page-banner

Pensions Bulletin 2016/45

Our viewpoint

Appeal Court rules on switching from RPI

The Court of Appeal has confirmed (by a majority) that the Barnardo’s pension scheme cannot change the index used for increasing pensions from the Retail Prices Index to the Consumer Prices Index.  The Court ruled this way on the basis of an interpretation of the scheme rules, including the definition of “Index”.

The appeal was also concerned with the judgments of the High Court in the Arcadia and Qinetiq cases (see Pensions Bulletin 2014/32 and Pensions Bulletin 2012/12 respectively) – in both of which it was held that Section 67 of the Pensions Act 1995 (which protects accrued rights) did not prevent the trustees from switching from the RPI to the CPI.

The Court of Appeal agreed with the approach of the High Court in these cases, holding that “… it is not possible to say that the member has a right to an increase measured in any particular way”.  This means that the adoption of the CPI in place of the RPI by these two schemes is not a “detrimental modification” which is protected by Section 67.

Comment

It has been known for a long time that whether or not a scheme can switch to the CPI depends on the precise wording in its rules and that the normal rules of construction will apply to every scheme.

What are of more general interest are the comments on Section 67.  The confirmation that it does not provide a technical block to switching to the CPI may encourage schemes whose rules enable them to make the switch to proceed.

Pensions Regulator takes enforcement action on BHS

The Pensions Regulator has started enforcement proceedings against various targets in the BHS affair, following a moral hazard investigation that started when BHS was sold in March 2015.

On 2 November 2016, it revealed that it had sent Warning Notices to Sir Philip Green, Taveta Investments Limited, Taveta Investments (No. 2) Limited, Dominic Chappell and Retail Acquisitions Limited.

Each notice runs to over 300 pages, and sets out the arguments and evidence as to why it believes the parties above should be liable to support the BHS schemes.  The Regulator believes that it has sufficient evidence to support the use of both of its Contribution Notice and Financial Support Direction powers.

Chief Executive Lesley Titcomb said that the Regulator has “yet to receive a sufficiently credible and comprehensive offer in respect of the BHS schemes ….. but if parties wish to approach [the Regulator] with settlement offers, that course remains open to them”.

In contrast, Sir Philip is reported as having presented “a credible and substantial proposal”.

Comment

Unless a settlement is reached, the regulatory process could spin out for years.  The next steps are for the targeted parties to respond with their comments and representations, which will then need to be considered by the Regulator’s Determinations Panel before it decides whether or not to invoke any of its moral hazard powers.

DB transfer quotations increase following Brexit referendum

LCP has issued its latest quarterly update on the pattern of transfer quotations and payments for the DB schemes we administer, including for the first time an analysis of where members are taking their transfer value payments to.

Our latest findings include:

  • The average size of transfer values quoted in Q3 of 2016 was £368,000, 25% higher than the previous quarter, reflecting the fall in bond yields after the Brexit referendum. The average transfer value quotation is now more than twice the level of two years ago
  • The number of quotations was around 30% higher than usual in September 2016, perhaps prompted by media comment about the rise in transfer values. Early indications are that this increased level of activity has continued through into October
  • Quotation and take-up rates continue to be highest for those aged 55 and over
  • Most transfer payments are made to personal pensions (74% by value since the start of 2014), with a significant minority (25%) to overseas schemes (known as QROPS)
  • Most of these overseas payments go to QROPS arrangements based in Gibraltar (47% by value since the start of 2014) or Malta (36%)

More details, including charts, are available here.

Plans for CPIH are confirmed

The Office for National Statistics has today published a statement by the National Statistician, John Pullinger, concluding that the CPIH will be made the preferred measure of consumer price inflation.  The ONS intends that this should take place from March 2017.

The statement is the National Statistician’s formal response to an earlier consultation on the future of consumer price inflation statistics in the UK (see Pensions Bulletin 2015/26).

As discussed in Pensions Bulletin 2016/44 the CPIH is currently not of national statistic designation.  The statement confirms that the ONS will be working towards re-designation as early as possible.

Amongst other things, the statement also confirms that the publication of the RPIJ will cease with effect from March 2017 and points to a note which sets out precisely which RPI-related data will continue to be published for the foreseeable future and which will be discontinued.

Comment

The timing of this announcement could be significant, coming less than two weeks before the Autumn Statement, as it now enables the Government to follow on and make the CPIH its preferred measure of price inflation for social security and pension benefits.

MPs call for the triple lock to be scrapped

In its latest report, the House of Commons’ Work and Pensions Committee calls for the state pension triple lock, introduced by the Coalition Government in 2012, to be replaced by a measure that focuses on earnings growth.

Accepting that the current Government has promised to keep the triple lock in play for this Parliament, the MPs suggest that in 2020 the new state pension and basic state pension should be benchmarked against average full-time earnings and from there on a smoothed earnings link applied.  Under this, when earnings lag behind price inflation, an above-earnings increase is applied to protect pensioners against a reduction in the purchasing power of their state pension - with price indexation continuing when real earnings growth resumes until the state pension reverts to its benchmark proportion of average earnings.

Amongst other things “intergenerational unfairness” also says that there is no case for future Governments to contemplate any increase in the value or range of universal pensioner benefits (such as the Winter Fuel Payment).  They should also not be off limits when spending priorities are set in future Parliaments.

Comment

There is a groundswell of opinion that the triple lock should go, but its chief architect from the Coalition Government remains of the view that it has yet to complete its work in bringing state pensions back to broadly the same level of national average earnings when the earnings link was broken in the early 1980s.  This is certainly true for those pensioners relying on the pre April 2016 state pension system.  Despite the present Government not wishing to move away from the triple lock, there will surely come a time when this policy will be abandoned.

National Audit Office publishes report on the introduction of the new state pension

The National Audit Office reports that the introduction of the new state pension has been successfully managed by the DWP, but it is not yet clear whether the simplified system will improve understanding of retirement savings.

In what is largely an upbeat report, the NAO also finds that:

  • The DWP was able to introduce the new state pension one year ahead of the date originally proposed largely by making the minimum necessary changes to its IT systems
  • The cost of implementing the new state pension was within budget but future expected operational savings have been substantially reduced
  • The DWP is likely to maintain the accuracy of state pension payments as the calculation of pension entitlement is based on the same NI data as the old system
  • Progress is slow on GMP reconciliation with HMRC having confirmed just 1.7% of deferred and pensioner memberships by August 2016 – it may also need extra resources to complete its work by December 2018 as it is now expecting to receive many more queries than initially estimated
  • There has been some deterioration in the time taken by the DWP to process state pension claims – reflecting partly on the introduction of the new state pension but also the wider demands on operational staff since April 2016; and
  • Although the communication campaign did raise awareness of the changes to the state pension, the DWP did not directly contact groups likely to be adversely affected

Comment

The NAO concludes that so far, the DWP’s policy implementation represents value for money – and so it has.  There were a number of concerns expressed a few years ago that the policy acceleration would only lead to trouble, but despite a few hiccups along the way, it has been a notable success for the DWP and the Coalition Government.

ACA reports that smaller firms are confused by Lifetime ISA launch

In the second interim report of its 2016 smaller firms pensions survey, the Association of Consulting Actuaries reports that over 70% of respondents are confused by the launch of the Lifetime ISA next year given the Government’s parallel initiative of requiring all small firms with one or more employees to also auto-enrol employees into separate qualifying pension arrangements.

It also reports that 60% of firms say they want the current system of pensions tax relief retained but with more help targeted at lower income groups, with 44% saying that tax relief should be further restricted for those on higher incomes.

The ACA comments that the present Chancellor would be wise to reflect on the role of the Lifetime ISA “before fixing on what now looks to be a premature launch” and in relation to pensions tax relief suggests that the Chancellor should not look to raise tax revenue by restricting the overall level of relief available.

Law Commission to examine social investment by pension schemes

The Law Commission has issued a short call for evidence following a request by the Government to look at social investment by pension schemes.  The Commission is particularly interested in whether there are any legal or regulatory barriers to such investment – which it defines as an investment which combines financial and social objectives.

The call for evidence builds on the Law Commission’s 2014 report (“Fiduciary Duties of Investment Intermediaries” – see Pensions Bulletin 2014/27), but focusses on DC schemes, particularly where funds are chosen by the individual.  And rather than look at negative screening, the Commission asks when pension schemes may be invested positively for social good.

The consultation closes on 15 December 2016 and the Law Commission plans to publish a report by May 2017.

HMRC proposes changes to its provision of information regulations

HMRC is proposing two sets of changes to its 2006 Provision of Information Regulations.

The first deals with situations where the scheme administrator must still deduct tax at 45% before paying a lump sum death benefit, although with effect from 6 April 2016 many such payments now incur tax at the recipient’s marginal tax rate (see Pensions Bulletin 2015/30).  This situation could typically arise if paying the lump sum to a trust which then pays the sum on to an individual (rather than directly to an individual).

The intention is that the final recipient in these cases should be in the same position as they would have been had the lump sum been paid directly from the pension scheme.  The draft regulation change therefore requires the scheme administrator to provide the receiving trust with certain information, and the trust to provide information to the eventual individual recipient, so that ultimately the individual recipient has enough information to ensure they pay their marginal rate of tax on the benefit.  For the vast majority of cases this will mean getting a tax refund from HMRC.

The second comprises minor technical changes to the requirements around information to provide to members in Annual Allowance Pension Savings Statements, in a world of transitional rules for 2015/16, the tapered annual allowance from 2016/17 with the £10K money purchase Annual Allowance sitting alongside both.

The consultation closes on 5 December 2016.

Comment

This is further confirmation of how complex death tax and AA are, especially at the edges.  Perhaps this consultation gives an opportunity to push for corrections to other known flaws in relation to PSS requirements.

Little news in HMRC’s latest pension schemes newsletter

There is little new news in HMRC’s latest newsletter.  Covering eight subjects briefly, the two of perhaps greatest interest are:

  • Clarification that when a member validly applies (however late in the day) for fixed or individual protection 2016, the protection is effective retrospectively to 6 April 2016 (or if later, to the date another protection that made this one dormant failed) – and correspondingly for individual protection 2014; and
  • A promise of an adjustment to HMRC’s beta version of its annual allowance calculator launched in September (see Pensions Bulletin 2016/39)

Comment

It is not surprising that there is confusion on the point about protection retrospection as there had been the possibility of a different way for it to operate (see Pensions Bulletin 2016/14).  Retrospectivity is good for the individuals concerned but does create challenges for scheme administration, especially given that there is no closing deadline for 2016 protection applications.

When the calculator was launched we noted concern that it could not accept pension input amounts for 2012/13 (let alone earlier), so it is pleasing to see that this is to be fixed imminently.  This should mean that – provided all other aspects of the tool are correct – the output it gives as to whether there is a tax charge for individuals to report in 2015/16 self-assessment returns (and whether they have carry forward to help current savings) is correct for more cases.  But there will still be plenty of situations where, because the tool does not accept pension input amounts for earlier tax years, which could still be relevant because of the individual’s particular pattern of savings, it will overstate the tax to pay and understate the carry forward available to support future savings.

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.

Subscribe to receive our Pensions Bulletin and News Alerts