Welcome to the spring 2016 edition of Osborne Clarke’s quarterly trustee update. In here we summarise the latest pensions news of interest to trustees and all those involved with the pensions industry.
If you would like to discuss any of the content, or have a subject that you would like us to cover in next quarter’s edition, please let one of us know. Our contact details are set out below.
Our pensions timeline is designed to ensure that trustees and employers are ahead of the game in terms of planning how to deal with forthcoming developments. The timeline includes a number of developments that are coming into force shortly on 6 April 2016, for which schemes and employers should already be well prepared. The pace of change shows little sign of slowing and there are numerous developments highlighted further down the line.
A British exit from the EU would have far-reaching consequences for UK and international business. Click here to view OC’s articles highlighting the likely legal implications for businesses across a range of areas, and here to view our thoughts on the impact of Brexit on UK pensions.
In his Budget speech the Chancellor announced the introduction of a new Lifetime ISA (LISA) from 6 April 2017, available to any adult under 40, and designed to facilitate saving both for a first home and for retirement. He left the existing pensions tax regime intact, allowing the new LISA for younger savers to sit alongside it. In our update we consider the impact of the new LISA on the pensions tax regime and automatic enrolment, as well as covering other budget announcements on pensions.
In this update we highlighted some technical issues arising on the end of defined benefit (DB) contracting-out, which is being abolished from 6 April 2016.
John Cridland CBE has been appointed to lead the UK’s first State pension age review. The 2014 Pensions Act requires the State pension age to be reviewed during each Parliament. The review is to consider changes in life expectancy, wider changes in society and help to ensure the State pension remains sustainable. The review will report in time to allow the government to consider its recommendations by May 2017. The DWP states that review will be forward-looking and focused on the longer term, and will not cover the existing State pension age timetable to April 2028.
In this update we review the implications of Hughes v Royal London, a recent High Court decision in a suspected pensions liberation claim. Schemes may need to adjust their transfer processes in light of the decision. The High Court held that where a member wished to transfer their pension benefits to an occupational pension scheme that had an employer that the member was not employed by, the latter factor could not be construed as an indication of pensions liberation. Many schemes will have been taking this into account as a warning sign of possible pensions liberation prior to this decision, hence the possible need to change processes.
The government has published its response to a consultation that it issued in July 2015 on pension transfers and early exit charges. The consultation considered options to address possible barriers to people transferring their pension benefits in order to take advantage of the new defined contribution freedoms when they wished to access their pension. In our update we review the government’s decisions on a legislative cap on early exit charges, guidance on the transfer process, and the circumstances in which someone should seek financial advice.
A revised version of the Code of Good Practice on incentive exercises has been published. The core of the Code remains the same, but a new ‘proportionality threshold’ has been introduced allowing smaller value exercises to be run with fewer requirements and costs in terms of the provision of advice, and some clarity is provided on the application of the Code to trivial commutation exercises. Our update gives further details.
Safeway Ltd v Newton is another in the long line of cases considering issues thrown up by the need to equalise the retirement ages of men and women in pension schemes. In this case the High Court has followed previous decisions and rejected a claim that equalisation took place by virtue of an announcement that was sent to members; the court held that equalisation did not take place until a subsequent deed of amendment was executed.
Sterling Insurance Trustees Ltd v Sterling Insurance Group Ltd considered the scope of a scheme’s power of amendment. The context was the closure of a final salary scheme to future accrual by an amendment to the scheme which also purported to break the link to final salary, so that members’ benefits would broadly be calculated by reference to their salary at the date of the closure, rather than their salary at the date of leaving the employer or retiring. The court held that the wording of the amendment power required the final salary link to be maintained. This decision may be appealed to the Court of Appeal.
We reported in a previous update on action required to be taken by defined benefit pension schemes with a power in their trust deed and rules allowing payment of surplus funds in the scheme back to the employer(s). In particular, affected schemes need to pass a trustee resolution to preserve that power prior to 6 April 2016, otherwise the power will lapse.
It was necessary to give scheme members and the employer(s) three months’ notice prior to passing the resolution. Where such notice has been given, this is just a brief reminder to trustees to ensure that the resolution is passed prior to 6 April 2016.
The Security of Assets Working Party has issued a report exploring the types of questions that pension trustees who deal with DC assets should think about asking their investment consultants, fund managers, platform providers and lawyers to help the trustees improve their understanding of the protections in place for scheme members’ assets. The working party that produced the guide is continuing to explore the issue with various industry bodies and plans to provide further updates.
The PPF has provided more information on its plans to re-invoice pension schemes which mistakenly claimed the last man standing (LMS) discount on their PPF levy in previous years, resulting in underpayment of the levy. In this update we set out how the PPF’s plans will affect trustees of schemes which have previously held themselves out as being a LMS scheme.
The new ‘National Living Wage’ (NLW) comes into force on 1 April 2016, and this could impact on DB or DC schemes that are open to accrual and subject to salary sacrifice.
Normally the scheme rules do not refer to the National Minimum Wage (NMW), but this is often referred to in communications – for example with a new member joining to inform them about the salary sacrifice arrangement – so the communications should be updated to refer to the NLW. The NLW is a rise from the current minimum wage of 50p an hour for those aged over 25, so schemes also need to ensure that they do not opt members into salary sacrifice who are earning up to the new level. Note that employees may also be sacrificing salary for other benefits (childcare vouchers, cycle to work etc); overall the sacrifices cannot reduce an employee’s cash earnings below the NMW (or the new NLW).
The NLW applies to workers aged 25 and will be £7.20 an hour, increased from the current NMW which is £6.70 an hour.
The government has launched a further consultation on public sector exit payments. This follows a consultation in July 2015 on capping public sector exit payments at £95,000, and another in December 2015 on draft regulations aiming to ‘claw-back’ exit payments made to public sector employees who return to employment within the public sector within twelve months.
Of particular interest from a pensions perspective in all of these consultations are proposals to reform and limit entitlements to immediate payment of an unreduced early retirement pension, and how these proposals may work in practice.
Our update reviews the details of the latest consultation, and contains OC’s comment on the government’s challenge in reconciling its past promises on public service pensions with these proposed changes.
The Budget included an announcement of a reduction in the discount rate for unfunded public service pension schemes, and further statements on LGPS collective asset pooling which will create the ‘British Wealth Funds’. Our update contains further details and analysis.
From 6 April 2016 all UK companies (except for certain publicly listed companies) will be legally required to maintain their own register of people who have significant control over them (a ‘PSC register’).
If a pension scheme has a corporate trustee, that company must ensure that it has a PSC register in place by 6 April 2016, and information on the register must be submitted to Companies House from 30 June 2016, as part of the filing of the Confirmation Statement (which has replaced the Annual Return).