7th December 2006 Issue No: 49 Pensions Bulletin Pre-Budget Report Pensions aspects On 6th December 2006, Gordon Brown delivered his tenth Pre-Budget Report. It contains many changes to the pension tax simplification regime that will be contained in the Finance Act 2007, including the following: A number of technical improvements. Further detail may be found in Annexes B and C of the Regulatory Impact Assessment. They include being able to pay a pension commencement lump sum within twelve months of entitlement, as opposed to the current three months and enabling ill-health pensions to be reduced. Proposals on the vexed subject of alternatively secured pensions. Further details of the approach taken are in a paper entitled The Annuities Market. Draft Finance Bill clauses have also been published. The Government has decided not to scrap ASPs entirely. Nor will access be restricted to particular religious groups (which is clearly impractical). Instead the Government proposes to restrict the scope for using ASP to accumulate capital rather than provide for an income (which it believes is being actively explored by some of the financial planning industry) by requiring withdrawals to fall within a range of 65% - 90% of the basis amount (ie the annuity that the fund could have purchased). Abolition of the transfer lump sum death benefit closing down a mechanism whereby ASP could be used for inter-generational capital transfers. No longer allowing life insurance policies delivering lump sum death benefits to be structured as personal pension arrangements. Any changes the Government decides to make will not affect either personal arrangements entered into before 6th December 2006 or existing types of employer arrangements. Consultation is also to start on two subjects with a view to changes being made in Finance Act 2008. Representations are invited on how to simplify testing for excessive increases to pensions in payment and on whether further changes are needed to the dependant scheme pension limits where the member dies on or after age 75. HMRC will also be discussing concerns over the administration involved in the checks required to be made when paying trivial commutation lump sums. Announcements have also been made concerning income tax allowances and national insurance contributions from 6th April 2007. Details of the Pre-Budget report and associated press releases can be found on the Treasury website. www.lcp.uk.com
New amendment to FRS17 published As expected, the Accounting Standards Board has today published a new amendment to the UK standard for accounting for pensions, FRS17. The new amendments bring the disclosure requirements of FRS17 into line with the requirements of the relevant international standard, IAS19. However, while the disclosures will look very similar, differences still remain in the underlying accounting rules. This means that in some cases FRS17 figures and IAS19 figures will still not be identical. As announced in November (see Pensions Bulletin 2006/45), the ASB have also amended the definition of the fair value of quoted securities from "mid value" to "bid value", to eliminate one of the main remaining differences between IAS19 and FRS17. Somewhat unhelpfully, the change in the definition of the asset values will also need to be reflected in the prior year comparative amounts. This means that the value of assets at the opening balance sheet date will need to be restated where the difference is material. The amendments take effect for accounting periods beginning on or after 6 April 2007, with early adoption encouraged. Comment: The harmonisation of disclosure requirements with the now-familiar international standard is welcome, and some companies may want to adopt the amendments for their December 2006 year-end accounts. Pensions Bill Supporting documents Following the publication of last week s Pensions Bill (see Pensions Bulletin 2006/48), the Department for Work and Pensions has published a number of supporting documents. The most interesting of these is the regulatory impact assessment. In addition to setting out costs, savings and the impact on specimen individuals, it provides some further clues as to the direction of policy including the following: there is no specific commitment as to the rate at which the lower earnings limit will increase once the link between it and the basic state pension is broken; enhancements to the basic state pension that are awarded as a result of deferring payment beyond state pension age will not increase in line with earnings when the switch to earnings increases is made they will continue to increase in line with prices; the reference scheme test will be amended so that once the upper earnings limit is frozen for State Second Pension (S2P) purposes (at the upper accrual point ), the test refers to the band of earnings between the lower earnings limit and the upper accrual point; and an escalating upper earnings limit will continue to exist for national insurance contribution purposes contributions at the contracted-in rate will be payable on that band of earnings between the frozen upper accrual point and the escalating upper earnings limit despite the fact that no S2P benefit will accrue on this earnings band. Page 2
Comment: The last of these is particularly controversial and is a further indication of national insurance becoming just another tax. This unannounced stealth tax on the higher paid would appear to be the price for limiting any increases in the headline rates of national insurance contributions as S2P moves to a flat rate system. The other published documents published provide further analysis to support the reforms as follows: The Gender Impact of Pension Reform this examines how the pension reforms set out in the Bill will particularly benefit women, addressing issues raised by the compendium of evidence on women and pensions published in November 2005 (see Pensions Bulletin 2005/44); Estimating economic and social welfare impacts of pension reform this working paper considers the impact of the proposed pension reforms on the UK economy and social well-being; and Financial incentives to save for retirement this paper examines the Government s estimates of the kind of returns individuals can expect from their savings in personal accounts. Age Discrimination Legality of default retirement age referred to ECJ The High Court has decided that Heyday s challenge that default retirement ages are discriminatory should be referred to the European Court of Justice (ECJ). The Heyday organisation, part of the National Council on Ageing, claims that the introduction of a default retirement age at 65 by the Employment Equality (Age) Regulations 2006 is discriminatory under the EU Equal Treatment Directive. Heyday s argument is that the regulations leave people over 65 without the right or choice to work. The Government believes that a default retirement age is objectively justified on the grounds that it helps employers with workforce planning and it is a central component of its age discrimination legislation. The legislation, as currently written, requires employers to notify employees of their right to request to work beyond 65 and, if a request is made must normally discuss the issue with the employee and consider the request. This, together with other safeguards built into the legislation, perhaps mean that the default retirement age of 65 is not as mandatory as has been reported in the media. The ECJ is expected to hear the case in January after the precise questions to be asked have been formulated. Comment: This case adds to the long-winded but predictably difficult saga of implementing age discrimination laws just two months after the non-pensions aspects of the regulations came into force. Pension Protection Fund Voluntary certificates for the 2007/08 levy The Pension Protection Fund (PPF) has released final versions of the section 179 valuation certificate, actuarial certificate of deficit-reduction contributions and contingent asset certificates for the 2007/08 levy year. Page 3
Schemes wishing to submit these certificates should do so by 30th March 2007 (5th April 2007 in the case of the actuarial certificate of deficit-reduction contributions) in order for the PPF to consider them in the 2007/08 risk-based levy calculation. Schemes that registered contingent assets for the 2005/06 levy calculation will be sent recertification documentation directly from the PPF. The PPF Determination document, which will set out the rate of the 2007/08 levies, is expected in draft by the end of 2006 and in final form by the end of January 2007. Pension Protection Fund Investment risk and the risk-based levy The Pension Protection Fund (PPF) has published a consultation document on whether investment strategy should be included as a factor in the risk-based levy. However the PPF Board s initial view is that it is unlikely to be appropriate to introduce this at the current time. Nevertheless, the PPF intends to monitor trends and may review its decision in the light of developments in key indicators. Pension Protection Fund First direct payments to scheme members The Pension Protection Fund (PPF) announced the passing of what it considers to be a key milestone on 1st December 2006 as it made its first direct payments to members of occupational pension schemes covered by the Fund. Pensions Regulator Pension scheme report and accounts The Pensions Regulator has published a document summarising the responses received to its discussion paper (see Pensions Bulletin 2006/23) on proposals to change the content of pension scheme annual reports and accounts. The Regulator has concluded that: the primary purpose of pension scheme reports and accounts is stewardship (a governance disclosure is floated) therefore mundane compliance type disclosures, which do not contribute to stewardship, should be removed; communication of meaningful and relevant information to members should be underpinned by an appropriate disclosure framework separate to disclosure in reports and accounts; improved disclosure of pension liabilities outside the report and accounts is preferred; for defined benefit schemes, the primary concern of members is the funding position of the scheme and the security of their benefits this is better disclosed through the summary funding statement; and the existing content of Statutory Money Purchase Illustrations should be reconsidered these provide an appropriate vehicle for communicating to scheme members. Page 4
The Regulator proposes to: pass the review to the Pensions Research Accountants Group (PRAG), which is reviewing the Pensions SORP (Statement of Recommended Practice) and to reinforce the emphasis that PRAG is already placing on summary financial statements; feed responses to the Pensions Advisory Panel of the Accounting Standards Board, pointing specifically to the views expressed on the treatment of actuarial liabilities in UK scheme accounts; contribute to the Department for Work and Pensions review of disclosure (which is just starting) emphasizing the support for accessible and properly regulated summary financial reports, a governance statement in the annual report (or popular report) and enhanced funding disclosure in the summary funding statement; consider developing a code of practice on annual report disclosures, with the SORP concentrating more on effective accounting disclosures; and liaise on the content of the scheme return to minimise duplication where possible. Pensions Tax Simplification Newsletter 22 HM Revenue and Customs (HMRC) has published its 22nd simplification newsletter. The main points of interest are as follows: HMRC gives detailed advice on what should be included on P60 (substitute) forms about the amount of Lifetime Allowance (LTA) used up by a Benefit Crystallisation Event; HMRC states that, in its view, the recent Employment Equality (Age) Regulations 2006 have no adverse effect on registered pension schemes as far as tax rules are concerned; New functionality is available on Pension Schemes Online. This includes the ability for individuals to authorise a Scheme Administrator to view their LTA protection certificates online by completing and submitting form APSS203. However, such authorisation only lasts for 90 days from when HMRC processes the form. Scheme Administrators will not be able to view online any temporary LTA certificates issued to date. For those individuals who have received temporary certificates, APSS staff have now started a programme of replacing these with permanent certificates as outlined in the previous newsletter. Further information about submitting any remaining information on pre A-day events using post A- day forms, following the withdrawal of the pre A-day forms. Pension Protection Fund Earnings percentage increase for levy ceiling An Order has been laid before Parliament that sets out the rise in the general level of earnings, that going forward will be used to increase the Pension Protection Fund levy ceiling. However, for 2007/08 it would appear to have no impact. Page 5
The Occupational Pension Schemes (Levy Ceiling Earnings Percentage Increase) Order 2006 (SI 2006/3105) specifies as 3.8%, the annual increase in the general level of earnings. See also the explanatory memorandum. Although the levy ceiling for 2006/07 was set at 775 million back in March (see Pensions Bulletin 2006/12), this latest Order will not increase the ceiling for 2007/08 accordingly. This is because the ceiling for 2007/08 has been set at 718.75m (see Pensions Bulletin 2006/42). Personal Accounts Suitability The Pensions Policy Institute (PPI) has published a report in which it considers the interaction between personal accounts, state pensions, the tax system and means-tested benefits in order to try and identify which groups of people are likely to benefit from personal accounts. Whilst the PPI is able to identify different categories of people who should or should not benefit from personal account membership, it recognises that individual circumstances will play an important part too. The PPI also warns the government of the need to take great care to ensure people are given enough information in order to make informed decisions about whether to allow themselves to be auto-enrolled into a personal account or opt-out. ONS Defined benefit scheme membership declines further The Office for National Statistics (ONS) has revealed that membership of employer-sponsored defined benefit pension schemes has fallen from 46% to 35% between 1997 and 2005, whilst membership of defined contribution schemes rose from 10% to 15% of the working age population over the same period. The ONS produces Pension Trends an online statistical resource intended to provide a statistical backdrop for the ongoing debate about pension reform. It considers both economic and social factors that influence changes in pension provision and income over time. CIMA Managing corporate risk The Chartered Institute of Management Accountants (CIMA) has produced a publication titled The pension liability managing the corporate risk as well as a checklist of questions for a Finance Director to address to the Board in order to raise and address the management of these risks. Page 6
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. ane 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, one of the top 10 international risk and financial services organisations, employing over 5,500 people in more than 30 countries. 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 870060 Fax: 01962 849802 LCP DC Link Ltd Churchgate New Road, Peterborough Tel: 01733 353600 Fax: 01733 353656 Alexander Forbes House 6 Bevis Marks London EC3A 7AF Tel: 020 7439 2266 Fax: 020 7439 0183 *Union House Union Street, St Helier Jersey JE4 8UU Tel: 01534 887600 Fax: 01534 702780 *PO Box 12 Maison Allaire Smith Street, St Peter Port Guernsey GY1 4AG Tel: 01481 711830 Fax: 01481 730455 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 CH-8022 Zürich Switzerland Tel: +41 (0)43 817 7300 Fax: +41 (0)43 817 7399 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 ACTUARIAL CONSULTANCY OF THE YEAR Page 7