PPF bridging pension anomaly to be addressed

The DWP is consulting on draft regulations correcting an anomaly in the way the PPF treats bridging pensions, which can currently mean a young pensioner receives more compensation if their scheme transfers into the PPF than pension if it winds up outside the PPF.

A “bridging pension” is paid by some DB schemes if the normal retirement age in the scheme is before the member’s State Pension Age.  Broadly, it is an additional pension paid between these points to allow for the fact the member’s State Pension is yet to come into payment.  It then stops around SPA.

Under current PPF compensation rules, any pensioner currently in receipt of a bridging pension continues to receive that additional pension as compensation, but instead of stopping around the member’s SPA it continues for the full life of the member.

The DWP proposes that the bridging pension should be converted into a lower, actuarially equivalent in value, pension paid over the rest of the member’s life.  That lifetime pension then forms part of the member’s PPF compensation.  An alternative solution of replicating the existing bridging pension within PPF compensation is considered too administratively difficult.

The proposal would only affect members of schemes entering a PPF assessment period on or after the date the regulations come into force.

The consultation also asks for evidence of the extent of GMP step-ups (where the member’s pension under the scheme rules increases to cover the minimum GMP level at GMP age) and whether in future PPF compensation should take account of such step-ups.  Currently such a step-up is only reflected in PPF compensation if it has already happened when the scheme goes into PPF assessment.

Consultation closes on 1 October 2017 with the apparent intention that the regulations come into force from around January 2018.

Comment

Many people have been asking for something like this for quite some time.  But perhaps it has taken the British Steel Pension Scheme case (see Pensions Bulletin 2017/34), where a number of individuals may benefit from the anomaly, for DWP to push through this amendment to PPF compensation.  An insolvency event under the proposed regulatory apportionment arrangement is not intended to be triggered until members have elected whether to continue with the current BSPS (and potentially benefit from the anomaly) or transfer to the new one with the poorer pension increases and the transfers have taken place.  As the member exercise is not intended to be completed until March 2018, the DWP has plenty of time to get these regulations made and laid.

Of the two options for reform, the proposed “conversion” approach seems sensible given the limitations of the PPF’s administrative systems.  And if it makes sense to now get round to resolving an anomaly that acted against the PPF, it also would seem timely to address GMP step-ups, as a similar conversion approach would end a feature of PPF compensation that acted against some members.  It would also serve to improve the compensation of some pensioners with the lowest pensions.

Pension Schemes Newsletter 90

The latest HMRC pension schemes newsletter covers a variety of topics, the key aspects of which are the following:

• A promise to release an updated version of the annual allowance calculator in the autumn
• A reminder to scheme administrators that they will soon need to be issuing annual allowance pension savings statements for 2016/17 to those active members contributing more than £40,000 to their pension scheme and a request that they remind members who have exceeded their (personal tapered) annual allowance across all schemes for 2016/17 with insufficient carry forward, that they must declare this on their self-assessment tax return
• More requests for outstanding information to be provided by 30 September 2017 in relation to schemes getting ready to operate relief at source for Scottish income tax from 6 April 2018
• A reminder that penalties may be incurred where the latest version of form APSS262 – which includes a request for details on any overseas transfer charge paid – is not used to report transfers to qualifying recognised overseas pension schemes made from 9 March 2017 within the relevant timescales
• A promise that the lifetime allowance look up service for pension scheme administrators will be “available shortly”
• An acceleration of the transfer of existing scheme administrator data on to the new pensions online service – by April 2018 instead of April 2019 – and a request for all pension scheme administrators to log on Pension Schemes Online as soon as possible and check that their details are up to date to facilitate this

Covenant advisers examine transactions in a distressed environment

Having late last year published guidance for covenant advisers on transactions in a non-distressed environment (see Pensions Bulletin 2016/50), the Employer Covenant Working Group has now gone on to consider transactions in a distressed environment.

Distressed scenarios considered in this context cover corporate activity where the directors’ focus should, or may be about to, switch from optimising the shareholders’ position to protecting the creditors.

The guidance covers a range of distressed scenarios, illustrated through a decline curve, evaluating the implications for the employer covenant, the associated risks to the security of member benefits in DB schemes and the related advice that practitioners may give to their clients.  Inevitably, as the employer’s symptoms worsen, so do the options and/or solutions available to the DB scheme.

Comment

Once again, this is a particularly good read, especially Section 5, which deals with regulatory apportionment arrangements and takes the reader through some of the complexities that need to be addressed as part of gaining the Pensions Regulator’s agreement.

Adjustments made to new employer auto-enrolment legislation

Somewhat embarrassingly, further regulations have had to be made in order to give effect to the original policy intention in relation to employers that become subject to the auto-enrolment duties from 1 April 2017, on discovery that the regulations made this March (see Pensions Bulletin 2017/12) were not up to the job.

The main objectives of the amendments made in these latest regulations is to ensure that

• The timing of the deferral date for post-staging employers is aligned with the equivalent for those employers subject to staging in order that the period for which automatic enrolment can be deferred is the same; and
• That employers whose first eligible worker is employed before 1 October 2017, but first pay PAYE income tax on or after 1 October 2017, are able to defer automatic enrolment

The Employers’ Duties (Miscellaneous Amendments) Regulations 2017 (SI 2017/868) come into force on 1 October 2017.

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.