Chancellor names the day for second 2015 Budget

Following the Conservative Party’s unexpected election win earlier this month, Chancellor George Osborne has set 8 July 2015 as the date of his second Budget of 2015.  A second 2015 Finance Bill is likely to follow shortly after this with the Government presumably wanting it to obtain Royal Assent before the summer recess.

This Finance Bill is likely to contain the 2010-15 Coalition Government’s proposal to cut the Lifetime Allowance from £1.25m to £1.0m (announced in the March 2015 Budget too late to find its way into the now Finance Act 2015).  We hope it will contain the details of the associated transitional protections that were promised back in March (the new Individual Protection 2016 and Fixed Protection 2016 – but with some tweaks (see Pensions Bulletin 2015/14)).  If it is indeed an Act this side of the summer, that will give individuals reasonable time to consider their position and act (applying for a protection or otherwise) and employers to consider what alternatives they will offer (if any) to those who decide to opt out of further pension savings.

The Bill may also contain provisions for allowing a secondary market in annuities from April 2016, depending on the outcome of the consultation on this that will close on 18 June 2015 (see Pensions Bulletin 2015/12), although that might be a matter for the 2016 Finance Act.

But all eyes are likely to be on whether and if so precisely how and when the Conservatives take forward their manifesto commitment to reduce pensions tax relief for those earning above £150,000 (explained by David Cameron in a Sunday Times’ interview as a tapering of the annual allowance from £40,000 pa (earnings at £150,000) to £10,000 pa (earnings at or more than £210,000).  Come 8 July will there still be scope for those affected to use any remainder of their 2015/16 £40,000 limit, or will it be too late?

Comment

It may be wishful thinking, but it would be far better if instead of taking another slice out of pension contribution tax relief, whilst at the same time bringing more people into the lifetime allowance charging regime, the Chancellor used his Budget speech to announce a review of the whole system of pension tax and put all announced measures on hold pending this.

Pensions Ombudsman finds GAD at fault for not reviewing commutation factors

In a case with potentially wider ramifications, the Pensions Ombudsman has found that the Government Actuary’s Department should have maintained and reviewed a scheme’s commutation factors proactively.  Its failure to do so, relying instead on the relevant government department to instruct it, amounted to maladministration.

This determination followed on from the 2013 decision in the Court of Appeal (see Pensions Bulletin 2013/31) which enabled the Ombudsman to commence his investigation into the complaint made by Mr Milne, a firefighter, who retired from the Fire Scheme in November 2005.  The Ombudsman had also received a number of other similar complaints which had been “parked”, awaiting the outcome of the legal proceedings.

Unusually, the terms of the scheme (and that of the Police Scheme) in effect required GAD to review the commutation factors from time to time so as to maintain actuarial equivalence with the pension that would be surrendered – specifically the rules said that “The lump sum is the actuarial equivalent of the commuted portion [of the pension] at the date of retirement, calculated from tables prepared by the Government Actuary”.

Until the mid-1990s GAD took the initiative in instigating the review and preparation of new commutation tables, in advising the relevant Department as to what had been decided and in forwarding new tables.  But when the GAD became subject to new funding arrangements its statutory role seemed to become obscured by its commercial role.

The Ombudsman found that the factors should have been reviewed between 1998 and 2005 and directed GAD to assess what the factors would have been in 2005 if reviews had taken place and to notify the scheme’s administrator so that they can recalculate the lump sum.  The scheme remains responsible for paying any additional lump sum, but GAD has been directed to pay interest on any such lump sum and to compensate Mr Milne if he is told by HMRC that he has any tax liability as a result of the payment of the lump sum.

Although the Ombudsman’s determination applies only to Mr Milne, as the principles are the same for other retired fire-fighters and police officers, the Ombudsman expects Government to make arrangements for similar payments to be made to others affected, reflecting the more beneficial terms that would have applied had the factors been reviewed and, where appropriate, revised at the appropriate times.

GAD has issued a Technical Bulletin on the subject where it says that it has prepared tables for use in the calculation of redress and put in place internal controls to ensure that its statutory responsibilities are discharged on a timely basis in future.

Comment

It is unusual for scheme rules to give responsibility to an actuarial adviser to produce and from time to time revise and implement actuarial tables with a specific objective in mind, such as the maintenance of actuarial equivalence, but where such an individual becomes so intrinsically bound in the administration of the scheme they could potentially find themselves at the receiving end of a maladministration claim with all the redress work that may then ensue.

As such, this case serves as a timely reminder for actuaries working in the private sector to be able to distinguish between advisory and executive roles.

Nortel – lockbox opened and pensioners get a share of $7bn

In a remarkable legal case the trustees of the Nortel UK pension scheme and the PPF (known as the UK pension claimants) have won a landmark ruling in the US and Canada, meaning they get a share of the insolvent company’s $7.3bn (£4.5bn) assets, up until now stored in an escrow “lockbox”.

The UK pension claimants will now get a share of the lockbox on a pro rata basis, along with other claimants in the US and Canada.  Had the ruling gone the other way, the US and Canadian creditors would have got the lion’s share, but both judges adopted the argument made by the UK pension claimants that the assets of the global Nortel Group should be divided on a pro rata basis based on creditor claims.  It is thought that the creditors, including the UK pension claimants, will receive around 71% of their claims against Nortel’s subsidiaries.  As the buyout deficit is approximately £2.2bn then about £1.5bn from the lockbox should be heading to the UK.

Comment

This is a fantastic result for the UK pension claimants, especially when the prospects seemed so poor before Christmas (see Pensions Bulletin 2014/52).  If the decision had gone the other way then the Nortel scheme would have entered the PPF with potentially a very adverse effect on its funding level.  It is unclear if the recovery from the lockbox will be enough to keep the scheme out of the PPF but it will be a huge relief for the PPF (and its levy payers) not to have to take on a deficit of this magnitude.  We do hope that the rulings are not appealed resulting in years more delay and uncertainty.

Desmond – Contribution notices case settles

We last reported on the action taken by the Pensions Regulator against the directors of Desmond & Sons Ltd in Pensions Bulletin 2012/12.  This case involved the proposed issuing of contribution notices against the directors following the sudden insolvency of the sponsor of the Desmond & Sons Limited 1975 Pension and Life Assurance Scheme in 2004.  The contribution notices were for £1m in aggregate and related to a shortfall in the scheme estimated at £10.9m.

The Pensions Act 2004 provides that the Regulator may issue a contribution notice to a person to pay money if that person was a party to an act, or a deliberate failure to act, resulting in a “material detriment” to the scheme and if the Regulator is of the opinion that the main purpose, or one of the main purposes of the act or failure was to prevent recovery of a debt to the employer arising under section 75 of the Pensions Act 1995.

Having determined to issue contribution notices in 2010, the matter became tied up in the courts.  But now the Regulator has published a Section 89 report which states that the parties have now settled, with agreement that one of the directors will make a payment to the Scheme.  It appears that the matter ends here.  No admissions of liability have been made and “the allegations made by all parties in the proceedings, including those that parties have acted otherwise than in good faith, are not maintained”.

Comment

So this regulatory action comes to an end more than a decade after original events.  So far as we can make out the Regulator has not yet successfully issued a contribution notice under its draconian “moral hazard” powers.

ACA highlights some issues to HMRC for cashing out benefits at retirement

The ACA has written to HMRC outlining the tax labels that might be used when money purchase funds are being fully cashed out under the new 2015 flexibilities; and asking that HMRC’s soon to be finalised Pensions Tax Manual highlights two issues relating to the treatment of members with scheme-specific protected lump sum limits.

Some occupational pension schemes have a significant number of members who, because of their 2006 position and special transitional tax law arrangements, potentially can draw more than 25% of their benefits as a tax-free retirement lump sum; the ACA argues that they take on a new importance post April 2015.

The two issues are as follows:

• A partial transfer might reduce the member’s scope to take tax-free lump sums across both schemes in an unintuitive way not made clear in guidance to date
• There are a variety of tax labels that trustees/providers can use when offering members with money purchase benefits the option of a full cash out from the scheme.  The ACA letter notes that if a member with protected limits has less than £10,000 residual benefit, using the “trivial lump sum” (“7A TCLS”) label to cash it out (rather than other labels) has advantages over other ways of cashing out

Comment

When offering the new flexibilities to members with money purchase benefits (whether the entire member’s benefit in the scheme is money purchase, or just AVCs topping up DB benefits, there are a variety of tax labels that trustees can use.  Which label they choose can impact both a member’s tax and the practical administration of the scheme – and can throw new light on old elements of tax law.  The journey of exploring all this (and reading all of the Finance Act 2004 through the new flexibility spectacles) is just beginning and no doubt more issues will emerge!

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.