Pensions Bulletin Number 2006/10 9th March 2006 CONTRACTING OUT REBATES FOR 2007 TO 2012 FINALISED The Government has announced the contracting-out rebates to apply from 6th April 2007. A draft Order has been laid before Parliament confirming that: the rebate for contracted-out salary-related schemes (COSRS) will remain largely unchanged (up 0.2% to 5.3% of upper band earnings); and age-related rebates for contracted-out money purchase schemes (COMPS) and appropriate personal pension arrangements (APPs) will be capped at 7.4% (down from 10.5%), although below the cap the rebates will increase by between 0.5% and 1.9%. Further details are set out in Review of certain contracting-out terms, which includes the Government Actuary s final report (updating the initial report he published last September see Pensions Bulletin 2005/38), as well as a report by the Secretary of State for Work and Pensions. The latter confirms that: the 5.3% rebates for COSRS is split 3.7% to employers (currently 3.5%) and 1.6% to employees (currently 1.6%); fixed rate revaluation of GMPs for future early leavers will be 4.0% down from 4.5% at present; and the COMPS rebates which start at 3.0% is split 1.4% to employers (currently 1.0%) and 1.6% to employees (currently 1.6%). The Secretary of State has not adopted the Government Actuary s final proposals, opting for a COSRS rebate 0.5% lower than recommended, in view of the present fiscal circumstances and the Government s forthcoming White Paper on pension reform. The same reasons are cited for capping the COMPS and APPs rebates at a lower level. However, the Government has stated that it will consider whether to review the rebates again in light of decisions on the long-term future of contracting out in the White Paper, expected in March. Comment: Contracting-out remains unattractive on purely financial grounds for most occupational pension schemes. The terms for individual arrangements are also poor despite increases in the rebates. DISCLOSURE REGULATIONS DELAYED UNTIL OCTOBER 2006 Amendments to the main set of disclosure regulations that will, in conjunction with a code of practice, replace the statutory timing requirements with reasonable periods, for the provision of information to
occupational pension scheme members, are now not take effect until October 2006. They had been expected to come into force on 6th April 2006. Pensions Minister, Stephen Timms, announced the delay in a written Commons answer, attributing it to the careful consideration that has to be given to the large number of helpful technical comments received on the draft regulations published in September 2005 (see Pensions Bulletin 2005/37). Comment: This delay should not affect the new requirement for an annual funding statement to be sent automatically to members and beneficiaries of defined benefit schemes not later than 22nd September 2006. CROSS-BORDER SCHEMES REGULATOR S GUIDANCE CLARIFIED The Pensions Regulator has updated its guidance for schemes wishing to operate cross-border (see Bulletin 2006/01), following negotiations with the DWP which issued the underlying regulations. The most significant change is that the guidance confirms that deferred and pensioner members resident elsewhere in the EU will be treated as scheme members for the purposes of the Cross- Border Regulations if still employed by the same employer and if that employer pays contributions in respect of them. This would bring the scheme into the scope of the authorisation regime under the Cross-Border Regulations which include a requirement for defined benefit schemes to have sufficient assets to cover the technical provisions by 22 September 2008. The payment of a section 75 debt, a deficit contribution or even an ordinary past service contribution would appear to catch these employees within the cross-border operations net. New sections have also been added to the guidance covering the withdrawal of applications and the revocation of authorisation. Comment: The potential for deferred and pensioner members to bring schemes into the crossborder regime is grounds for some concern as schemes may not have checked whether they have any deferred or pensioner members who fall into this category. The deadline by which authorisation must be applied for is 29 March 2006 (15 May for Section 615 schemes) and schemes should check their membership records as soon as possible. TAX SIMPLIFICATION FINANCE BILL 2006 CHANGES HM Revenue and Customs has announced details of further measures to be included within this year s Finance Bill. They all address shortcomings with Finance Act 2004 and are as follows: Lump sum death benefits Enhanced protection will not be lost in the following circumstances: where premiums are paid after A-day into insurance policies providing lump sum death benefits so long as such benefits are those payable under the terms of the policy at 5 April 2006; in the event of death after A-day in respect of the amount of stand-alone lump sum death benefits that would have been payable on 5th April 2006. (The announcement is not precise it may be that the Revenue intend to only provide protection for the monetary amount that would have been payable at death on 5th April 2006). Bridging pensions Schemes will be able to reduce the rate of scheme pension payable when a member reaches state pension age, regardless of whether they have an actual entitlement to state pension. For contracted-out schemes the reduction cannot exceed the maximum basic state pension. For contracted-in schemes the reduction cannot exceed twice the maximum basic state pension. Page 2 of 6
Comment: We await sight of the legislation to clarify whether the reference to maximum is intended to encompass the married person s allowance. Refund of excess contributions lump sum Where a member is given relief at source on his contributions the limit on any subsequent refund arising from contributions that don t attract tax relief will exclude the amount given through relief at source on the excess contributions made by the member. Migrant member relief Individuals who fail the non-uk residency test when they joined their overseas scheme because of matters outside their control, such as through a block transfer after they have arrived in the UK, should be able to continue to obtain migrant member relief on contributions to their new scheme. Maximum permitted pension separate lump sums The maximum permitted pension for schemes that provide for lump sums as of right (rather than by commutation) will reflect the value of this lump sum and hence increase the amount subject to primary or enhanced protection. Comment: These latest changes demonstrate the complexity of pension tax simplification. They will not be the last. HOUSE OF LORDS PART TIME FIRE FIGHTERS WIN PENSION RIGHTS On 1st March 2006 the House of Lords upheld the appeal of the fire fighters in the case of Matthews v Kent and Medway Towns Fire Authority. The litigation began in 2001 and the original Employment Tribunal decision against the fire fighters was upheld all the way to the Court of Appeal before the Lords overturned it. There are two sorts of fire fighter, whole time and retained. Retained fire fighters are part time and are excluded from the Fireman s Pension Scheme. The retained fire fighters, with union backing sued, claiming that their exclusion was a breach of the Part Time Workers (Prevention of Less Favourable Treatment) Regulations 2000. These regulations are intended to prevent part time employees from being treated less favourably than full time employees doing comparable jobs under the same contracts of employment. The decision hinged on whether whole time and retained fire fighters are comparable for the purposes of the regulations. The Law Lords decided, albeit by 3 to 2, that they were and so the retained fire fighters will be entitled to join the Firemen s Pension Scheme (although the extent of retroactivity is unclear). Comment: This case has generated a lot of publicity but none of it is really to the point. The judgment deals with a very particular employment relationship and so is unlikely to have wide application because most private sector schemes now admit part timers in the wake of the various European Court of Justice rulings in the 1990 s on sex discrimination. However those who continue to exclude part-timers may wish to examine the case. CODES OF PRACTICE LATE PAYMENT OF CONTRIBUTIONS The Pensions Regulator has laid two more codes of practice before Parliament, setting out its interpretation of what constitutes a reasonable period for the reporting of late payments of contributions to money purchase schemes, under legislative requirements that are expected to come into force on 6th April 2006. The codes were published in draft last May (see Pensions Bulletin 2005/19). Code of Practice 5: Reporting late payment of contributions to occupational money purchase schemes requires that: Page 3 of 6
Reports to the Regulator should now normally be made within ten working days (not five as originally proposed) of identifying that a late payment is material. In more serious cases trustees should report sooner and by telephone. In serious cases members should be notified within 30 working days (not five as proposed) of the telephone call. Otherwise members should be notified within 30 working days of the end of the 90 day period of grace (although earlier reporting to members, including before the end of the 90 day period is encouraged, particularly if it might help rectify the situation sooner). Code of Practice 6: Reporting late payment of contributions to personal pensions requires that: Employers must, within 30 days of request, provide managers with information to enable them to monitor the payment of contributions. Managers must, within 60 days of request, notify the Regulator where the employers failure to provide information prevents them from monitoring payment of contributions. Managers must, within ten working days of identification (not five as originally proposed), report late payment of contributions to the Regulator and employees where they have reasonable cause to believe this is likely to be of material significance to the Regulator. Examples are provided of situations that are likely to be material as well as some that are not (eg where there has been an administrative error that has been corrected promptly and reasonable steps were taken to avoid a recurrence). NISPI NEWSLETTER NO 22 HM Revenue and Customs has published its latest Pensions Industry Newsletter. Of particular interest is: a useful summary of various changes to contracting-out legislation where NISPI explain their procedural expectations following the changes to protected rights and trivial/serious illhealth commutation from 6th April 2006; and backdated membership of COSRS where NISPI explain their intentions regarding the calculation of GMP liability for those part-time workers who are now able to claim backdated membership. FINANCE ACT 2004 PROTECTING RETIREMENT AGE AND LUMP SUM RIGHTS HM Revenue and Customs has made available The Pension Schemes (Transfers, Reorganisations and Winding Up) (Transitional Provisions Order) 2006 in draft form. This updates the previous draft Pension Schemes (Transitional Provisions) Order 2005) which preserves certain rights for members where there has been a TUPE transfer or where the benefits were moved from a scheme following its winding up (see Pensions Bulletin 2005/39). In the latest version, the Revenue has extended the circumstances where rights are protected to include: protecting a members right to retire before normal minimum pension age where this existed prior to a sponsoring employer reorganising its pension scheme between 10th December 2003 and A-day; and protecting the right to a lump sum in excess of 25% of uncrystallised rights and the right to retire before age 55 (if they had that right on 10th December 2003) under a deferred annuity that was purchased as a result of the scheme winding up, even where the winding up is not concluded before A-day. Page 4 of 6
PENSION PROTECTION FUND CONTINGENT ASSETS The PPF Board has updated its guidance note on contingent assets following its publication of nearfinal details of its levies for 2006/2007 (see Pensions Bulletin 2006/09) and its FAQs on contingent assets. The guidance defines more concisely the range of companies or other bodies that are permitted to provide contingent assets to trustees. The provider must be an associate of at least one of the scheme s participating employers, within the meaning of Section 435 of the Insolvency Act 1986. The provider in this sense could be the guarantor granting assets to the trustees under a type A arrangement, the chargor providing assets to them under a type B arrangement, or the purchaser of a letter of credit or bank guarantee provided by a bank to the trustees under a type C arrangement. The FAQs provide in particular for more flexibility to the parties involved in type C arrangements. It appears that the replacing arrangement (or, where there is not to be one, the cash payment to the trustees) can take account of changes to the section 179 position since the arrangement was negotiated (including any actuarially certified special contributions made during the interim period that have been notified to the PPF Board). FINANCE ACT 2004 INCOME WITHDRAWAL LIMITS HM Revenue and Customs has published tables and instructions from the Government Actuary s Department that are to be used to determine the maximum annual income that can be taken post A- day via member s and dependant s unsecured and alternatively secured pensions. These are identical to those on which the Revenue consulted last November (see Pensions Bulletin 2005/45). The tables are also available as an Excel file. REVALUATION OF EARNINGS FACTORS SECTION 148 ORDER The Social Security Revaluation of Earnings Factors Order 2006 (SI 2006/496) has been laid before Parliament. It contains a table of factors for revaluing to 2006/07 earnings from tax years 1978/79 to 2005/06. It applies to GMPs and some social security benefits (see also the press release). The increase for 2006/07 is 3.4%. LOW EARNINGS THRESHOLD 2006/2007 The Department for Work and Pensions has announced that the Social Security Pensions (Low Earnings Threshold) Order 2006 (SI 2006/500) has been laid before Parliament. This Order sets the Low Earnings Threshold (LET) for 2006/07 as 12,500. The LET forms the earnings boundary between the 40% and 10% accrual segments of the State Second Pension. CONSULTATION BY EMPLOYERS CONSEQUENTIAL REGULATIONS The Information and Consultation of Employees (Amendment) Regulations 2006 (SI 2006/514) have been laid before Parliament and come into force on 6th April 2006 (see also the explanatory memorandum and Pensions Bulletin 2006/04). STATE PENSION DEFERRAL AMENDING REGULATIONS The Social Security (Deferral of Retirement Pensions etc.) Regulations 2006 (SI 2006/516) have been laid before Parliament and come into force on 6th April 2006 (see also the explanatory memorandum). They make minor changes to the existing regulations on deferring state retirement pension, shared additional pension and graduated retirement benefit. Page 5 of 6
FRAUD COMPENSATION LEVY REGULATIONS The Occupational Pension Schemes (Fraud Compensation Levy) Regulations 2006 (SI 2006/558) have been laid before Parliament and come into force on 1st April 2006 (see also the explanatory memorandum). They set out detail concerning the fraud compensation levy. It can only be imposed once per year and is to be based on the total number of members of the scheme subject to the levy on a reference day. It cannot exceed 23 pence per member and will not be reduced if a scheme ceases to be eligible during the financial year. The circumstances when the PPF Board may waive the levy are also set out. Comment: There is no news yet as to whether a levy will be set for 2006/07. TAX LAW REWRITE PROJECT DRAFT INCOME TAX BILL The Tax Law Rewrite Project (HM Revenue and Customs) has published a new draft Income Tax Bill which, when enacted, should complete its work rewriting income tax legislation. The project has already produced two Acts on income tax legislation, the Income Tax (Earnings and Pensions) Act 2003 and the Income Tax (Trading and Other Income) Act 2005. On enactment of the third Bill, the project will then turn its attention to rewriting the body of corporation tax legislation. DEFINED CONTRIBUTION PENSIONS PENSIONS INSTITUTE RESEARCH The Pensions Institute has published a discussion paper about the impact of occupation and gender on pensions from defined contribution (DC) plans. It concludes that those who benefit most from DC pension provision are those with the highest career averaged salary relative to their final salary and those whose salary peaks earliest in their careers thus low-skilled workers and women do relatively well from DC plans. 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 6 of 6