BCE3 (the benefit crystallisation associated with proportionately large pension increases);

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1 29th November 2007 Issue No: 49 Pensions Bulletin HMRC easement on forthcoming legislative changes HM Revenue & Customs (HMRC) have made a welcome announcement in advance of proposed legislative changes that were announced in the Pre-Budget Report for incorporation in Finance Act 2008 (see Pensions Bulletins 2007/42 and 2007/43). The easement confirms, in relation to three announced changes, that where scheme administrators act in accordance with the announcements or draft legislation as appropriate neither they nor members will be subject to HMRC sanctions for failing to operate in accordance with the existing legislation. In this context, sanctions means penalties eg charges for late notifications or payments - whether taxes such as the lifetime allowance charge or the taxes associated with unauthorised payments are due will be determined according to the final legislation. The three areas covered are the proposed changes to BCE3 (the benefit crystallisation associated with proportionately large pension increases); the transitional protection of Scheme specific lump sum rights exceeding 25% (and helpfully, this announcement confirms the exact nature of the proposed change); and a change to the definition of investment-regulated pension schemes relating to taxable property. Examples are given of how the easement works. For example, if a pension increase occurring in December 2007 would trigger a BCE3 under current legislation but not under the proposed legislation, then HMRC will not apply sanctions if the scheme administrator works under the proposed legislation and in particular does not send the member a statement of the BCE by the normal time limit of March If there are changes to the proposed legislation when it eventually comes into force then administrators will be expected to to take corrective measures, if necessary, to be in line with the final legislation in force. This is a welcome announcement following lobbying by industry representatives. In particular, pension increase exercises for which work starts this month can immediately use new draft provisions that are intended subtantially to reduce the number of cases triggering BCE3 tests and so reduce administration. Administrators should however keep careful record of the legislation or proposed legislation they are working under during this period. BAS consults on conceptual framework for actuarial standards The Board for Actuarial Standards (BAS) has published a consultation paper on the underlying conceptual framework of actuarial standards. To ensure that the strategic goal set by the FRC is met - that users of actuarial information can place a high degree of reliance on the information s relevance, transparency of assumptions, completeness and comprehensibility the paper explores: how to strike a balance between regulating the content of actuarial information and not stifling new ideas;

2 how the component parts of an actuarial calculation fit together and how to describe and explain the linkages between the different components in terms that are relevant to the user s needs, without over-burdening the user with unnecessary information; and resolution of some of the myths and misunderstandings surrounding existing actuarial practice. The consultation closes for comment on 31st January 2008, and BAS emphasises that it welcomes views from users of actuarial services as well as the actuarial profession itself. Trustees of pension funds who also hold financial roles with the employer managing conflicts The Institute of Chartered Accountants in England and Wales has published a technical release aimed at assisting trustees that also hold a financial role with the sponsoring employer, to manage the conflicts of interest they may face. The paper suggests ways of ensuring conflicts of interest are handled appropriately by encouraging open declarations of potential conflicts, preparation ahead of actual conflicts, the input of professionals and possibly independent trustees. This paper provides useful assistance to trustees who find themselves in this difficult position. Trustees concerned about conflicts of interest should note that the Pensions Regulator is expected to issue a Code of Practice regarding conflicts of interest shortly. NAPF - Corporate Governance Policy and Voting Guidelines To assist trustees and other shareholders interpret the Combined Code when considering voting decisions at company meetings, the National Association of Pension Funds (NAPF) has published its updated corporate governance policy and voting guidelines. It now offers guidance on environmental, social and governance issues, as well as investors responsibilities and particular voting issues. Self Assessment Tax Returns No longer issued to all schemes HM Revenue & Customs (HMRC) has published a notice confirming (as reported in its Pensions Tax Simplification Newsletter 25, see Pensions Bulletin 2007/09) that, from 6th April 2007, it will not issue a Self Assessment Tax Return form (SA970) to every pension scheme. From this date, the only scheme required to file a SA970 for the last tax year is one that: has been issued a return by HMRC; or has made any repayment claims in the last 2 years; or is due a repayment of tax; or has any other tax liability to declare. Page 2

3 EFRP Survey Implementation of the EU Pensions Directive The European Federation for Retirement Provision (EFRP) has published a survey showing that, in the opinion of EU-wide industry, the implementation of the Institutions for Occupational Retirement Provisions, IORP (or EU Pensions), Directive has had a significant impact on pension provision in the EU. The survey acknowledged that implementation of the Directive had taken too long and, as a result, it was too early to see the true impact of the Directive. Nevertheless, it found that in the early stages of implementation the Directive has: led to a more liberalised investment regime; resulted in more sophisticated national regulation and supervision; encouraged certain states to devise specific legislation making them prime locations to host crossborder schemes; and brought the issue of occupational and private pensions to the fore. The survey found that whilst members felt the implementation of the IORP Directive had a relatively positive impact on member states it was too early to judge the full potential of the Directive. These results reflect the European-wide basis of the Survey participants. In the UK, most of the positive aspects of the Directive were already in place and the only real impact has been employers excluding overseas employees from UK plans to prevent the plans becoming cross-border. Solvency II proposal The European Federation for Retirement Provision (EFRP) has voiced its concern about the proposal to extend Solvency II Directive rules to Institutions for Occupational Retirement Provisions (IORPs), a concern echoed by the National Association of Pension Funds (NAPF). Both organisations warn that it would not make sense to copy the regulations applicable to the insurance industry, laid out under Solvency II, and transfer them to pension funds. The effect could be that pension funds would have to increase their assets by approximately % of liabilities or, alternatively, sell off their equity holdings to reduce risk. These announcements were timed to coincide with a recent meeting of CEIOPS (European Pension Scheme supervisors) where Solvency II was being discussed. At the same meeting Charlie McCreevy (EU Commissioner responsible) said that Solvency II would have to be significantly adapted before being applied to pension funds. So while we need to watch progress, we would hope that, even if eventually implemented, the final form s effect will not fulfill EFRP s concerns. Page 3

4 PPI Report Will Personal Accounts increase UK Pensions Saving? The Pensions Policy Institute has published a report investigating the impact that Personal Accounts might have on the overall level of pension saving in the UK. The report concluded that Government reforms were likely to have the following effects: the number of people saving for a pension is likely to increase - estimated to be potentially between 4 and 9 million new savers - but the level of opt outs remain uncertain as the UK would be only the second country to introduce a national system of auto enrolment; and the total level of pension contributions could go up or down as a result of the proposed reforms, depending on whether employers reduce their current level of pension contributions to the minimum 3% level, close their existing pension schemes and whether any employers offer more than the minimum 3% in the new schemes set up. The report notes that employers responses to the introduction of the reforms will be critical in determining the overall impact that the reforms have on the level of pension saving and the shape of the pensions market. It also notes concern that pensions saving is not appropriate for everyone. Updated life annuity form PLA1 HM Revenue & Customs (HMRC) has published an updated version of form PLA1, the application for exemption from income tax on the capital element of a purchased life annuity to be completed by the annuity recipient. Pensions Institute Discussion Papers The Pensions Institute has published two discussion papers. The first is entitled Completing the Survivor Derivatives Market, the paper derives a generalised pricing model for survivor swaps (used to manage longevity risk) and then applies it to a further range of survivor derivatives such as basis swaps, futures, forward swaps, swaptions, future options and combined option products. It then presents a model for pricing and hedging options on such derivatives. The second paper, Options on Normal Underlyings looks at the option pricing model based on a normally distributed underlying asset and shows how this model can be used to price swaptions on survivor swaps. Page 4

5 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 David Everett at our London office or the partner who normally advises you. Lane Clark & Peacock LLP provides a full range of actuarial, consultancy, risk analysis and administration services to companies in the UK and internationally. LCP is part of the Alexander Forbes group of companies, employing over 4,000 people internationally. 30 Old Burlington Street London W1S 3NN Tel: Fax: St Paul s House St Paul s Hill Winchester Hampshire SO22 5AB Tel: Fax: *PO Box 12 Suite 7, Pollet House St Peter Port Guernsey GY1 4AG Tel: Fax: *Oriel House York Lane, St Helier Jersey JE2 4YH Tel: Fax: LCP Belgium Marcel Thirylaan 200 Avenue Marcel Thiry 200 B Brussel Bruxelles, Belgium Tel: +32 (0) Fax: +32 (0) LCP Libera AG Stockerstrasse 34 Postfach 8022 Zürich, Switzerland Tel: +41 (0) Fax: +41 (0) LCP Libera AG Aeschengraben 10 Postfach 4010 Basel Switzerland Tel: +44 (0) Fax: +44(0) Actuarial Consultancy of the Year UK Pensions Awards 2005, 2006 & 2007 FT Business Pension and Investment Provider Awards 2007 Investment Consultancy of the Year UK Pensions Awards 2007 FT Business Pension and Investment Provider Awards 2007 All rights to this document are reserved to Lane Clark & Peacock LLP. This document may not be copied or used in anyway without prior permission from Lane Clark & Peacock LLP. LCP is a limited liability partnership registered in England and Wales with registered number OC LCP is a registered trademark in the UK (Regd. TM No ) and in the EU (Regd. TM No ). All partners are members of Lane Clark & Peacock LLP. A list of members names is available for inspection at 30 Old Burlington Street, W1S 3NN, the firm s principal place of business and registered office. The firm is regulated by the Institute of Actuaries in respect of a range of investment business activities. A member of the Multinational Group of Actuaries & Consultants Main offices in: AFRICA AUSTRALIA EUROPE NORTH AND CENTRAL AMERICA * No regulated business is carried out from these offices Page 5