5th July 2007 Issue No: 28 Pensions Bulletin Pensions Regulator Scheme funding guidance The Pensions Regulator (tpr) has published additional scheme funding guidance in the form of Q & A s based on actual queries tpr has received. Useful points of clarification include: Confirmation of best practice for the description of assumptions in the statement of funding principles; Confirmation that trustees can agree to different assumptions over the term of the schedule of contributions to those used for setting technical provisions, in respect of both the past service deficit and contributions for future accrual; Confirmation that the Regulator s view is that when the actuary certifies the technical provisions, the actuary is not certifying that the trustees have chosen the assumptions prudently. An outline of the considerations an actuary should take into account when certifying a schedule of contributions when the actuary has the power under the scheme rules to set the contribution rate; An example of where tpr would accept a deferral of the due date for a valuation if the trustees agreed the deferral with tpr in advance; A description of the requirements and timetable for agreeing contributions when a new defined benefit scheme is established; and Confirmation that the relevant accounts for scheme funding purposes means full audited accounts, an audited asset statement is not sufficient. Pension Protection Fund 7800 Index The Pension Protection Fund (PPF) has announced that it will publish the first PPF 7800 Index on Monday 9th July. The PPF 7800 index will provide monthly updates on the estimated funding positions of 7,800 defined benefit pension schemes against the cost of buying out their PPF liabilities with an insurance company. The PPF hopes the index will give the pensions industry a greater insight into the level of risk in the system. Highlights from the first PPF 7800 Index will be included in next week s bulletin. Accounting for pensions New interpretation on balance sheets limits published As anticipated in last week's pensions bulletin (See Pensions Bulletin 2007/27), the International Accounting Standards Board has formally published new rules governing how the international accounting standard for pensions, IAS19, is to be interpreted. This refers to the recognition of pension scheme surpluses in company accounts and the potential effect of "minimum funding requirements" on the pensions asset or liability in the accounts. The document, now titled "IFRIC Interpretation 14", is largely unchanged from the near final draft covered in last week's bulletin. www.lcp.uk.com
Local authority employment transfers DCLG pension protection direction The Secretary of State for the Department of Communities and Local Government (DCLG) has made a direction under section 101 of the Local Government Act 2003, "The Best Value Authorities Staff Transfers (Pensions) Direction 2007", which comes into effect on 1st October 2007. The direction will make it a statutory requirement for local authority employees, who are members of the Local Government Pension Scheme (LGPS) and whose employment transfers under an outsourcing contract, to be offered broadly comparable pension rights by their new employer. Up to now, while this has been best practice under DCLG guidance, it has not been a legal requirement. Comment Until now, the Government's "Fair Deal" guidance (which covers the pension rights of employees transferring under TUPE from public service employment either to the private sector or to non-profit organisations such as charities) has had no statutory backing. This has meant that there has been flexibility for public sector contracting authorities to agree not to apply the Fair Deal in circumstances where they believe it would be inappropriate. From 1st October 2007 this flexibility will no longer be available to local authority employers. Pensions Tax Simplification Newsletter 28 HM Revenue & Customs (HMRC) has published its 28th simplification newsletter. Many of the items have already been covered in recent Pensions Bulletins, but there are some other developments: Bridging Pensions transitional provision HMRC are aware that certain schemes that paid bridging pensions between the scheme retirement age and State pension age before 6th April 2006 in accordance with the pre A-Day rules are now in a position that if they reduce the bridging pension by the full amount permitted by scheme rules, the reduction would exceed that permitted by the new legislation and so create an unauthorised payments tax charge. HMRC intend to permit transitional relief via secondary legislation for cases where the member was entitled to the bridging pension on or before 2nd July 2007. However, bridging pensions coming into payment after 2nd July 2007 must only be reduced in accordance with the rules in Schedule 28, Finance Act 2004, to prevent unauthorised payment tax charges applying. The period for transitional protection has already run out, so schemes should immediately check that their rules and administrative processes do not fall foul of the Finance Act 2004 provisions if they wish to avoid unauthorised payment tax charges. Benefit re-design may be required. Non-cash benefits provided after retirement (including post-retirement medical cover) by employer financed retirement benefit schemes ( EFRBSs ) In the 2007 Budget HMRC had confirmed which non-cash benefits will not incur a tax charge when paid to retired former employees (see Pensions Bulletin 2007/12). HMRC have now confirmed how non-cash benefits provided by EFRBSs should be reported. Further, HMRC have stated that Benefits where the right to the continuing benefit arose on retirement before 6 April 1998 will not be subject to tax. This exclusion applies to benefits received where the right to the continuing benefit arose in connection with a retirement before 6 April 1998 and that right was chargeable to tax. Page 2
The responsible person for the EFRBS must send HMRC details of the relevant non-cash benefits (that are not exempt from tax) provided to recipients in the tax year ended 5th April 2007. This report must reach HMRC by 7th July 2007. The details to be reported to HMRC are: The name, address and national insurance number of the individual receiving the relevant benefit; and The nature and amount of the relevant benefit. Benefits that will not incur a tax charge, including continued provision by former employers of accommodation, recreational benefits and benefits first provided before 6th April 1998 do not have to be reported to HMRC. As there is no specific exemption it appears that post-retirement medical cover, if not in connection with a retirement before 6th April 1998, must be reported and taxed. Even if it were paid before 6th April 1998, it appears that only benefits arising on retirement that were chargeable to tax are now not liable to a tax charge no indication is given as to how HMRC intend this exemption to operate. Any employers who provide post-retirement medical cover who have not yet received legal and tax advice on this issue should do so as a matter of urgency. Annual Allowance test when a transfer is made to a Qualifying Recognised Overseas Pension Scheme (QROPS) HMRC have responded to industry concern regarding the inclusion of an amount transferred to a QROPS in the annual allowance test (see Pensions Bulletin 2007/20). The concern was that legislation required the value of a transfer made to a QROPS to be doublecounted in the closing value of the annual allowance test. HMRC have stated that their interpretation of the legislation is that, although both a transfer and a Benefit Crystallisation Event (8) are taking place, there is only one transaction and therefore the transfer only needs to be included in the closing value once. This is the common sense outcome that was hoped for. However, it is another example of the difficulties of operating under a codified pensions tax regime reliant on interpretation of legislation rather than the pre A-day discretionary tax regime. QROPS List HMRC has assured UK scheme administrators that they can rely on the published QROPS list as the basis of a defence against the imposition of a scheme sanction charge if a transfer is made to an overseas scheme which turns out not to be a genuine QROPS scheme. Provided the scheme administrator has carried out reasonable checks including checking the QROPS list no more than one day before the transfer is made - they should have just and reasonable grounds for asking HMRC to discharge their liability to a scheme sanction charge if it later transpires that the overseas scheme was not bona fide and is subsequently removed from the list. The UK Scheme Administrator should keep a note of the date on which they checked the list (and retain a copy of the overseas scheme s HMRC QROPS letter if this has also been obtained). Page 3
HMRC will delete a scheme s name from the list as a matter of urgency if it ceases to be a QROPS, and will now publish the QROPS list twice a month, where there are new QROPS that have been accepted since publication of the previous list. As a result of these changes, scheme administrators should only seek confirmation from HMRC regarding the status of a scheme on the QROPS list if there is reasonable doubt about the legitimacy of the scheme. Australian Pension Schemes and QROPS status As reported in Pensions Bulletin 2007/24, the way Australia taxes pensions has changed from 1st July 2007. Regulations have been put in place to ensure that Australian schemes can still qualify as QROPS. Registered Pension Scheme Return and new Scheme Administrators HMRC has clarified that when a registered pension scheme return is sent to a Scheme Administrator who is subsequently replaced by a new Scheme Administrator before the return is submitted, it is the new Scheme Administrator who is responsible for submitting the scheme return. New Pensions Reform Minister appointed Following the appointment of Peter Hain as Secretary of State for Work and Pensions last week (see Pensions Bulletin 2007/27) the wider ministerial team has been announced with Mike O Brien appointed as Minister of State for Pensions Reform. The Pensions Advisory Service - Annual report The Pensions Advisory Service (TPAS) has issued its annual report for the year 2006/07. As highlighted in its press release, the report shows an improvement in standards of administration in occupational pensions schemes (complaints down 12%) but highlights the lack of concern for the needs of the customer demonstrated by some insurance companies, particularly those closed to new business, in relation to personal pensions (complaints up by 43%). The report noted that poor complaint handling often became a bigger issue than the poor administration. Companies Act 2006 Commencement Order No. 3 The draft Companies Act 2006 (Commencement No. 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007 have been laid before Parliament. Once finalised the regulations will bring into force many of the sections of the Companies Act 2006 with effect from a variety of dates (mostly late 2007), including sections 235 and 236 which relate to indemnity arrangements for directors of corporate trustees (see Pensions Bulletin 2006/50) with effect from 1st October 2007. Pan-European Pension Plans The members of the European Financial Services Round Table (EFR) have published a paper titled Pan- European Pension Plans, From Concept to Action (see also the Executive Summary). The paper explores the differences between national savings laws which affect the creation of a single market for private retirement savings and outlines how some of the obstacles could be overcome or accommodated within a set Page 4
of rules (or framework) to support the development of pan-european Pension Plans. The report hopes to encourage further research and debate amongst European institutions, Member States, industry and consumers. Pensions Regulator Reporting Breaches of the Law The Pensions Regulator ( tpr ) has completed its first review of its first Code of Practice, Reporting Breaches of the Law which was first published in April 2005 (see Pensions Bulletin 2005/16), and its accompanying guidance. After reviewing the code it was decided that no amendments were necessary, although tpr has made minor presentational updates to the guidance in response to new legislation, regulatory experiences and general feedback. The Pensions Institute Tax-Efficient Pension Choices in the UK The Pensions Institute has published a discussion paper titled Tax-Efficient Pension Choices in the UK. The paper compares the options available to retirees, particularly whether to annuitise, using stochastic modelling which allows for the UK s particular tax treatments. 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. Alexander Forbes is a public company listed on the JSE in South Africa. 30 Old Burlington Street London W1S 3NN Tel: 020 7439 2266 Fax: 020 7439 0183 St Paul s House St Paul s Hill Winchester Hampshire SO22 5AB Tel: 01962 870 060 Fax: 01962 849 802 *PO Box 12 Suite 7, Pollet House St Peter Port Guernsey GY1 4AG Tel: 01481 728 071 Fax: 01481 736 124 *Oriel House York Lane, St Helier Jersey JE2 4YH Tel: 01534 887 600 Fax: 01534 837 888 LCP Belgium Marcel Thirylaan 200 Avenue Marcel Thiry 200 B - 1200 Brussel Bruxelles, Belgium Tel: +32 (0)2 774 9493 Fax: +32 (0)2 774 9257 LCP Libera AG Stockerstrasse 34 Postfach 8022 Zürich, Switzerland Tel: +41 (0)43 817 7300 Fax: +41 (0)43 817 7399 LCP Libera AG Aeschengraben 10 Postfach 4010 Basel Switzerland Tel: +44 (0)61 205 7400 Fax: +44(0)61 205 7499 Actuarial Consultancy of the Year UK Pensions Awards 2005, 2006 & 2007 FT Business Pension and Investment Provider 2007 Investment Consultancy of the Year UK Pensions Awards 2007 FT Business Pension and Investment Provider 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 OC301436. LCP is a registered trademark in the UK (Regd. TM No 2315442) and in the EU (Regd. TM No 002935583). 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 www.mgac.org. Main offices in: AFRICA AUSTRALIA EUROPE NORTH AND CENTRAL AMERICA * No regulated business is carried out from these offices Page 5