4th February 2010 Issue No: 5 Pensions Bulletin Ministerial announcement on adjustment of benefits for unequal GMPs In a written statement to Parliament last week, Angela Eagle, the Minister of State for Pensions and the Ageing Society, has effectively said that virtually all UK occupational pension schemes with GMP liabilities are acting outside European law and that in anticipation of amending UK legislation, trustees and others should act as if existing domestic legislation also requires equalisation in respect of differences resulting from unequal GMPs. For further details about this important development see the recent News Alert. The issue of adjusting scheme benefits for unequal GMPs (colloquially referred to by some as GMP equalisation ) has been around ever since the European Court of Justice decision in the case of Barber v GRE on 17th May 1990, but it has been thought too difficult to tackle without government assistance. The minister s statement does not say anything that is particularly new, but its significance is that this issue will need to come back onto trustees agendas. Financial Assistance Scheme Draft guidance Following the laying before Parliament of the draft Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2010 (see Pensions Bulletin 2010/04), the Department for Work and Pensions is consulting on two issues in relation to the transfer of assets remaining in relevant Financial Assistance Scheme (FAS)-qualifying schemes to the government. The topics covered are: Draft actuarial guidance in relation to the valuation of assets and liabilities of relevant schemes and for individual asset shares to be calculated for scheme beneficiaries. This guidance, which is now in five parts, is an update to that on which consultation took place in 2009 (see Pensions Bulletin 2009/14). One significant addition is that the government has also prepared draft guidance on how transferring schemes should deal with the impact of the guaranteed minimum pension (GMP) on the equalisation (between men and women) of members expected pensions ahead of providing data to the FAS scheme manager. Changes to the FAS synthetic buy-out basis which seeks to provide an estimate of the amount of bulk annuity that could have been secured for a cash sum from an insurer. The basis was last reviewed in early 2008. The new basis is intended to reflect the basis most recently adopted by the Pension Protection Fund for section 179 valuations used in pension protection levy calculations. The consultations close on 10th March 2010. The approach being proposed on equalisation is similar to that for entry to the Pension Protection Fund benefits are levelled up as at the date that wind up commences, albeit with an allowance for deferral of the GMP where the FAS normal retirement age exceeds the age at which entitlement to the GMP arises. This is a valid approach because once the residual assets have been transferred into the FAS, the rules of the assistance scheme are such that the GMP ceases to exist. This approach is of no help to ongoing schemes where, because GMPs continue to exist, the issues are far more complex. www.lcp.uk.com
Pension Protection Fund Insolvency risk in the 2011/12 levy year The Pension Protection Fund (PPF) has published its finalised policy statement on the way insolvency risk should be measured in the 2011/12 levy year and beyond. The PPF has stayed with the changes proposed in its consultation paper (see Pensions Bulletin 2009/46) and has published a new table of assumed probabilities of insolvency to accompany the statement. The changes to the insolvency probabilities will lead to a redistribution of the levy take from those schemes with weak sponsoring employers to those with stronger employers. The PPF estimates that the impact on schemes backed by the very strongest employers, ie those with a D&B failure score of 100, would be an increase in the risk based levy of around 70% (although the effect for most other failure scores would be much lower). However, the PPF also goes on to say that, all other factors being equal, for most schemes an increase in the insolvency probabilities should be significantly mitigated by a reduction in the levy scaling factor. A further consultation on the levy for 2011/12 is expected to be carried out in the autumn, covering the overall levy estimate, the scaling factors and the draft determination for 2011/12. The PPF s conclusions are not a surprise. However, given that the revised insolvency probability table that impacts levy year 2011/12 (and beyond) applies from 31st March this year, it has not allowed much time for employers to deal with the implications of the changes. Record-keeping the Pensions Regulator consults on regulatory proposals The Pensions Regulator has launched a consultation on proposed standards of record-keeping for pension scheme trustees and administrators, which builds on guidance originally issued in December 2008 (see Pensions Bulletin 2008/52). The original guidance offered a framework for the clarification and assessment of member records. Research carried out by the Regulator during 2009 indicated that there is no evidence of marked improvement in administration practices since the guidance was issued. Therefore, although the Regulator expects to maintain its focus on supporting trustees to improve standards, the proposals contained in the new consultation set formal standards for member records and require schemes that fall short to improve their performance. The Regulator proposes to set separate targets for the accuracy of both new and legacy data, with the highest standards applying to common data (as these are the fields needed to uniquely identify members and their status in the scheme). High standards are also expected to be applied to conditional data, but the Regulator recognises that the composition and importance of these data items will be scheme-specific. Where schemes fail to have adequate plans in place to resolve data issues, the Regulator will require them to improve. The Regulator intends to select sample schemes, based on pre-defined risk criteria, which will be required to carry out data tests. If these reveal poor record-keeping, this will lead to the Regulator taking enforcement action unless agreed, specific action plans are in place to rectify the problems and these plans are implemented. The enforcement action would depend on the circumstances of each case but could include: Page 2
directions to carry out certain tasks eg to rectify gaps or errors in member records using Improvement or Third Party Notices under sections 13 or 14 of the Pensions Act 2004; penalties (fines) for failure to comply; in extreme cases, prohibition of trustees and/or appointment of new trustees; and publishing the details of the actions taken. The practical application of this approach would mean that any contact with the Regulator (eg through a whistleblower report, scheme return query, or scheme specific funding plans) could result in the scheme being asked to demonstrate compliance with the record-keeping guidance. The Regulator also plans to launch an e-learning module to complement the updated guidance and host a number of governance workshops which will focus in part on record-keeping. The consultation on the proposed new guidance itself ends on 27th April 2010. Building a society for all ages Government update on initiatives The government has published a summary of the responses to its consultation last summer (Building a Society for All Ages) on a strategy for facing the challenges presented by an ageing population in the UK (see Pensions Bulletin 2009/29), together with an implementation plan for delivering the various proposals. With regard to the subject of older workers and encouraging employers to employ and retain older workers and for people to think about working longer if they want to, there were a number of ideas put forward: Default Retirement Age as expected, a number of people called for an end to the default retirement age. A consultation calling for evidence from businesses and individuals on the impact where the default retirement age has been raised or removed altogether, ended this week. The government expects to consult further on specific options, with any changes expected to be implemented in 2011; Flexible working employers could offer and allow more flexible working packages including working part time and from home; and Communicating pensions there were calls for more and earlier information about pension entitlements, which would make it easier for people to evaluate their options. Age discrimination Financial Services The Equality Bill, which is currently working its way through the House of Lords, introduces measures to outlaw unjustifiable age discrimination in the provision of services and the exercise of public functions, but also contains powers to make exceptions where justifiable age-related practices will be allowed to continue. The Government Equalities Office (GEO) has published a policy statement which sets out the government s response to an earlier consultation on proposals for the implementation of an age discrimination ban in the provision of services once the Equality Bill has been made law. The statement also sets out the Page 3
government s proposals on areas where age differentiation should still be permitted and, in particular, includes a number of proposals concerning the provision of financial services: A specific exception will be created to allow financial service providers to treat people of different ages differently, but only where this is proportionate to risks and costs. Prices can still be varied by age, where this genuinely reflects risk or costs; Financial service providers will be required to publish aggregate data in respect of certain products that anyone can check; and The providers of certain insurance products will be required to operate a signposting and referrals system. Where this requirement applies and an insurer does not provide the service to a person because of their age, they will be required to refer the person to a supplier who can meet their needs or refer them to a dedicated signposting service. The Annex to the statement lists a number of consultation questions. The government has requested responses by 30th April 2010, with a view to incorporating the proposals including those related to the exceptions for the provision of financial services, in a draft Order for parliamentary debate this autumn. It then hopes to lay the Order before Parliament in 2011 and achieve full implementation of the age discrimination ban in 2012. Longevity and Mortality Risk the Life & Longevity Markets Association A group of banking and insurance giants Axa, Deutsche Bank, JP Morgan, Legal & General, Pension Corporation, Prudential, Royal Bank of Scotland and Swiss Re have got together to form a new not-forprofit venture aimed at promoting a liquid traded market in longevity and mortality-related risk. The Life & Longevity Markets Association (LLMA) is intended to encourage the growth and development of the market in longevity and mortality-related risk products, such as longevity swaps and bulk annuities, by promoting the development of consistent standards, methodologies and benchmarks. Notional Earnings Cap 2010/11 confirmed Under the pre A-day regime, the pensionable salary of members in tax-approved schemes could not exceed the statutory earnings cap for the purposes of calculating maximum pension benefits. Following A-day, many schemes are relying on the notional earnings cap allowed for under modification regulations. HM Revenue and Customs (HMRC) has now confirmed that for 2010/11 this figure is 123,600. This figure is the same as in 2009/10 due to a 0% collar applying to the negative inflation in the year to September 2009. Schemes that still have rules relying on the modification regulations for such matters as the notional earnings cap should be amending them since these regulations are expected to expire at the end of the 2010/11 tax year. When these regulations are gone, references in scheme rules to the earnings cap may become meaningless and could result in significant increases to pension costs if member benefits increase as a result of being uncapped. Page 4
National insurance limits and thresholds 2010/11 Draft legislation Draft regulations have been laid before Parliament which will implement the lower and upper earnings limits for primary Class 1 contributions and the primary and secondary thresholds for primary and secondary Class 1 contributions for the 2010/11 tax year. However, apart from the lower earnings limit, all the limits and thresholds are frozen at the 2009/10 level. The draft Social Security (Contributions) (Amendment) Regulations 2010 should come into force on 6th April 2010 (see also the draft explanatory memorandum). State pensions DWP plans to streamline claims for those already on benefit The Department for Work and Pensions (DWP) has launched a consultation on plans to simplify the process of claiming state pension for those who are already in receipt of certain social security benefits. The intention is that from next summer, many of those receiving social security benefits should enjoy a much simpler transition to the state pension, as the DWP will proactively contact them to discuss their options and, in many cases, automatically process their transition to state pension if they are on certain social security benefits such as the pension credit. The consultation runs until 12th March 2010, with the DWP intending to publish its response by the end of March. The paper also includes the draft Social Security (Exemption from Claiming Retirement Pension) Regulations 2010 which will give effect to the DWP s finalised proposals, intended to come into force on 26th October 2010. 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. Page 5