Pope Anderson LLP

2010 Budget - High Earners Tax

The main pension related item of the 2010 Budget was confirmation that the changes to taxation for high earners are to go ahead as planned from April 2011.  Tax relief on pension contributions will be restricted for those with gross earnings of £150,000 or more, including employer pension contributions (with an income floor of £130,000).  Tax relief will be tapered for those on gross incomes of £150,000 to £180,000, at a rate of 1% for every £1,000 of income, starting at 50% at £150,000 down to 20% at £180,000. 

The Government also published a document setting out some details of how the restriction will operate:

http://www.hm-treasury.gov.uk/d/budget2010_pensionstaxrelief_summary.pdf

It is important that all those who may be caught by the new rules are made aware of the position.  Pope Anderson can help to identify those affected and calculate the impact the changes will have.

Pension Reforms - Auto enrolment, minimum contributions

It has been confirmed that the implementation of automatic enrolment, part of the forthcoming pensions reforms, is to be staged over four years with the largest employers required to comply first.

The minimum level of contributions will also be phased in:

The percentages shown are of “qualifying earnings”.

Information on Pensions Reform can be found on the DWP’s website:

http://www.dwp.gov.uk/policy/pensions-reform/
and the Regulator’s website:
http://www.thepensionsregulator.gov.uk/pensions-reform.aspx

Pope Anderson’s recent seminars helped a number of clients find out more about the pension reforms and what they need to start considering.  We can help employers identify the issues for them and plan the actions necessary.

IAS19 changes

The International Accounting Standards Board has published an exposure draft for proposed amendments to IAS19. 

It is proposed to remove the corridor approach with all actuarial gains and losses recognised immediately within the Statement of Comprehensive Income (previously named the SORIE).  This would:

• Improve comparability across all entities as there would be no choice on the approach being used;
• Prevent companies recognising an asset on their balance sheet when their scheme had a large deficit, and
• End the recognition of gains or losses in the profit and loss account that related to past periods.

It is proposed to use the same rate for the expected return on assets as used for the discount rate.  This would remove any subjectivity previously incorporated into the expected return on asset assumption, and hence provide comparability across entities.

It is also proposed to generally improve disclosure requirements such as:

• The characteristics of defined benefit schemes;
• The amounts recognised in the financial statements;
• Risks arising from defined benefit schemes; and
• Participation in multi-employer schemes.

Finally it is proposed that IFRIC 14 should be incorporated into IAS19 disclosures.  This has the effect of limiting the amount of surplus that can be recognised and can increase the liabilities where a minimum funding requirement is applied.

The Exposure Draft is open for public comment until 6 September 2010, with the disclosures expected to be finalised around the middle of 2011.

The Exposure Draft can be found at:
http://www.iasb.org/NR/rdonlyres/A366AC39-6AE3-4516-A81D-ACFB4A9E5D42/0/EDIAS19DefinedBenefit.pdf
with a snapshot at:
http://www.iasb.org/NR/rdonlyres/C6F8EF54-ADE4-4C9C-B23A-AEFAE9BFE815/0/EDIAS19DefinedBenefit0410.pdf

Pope Anderson can advise on the potential impact of the proposed changes.

Employer Debt Regulations

The DWP published Regulations effective from 6 April 2010 that could ease some of the existing Employer Debt requirements.  Although some changes have been made to the draft regulations that we commented on in a previous Current Topics Update, the principle remains that where there is a corporate restructuring and one employer’s assets and pension liabilities are transferred to another, then as long as  seven prescribed steps are followed no debt will arise. 

This ‘general easement’ will also apply where there are a number of exiting employers and one receiving employer, or an employer is undergoing a change in legal status, provided the steps are followed. 

The steps include a 'Restructuring Test’.  This requires trustees to consider whether, after the corporate restructuring has taken place, the receiving employer is at least as likely:

• As the exiting employer to meet the scheme’s liabilities attributable to it, and
• To be able to meet its own liabilities as it was immediately before any reorganisation.

As part of this the Trustees are required to consider, amongst other things, the covenant of the receiving employer and the exiting employer to assess the likelihood of the restructure test being satisfied.

The transfer of assets, employees and pension liabilities has to occur within 18 weeks of the trustees informing the employers that the relevant conditions have been satisfied.

Minor departures from the detailed procedures will not invalidate them. However, if within 6 years of the restructuring, it becomes apparent that not all assets, employees, scheme members or scheme liabilities have been transferred to the receiving employer an employer debt will be triggered. A debt will also be triggered if the employer provided incomplete or inaccurate information to the trustees that materially affected their decision on the ‘Restructuring Test’.

The proposals also allow for small corporate restructurings without triggering a debt.  Under the de minimis easement the following conditions have to be satisfied:

• The scheme is funded in excess of 100% on the section 179 (PPF) basis;
• No more than 2 members or less than 3 per cent of the scheme’s membership is with the exiting employer (whichever is greater);
• The total accrued pensions of the members for whom the exiting employer is responsible do not exceed £20,000 (to be increased by £500 each tax year);
• No more than 5 members or 7.5 per cent of scheme members (whichever is greater) can be included in de minimis transactions in a rolling three year period; and
• The total amount of accrued pensions covered by any de minimis transactions must not exceed £50,000 in a rolling three year period.

Apportionment arrangements are still likely to be required in many cases. 

Abolition of Protected Rights

The DWP has confirmed that contracting out on a defined contribution basis will be abolished from 6 April 2012.  After this date no national insurance rebates will be paid and employees will be brought back into the additional state pension scheme (S2P).  Restrictions on how protected rights benefits are treated will also be removed.  Contracting out certificates will be cancelled automatically.

Members contracted out on a defined benefit basis are not affected.

The DWP has published a factsheet for employers:
http://www.dwp.gov.uk/docs/emp-contracting-out-factsheet.pdf

For defined benefit schemes contracted out on a money purchase basis costs will increase as the national insurance rebate is lost without any corresponding reduction in scheme benefits.  Employers need to consider what action to take.

IGG - DC investment principles

The Investment Governance Group has issued a consultation paper setting out six investment governance principles for Defined Contribution schemes. The six Principles are:

• Clear roles and responsibilities for investment decision making and governance.
• Effective decision making.
• Appropriate investment options.
• Appropriate default strategy.
• Effective performance assessment.
• Clear and relevant communication with members.

The consultation paper includes ‘best practice’ guidance which sets out steps to help apply the principles and aims to provide a checklist to identify the areas requiring attention.

The consultation paper can be found at:
http://www.thepensionsregulator.gov.uk/pdf/igg-con-doc-2010.pdf

Data protection fines

With effect from 6 April 2010 the Information Commissioner can issue fines of up to £500,000 on organisations for serious breaches of the Data Protection Act 1998. 

Trustees of occupational pension schemes are ‘data controllers’ and could, therefore, face a fine if adequate controls are not in place, or if serious breaches occur.

Notification is the process by which a data controller gives the Information Commissioner’s Office (ICO) details about their processing of personal information. Notification is a statutory requirement and every organisation that processes personal information must notify the ICO, unless they are exempt. Failure to notify is a criminal offence. Have you notified? Your usual contact at Pope Anderson will be able to help.

The Pensions Regulator

Three year plan

The Regulator has set out its plans for the next three years.  These include:

• To continue to emphasise to trustees the importance of setting prudent funding targets and agreeing with employers that any resulting deficit is removed as quickly as possible;
• To support employers with their new duties to auto-enrol staff into workplace pension schemes, and to design and build an effective compliance regime;
• To focus on standards of delivery of DC schemes;
• To improve standards of administration across the industry;
• To continue to raise standards of governance by trustees;
• To continue to monitor transfers of pensions risk away from employers to ensure that, where such practices occur, members’ benefits are protected; and
• To continue to direct its resources to the areas of greatest risk to members, educate and enable the industry to respond, and reduce the risk of calls on the Pension Protection Fund (PPF).

Record keeping consultation document

The Pensions Regulator has published a consultation document following a review of the good practice guidance on recording keeping which was published in January 2009 and set out methods for measuring and improving scheme data.  The guidance split the data into 3 types:

Common data

information that should be held for all scheme members, irrespective of type

Conditional data

additional information required for a particular scheme to allow for its efficient administration.

Numerical data

membership statistics etc

Few schemes have tested their common and conditional data in accordance with the guidance and the results of those that have tested have been disappointing.  Under the proposals it will now be a requirement for all schemes to maintain high-quality standards of data.  The Regulator will now take a stronger stance and evoke the use of its powers to investigate standards of record keeping.

Targets for the accuracy of common and conditional data are being considered.  The Regulator expects that common data collected from 2010 onwards should be 100% complete and accurate and that a target of 95% should be aimed at for data before this.  For data collected before 2010 the Regulator expects trustees to assess the data required to run the scheme and set challenging but realistic targets to rectify errors and omissions.  However, the Regulator does recognise that it may be impossible to achieve 100% accuracy for all data and asks for views on situations in which it could conclude that ‘all reasonable endeavours’ had been made to resolve issues.

The Regulator proposes to review the performance of schemes and those that do not have adequate plans in place to resolve data issues will be required to improve. 

The Regulator has also published two bite sized e-learning modules on record keeping.
http://www.thepensionsregulator.gov.uk/doc-library/biteSized/RKbite12tpr/RKbite12tpr.htm
http://www.thepensionsregulator.gov.uk/doc-library/biteSized/RKbite2tpr/RKbite2tpr.htm

Although the consultation period has now ended the document can still be found at:
http://www.thepensionsregulator.gov.uk/docs/record-keeping-con-doc-2010.pdf

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.

Update on the PPF

How to reduce your PPF levy

The Pension Protection Fund (PPF) and the Confederation of British Industry (CBI) have jointly published a guide on ways that a scheme can reduce its levy. The guide is aimed at pension schemes, advisors and trustees. It provides information about how the levy is calculated and suggests ten actions that can be taken to reduce the levy, as follows:

• Make sure that the PPF and the Regulator hold the correct data on your scheme;
• Check that D&B holds the right data on the sponsoring employer;
• Understand your insolvency risk and appeal your failure score if you think it is wrong;
• Make a deficit reduction contribution;
• Use a group company guarantee;
• Pledge company assets to the scheme;
• Get a guarantee from a third party;
• Consider an out-of-cycle s179 valuation;
• Make sure you have correctly certified block transfers; and
• Get involved with the development of the levy.

The guide can be found at:
http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/how_to_reduce.pdf

Pope Anderson has been able to assist many of its clients to reduce their PPF levy.  To discuss this further please contact your usual Pope Anderson contact or call 020 7292 8100.

Levy Steering Group

The PPF Levy Steering Group has published two papers outlining its ideas for the future of the PPF levy. The Steering Group’s thinking is that changes in the levy for a scheme from year to year should relate to changes in the risk for that scheme and not changes in risks to other schemes. It should then be possible to estimate a scheme’s levy for a number of years. Currently a scheme can see its risk fall and its levy rise. A fairer system would reflect a scheme’s own characteristics so that the levy can be more predictable and proportional to changes in a specific scheme’s risk and take into account factors such as:

• The employer covenant – measured to a degree of accuracy supportable by evidence;
• The scheme funding;
• The investment strategy – provided this is able to take account of the range of investment strategies used by schemes; and
• The benefits of risk reduction, such as contingent assets, and deficit reduction contributions.

The Steering Group also suggests the PPF should consider extending the risk characteristics to include:

• Governance; and
• Funding strategy.

Thinking about the position of an individual scheme is a “bottom up” approach, which is opposite to the current “top down” approach and could result in a volatile levy at both a scheme and an overall level.  The Group suggests stability could be achieved by assessing risks over a period rather than at a point in time and bringing to an end the annual PPF consultation exercise.  Schemes would then be able to look at a levy that would remain stable, subject to changes in their own risk.

It remains to be seen which, if any, of these ideas make it into the PPF’s future policy for the levy.

PPF factors and compensation cap

The Pension Protection Fund has published revised Commutation factors, Compensation Cap factors and Early Retirement factors. The new factors should be used for all calculations with an effective date on or after 1 April 2010 for the Compensation Cap factors, and 6 April 2010 for the Commutation and Early Retirement factors.

The Compensation Cap from 1 April 2010 will be £33,054.09 per annum at age 65. This equates to compensation of £29,748.68 per annum once the 90% adjustment is applied.

Financial Assistance Scheme (FAS)

The Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2010 came into force on 2 April 2010. The assets of qualifying schemes will transfer over to the Government to supplement the funding provided by Parliament and the FAS will be solely responsible for the payments. Previously the trustees were to buy annuities at a level that they could afford and the FAS would top up the payment.

The Regulations will also allow payments exceeding the standard FAS limits for those whose asset share would have secured a higher annuity and allow tax-free cash lump sums to members whose pensions have not yet commenced.

Guidance has also been issued on;

• The preparation of relevant accounts;
• The method and assumptions to use when performing a valuation for FAS, together with example calculations; and
• GMP equalisation.

The documents can be found at: http://www.dwp.gov.uk/consultations/#lcr

GMP equalisation

Under the guidance, if a member would have had a higher expected pension had their benefits been calculated on the benefit structure applying to the opposite sex then that alternative benefit calculation is provided to the FAS scheme manager. In many cases the overall pension remains the same, but the split between GMP and non GMP may change.

This method is only one possible method for equalising the expected pension and should not be treated as guidance on how to equalise scheme benefits generally. Schemes considering their EC law obligations to equalise should be aware that the Government has recently announced that, in its opinion, there is no need for a scheme to seek a comparator before equalising, where any inequality in scheme benefits results from the legislative provisions governing the GMP.

Trustees should seek legal advice before taking any course of action.