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Pensions Bulletin 2017/09

Our viewpoint

BHS – Pensions Regulator agrees settlement with Sir Philip Green

An important step forward in the BHS saga has been achieved with the announcement by the Pensions Regulator on Tuesday that it has agreed a cash settlement worth up to £363m with Sir Philip Green.

Under the agreement members of the BHS schemes will have three options:

  • Transfer to a new scheme whose benefits are lower than those promised by BHS – in particular benefits built up prior to April 1997 will attract pension increases of only 1.8% pa
  • Take a lump sum payment if the value of their BHS benefits does not exceed £18,000; or
  • Temporarily remain in their current scheme but in due course have their benefits replaced by lower PPF compensation as a result of the insolvency of BHS

The agreement looks remarkably similar to the restructuring of the DB pension schemes that Sir Philip Green was working on in late 2013 (see our News Alert), although it is far more costly for Sir Philip than had been hoped for at the time.  This is likely due to a number of factors including more generous terms in the new scheme, possibly improved lump sum option terms, adverse changes in investment markets and the Regulator and Pension Protection Fund requiring more money to be passed to the new scheme in order for it to successfully run on a self-sufficiency basis.

It appears that the new scheme will be one of the new breed of schemes without a substantive sponsor on which the PPF is proposing a new levy rule related to the risk of failure in the scheme’s investment strategy (see Pensions Bulletin 2017/08).  The scheme will be independent of Sir Philip Green and the Arcadia Group.

The Pensions Regulator has agreed to cease its enforcement action against Sir Philip Green, Taveta Investments Limited and Taveta Investments (No. 2) Limited (see Pensions Bulletin 2016/45).  Enforcement action continues in respect of Dominic Chappell and Retail Acquisitions Limited.

Comment

The Pensions Regulator says that the agreement represents a strong outcome, but the reality is that it is a compromise all round.  The Regulator has extracted far less than had it been able to successfully conclude its moral hazard case, Sir Philip has paid far more than had the pensions aspects of Project Thor been delivered back in 2014 whilst BHS remained in his ownership, and most BHS scheme members are seeing their pension promise cut back.  The winners in all this are the Pension Protection Fund which is not having to take on two underfunded schemes and a handful of former BHS employees for whom the PPF’s compensation cap would have bitten very harshly.

Pensions Regulator publishes a further analysis of tranche 9 schemes

The Pensions Regulator has published an overview of the analysis it had published last June (see Pensions Bulletin 2016/23) on tranche 9 DB schemes – ie those with triennial valuation dates between 22 September 2013 and 21 September 2014.  These were the first set of valuations undertaken since the revised DB code of practice and the Regulator’s new statutory objective came into force.

In this latest document the Regulator says that:

  • Deficits have increased, but sponsor affordability has also improved for around half of the schemes – the Regulator says that this demonstrates that those employers with increased deficits but who also experienced an increase in affordability and did not increase their deficit recovery contributions had the ability to do so
  • A majority of tranche 9 schemes have made use of the flexibilities to manage the impact of their increased deficits to carry risk in the scheme and prioritise investing in the sustainable growth of the employer, rather than increasing deficit recovery contributions
  • A minority of tranche 9 schemes have not used or fully utilised the flexibilities highlighted in the 2014 annual funding statement – ie they may have had the potential to take greater risk if they wished and were able to. The Regulator goes on to say that a variety of approaches are being adopted to suit the circumstances of different schemes and employers
  • There has been an increase in the proportion of trustees and employers applying an integrated approach to risks

The Regulator concludes that overall, schemes behaved consistently with its expectations, but to illustrate the different approaches that individual schemes have taken, the overview concludes with some case examples.

Comment

The timing of this publication is of note, given that last week’s Green Paper was premised on the assumption that most employers can afford to meet their DB pension promises and the scheme funding regime is broadly fit for purpose.

A new definition of financial advice

HM Treasury has published its response to last year’s consultation on the definition of financial advice (see Pensions Bulletin 2016/38) in which it states that going forwards regulated firms will be giving financial advice only where they provide a personal recommendation.  The Treasury says that the wider definition of advice set out in the Regulated Activities Order 2001 (“advising on investments”) will remain in place for unregulated firms.

Further details are set out in the FCA’s explanatory note, a reading of which suggests that the actual proposal is more complex than the Treasury is suggesting.  Nevertheless it seems clear that:

  • Regulated firms will be able to provide more advanced guidance services, that would have been caught by the current RAO definition, without being subject to the higher regulatory requirements associated with regulated advice
  • As now, unregulated firms will not be able to provide these more detailed and tailored guidance services

The Treasury says that this dual approach mitigates the risk of consumers being scammed.

The Government will lay a statutory instrument shortly that will bring this new (and as yet unseen) definition into effect on 3 January 2018.  The FCA’s explanatory note also sets out its intention to consult on and publish new guidance on the advice boundary before the change takes effect.

Comment

The Government hopes this change will increase the amount of helpful, accessible guidance available to individuals making important financial decisions without paying for independent financial advice.  If it works, that would be good news for millions of people.  What remains to be seen is how this new definition of financial advice will operate in relation to the personal advice allowance (used to pay for “retirement financial advice” which is “regulated financial advice”), the enhanced provisions for employer-arranged pension advice and the existing provisions for “appropriate independent advice” to be received by those wishing to take certain actions in relation to their safeguarded benefits.

Scottish Government sets a lower 40% threshold for income tax than the rest of the UK

The Scottish Parliament has set its first income tax rates and bands that differ from the rest of the UK, but only in relation to the boundary between the 20% and 40% income tax rates.  For 2017/18 Scottish taxpayers will start to pay 40% income tax once their earnings reach £43,000 – £2,000 less than taxpayers in the rest of the UK.

This is the first use of new tax powers granted by Westminster under the Scotland Act 2016.  We can expect HM Treasury to lay regulations shortly that will make consequential changes to UK-wide income tax law, in particular to the tax law governing registered pension schemes.

The identification of Scottish taxpayers is the responsibility of HMRC, not employers, as HMRC’s Employer Bulletin 57 issued in December 2015 makes clear.

Comment

For occupational pension schemes using the net pay system, for Scottish taxpayers, the intention is that relief on member contributions will be received automatically at the individual’s Scottish marginal rate of tax.  So PAYE systems will need to be able to differentiate Scottish taxpayers and potentially apply a different amount of tax relief to the member contributions than to other UK taxpayers.

One pensions tax change that could adversely affect Scottish taxpayers is the annual allowance charge.  Where such a charge arises in 2017/18, the Scottish taxpayer could pay more than his or her rest of the UK counterpart.

Pensions tax – a reminder of two upcoming deadlines

It is now barely a month before:

  • The window closes, on 5 April 2017, for an individual to register with HMRC for Individual Protection 2014 (if the individual could qualify for it); with the potential to protect a lifetime allowance of between £1.25m and £1.5m; and
  • The money purchase annual allowance is due to fall from £10,000 to £4,000 (this is the annual allowance for making DC savings each tax year without triggering an extra tax charge, that applies just for those that use (or have used) certain Freedom and Choice flexibilities)

Do your members and employees know about these?

Comment

It is worth noting that HMRC guidance on Individual Protection 2014 registration is quite firm: if you miss the deadline for registration, HMRC will accept a late notification only in “exceptional circumstances”.  It’s a different matter on corrections: if you do register within the deadline but later discover that you registered the wrong number, then of course you should tell HMRC the correction as soon as possible.

HMRC finalises Lifetime ISA regulations

HMRC has laid before Parliament the finalised form of the regulations on which it consulted last November (see Pensions Bulletin 2016/44).

The Individual Savings Account (Amendment No. 2) Regulations 2017 are little altered from the earlier draft regulations and as before set out a lot of the details of the Lifetime ISA including the provision of the 25% Government bonus, the circumstances in which sums can be withdrawn without charge and the application of the 25% charge to other withdrawals.

HMRC has also published a policy paper that describes some of the key aspects of the Lifetime ISA.

DWP passes levy reduction to mega schemes

The DWP has now laid regulations that will distribute a surplus raised on the general levy of around £13m, but only to schemes with 500,000 or more members.  The general levy is used to fund the Pensions Regulator, the Pensions Advisory Service and the Pensions Ombudsman.

The Occupational and Personal Pension Schemes (General Levy) (Amendment) Regulations 2017 (SI 2017/203) come into force on 1 April 2017 delivering a 25% cut in that part of the levy which is attributable to members in excess of 500,000.

The DWP has also published its response to the consultation.

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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