employment Group of Slaughter and May in London. We advise on a wide range of pension matters, acting both for corporate sponsors (UK and non-uk) and for trustees. We also advise on a wide range of both contentious and non-contentious employments matters, and generally on employee benefit matters. Our pensions team is described in the 2012 edition of The Legal 500 as extremely knowledgable and as having strength in depth. Our recent work includes advising: Royal Mail on a benefit change exercise which enabled Royal Mail to use some of the c 2bn of assets remaining in the Royal Mail Pension Plan following the 2012 transfer of its pension liabilities to HM Government to fund a 300 million a year gap which would otherwise have opened up between the pension contributions which it could afford and the amount which was required to keep the Plan open for the future accrual of benefits. We had previously advised on the 2012 transfer of approximately 30 billion of Royal Mail s historic pension liabilities to HM Government The Trustee of the General Motors UK Retirees Pension Plan, on the surrender in October, 2012 of 2 insurance policies and the purchase of a bulk purchase annuity policy with Rothesay Life. The transaction covered all or substantially all of the Plan s benefit obligations and had an aggregate value of approximately 230 million The Trustee of ConocoPhillips Pension Plan, on the UK pensions issues arising from the demerger of the ConocoPhillips downstream oil business in May, 2012, including establishment of a new mirror image defined benefit pension scheme for the downstream UK business. ConocoPhillips is a US company and a number of cross border issues arose from the pension demerger as a result. We coordinated our advice on these issues with legal advice from Cravath Swaine & Moore in the US Global Infrastructure Partners, on the establishment of the Edinburgh Airport Pension Plan, a new defined benefit scheme, in June, 2012 Unilever Plc on a benefit change exercise in June, 2012 involving the closure of the final salary section of the Unilever UK Pension Fund and the provision of future benefits under the career average and defined contribution sections of the Fund Having advised Marks and Spencer plc on the master trust arrangement which provides an overarching framework under which multiple pension schemes from different companies can operate, we have subsequently advised other clients on these arrangements GlaxoSmithKline plc on an arrangement under which from 1st April, 2013 increases in basic salary for employees in one of its defined benefit pension plans are capped at 2% pa. Pay increases which would otherwise have been awarded above that 2% pa level take the form of a non-pensionable salary supplement. If you would like to find out more about our Pensions and Employment Group or require advice on a pensions, employment or employee benefits matters, please contact Jonathan Fenn jonathan.fenn@slaughterandmay.com or your usual Slaughter and May adviser. London T +44 (0) F +44 (0) Brussels T +32 (0) F +32 (0) Hong Kong T F Beijing T F Published to provide general information and not as legal advice. Slaughter and May, For further information, please speak to your usual Slaughter and May contact.