Pope Anderson LLP

Spending review

State pension

As announced in the Budget, the earnings link is to be restored for the Basic State Pension from 2011. The triple guarantee will guarantee that from April 2011 pensions will rise each year by earnings, inflation or 2.5 per cent – whichever is the higher.

State Pension Age

The State Pension Age for men and women will reach 66 by the year 2020. This will involve a gradual increase in the State Pension Age from 65 to 66, starting in 2018. It will mean an acceleration of the increase in the female pension age to age 65 by November 2018.

Auto enrolment and NEST

Auto enrolment will go ahead from 2012 and NEST will be established to facilitate this.

Public sector pensions

These will continue in a defined benefit form with increases to employee contributions phased in from April 2012 although the exact detail is to await Lord Hutton‟s final report next spring.

Pensions Tax Relief

The Financial Secretary to the Treasury, Mark Hoban MP, has announced that the Annual Allowance for tax-free pension saving will be reduced from £255,000 to £50,000 from April 2011, and that the Lifetime Allowance will be reduced from £1.8 million to £1.5 million from April 2012. This replaces the complex proposal legislated in the Finance Act 2010.

The factor for calculating the increase in defined benefit pension will also be increased from 10, as at present, to 16. However, individuals will be allowed to offset this against any unused allowance from the previous three years.

Our Briefing Note, Restriction of tax relief on pension savings, provides more information.

The full statement and other information on the changes including draft legislation can be found at:
http://www.hmrc.gov.uk/budget-updates/index.htm

Pensions indexation - Move to CPI

RPI vs CPI

Figures from the Office for National Statistics (ONS) show that CPI inflation in the year to September was 3.1% while RPI inflation was 4.6%. Following the Budget in June, increases to public sector pension schemes and the State Second Pension, awarded in April each year, are now based on CPI during the 12 months to the previous September. Increases in April 2011 will, therefore, be almost one-third lower than if the link to RPI had been retained.

This will also impact on increases to pensions in payment and deferment of private sector defined benefit schemes, depending on the precise wording of the trust deed and rules.

Government letter

Pensions Minister Steve Webb has confirmed in a letter to a senior pensions consultant that he is considering proposals regarding indexation which would potentially give schemes the power to over-ride a contractual agreement in the terms of workers' pensions. The letter reveals that the Government intends to take previously announced plans to link pensions to CPI much further than first expected, stating: “The Government is aware ... there are schemes that have RPI increases written in to their scheme rules and we are considering whether there is a case for using legislation to make it easier for these schemes to adopt CPI if they want to.” Any such legislation is likely to be challenged in the courts.

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

Refund of surplus to employer

Under section 251 of the Pensions Act 2004, trustees had until 5 April 2011 to pass a resolution to retain any power under their scheme rules for the trustees to make payments to a sponsoring employer.

The DWP has confirmed that the section is only to apply to the payments of surplus from ongoing schemes and that the deadline for trustees to pass a resolution is to be extended to 6 April 2016. Legislation will be passed to amend the provision „when a suitable opportunity arises'. The legislation as it stands requires trustees to give members three months notice of their intention to pass a resolution so amending legislation will be needed by December.

Trustees should consider taking legal advice on any work that is currently being undertaken towards a resolution and certainly review the position in December.

Default Retirement Age

The Government has published a consultation document setting out proposals for phasing out the Default Retirement Age (DRA) from 6 April 2011. The proposals allow for a six month transition to apply if the employer has given notice of retirement before 6 April 2011 and the date of retirement is before 1 October 2011. After then the employer can have a compulsory retirement age provided they can objectively justify it.

The consultation can be found at:
http://www.bis.gov.uk/Consultations/retirement-age?cat=open

Requirement to annuitise at age 75 to be removed

HM Treasury has published a consultation paper setting out its proposals to remove the requirement to purchase an annuity with pension fund savings by age 75, as announced in the June 2010 budget.

Under the new plans, annuities do not have to be purchased by a specific age. The current alternatively secured pension option will be abolished and the unsecured pension option will be extended to include capped and flexible drawdown arrangements. Individuals will be able to drawdown more than the annual limit if they satisfy a minimum income test. The existing age limit of 75 on paying pension commencement and trivial commutation lump sums will be removed. However, age 75 will be retained as the age at which tax relief ceases to be available on pension contributions and the age at which pension savings must be tested against the lifetime allowance.

Legislation implementing the changes will be enacted in the Finance Bill 2011.

Contracting-out

Abolition of Protected Rights

The DWP has published for consultation four sets of draft regulations which will abolish contracting out on a defined contribution basis from 6 April 2012. After this date protected rights will become ordinary money purchase scheme benefits and will not be subject to current restrictions. Schemes will be required to notify members that the scheme has ceased to be a contracted out money purchase scheme within four months. A three year transitional period will allow HMRC to pay rebates for the 2011/12 tax year and make adjustments to their records. Rebates after April 2015 will be paid direct to individuals.

The consultation can be found at:
http://www.dwp.gov.uk/consultations/2010/abolition-contracting-out-dc.shtml

Contracted-out rebates review

The Government Actuaries Department (GAD) has begun a consultation on the review of contracted-out rebates. The Government Actuary is required to produce a report on the defined benefit contracted-out rebate at least every 5 years. In light of the expected abolition of contracting-out on a defined contribution basis the consultation focuses on defined benefit pension schemes. Contrary to previous reviews where a recommendation was made, the Government Actuary will set out three alternative approaches to enable the Secretary of State to consider the cost of providing these benefits compared to the value of the State Second Pension that is forgone by members who are contracted out.

The consultation document can be found at:
http://www.gad.gov.uk/services/Pensions_Policy_and_Regulation/Contracted-out_rebates.html

Governance issues

Principles for Responsible Investment

The PRI is an initiative and a set of aspirational and voluntary guidelines for investors wishing to address environmental, social, and corporate governance (ESG) issues.

The PRI is based on the notion that ESG issues, such as climate change and human rights, can affect the performance of investment portfolios and should therefore be considered alongside more traditional financial factors if investors are to properly fulfill their fiduciary duty.

The six principles provide a global framework for mainstream investors to consider these ESG issues. The PRI Initiative has also been created alongside the Principles to help put the framework into practice.

Over 650 investment institutions have signed up to the Principles, with an increased sign up arising from the global financial crisis of 2008-2009, according to a report in the Financial Times.

The Principles are „voluntary and aspirational‟ and they do not have minimum entry requirements or absolute performance standards for responsible investment. However, signatories have an obligation to report on the extent to which they implement the Principles. In 2009, five signatories were delisted for not fulfilling this obligation.
The Principles themselves, a full list of signatories and more information can be found at:
www.unpri.org

UK Stewardship Code

The UK Stewardship Code was published by the Financial Reporting Council (FRC) in July 2010 and sets out good practice for institutional investors on engagement with investee companies.

The FRC sees the UK Stewardship Code as complementary to the UK Corporate Governance Code for listed companies and, like that Code, it should be applied on a “comply or explain” basis.

The Code is addressed in the first instance to firms who manage assets on behalf of institutional shareholders such as pension funds, insurance companies, investment trusts and other collective investment vehicles. The FRC expects institutional investors to disclose on their websites how they have applied the Code.

However the responsibility for monitoring company performance does not rest with fund managers alone. Pension fund trustees and other owners can do so either directly or indirectly through the mandates given to fund managers. Their actions can have a significant impact on the quality and quantity of engagement with UK companies. The FRC therefore encourages all institutional investors to report if and how they have complied with the Code.

More information on the Stewardship Code and those that have signed up to it can be found at:
http://www.frc.org.uk/corporate/investorgovernance.cfm

APB issues Draft Revised Guidance on the Audit of Occupational Pension Schemes

The Auditing Practices Board (APB) of the FRC recently published an exposure draft of a revision of Practice Note (PN) 15: „The Audit of Occupational Pension Schemes in the United Kingdom (Revised)‟. The consultation period ends on 29 October 2010.

When finalised, the revised guidance will apply to the audits of occupational pension schemes for periods ending on or after 15 December 2010. The exposure draft updates the current guidance, which was issued in March 2007, to reflect:

• The new International Standards on Auditing (ISAs) (UK and Ireland) (which are also to apply to audits of financial statements of occupational pension schemes for periods ending on or after 15 December 2010); and
• Changes in the legislative and regulatory framework.

The new ISAs (UK and Ireland) primarily improve the overall readability and understandability of the ISAs (UK and Ireland). The core guidance contained in the exposure draft is largely unchanged from the current guidance. However, new, enhanced or revised guidance has been included with respect to:

• Communicating Deficiencies in Internal Control to Those Charged with Governance and Management.
• Audit Considerations Relating to an Entity Using a Service Organisation.
• Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures.
• Going Concern.
• The illustrative examples of various auditors‟ reports.

A copy of the exposure draft may be downloaded from the publications section of the APB‟s web site at:
http://www.frc.org.uk/apb/publications/pub2334.html.

Update on the PPF

PPF publishes funding strategy

The PPF has published its long-term funding strategy, which sets out it aims to be fully funded by 2030. It also aims to have removed its exposure to market risks by that date, including inflation and interest rates, and to have a sufficient reserve to cover, or to be hedged against, future claims on the PPF and the risks of members living longer than assumed.

The funding objective will be reviewed on an annual basis and, if necessary, investment strategy reviewed, increases/decreases to the PPF levy in the medium term considered or the funding objective itself adjusted.

Full details of the strategy can be found at:
http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/PPF_Funding_Strategy_Document.pdf

New FAS guidance

The Department for Work and Pensions (DWP) has published new Financial Assistance Scheme (FAS) guidance on methods and assumptions to use when undertaking a valuation under regulation 22 of the Financial Assistance Scheme Regulations 2005. The new guidance, which mainly supplements rather than changes the previous guidance, will apply to schemes that have a calculation date on or after 30 September. For schemes that have calculation dates before 30 September 2010, the previous guidance will still apply.

PPF & FAS draft CPI Regulations

The DWP has published a consultation document on the draft Financial Assistance Scheme and Pension Protection Fund (Valuation, Revaluation and Indexation Amendments) Regulations 2011. The regulations are intended to implement the change from RPI to CPI for payments from the FAS and the PPF. The closing date for responses to the consultation is 3 November 2010.

The consultation document can be found at:
http://www.dwp.gov.uk/consultations/2010/fas-ppf-regs-2011.shtml

PPF levy 2011/12

The Pension Protection Fund (PPF) plans to collect £600 million through the levy for 2011/12, down from £720 million for 2010/11. The reduction partly reflects the move from RPI to CPI. In addition, the cap is to be increased from 0.5% to 0.75% of liabilities. There are also increases to the funding levels at which schemes pay a reduced levy – between 135% and 155% compared with 120% and 140% for 2010/11. The proposals are expected to be finalised by the end of the year.

PPF levy 2012/13

The Pension Protection Fund (PPF) has announced proposals for a new formula to be used for calculating the pension protection levy from 2012/13 onwards. Part of the proposal is to fix the levy rules for three years at a time to provide greater predictability and stability.

Average measures are to be used for both underfunding and insolvency risk - a move aimed at reducing volatility of levy payments. Any temporary changes in insolvency risk or funding position would not disproportionately affect the levy. Contributions to improve funding would continue to be recognised.

The new levy formula will also focus more on factors in the levy payers' control rather than those factors they have little influence over, with a greater emphasis on funding positions and investment risk and a reduced emphasis on covenant.

Compared to the 2010/11 levy, schemes with strong funding positions would generally gain. Schemes with strong employers but not well funded would tend to pay more and schemes with weaker employers would tend to pay less.

Consultation on the proposals runs to 20 December 2010. The full details can be found at:
http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/levy_consultation_oct10.pdf

The Pensions Regulator

Determinations

The Regulator has imposed its first contribution notice (in respect of the Bonas Group Pension Scheme) and issued financial support directions (FSDs) against Nortel Group and Lehman Brothers Group, who have now joined together to challenge the Regulator‟s use of an FSD through the High Court. Both companies are subject to ongoing insolvency proceedings.

Statement on RAAs

The Regulator has issued a statement on the use of regulated apportionment arrangements (RAAs). They are one of the options available for modifying an employer‟s debt when it leaves a multi employer scheme, but only if the scheme is already in a PPF assessment period or is expected to enter an assessment period in the next 12 months. Hence, they are expected to be used rarely.

The main points from the statement include:

• The RAA needs to be approved by both the Regulator and the PPF;
• The RAA application should be accompanied by a clearance application;
• The proposal should be discussed in detail with the trustees who should consider all relevant factors including alternatives and if employer solvency is inevitable;
• Trustees must address conflicts of interest, and seek advice; and
• TPR will undertake due diligence which may take some time.

The circumstances the Regulator will take into account when deciding to agree an RAA include:

• Whether the insolvency of the employer would be inevitable;
• Whether the scheme might receive more form insolvency;
• The position of the rest of the employer group; and
• The outcome of the proposals for other creditors.

The statement can be found at:
http://www.thepensionsregulator.gov.uk/docs/regulated-apportionment-arrangements-statement-august-2010.pdf