Investment Association publishes updated executive pay guidelines

The Investment Association has published updated executive pay guidelines in light of investor concerns that companies are not listening or responding to shareholders over executive pay.

The Association’s “Principles of Remuneration” has been brought to the attention of all Chairs of FTSE350 Remuneration Committees by means of a letter which contains the following pensions paragraph:

“Pensions - The UK Corporate Governance Code states that pension contribution rates should be aligned with those available to the workforce.  IA members consider this to be the contribution rate given to the majority of the company’s workforce.  Investors expect new executive directors and directors changing roles to be appointed on this pension contribution level.  The pension contributions for current executive directors should be reduced over time to equal the rate received by the majority of the workforce.  Shareholders expect that no compensation will be awarded for this change.”

The latest version of the Corporate Governance Code referred to above was published by the Financial Reporting Council in July 2018 (see Pensions Bulletin 2018/29).

Comment

A number of FTSE100s made changes to their executive pensions in the last 12 months, in anticipation of the upcoming Corporate Governance Code at the time, by announcing a lower rate of pension contributions for future executive hires.  The implication of the Association’s statements is that there may be pressure from shareholders to reduce existing executive pension rates, without any compensation and for the new rates to be the level that applies to staff generally, rather than that that applies to senior management.

Pension Schemes Newsletter 105

HMRC’s latest newsletter to the pensions industry covers six unrelated issues, two of which are promises of further newsletters in December (on relief at source and the manage and register pension schemes services), whilst a third contains further information on the reporting of non-taxable death benefits.

But it is the final article, written with the Pensions Regulator, that attracts most interest as it briefly outlines the two main ways of getting tax relief on member pension contributions and goes on to state that the Regulator and HMRC are aware of some instances of no relief being given and of others where members get too much.  The article ends by giving an email address to contact if administrators think any of their pension scheme members have been given the wrong amount of tax relief.

There is also a reminder of the HMRC consultation on draft regulations about the information requirements and process for claiming a repayment of the overseas transfer charge (see Pensions Bulletin 2018/46).

Comment

It appears that these instances of incorrect relief being given are simply due to misunderstandings of how to operate the two forms of relief.  As such this is a completely different topic to the concern expressed by some campaigners that non-income taxpayers that contribute to pension schemes under the net pay arrangement method should get the same tax relief on their contributions as those that contribute under the relief at source method.

Fixed Protection case shows it’s OK to be confused by the law, not be unaware of it

HMRC has been directed to reinstate a member’s Lifetime Allowance Fixed Protection in an interesting case which hinged on the member’s knowledge and understanding of the tax legislation.

The case of Hymanson vs HMRC saw Mr Hymanson have Fixed Protection for an £1.8 million underpin to his Lifetime Allowance.  One of the conditions of keeping that protection is that additional DC contributions are not paid into the pension scheme.

Correspondence shows Mr Hymanson was aware of that condition, but he had seen monthly rental payments from his company were still going into one of his schemes and thought the existing monthly DC contributions he and the company had always made to some of his other schemes could similarly continue (he understood he could not make any DC contributions above those he had already been making).  But when in 2015 he reviewed material, realised the possible error and with his adviser reported the facts to HMRC, they revoked his Fixed Protection.

Mr Hymanson appealed to the First-tier Tribunal.  The judge ruled that effectively the offending contributions could be voided because:

• The mistake was not a question of ignorance, as Mr Hymanson was aware that additional contributions could lose his Fixed Protection
• Neither was the mistake deliberate – it was not that he knew what he should do and failed to do it, he simply misunderstood what he was meant to do; and
• The consequences of the mistake (Mr Hymanson paying additional tax of around £50,000 in this case) are serious enough to merit the remedy of rescission – effectively undoing the additional payments Mr Hymanson made that lost him the Fixed Protection

The judge further ruled that the High Court would agree and that HMRC should have taken into account that rescission was a possibility before revoking his Fixed Protection; and so felt able to direct HMRC to issue Mr Hymanson with a new Fixed Protection certificate.

Comment

We often note that the decision hinged on the details of the case and that is certainly true here, in a result that may come as a surprise to many.  Whilst we do not expect the floodgates of lost Fixed Protection claims to open, there could well be others who were aware of the potential to lose Fixed Protection if they paid more contributions, continued to make contributions under a misinterpretation and have then opened themselves up to foot a substantial tax bill as a result.  We wonder whether HMRC might appeal!

Statutory revaluation and indexation confirmed

The Order has now been made setting the statutory minimum revaluation of deferred pensions other than GMPs for those reaching normal pension age in 2019.  The same Order also sets, indirectly, the statutory minimum increases for pensions in payment in 2019.

The revaluation percentages within The Occupational Pensions (Revaluation) Order 2018 (SI 2018/1218) reflect the overall rise in the Consumer Prices Index from September 2010 to September 2018 and movements in the Retail Prices Index prior to this.

The one-year Order for revaluations subject to both the 2.5% and 5% caps is 2.4% (the CPI rose by 2.4% in the twelve months to September 2018).  These one year Orders also form the basis for so-called Limited Price Indexation for pensions in payment and so the 2.5% and 5% LPI increases will also be 2.4%.

State pension uprating confirmed

The Government has confirmed that the basic and new State Pension will be increased by 2.6% next year, being the increase in the average of May to July average weekly earnings.  This announcement was made in the House of Commons on 23 November along with the publication of the proposed benefit and pension rates for 2019 to 2020.

This means that the Basic State Pension will rise to £129.20 per week whilst the full rate of the new State Pension will rise to £168.60 per week.

Separately, two sets of regulations have been laid which for those reaching State Pension Age on or after 9 April 2019:

• Increase that part of any transitional new State Pension, which when calculated as at 6 April 2016, was above the then full rate (the “protected payment”), by the increase in the CPI (so by 6.5% for the three year period ending on 5 April 2019); and
• Increase that part of any pension debit or credit on divorce, that has been applied to such a “protected payment”, by the increase in the CPI since the debit or credit was created

The State Pension Revaluation for Transitional Pensions Order 2018 (SI 2018/1217) and The State Pension Debits and Credits (Revaluation) Order 2018 (SI 2018/1219) come into force on 8 April 2019 for most purposes.

Comment

Whilst it was accepted that the earnings component of the triple lock would drive the increase in State Pensions next year, there was some doubt as to the precise statistic that would be used as it is neither set down in legislation nor made clear in policy papers issued by the DWP.  That lack of clarity could well continue right through to the next time earnings drives the increase in State Pensions.

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.