2nd October 2008 Issue No: 41 Pensions Bulletin Pension Protection Fund 2008/09 invoices issued The Pension Protection Fund (PPF) has announced that schemes will be receiving their 2008/09 pension protection levy invoices from 27th September 2008 onwards. The announcement contains links to related material including a 24 page guide to the 2008/09 levy and supporting information, both of which will accompany the invoices. Recipients will shortly see the full extent of the controversial 3.77 scaling factor on their risk-based levy. As in previous years, trustees should take care to check that the data on which the levy calculations have been undertaken is as submitted and that the calculations are themselves in order, before authorising the payment of what may be substantial sums. Pension Protection Fund announces 2009/10 levy proposals The Pension Protection Fund (PPF) has published a consultation document containing its proposals for the 2009/10 pension protection levy along with a draft determination containing a multitude of technical documents. The proposals are intended to be firm and the PPF Board does not anticipate substantial changes prior to finalisation in November (consultation ends on 23rd October). The PPF is aiming to collect a total levy of 700m in 2009/10, which is the 675m target settled on for 2008/09 with earnings indexation. As before the PPF intends that 80% of the levy be raised via the riskbased element and 20% via the scheme-based element. The PPF has chosen to stick to its three year commitment on the overall level of the levy despite the recent worsening in financial conditions, which surely must have increased the chance of employer insolvency (Lehmans has recently joined the queue for PPF admission). The need for stability is emphasised with the PPF stating that it felt that it had to help reduce the burden on levy payers, particularly during the current economic downturn. The 700m will be divided between schemes in a similar way to 2008/09: the risk-based element of each scheme s levy will be calculated with reference to its shortfall against a 121% section 179 funding level schemes which are better than 140% funded will avoid the riskbased element entirely and a taper will operate for those with funding levels in between; and the cap on the risk-based element of the levy will remain at 1% of section 179 liabilities. As proposed last year, the section 179 liabilities and shortfall, used in the scheme-based element and the under-funding risk aspect of the risk-based element respectively, are to be measured on financial conditions as at 31st March 2008. The D&B failure scores used in the insolvency risk aspect of the risk-based element are also to be measured as at 31st March 2008. Consequently there will be limited room for schemes to effect levy reduction measures with an immediate impact in the run up to 31st March 2009. In particular, those who were hit www.lcp.uk.com
hard with poor D&B scores in their 2008/09 levy will be hit hard again as the 31st March 2008 scores are being used twice in a row. The scaling factor used to finalise the risk-based element of the levy falls from 3.77 in 2008/09 to an indicative figure of 2.22 in 2009/10 mainly due to the decline in defined benefit scheme finances in the five months to 31st March 2008. The separate multiplier used to finalise the scheme-based element of the levy falls slightly from 165 to an indicative 162 per 1m of section 179 liabilities. Although subject to consultation, the PPF believes that neither factor will be changed. Unlike the 2008/09 factors, they will be confirmed in November, giving scheme sponsors much needed certainty that was so sorely lacking in 2008/09. The consequence is that the PPF will not be certain of collecting the 700m target since the assumptions it has made, particularly on the extent of new risk reduction measures that will be certified, may turn out to under-estimate the required scaling factor. Midnight on 31st March 2008 was the deadline for submission of scheme return data (including section 179 valuations) to be used in the 2009/10 levy year and midnight on 7th April 2008 was the deadline for certifying partial block transfers to be taken into account for the 2008/09 levy year. Other deadlines for submitting information for the 2009/10 levy year are: 5 pm on 31st March 2009 for contingent asset certificates, 5 pm on 7th April 2009 for actuarial certificates of deficit reduction contributions and 5 pm on 30th April 2009 for block transfer certificates where the transferring scheme has become ineligible. In preparing for the 2009/10 levy, schemes will need to bear in mind that some important deadlines for the 2010/11 levy are being proposed for early next year, in particular 5 pm on 31st March 2009 for submission of scheme return data (including section 179 valuations) and for providing information to D&B regarding sponsoring employers failure scores and 5 pm on 30th April 2009 for block transfer certificates in respect of partial transfers of assets and liabilities (which will be mandatory rather than optional for 2010/11). This block transfer deadline could be particularly onerous not only is there likely to be a significant penalty for missing it, but for partial transfers completed on 31st March 2009 the actuary has an unrealistic 30 day period to complete detailed calculations. Over the coming months schemes will need to keep these 2010/11 deadlines in sight. There are clear dangers in forgetting to plan ahead for the year after next s levy. We hope that the PPF will extend the deadline for submitting block transfer certificates for partial transfers, otherwise many schemes may face the proposed 5% reduction of transferring assets in the risk-based levy calculation. The PPF intends to consult in October on proposals for the long-term, implementation of which has been put back one year to 2011/12. This consultation is intended to set forth significant and wide-ranging proposals on the calculation of the levy and the way bills are distributed. One may be forgiven for thinking that the forthcoming levy season will be much quieter than that for the 2008/09 levy. For 2009/10 the nature of the game is that submission of special certificates may predominate because it is only through sending in deficit reduction and contingent asset certificates that most schemes will be able to influence the levy bill. But schemes must also be alert to the deadlines early next year for the 2010/11 levy. Page 2
Conflicts of interest Pensions Regulator publishes final guidance The Pensions Regulator has published the final version of its guidance which is intended to help trustees of occupational pension schemes and employers identify, monitor and manage conflicts of interest. The final guidance does not differ materially from the draft guidance made available for consultation in February (see Pensions Bulletin 2008/09). There were 42 responses to the consultation and an analysis of these along with the Regulator s actions is contained in a consultation report. The Regulator has heeded the responses it received as follows: The guidance has been slightly reduced in length but in recognition of the fact that the guidance is still 43 pages long, the Regulator has also produced an 8 page summary which states the key principles and some of the questions that trustees should be asking themselves; Much of the wording has been made clearer and the ordering of the five principles has been rearranged to be more logical; The negative tone about employer involvement on the trustee board has been weakened and, to balance that, it is noted that trade union representatives may also have conflicts of interest; The many references to seeking legal advice have been reduced and the recommendation that a conflicts policy must be subject to a legal review has been weakened. However, the Regulator continues to expect trustees to seriously consider obtaining independent legal advice, when seeking to manage a non-trivial conflict of interest, where the conflict could have the potential to be detrimental to the conduct or decisions of the trustees, and act on this advice; More emphasis is placed on defined contribution schemes with specific case studies being added to the guidance; and The commentary about employers and trustees sharing the same advisers has been revised in acknowledgement that such situations can exist in commercial reality. The guidance states that it aims to provide educational support with a view to sharing good practice and raising standards. The Regulator intends to monitor this primarily through its annual governance tracker survey and in particular expects that following publication of this guidance there will be a marked improvement in areas of conflicts management, going on to mention in particular the production of a conflicts policy which it sees as playing an important role in communicating important messages to trustees. The topic of conflicts of interest has been at the edge of many trustees thoughts for a few years now. The publication of this guidance in final form should prompt trustee boards that have not yet taken action to do so. Page 3
Transfer values Pensions Regulator finalises good practice guidance The Pensions Regulator has published the final version of its guidance which is intended to assist trustees in understanding the trustee-driven transfer regime that came into force on 1st October and to set out the Regulator s views on good practice standards. The guidance was issued in draft in August (see Pensions Bulletin 2008/34) and the Pensions Regulator says that there are no new principles involved in the final guidance, although account has been taken of many of the responses to the consultation. Nevertheless, it appears that little has changed other than drafting points. One issue raised by respondents is that the draft guidance is silent on how schemes should approach situations where a quote was issued before 1st October on the old basis, but the individual has not accepted the quote by this time. The regulations are silent on this matter, as is the finalised guidance. Since in many cases the trustee-driven transfer basis will be more generous than the previous basis, care will be needed in dealing with these situations. We will need to await the formal consultation response (promised for publication in coming weeks) to see how the Regulator intends to deal with criticisms of such matters as not being able to take advantage of well-used options that benefit the scheme and uncertainty of treatment of transfer values that are calculated prior to 1st October 2008 but paid after this date. Pensions Bill Parliamentary progress The Pensions Bill will resume its progress when Parliament is reconvened next week after its summer recess. Government amendments have been tabled for the Report Stage in the House of Lords, scheduled to commence on 7th October 2008. The most important of the amendments is the Government taking powers to specify the period over which qualifying earnings (see Pensions Bulletin 2008/28) will be measured for the purpose of automatic enrolment. We expect the Government to consult on regulations setting out precisely how qualifying earnings are to be determined in the Spring of 2009. Age Discrimination European Court of Justice judgment The European Court of Justice (ECJ) has, as expected, ruled against Birgit Bartsch, whose claim for a survivor s pension from her husband s former employer was turned down because the employer s pension scheme rules include a maximum age gap restriction on survivor benefits. The Court followed the Advocate General s opinion in Bartsch v Bosch und Siemens Hausgeräte (BSH) Altersfürsorge GmbH (see Pensions Bulletin 2008/29) that age discrimination had not occurred in this case but only because of the fact that at the relevant time Germany had yet to implement the age strand of the Directive and was not out of time in this respect. The ECJ, unlike the Advocate General, did not address the issue of whether unacceptable discrimination would have occurred if the case had not failed on the timing technicality. Page 4
VAT and investment trust companies Exemptions extended An Order has been laid before Parliament that extends the VAT exemption for fund management services, following the announcement in this year s Budget (see Pensions Bulletin 2008/11). The Value Added Tax (Finance) (No.2) Order 2008 (SI 2008/2547) is the Government s second attempt to extend the exemption (see Revenue & Customs Brief 48/08 and the explanatory memorandum). The need for the extension follows the European Court of Justice ruling in the Claverhouse case (see Pensions Bulletin 2007/46), where it was held that investment trusts should be exempt from VAT on investment management services. As a consequence of this, the National Association of Pension Funds (NAPF) and others are challenging HM Revenue and Customs on the application of VAT to the investment management services supplied to occupational pension funds (see Pensions Bulletin 2008/21). State Pension Deferral Public Awareness and Attitudes The Department for Work and Pensions (DWP) has published a research report about awareness and attitudes to state pension deferral (the ability to put off receiving a state pension in return either for an uplift in the pension or a lump sum). The report suggests that public awareness and enthusiasm for state pension deferral is limited and that the DWP has more work to do to raise the understanding of the options available. 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