Pope Anderson LLP

Pensions indexation - Move to CPI

The UK government has expressed its intent to change the inflation linkage for UK pension schemes from the Retail Price Index (RPI) to the Consumer Price Index (CPI) from April 2011.  The impact of the change will depend on the exact details of the legislative changes and the terminology used in a scheme’s Rules.  Our Special Edition bulletin provides further information.

Until any legislative changes are confirmed, trustees should ensure that they continue to take decisions relative to the current state of the law and their trust deed and rules.  Trustees should review scheme rules so that they are prepared to take the necessary action.  Trustees should also plan to communicate with members on the impact as soon as possible once known, even if the resulting change is likely to be negligible.

The statement is at: http://www.thepensionsregulator.gov.uk/doc-library/statements.aspx

Pope Anderson is well placed to assist trustees and companies to understand the affect of this change, calculate the impact on a scheme’s funding position or an individual’s pension, and communicate to scheme members. 

Emergency Budget

The key points relating to pensions from June’s Emergency Budget were:

• The requirement to purchase annuities with pension fund savings before the age 75 will be removed from April 2011.  Transitional provisions apply for those reaching age 75 after 22 June 2010 who haven’t yet bought an annuity.  They will have until age 77 to do so. 

• Currently individuals can draw down an income before age 75 up to a maximum level of 120% of an equivalent annuity.  After age 75 they can enter an Alternative Secured Pension (ASP) leaving their pension fund invested while drawing down income between 55% and 90% of an equivalent annuity.  ASP will cease when the new rules come in.  However, the pre age 75 drawdown is to be extended beyond age 75 and the draw down limits reviewed.

• Restrictions on pensions tax relief for high earners from April 2011 were announced in the 2009 Budget.  In the Emergency Budget the Chancellor announced that he is looking at ways to repeal the legislation and is to work with the pensions industry to explore alternative ways of raising the same amount of revenue.  This may include a reduction in the annual allowance to £30,000 to £45,000 (currently £255,000).  There will be no change to the anti-forestalling regime.

• Public sector pensions are to be reviewed.

• From 6 April 2011, the Basic State Pension will rise in line with the greater of earnings, prices, or 2.5 per cent.

• The CPI will be used as the measure of prices, although the Basic State Pension will increase by at least the equivalent of the Retail Price Index at 6 April 2011.

• The increase in the state pension age to 66 is be reviewed with an aim to bring it forward.

• There will be consultation on phasing out the default retirement age of 65 from April 2011.

NEST and automatic enrolment review

The new Government has announced a summer review of automatic enrolment to conclude by the end of September 2010.  It will look at issues including how the regime will work, which employees it applies to, the cost to employers, the NEST contract and charging structure and the four-year implementation period.

April 2011 deadline

Pre A Day limits rules

The “earnings cap” disappeared from A Day (6 April 2006). Since then HMRC has published the notional earnings cap (£123,600 for the tax year 2010/11).  Regulations allowed pension schemes to rely upon the notional earnings cap and other limits until appropriate amendments were made to the scheme rules. This facility ends on 5 April 2011. No further notional earnings caps are to be published and scheme rules must be amended before 5 April 2011 to retain any pre A Day limits on benefits. If this is not done, there is a risk that greater benefits may be provided than intended.

Trustees should check that they have incorporated any required pre A Day limits in their rules and seek legal advice if in any doubt.

Refund of surplus to employer

Under section 251 of the Pensions Act 2004, trustees have until 5 April 2011 to pass a resolution to retain any power under their scheme rules for the trustees to make a repayment of surplus to a sponsoring employer. Certain conditions apply:

• The scheme must have been established before 6 April 2006 and its governing documentation must include a power for a surplus payment to be made to an employer while the scheme is ongoing;
• The trustees must be satisfied that the resolution is in the interests of scheme members;
• The power to pass the resolution may be exercised only once (and prior to 6 April 2011);
• The power to make a repayment of surplus to an employer must be exercisable only by the trustees;
• A repayment of surplus to an employer cannot be made unless the scheme is fully funded on the buy-out basis; and
• The scheme’s participating employers and members must be given at least 3 months written notice of the intention to pass the resolution.

Although surpluses are not an issue for most schemes at present it may become relevant in the future. Employers may be less willing to consider large contributions to schemes if they are unable to get money back should the funding position improve.

Trustees should consider taking legal advice on this issue well in advance of the 6 April 2011 deadline.

The Pensions Regulator

Employer covenant

The Regulator has issued a number of publications on employer covenant:

• A statement to trustees;
• A consultation on draft guidance for trustees;
• A consultation on draft guidance for trustees of multi employer schemes
• An e-learning module; and
• A short guide for employers.

The statement to trustees sets out the regulator’s expectations of trustees in relation to employer covenant issues, and builds on the June 2009 statement. In general, trustees should:

• Ask probing questions to properly understand the covenant and engage the right professional help;
• Assess the covenant objectively in the context of the scheme’s exposure to risk;
• Have a framework for assessing and reviewing the covenant, including monitoring, which should be regarded as equally important as investment monitoring;
• Have a good understanding of the liabilities of employers;
• Prepare plans with employers for realising employer support should it be needed, which could include contingent assets; and
• Act proportionately in assessing and monitoring the covenant.

The guidance includes practical help such as case studies to aid trustees’ understanding of how to take appropriate and proportionate action, and checklists of information that may be useful in assessing the financial strength of employers or drawing up a brief for a covenant assessor.

The various publications can be found at:

http://www.thepensionsregulator.gov.uk/docs/employer-support-DB-statement-june-2010.pdf

http://www.thepensionsregulator.gov.uk/docs/employer-support-consultation-document.pdf

(consultation closes 7 September 2010)

http://www.thepensionsregulator.gov.uk/docs/multi-employer-consultation-document.pdf

(consultation closes 23 September 2010)

http://www.thepensionsregulator.gov.uk/doc-library/learning-resources.aspx

http://www.thepensionsregulator.gov.uk/docs/employer-covenant-at-a-glance.pdf

The assessment of the employer covenant is a key part of trustees’ considerations in relation to scheme funding.  We recommend that trustees should review the Regulator’s guidance with their usual Pope Anderson consultant.

Transfer incentives guidance updated

A strengthened position on transfer incentives has been outlined in guidance published for consultation by the Regulator.  It clarifies the roles of the employer and trustee and aims to ensure that trustees become actively involved in managing the risks of such exercises. The guidance is accompanied by a new e-learning module and a joint statement with the FSA.

The guidance replaces the 'Inducement Offers' guidance published in 2007. It explains that trustees should start from the presumption that such exercises and transfers are not in members’ interests and should therefore approach any exercise cautiously and actively.

Trustees play an important role in ensuring that scheme members are in the best possible position to make the right decision in relation to their benefits. In order for transfer exercises to be conducted in an open, fair and transparent way, the regulator expects:

• Members to be provided with clear information that is not misleading;
• Members to be provided with impartial and independent advice to ensure they make the right decisions;
• Trustees to engage in the offer process and apply a high level of scrutiny to all incentive exercises to ensure members’ interests are protected;
• Employers to ensure that any offers made are consistent with the principles in the guidance; and
• No pressure of any sort to be placed on members to make a decision to accept the offer.

The consultation runs to 5 October 2010.  The guidance can be found at:

http://www.thepensionsregulator.gov.uk/docs/transfer-incentives-consultation-document-july-2010.pdf

The e-learning module is at:

http://www.thepensionsregulator.gov.uk/trustees/trustees-essentials.aspx

The joint statement is at:

http://www.thepensionsregulator.gov.uk/docs/transfer-values-joint-statement-july-2010.pdf

The Regulator has also issued guidance in a number of other areas following earlier consultations. 

Record keeping guidance

This guidance is largely unchanged from the draft that we covered in the last issue.

The guidance is aimed at trustees, providers and administrators, who as well as checking that necessary data exists, need to ensure that the data held is accurate.  It also sets out a proposed framework for data checking.

The Regulator expects all schemes to measure their member records and, where necessary, have plans in place for improvement.  The guidance sets out a strengthened approach that includes:

• Recommending specific targets for standards of common data;
• Using regulatory powers to investigate standards within schemes including sampling schemes for data audit;
• Potential enforcement action where there is a breach of legislation;
• Setting a deadline of December 2012 for the resolution of outstanding data issues; and
• Enhancing the education material on its website.

The full guidance can be found at:

http://www.thepensionsregulator.gov.uk/guidance/guidance-record-keeping.aspx

Pope Anderson is working with trustees to review and improve data.  To find out how we can help you get in touch with your usual Pope Anderson contact or call 0207 292 8100.

Winding up guidance

Despite several respondents to the consultation commenting that it was not practical, the two-year target for schemes to complete wind-up remains unchanged.  To avoid unreasonable delays trustees are encouraged to adopt a pragmatic and proportionate approach, where appropriate, whilst working in line with the provisions of the trust deed and rules, their fiduciary duties and any legislative requirements.

They are also advised that the reconciliation of contracted-out liabilities should be among the first activities undertaken in the wind-up process since it can cause significant delays in the process.  GMP equalisation has been removed from the wind up process to avoid potential inconsistencies with separate FAS and PPF guidance.

The guidance is aimed at those with some experience or knowledge of the wind-up process – trustees, administrators, insurers and professional advisers.  For those with limited knowledge or experience there are some winding-up modules on the Trustee toolkit http://www.trusteetoolkit.com.

The guidance is also relevant to those involved in ongoing schemes as a well administered scheme is good practice regardless of whether winding up is being considered.

Details of the full guidance can be found at:

http://www.thepensionsregulator.gov.uk/guidance/guidance-winding-up.aspx 

Internal controls guidance

The guidance aims to ensure that trustees, especially of smaller schemes, have the tools and skills necessary to manage the most critical risks in their scheme, particularly in the current economic climate. 

Suggested control procedures are set out for seven key risk areas below, along with principles for implementing an adequate framework for identifying, evaluating and managing risk:

• Lack of knowledge and understanding;
• Conflicts of interest;
• Ineffective relations with advisers;
• Poor record keeping;
• Deterioration in employer covenant;
• Investment risk; and
• Ineffective retirement processes.

The full guidance can be found at:

http://www.thepensionsregulator.gov.uk/codes/code-related-internal-controls.aspx

It should be read alongside the Regulator’s Code of Practice on internal controls.

This update is not and should not be taken as a statement of the law.  It is a summary of changes that will affect all schemes in different ways.  To review the impact of the changes for your particular scheme you should get in touch with your usual contact at Pope Anderson.