NEST restrictions to be lifted

Restrictions on the annual amount of contributions and on transfers to and from the National Employment Savings Trust (NEST) are to be lifted.

From 1 April 2017, members will be able to contribute (or have contributions paid on their behalf) of more than £4,600 per annum. The government has the option of permitting transfers from 1 October 2015 to coincide with the introduction of automatic pension transfers on changing jobs.

The restrictions were originally imposed to minimise any competitive advantage gained by NEST through its state aid. The European Commission has confirmed that it will not oppose the move.

Minister for Pensions, Steve Webb, said: “This is a common sense decision which will help people save and give certainty and confidence to employers choosing to use NEST. By convincing Europe to support us on this, we’ve achieved a victory for consumers.”

There are currently more than 1.5 million workers who save into workplace pensions through NEST, with that figure expected to rise to up to 4 million over the next 3 years.

New criteria for scheme administrators

From 1 September 2014, HM Revenue and Customs (HMRC) have new powers to refuse to register a new pension scheme or de-register an existing registered pension scheme where they believe that the scheme administrator (in the HMRC sense) is not a fit and proper person. The change is in response to concerns over pension liberation.

Schemes that are de-registered will be subject to a 40% tax charge on the aggregate value of the assets held within the scheme. Guidance on the new criteria may be found at www.hmrc.gov.uk/pensionschemes/fitproper-guidance.pdf.

VAT on investment services

Decisions made recently by the Court of Justice of the European Union (CJEU) have raised a number of questions relating to the VAT treatment of services provided to pension funds, in particular investment management services. The cases of PPG Holdings, a Dutch company (C-26/12) and ATP Pension Services, a Danish company (C-464/12) seem to conflict with the earlier UK case of Wheels Common Investment Fund Trustees and Others (C-424/11).

Wheels and PPG involved defined benefit schemes whereas ATP involved a defined contribution scheme. In ATP the CJEU held that some of the services supplied could qualify for exemption on the basis that the scheme in that case was a ‘special investment fund’. Clients are therefore advised to contact their investment managers who may in turn wish to make a protective claim as VAT can only be recovered retrospectively for a maximum of four years. HMRC will be issuing further guidance on this matter in the autumn.

Company news

The People’s Pension has become the first ‘master trust’ to receive independent assurance of compliance with the regulator’s ‘quality features’ for defined contribution (DC) schemes under the voluntary framework developed by the Institute of Chartered Accountants of England and Wales (ICAEW).

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

Draft Taxation of Pensions Bill

HM Revenue and Customs have published a draft Taxation of Pensions Bill dealing with the tax changes required for the new flexible access for defined contribution pension pots. Other aspects, such as the associated guidance guarantee, are being introduced via amendments to the Pension Schemes Bill which is already working its way through Parliament.

The HM Revenue and Customs consultation may be found at www.gov.uk/government/publications/draft-legislation-the-taxation-of-pensions-bill.

Auto-enrolment compliance update

Figures published by the Pensions Regulator in its monthly ‘declaration of compliance (registration) report’ show that more than four million workers have now been automatically enrolled into a workplace pension.

Its first quarterly ‘compliance and enforcement bulletin’ also shows that the regulator used its powers (to ensure employers comply with their automatic enrolment duties) on twenty three occasions up to the end of June this year.

Both documents, along with other reports on the impact of automatic enrolment may be found at www.thepensionsregulator.gov.uk/doc-library/research-analysis.aspx.

Settlement reached in Lehman Brothers case

A settlement has been reached in the case of the Lehman Brothers UK pension scheme which will allow the full retirement benefits of members to be bought out, thus avoiding the scheme’s entry into the Pension Protection Fund (PPF). The settlement figure (the estimated buy-out shortfall) is expected to be £184 million, the largest sum paid to a scheme as a result of the regulator’s actions so far.

Lehman Brothers became insolvent in September 2008. Two years later, the Pensions Regulator imposed Financial Support Directions (FSDs) on various companies within the group. In July 2013, the Supreme Court ruled that FSDs were effective against insolvent targets, and later that year the High Court ruled that the regulator was not limited to the shortfall amount when imposing FSDs on multiple targets.

Interim chief executive of the Pensions Regulator, Stephen Soper, said: “This is a pleasing and appropriate settlement for the 2,466 members in the Lehman Brothers pension scheme, and shows we will not hesitate to pursue regulatory action to protect members’ benefits and PPF levy payers where we believe it is appropriate.”

Details of the case and the settlement are available at www.thepensionsregulator.gov.uk/docs/section-89-lehman-brothers.pdf.

Company news

The trustees of the PGL (Phoenix Group, formerly Pearl Group) Pension Scheme have entered into a £900m longevity swap with Phoenix Life Limited. This follows transactions for BT and Aviva which also involved an insurance vehicle associated with the scheme sponsor.

Rothesay Life has completed the £500m buy-out of the Western United Group Pension Scheme, a scheme for current and former employees of the Vestey Group. The scheme has around 14,000 members.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

Pensions ‘freedom and choice’ to proceed

The government has decided to proceed with the changes, announced in the Budget, to how people can access their pension savings at retirement. In its response to the consultation, the government has confirmed:

• A permissive statutory override will be introduced to ensure that all defined contribution schemes are able to offer the increased flexibility if desired, without the need for an immediate change to the scheme’s legal documents (although communication to members will need to be carefully considered);

• Transfers from private sector defined benefit schemes (and funded public sector schemes) will continue to be allowed, subject to the member having taken advice from an independent financial adviser. The government also intends to consult on allowing defined benefit members to access their savings directly rather than having to transfer to a defined contribution scheme first;

• The annual allowance for further tax-relieved pension savings for those who choose to draw down more than their tax-free lump sum will be reduced to £10,000. This aims to prevent the ‘recycling’ of pension contributions in order to obtain multiple tax relief;

• The minimum age at which people can access their savings will increase from 55 to 57 in 2028 and remain 10 years below state pension age thereafter. The minimum age for trivial commutation will be lowered from the current age of 60.

The much debated ‘guidance guarantee’ remains, although it will now be provided by independent organisations such as the Pensions Advisory Service (TPAS) and the Money Advice Service (MAS). The Financial Conduct Authority (FCA) will be responsible for setting standards for this guidance. Given the importance of the above changes, please contact your consultant to discuss them further.

NEST reaches one million members

The National Employment Savings Trust (NEST) has published its latest annual report which shows the extent of the impact of auto-enrolment. NEST now has over one million members, compared with 80,000 at the same time last year, and is working with some 4,700 employers compared with 347 last year.

Smaller employers now need to get to grips with their auto-enrolment duties which are approaching rapidly. Interestingly the level of employee ‘opt outs’ is somewhat lower than expected. Employers clearly need to factor these costs and future increases in their contributions into their remuneration package and financial plans. Again please contact your consultant if you wish to discuss these

New government appointments

The Department for Work and Pensions (DWP) has announced that David Harker CBE will be the new Chair of the Pensions Advisory Service (see item overleaf on the government’s ‘guidance guarantee’). Mr Harker has been a member of the Financial Conduct Authority Board since 2013 and was previously the chief executive of Citizens Advice.

The DWP has also appointed Dr Ros Altmann CBE as Business Champion for Older Workers. Her appointment marks the latest step in the government’s drive to support over-50s in the UK labour market.

Company news

The BT pension scheme has put in place a longevity swap covering £16 billion of the scheme’s liabilities using an insurance company created by itself and Prudential Insurance Co of America. The arrangement is the biggest of its kind in Britain.

Auto-enrolment provider NOW: Pensions has announced changes to its lifestyle investment strategy in light of the new pension flexibilities being introduced by the government. Previously, members’ funds were switched into a fund targeting annuity purchase as the member approached retirement. Going forward, they will be transferred to a cash fund.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

Regulator finalises DB code of practice

The Pensions Regulator has published the final version of its code of practice on defined benefit (DB) funding. Key changes to the code following the consultation (see the December 2013 issue of Update) include:

• Changing the emphasis from repaying deficits as quickly as reasonably affordable to considering the appropriate period in which to do so;

• Accepting that there can be potential rewards from upside risk;
• Ensuring that proportionality is properly referenced throughout;

• Renaming the ‘Balanced Funding Outcome’ the ‘Funding Risk Indicator’;

• Making clear that the regulator will continue to engage with some small schemes.

The regulator has also published its third annual funding statement which provides market commentary and direction for schemes with valuation dates between 22 September 2013 and 22 September 2014. The statement recognises that with interest rates continuing to be low, some schemes may find themselves in “challenging” positions.

Finally, there is an ‘essential guide’ to the DB code which provides an overview of the fundamental principles and the risk themes of funding, employer covenant and investment. www.thepensionsregulator.gov.uk/docs/essential-guide-db-code-trustees.pdf

PPF consults on next triennium

The Pension Protection Fund (PPF) has launched a consultation on its plans for the levy over the next triennium (2015/16 to 2017/18). The key change is the introduction of a new, PPF-specific insolvency risk model developed by Experian. This model results in a significant redistribution of the levy of around £230 million, with more levy payers seeing a fall in their levy than an increase. The consultation seeks views on whether schemes facing a significant increase should be given some form of transitional protection (which would be paid for by an increase in the scheme-based levy multiplier).

The consultation also proposes new approaches for the treatment of asset backed contributions, parental guarantees and associated last man standing schemes.

Queen’s Speech 2014

The Queen’s Speech on 4 June included two Pensions Bills, one to give effect to the changes to the pension tax rules announced in the Budget and the other to enable ‘defined ambition’ schemes, that share more of the risk between parties.

In particular, the Bill would enable ‘collective’ schemes that pool risk between members, potentially giving greater stability around pension outcomes – although it is fair to say that the initial reaction was lukewarm!

Meanwhile, the Pensions Act 2014, which will bring into force the single tier state pension, abolish salary-related contracting-out and enable a framework for state pension age to be reviewed in future, has received Royal Assent. The Act also introduces the Pensions Regulator’s new statutory objective to minimise any adverse impact on the sustainable growth of an employer when applying its scheme funding powers.

Company news

Pension Insurance Corporation (PIC) has concluded a pension insurance buy-in with the Trustee of the Total UK Pension Plan. The transaction covers £1.6 billion of pensioner liabilities, representing 60% of the plan’s total liabilities.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

First ‘section 89’ report on auto-enrolment

The Pensions Regulator has published its first ‘section 89’ report in relation to automatic enrolment (under section 89 of the Pensions Act 2004, the Pensions Regulator may, if it considers it appropriate to do so in any particular case, publish a report of its considerations in relation to the exercise of its functions). This report relates to automatic enrolment failings by Dunelm Soft Furnishings Ltd.

Dunelm’s staging date for automatic enrolment was 1 April 2013 so they were required to complete registration, indicating that they had fully complied with their employer duties, by 31 July 2013. The company did not complete registration and were contacted by the regulator. When Dunelm did complete registration, the regulator received information which led it to believe that the company may not have fully completed their employer duties.

Following a statutory inspection at the company’s head office, the regulator found that Dunelm had failed to enrol a number of its employees on time and as a result had not paid across sufficient contributions to its pension provider. The reasons for the failings were a flawed payroll solution, key members of staff leaving at critical times and data quality issues.

Dunelm is now compliant with its automatic enrolment duties, but the regulator wants other employers to learn from Dunelm’s experience www.thepensionsregulator.gov.uk/docs/section-89-dunelm.pdf).

NAPF research on Budget reforms

Over a quarter (28%) of consumers are now more likely to start saving or save more into a pension following the reforms announced in the Budget, according to research by the National Association of Pension Funds (NAPF). The research found that young people (age 18 to 24) were the most likely group to save into a pension. Lower income respondents (a combined household income of less than £14,000 a year) also said they felt more attracted to pension saving.

In a separate poll asking defined contribution (DC) pension schemes about the proposed ‘guidance guarantee’, more than three quarters (78%) said they did not understand what the Government expects them to deliver. 57% said they would struggle to deliver the service ahead of the April 2015 deadline.

LGPS investment changes

The Department for Communities and Local Government (DCLG) has issued a consultation paper proposing that all £85bn of listed assets held by the Local Government Pension Scheme (LGPS) should be switched to passive management, accessed through a common investment vehicle. In addition, all ‘fund of funds’ arrangements should be replaced by a common investment vehicle for alternative assets. These proposals would save up to £660m per year in investment costs.

The proposals do not go as far as replacing the 89 separate funds that currently make up the LGPS with a smaller number of merged funds. The DCLG was concerned that this would result in a loss of local accountability on key matters such as asset allocation. However, Edmund Truell, chairman of the London Pension Fund Authority, accused the Government of being “driven into a blind alley by vested interests and the forces of conservatism”.

Company news

The Court of Appeal has upheld a High Court decision that employees of Honda of the UK Manufacturing Ltd (HUM) are entitled to the higher level of benefits earned by their colleagues at Honda Motor Europe Ltd (HME) between 1986 and 1998. HUM were meant to receive a lower level of benefits on joining the Honda Group UK Pension Scheme but the deed of adherence did not mention this. The cost is estimated to be £47m on a scheme funding basis.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

Lamborghinis and life expectations

Following the radical pension changes announced in the budget, there have been a number of associated documents produced, including from the Pensions Regulator, HMRC and FCA. The treasury also announced that people who have recently taken a tax-free lump sum from their defined contribution (DC) pension will be given 18 months rather than 6 months to decide what they wish to do with the rest of their retirement savings so that they do not miss out on the new flexibilities.

Not to be outdone, Pensions Minister Steve Webb announced that, following the recent consultation, a 0.75% cap on charges will be introduced for the default funds of all qualifying DC schemes with effect from April 2015. Trustees and, for contract-based schemes, Independent Governance Committees (IGCs) will have new duties to consider and report on costs and charges. In an interview, Mr Webb went on to suggest that pensions and tax relief should be levied at a flat rate of 30% rather than an individual's marginal rate, although he did point out that this was not yet Government policy.

DB pension costs research

The pensions Regulator has published the findings of research examining how define benefit (DB) schemes could not identify what they were paying in investment charges, even though these represent the second largest expense for such schemes.

The regulator has also developed a charges checklist and a web tool to help trustees assess how the costs of their scheme compare with those of a typical scheme of a similar size.

www.thepensionsregulator.gov.uk/trustees/db-scheme-costs-tool.aspx

NEST appointments

The Department for work and pensions has announced the appointment of three new Trustee Members to the National Savings Trust (NEST) to replace three retiring members. The Trustee Members from the Trustee of the NEST Scheme.

The new Trustee Members are Carolan Dobson (most recently chair of the Bespak Pension Scheme), Iam Armfield (PwC) and Karen Silcock (deloitte). The Chair of NEST is Lawrence Churchill CBE.

www.nestpensions.org.uk

Company News

UK Coal has announced the "managed closure" of its business by late 2015. This is despite the agreement reached in July 2013 under which the Pension Protection Fund (PPF) took on the company's pension schemes, covering 7,000 members, while enabling the business to continue trading. The PPF expects to be no worse off than if the company had passed onto the immediate liquidation last July.