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Pensions Bulletin 2017/18

Our viewpoint

Pensions Regulator to be more interventionist

In its first corporate plan since the BHS inquiry last summer, the Pensions Regulator promises to evolve to become a bolder, more effective regulator by intervening more frequently and acting faster, particularly where DB schemes are underfunded or avoidance is suspected.

Its ten priorities set out last year (see Pensions Bulletin 2016/16) have been refined to eight this year, with driving up standards of trusteeship and creating high performing teams of people across the Regulator being notable changes of emphasis in addition to the above on DB regulation.  There is also the promise to be clearer in codes, guidance and other interactions with schemes and employers about the Regulator’s expectations.

The Regulator has also set out its vision on “TPR Future”, which aims to look at the risks and challenges to create a sustainable approach to regulating all types of occupational pension schemes over the next five to ten years.

The Regulator has recognised new key challenges in implementing the master trust authorisation regime and frontline resources, and has agreed an increased budget with the DWP to fund this work.  For 2017/18 this brings the total budget to £84m, an increase of £3.5m to the original budget and an increase of almost £8m to the actual 2016/17 spend.

The Regulator concludes that in the coming year it will focus 31% of its resources on frontline regulation (a sharp increase from 16% in 2016/17), 21% on regulatory policy (16% in 2016/17) and 18% on auto-enrolment work (34% in 2016/17).

Comment

This latest corporate plan marks a significant change of emphasis to those that have gone before, with a much clearer focus on member protection through intervention – for example, the Regulator intends to almost double the number of DB schemes it will proactively engage with ahead of their formal valuations.  It will be interesting to see how this all pans out over the coming period.

DWP proposes easement to the employer debt regulations for multi-employer schemes

A further option for addressing employer debts is proposed by the DWP in a consultation paper that has been produced following its call for evidence in relation to non-associated multi-employer schemes in March 2015 (see Pensions Bulletin 2015/13).

Called the “deferred debt arrangement”, it is to be made available to employers who have triggered an employment-cessation event (typically when their last active member leaves), or would have done so were they not already in a grace period.  However, the following conditions must be met:

  • The “funding test” applicable to certain other employer debt options must be met
  • The scheme cannot be in a PPF assessment period (or likely to enter one in the next 12 months) or be winding up; and
  • The trustees must agree to the arrangement taking place

Under the arrangement, the trustees cannot impose a debt on the employer.  Instead the now deferred employer continues with its obligations towards the scheme as if the cessation event had not occurred.

The arrangement remains in place with some permitted exits not giving rise to the debt (such as actually employing an active member) and others resulting in the debt being determined as at the exit (such as if the deferred employer restructures, or the trustees being reasonably satisfied that either the deferred employer has failed to comply with its scheme funding obligations, or its covenant to the scheme is likely to weaken in any other way in the next 12 months).

A number of other changes are proposed to the employer debt legislation, including extending the notification period that employers have to write to trustees to seek permission to use the period of grace from two to three months.

Consultation closes on 18 May 2017.

Comment

The employer debt legislation has become littered with options for paying debts due as a result of employers ceasing to employ active members, or otherwise managing them.  Nevertheless, there is merit in adding a further option of the latter variety.  It may be of particular benefit to smaller employers participating in non-associated multi-employer schemes who by their very nature will not be able to enter into flexible apportionment arrangements with a replacement employer.

Such employers right now are likely to be fearful of triggering debts when their last active member retires.  They could also be trapped into continuing to accrue liabilities they cannot afford.  This latest measure offers some comfort to these employers, but it is not without difficulties for trustees asked to enter into and then monitor them.

Royal Assent for the Finance Bill

The Finance Bill will shortly receive Royal Assent, but it was significantly pared back on Tuesday as part of the wash up proceedings.  No less than 72 out of 135 clauses and 18 out of 29 schedules were dropped following discussions with the Opposition.

But in relation to pensions tax law and related matters (see our News Alert when the Finance Bill was published in March) the cull was much less severe.

Remaining in

The following remained in the Bill:

  • Ending the tax-free status of Section 615 schemes – but further amendments were made to ensure that the legislation works as intended, in particular ensuring that the current tax treatment continues to apply in respect of lump sums paid out of funds built up as a result of foreign service before 6 April 2017, and in respect of pension saving under Section 615 schemes before this date
  • Various adjustments to the taxation of foreign pension schemes
  • The overseas transfer charge that potentially operates when transferring benefits to QROPS – but extensive further amendments were made which aim to restrict the time periods in relation to the overseas transfer charge, clarify how the charge operates, ensure all scheme operators have and provide the necessary information and amounts transferred are subject to the lifetime allowance only once; and
  • Optional remuneration arrangements – but a further amendment was made to ensure that contributions towards retirement benefits (but not death benefits) that are currently exempt from income tax via section 307 of the Income Tax (Earnings and Pensions) Act 2003 are not brought into scope of the new arrangements

Removed

Two measures were removed:

  • The drop in the money purchase annual allowance from £10,000 to £4,000 (see article below); and
  • The increase in the income tax exemption for employer-provided pensions advice from £150 (provided the advice costs no more than this), to £500 with no cliff edge

For the avoidance of doubt, the regulations providing for the pensions advice allowance (see our News Alert), whereby members can use their DC funds to pay for regulated retirement financial advice, came into force on 6 April 2017 and are unaffected by the above changes to the Finance Bill.

Comment

We had expected to see more pensions tax measures dropped than has turned out to be the case (see Pensions Bulletin 2017/17), so there is relief that, for example, we know where we stand on the complex changes applying to transfers to QROPS.  This is not the case for the money purchase annual allowance as the following article explains.

Is the money purchase annual allowance £4,000?

Technically no – it remains at £10,000 – but the surprise withdrawal of the legislation in the Finance Bill (see article above) bringing about the drop in the money purchase annual allowance to £4,000 should be no more than a temporary situation if a Conservative Government is returned at the General Election.  This is because the Financial Secretary to the Treasury said in the House of Commons on Tuesday, “there has been no policy change and the Government will legislate for the provisions at the earliest opportunity in the next Parliament”.

Quite why this measure became a victim of the wash up process under which legislation is either agreed with the Opposition or dropped is not clear, but there had been a number of objections to its introduction, not least on the grounds that the evidence necessitating it was lacking.  Presumably, on its re-introduction, it will be backdated to 6 April 2017, but this is not clear.

Comment

The money purchase annual allowance is a “minority sport” in that it applies only to individuals who have used (now or any time in the past, in any scheme) certain of the flexibilities introduced in 2015 for money purchase funds.  But it then applies to all their money purchase savings made in future in total to any schemes.

Given the Financial Secretary’s statement, our view is that it would be a brave employer, scheme provider or adviser that rows back on warning members that the money purchase annual allowance is likely to be £4,000.

HMRC had already updated its online Plain English guidance to reflect the £4,000 allowance, as well as in its “annual allowance calculator” tool (see Pensions Bulletin 2016/45), so it will be interesting to see what it does to these during the next three months or so of uncertainty.

Tax return for 2016/17 and the tapered annual allowance

HMRC has published form SA101 for the 2016/17 tax year submissions.  This is the page to add to the tax return to report pension savings tax charges such as annual allowance and lifetime allowance charges (as well as some of the other less common types of income, deductions and tax relief).

As expected, despite 2016/17 being the first year of individuals having to cope with the tapered annual allowance, the annual allowance questions remain unchanged – broadly, what are the excess savings attracting an annual allowance charge, how much of the charge will a scheme pay and which scheme?

Comment

We have yet to see an updated version of Help sheet HS345 to explain how to answer these – in particular that deceptively simple looking first question.  We look forward to seeing how it meets the challenge of how it describes the regime!

Pension Schemes Newsletter 86

HMRC’s latest pension schemes newsletter covers a number of largely administrative issues, but starts on a technical subject – the issue of when tax relief can be claimed on the contribution of assets to registered pension schemes (ie “in specie” contributions).  Broadly, such contributions are only acceptable where they are giving effect to a pre-existing obligation to make a cash contribution.  HMRC is at pains to point out that its position has not changed, nor could it as this would be contrary to the law.

Other subjects include the following:

  • The announcement of new forms to help scheme administrators and trustees meet their information obligations on taxable lump sum death benefits paid to trusts
  • A promise to deliver a basic version of the long awaited lifetime allowance look up service for pension scheme administrators “this summer” with a more sophisticated version of the service to follow on at some point
  • The further development of the lifetime allowance online service for individuals so that they can tell HMRC online if they have lost a protection (currently individuals need to write to HMRC); and
  • A pointer to updated guidance on annual allowance “scheme pays” – see the next article

There is also a further request to those processing QROPS transfers to use the recently updated forms as these contain the additional information required to be provided since the announcement of the overseas transfer charge in the Budget.  HMRC will reject old versions of the forms that don’t contain the information required under the new pension tax rules.

The importance of voluntary access to “Scheme Pays”

In the tapered annual allowance world for 2016/17 and onward, many more members are facing annual allowance charges, but the rights of a member to instruct that a scheme pays his charge from his benefits (so called “Scheme Pays”) are complicated and limited.

HMRC has updated its guidance, and released a new, very thorough, example that confirms just how limited.

HMRC guidance already made clear that even though a “high income” member may have an annual allowance for 2016/17 as low as £10,000, he can only demand Scheme Pays if savings made in the scheme (Pension Input Amount) exceed £40,000.  The new example makes clear that, even then, the part of the charge that the member can demand help on may be very limited.

If schemes only offer Scheme Pays at the minimum level they have to under law, it is relatively easy to envisage cases where a member may face paying as much as the first £13,500 of their annual allowance charge (or even worse) from their own pockets.

Comment

It is helpful that HMRC’s guidance has now confirmed a reading that many but not all will have gleaned from the complicated legislation.  The example is very thorough and is well worth a read.

This does re-emphasise that, unless scheme sponsors and trustees are flexible and offer Scheme Pays on a wider voluntary basis, many members could face paying some very large tax bills from their own pockets as they come to complete their 2016/17 returns – and will undoubtedly be very upset.

Whilst carry forward will help initially, both in terms of reducing the number of people with charges and (because of the technicalities) how much of the charge falls out of the minimum legal level of Scheme Pays, the issue will become even more acute as we head further into the tapered annual allowance world.

PPF raises Fraud Compensation Levy

The Pension Protection Fund has, for the 2017/18 levy year, decided to raise a Fraud Compensation Levy of 25p per member.  This is payable by most occupational pension schemes (including both DB and DC) to the Pensions Regulator alongside the general levy.

This is the first time a levy has been raised since 2012/13.  The PPF has been made aware of potential future claims to the Fraud Compensation Fund, and while the size and likelihood of these claims is unclear, the 2017/18 levy is expected to raise £5m “to ensure [the PPF is] prepared for these potential claims while smoothing the costs over time”.

Comment

The language used by the PPF suggests that a further levy may be needed in 2018/19.  Given that the Fund has around £9m at its disposal right now, it seems that the prospective claims could be quite high.

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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