Pensions Bulletin 2014/11

Our viewpoint

Chancellor springs a pensions surprise in the 2014 Budget

The Chancellor has today delivered his fifth Budget Statement to the House of Commons in which he focussed on measures of interest to pensions and wider savings.  The speech contained a complete surprise – a radical reform to the rules governing how defined contribution pension savings are drawn at retirement – with broad other legislative consequences too.

We will be covering this and other Budget developments impacting pensions saving in a Pensions Bulletin special to be issued later this week.  In the meantime, this edition of LCP’s Pensions Bulletin contains this week’s non-Budget pensions news.

VAT on DC pension costs – CJEU weighs in

Last December we reported the Advocate General’s opinion to the Court of Justice of the European Union (CJEU) on the VAT treatment of services provided to defined contribution (DC) schemes by the Danish company ATP PensionService A/S (see Pensions Bulletin 2013/53).

The Advocate General’s opinion has now been upheld by the CJEU.  In short, DC pension schemes may now be regarded as special investment funds and so be subject to the same VAT treatment on some of their supplier costs as other collective investment schemes.  In ATP’s case it appears that ATP was right not to charge VAT (since July 2002) on the administration services that it provides to its PensionDanmark client (a Danish equivalent to the UK’s NEST).  Subject to the findings of the Danish High Court, PensionDanmark can look forward to a VAT exemption potentially stretching back to 1991.

In particular, the CJEU concluded that:

  • DC pension funds may be treated as “special investment funds” for the purposes of EU VAT law so long as they are funded by the persons to whom the retirement benefit is to be paid, if the funds are invested using a risk-spreading principle and if the pension customers bear the investment risk.  In this regard it “is of little consequence” that the contributions are paid by the employer, that the amount is based on a collective agreement, that there are different ways of paying out the funds invested (eg pension and lump sum), that contributions are income tax deductible, or that it is possible to add an ancillary insurance element
  • Management services for such funds which may attract a VAT deduction include setting up and administering member accounts within the DC scheme, providing accounting services and member disclosures and making benefit payments and transfers

Although the CJEU said that DC pension funds “may” be VAT exempt, all the arguments put forward by the Danish authorities as to why a DC pension scheme differs from special investment funds have been rejected by the CJEU.  Moreover, the CJEU has given guidance as to how member states are permitted to approach the issue.  In particular, while the Court recognises that it is member states which have the power to define a special investment fund it is very clear that this power may not be exercised so as to undermine the very terms of the exemption in EU legislation.


We now await HM Revenue & Customs’ response following on from their recent announcement about the VAT treatment of pension fund management costs (see Pensions Bulletin 2014/05).  Although HMRC has said that it will seek to protect its position with regards to VAT on DC pension scheme services it is not clear at this stage what arguments it can employ in the face of the judgment to not treat UK DC schemes as special investment funds.  However, it may be able to take a strong line on what services constitute the “management” of such funds, such that investment management services remain subject to VAT.  There is also the prospect of having accepted that certain services are indeed exempt from VAT for HMRC to seek repayment of input tax previously recovered by suppliers.

Regrettably this means that there is a lot of uncertainty about the VAT deductibility of pension scheme costs which will not be resolved quickly.

GAD cancels existing “passports” for the LGPS

Existing “broad comparability certificates” (aka passports) ceased to be valid for transfers of employment of members of the Local Government Pension Scheme (England & Wales – LGPS (E&W)) which took place on or after 10 March 2014, as announced by the Government Actuary’s Department (GAD) on 12 March 2014.  This announcement was expected as a result of the changes to the LGPS benefits from 1 April 2014, but the precise timing was unknown until now (see Pensions Bulletin 2013/06).

An important detail to note is that this change also affects situations where contractual terms have been agreed (which include the use of a contractor’s broadly comparable scheme) but the transfer of staff has not yet taken place.  Certificates for such transfers will need to take account of the new LGPS (E&W) regulations.

Applications for passport certificates now need to take into account the LGPS (E&W) reforms coming into effect in April 2014, but there will be a delay before GAD is able to provide broad comparability certificates whilst its systems are updated.

GAD certificates which only cover the Scottish and/or Northern Irish Local Government Pension Schemes are unaffected by this announcement.

The review by the Department for Communities and Local Government (DCLG) in respect of what is needed for directions or other arrangements to achieve the principles of the new Fair Deal in local government is still awaited.


The good news is that this announcement ends the uncertainty over how long pre-2014 passports would remain valid.  However, contractors who are already at an advanced stage of a transfer but have not yet completed it will need to apply for a new passport certificate reflecting the new LGPS terms coming into effect in April 2014 – furthermore, when the new certificate will be issued is currently unknown.

This announcement has no effect on those contractors who have agreed to meet their pension obligations by signing up to an admission agreement with the relevant Local Authority Pension Fund.

Public service employer pension costs likely to increase

The Government’s policy on valuations of the main public service pension schemes and plans for an employer cost cap have been published in Public service pensions: actuarial valuations and the employer cost cap mechanism.

The Government has also confirmed that the near-final valuations by the Government Actuary’s Department are expected to reveal that the current contribution rates are insufficient to meet the full costs of the schemes in the future.  If current rates were allowed to continue, the shortfall would be nearly £1 billion a year across the teachers’, civil service and NHS schemes.

The final valuation results will be published over the coming months and changes to employer contribution rates will come into force in 2015.  Where the new valuations show that they have not been paying enough into the schemes, employers (eg in government departments, education and health sectors) will need to increase their contributions in line with the results of the new valuations.


This means that non-public sector employers who participate in unfunded public sector pension schemes via a Direction Order or participation agreements under the new Fair Deal (see Pensions Bulletin 2013/42) are likely to see their pension costs increase from April 2015.   How much they will increase by won’t be known until the new valuation results are published later this year, but the shortfall of nearly £1 billion a year in fact equates to approximately 1% of total employee earnings for the three main schemes involved.

Pensions Bill – Lords’ amendment rejected by Commons

The House of Commons has rejected the amendment made by the House of Lords (see Pensions Bulletin 2014/08) which would have enabled low paid workers (for instance those with zero hours contracts), with more than one job to amalgamate their earnings for the purpose of meeting the contribution conditions for entitlement to the single tier state pension.  Whilst rejecting the amendment pensions minister Steve Webb did appear to concede that the issue needs further thinking about.


The Government appears to not want any last minute changes made to the Bill after a very lengthy Parliamentary process.  The Bill is currently in “Ping-Pong” between the Lords and Commons with Royal Assent imminent.

Concerns raised on progress with Defined Ambition proposals

In a wide-ranging report concerning the performance of the Department for Work and Pensions in 2012/13, the Work and Pensions Select Committee has expressed concern about the lack of apparent progress being made on defined ambition.

Following the consultation launched in November (see Pensions Bulletin 2013/47), for which the aim was to consult on legislation in the New Year, the Committee expected by now to have been invited to carry out pre-legislative scrutiny on proposals for broadening the range of pensions available to employers.

As these proposals have not yet been published the Committee is concerned that the momentum for bringing forward the proposals “may have stalled”.  The MPs believe the situation is urgent due to the ending of salary-related contracting-out in April 2016 and look forward to seeing the Government's proposals very shortly.

First PPF levy data deadlines draw near

With less than two weeks to go before certain data deadlines in relation to 2014/15 levy calculations are reached the Pension Protection Fund (PPF) has issued a levy data deadlines alert.

The last D&B employer failure score will be calculated as at 31 March 2014 (being the last working day of March) and the following deadlines apply to submitting information to the PPF:

  • 5pm on 31 March 2014 for updating Exchange with levy-related information for the 2014/15 levy (except where set out below)
  • 5pm on 31 March 2014 for certification or re-certification of contingent assets
  • 5pm on 30 April 2014 for certification of deficit-reduction contributions; and
  • 5pm on 30 June 2014 for certification of full block transfers that have taken place up to and including 31 March 2014

Significant increase in numbers of pension scheme members due to auto-enrolment

The Office for National Statistics (ONS) has published data showing that just under 50% of employees had a workplace pension in 2013 – the first increase since 2006.  This masks significant variation throughout the workforce however – for example 85% of public sector employees are in a workplace pension, but only 36% of the private sector workforce is in a similar position.  The 2013 figure is also lower than the high water mark in recent times of just under 57% in 2002.

The ONS attributes this rise to the introduction of auto-enrolment and this corresponds with a press release by the Pensions Regulator stating that more than three million workers are now saving into a workplace pension scheme as a result of these reforms.  The Regulator states that the three millionth worker to be auto-enrolled is employed by West Ham United football club – coincidentally Karren Brady, the club’s vice-chairman and businesswoman well known from television series “The Apprentice”, was one of the “faces” used to publicise the roll out of auto-enrolment.

Regulator urges small and medium employers to check when auto-enrolment affects them

The Pensions Regulator has urged small and medium employers to find out when their new workplace pensions duties begin after research showed many have yet to check when auto-enrolment will affect their business.

The Regulator says that thousands of medium-sized employers due to stage before August should now have in place a suitable pension provider and payroll software.  If they have not, then they need to act now to avoid the risk of failing to meet their deadline to comply and the possibility of enforcement action, including fines.  The Regulator’s research into employer awareness and understanding of auto- enrolment found that while 82% of small employers are aware of the changes, 47% still don’t know when they will need to act.

The Regulator has also updated its detailed guidance on auto-enrolment.

2014/15 auto-enrolment earnings parameters order made

The Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2014 (SI 2014/623) gives effect to the 2014/15 auto-enrolment earnings parameters agreed in December (see Pensions Bulletin 2013/52).  So to recap this means that:

  • The auto-enrolment earnings trigger is £10,000 (equal to the income tax personal allowance for 2014/15)
  • The lower limit of the qualifying earnings band is £5,772 (equal to the lower earnings limit for national insurance contributions in 2014/15); and
  • The upper limit is £41,865 (equal to the upper earnings limit for national insurance contributions in 2014/15)

These are the same linkages as have been used since the inception of auto-enrolment.

Children and Families Act gains Royal Assent

The Department for Education has announced that the Children and Families Act 2014  gained Royal Assent on 13 March 2014.

In particular, the Act creates a new employment right to shared parental leave and statutory shared parental pay (see Pensions Bulletin 2014/09 for draft regulations in this regard) and extends the right to request flexible working.


Shared parental leave, in common with existing forms of childcare leave, will have implications for the administration of workplace pension schemes.  This new right is expected to come into force in April 2015.

Same sex marriage arrives

The Department for Culture, Media & Sport has announced that same sex couples planning to marry under the Marriage (Same Sex Couples) Act 2013 are able to formally give notice of their intention to marry from 13 March 2014.

The first same sex weddings in England and Wales will be able to take place from 29 March 2014 (see Pensions Bulletin 2013/52), though same sex couples who married abroad under foreign law and are currently treated as civil partners are recognised as being married in England and Wales from 13 March 2014.


Insofar as pension rights are concerned the intention is to treat a same sex partner the same as a civil partner when it comes to survivor benefits.  Schemes may need to revisit their rules and communication materials to make sure that this is in fact the case and to use gender neutral language when referring to members and their spouses.

New Chair of the Pensions Regulator appointed

The Department for Work and Pensions has announced that Mark Boyle has been appointed as Chair of the Pensions Regulator.  He replaces Michael O’Higgins with effect from 1 April 2014 and has been appointed for a fixed term of four years.

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.

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