Pensions Outlook Newsletter – Winter 2019

Some key dates for 2019

In the next 3 months:

• The Government’s consultation on so-called “superfunds” closes on 1 February. The proposals include strict conditions for transferring to one of these funds which is likely to mean that they are unattractive or unavailable to many schemes and sponsors;
• Applications for authorisation as a master trustee have to be made by 31 March. TPR are expected to take about 6 months to deal with the applications from existing funds. Once this authorisation regime is fully up and running employers will only be able use those with authorisation (or a group personal pension arrangement). This may be a relevant issue for employers and automatic enrolment;
• The minimum level of contributions for automatic enrolment increases from 6 April with an overall minimum of 8% and a minimum employer contribution of 3%. Depending on current levels of contributions, earnings recognised for this purpose, etc. employers may need to consult about these changes but will in any event need to make sure that payroll changes are implemented.

Contact Adrian Lamb to find out more information about these key dates.

PPF changes on contingent assets – trustees need to urgently review trustee security arrangements already in place                             

Re-execution required for certain Type A and B contingent assets. Urgent action may be required for levy reduction purposes.

The PPF published revised standard forms for contingent assets in January 2018.  For the levy year 2018/19, the new standard forms had to be used for any new arrangements executed on or after that date. However, previous arrangements could be certified or recertified without moving to the new versions.

In December 2018, the Pension Protection Fund (PPF) published its final determination for the levy year 2019/20.  The new determination sets out a different approach. Schemes with any Type A (parental guarantee) and Type B (security over an asset) contingent assets that include a fixed sum maximum amount element will need to re-execute their contingent asset arrangements, using the new standard form agreements if they wish to obtain levy credit. The re-executed versions must be certified by 31 March 2019 and hard copies must reach the PPF by 5pm on 1 April 2019, provided that all the necessary information has been entered on Exchange by midnight on 31 March. Urgent action will therefore need to be taken by some schemes, allowing sufficient time for the preparation and execution of all documentation, including the legal opinion.

Explore what action needs to be taken by getting in touch with John Hamilton.

SSAS’s and tax traps                                                    

Where a small pension scheme known as a ‘SSAS’ is used to provide retirement benefits for directors or senior employees, the trustees need to watch out for what might seem like tax traps. Once the trustees fall into a trap like this, it might prove difficult or impossible for them to climb out of it, and the trustees may well be faced with a substantial tax charge.

By way of an overview, a SSAS, or small self-administered scheme, is a type of pension scheme which tends to be set up by a small or medium size company for their directors or senior employees. A SSAS is run by trustees, who are also members of the scheme, and has fewer than 12 members.

Many small and medium size companies use a SSAS because funds in a SSAS can be invested in the company which set it up, where those funds are then used to provide retirement benefits, in a tax-efficient way. For example, a SSAS often holds premises which are then leased by the SSAS to the company which set it up.

The small and collegiate nature of a SSAS means that a scheme like this tends not to have the often substantial professional support and oversight of much bigger pension schemes for an entire workforce or in large organisations. This can prove a challenge in the operation of a SSAS.

Clearly, for example, trustees of a SSAS do need to be mindful of the tax rules which apply to pension schemes. To state the obvious, where trustees do not follow the tax rules, tax charges can arise, and those charges can be at substantial rates of 40% or 55%. The tax rules are complex, as you would expect, and where schemes lack proper professional support, traps and pitfalls lurk, into which trustees can unwittingly fall.

We have seen several examples of this happening, where a payment by a SSAS does not satisfy the tax rules. Often that occurs where a company, in reality, only uses a SSAS for the purposes of its wider business, and not for retirement benefits. The many and complex conditions in the tax rules exist to protect the policy that tax concessions are granted for funds which are ultimately used to provide retirement benefits, rather than for a company which only uses a SSAS for its business.

The message here is for trustees of a SSAS to be careful to follow the tax rules, and to use professional support on an ongoing basis.

Find out more about small pension schemes and how we can help by speaking to by Sean McNulty.

LGPS focus: payment of “exit credits” at the end of admission agreements

On 14 May 2018, amendments to Regulation 64 of the Local Government Pension Scheme Regulations came into force.  In broad terms, the result of the amendments is that where an employer ceases to participate in the LGPS, the Administering Authority is required to obtain:

• a revised actuarial valuation of the liabilities in respect of benefits in the LGPS for that employer’s current and former members of the LGPS; and
• a revised rates and adjustments certificate showing whether a payment is due from the departing employer to the LGPS (an “exit payment”) or whether a payment is due from the LGPS to the departing employer (an “exit credit”).  If an exit credit is payable to a departing employer, it must be paid within 3 months of ceasing to participate unless otherwise agreed.

The amendment was a fairly significant departure from the previous position where a departing employer could not recover any “surplus” (the now-named “exit credit”) from the LGPS.  We are aware of exit credits having been paid to departing employers since the changes came into force notwithstanding some initial commentary as to whether the actuarial calculations might limit exit credits.  An area that is open to question is what the Administering Authority’s views on the payment of an exit credit would be where the commercial agreement (typically entered into with the Local Authority but not in its capacity as Administering Authority) contained a risk share or pass-through cost arrangement – there are potentially a myriad of different possible costing / pricing arrangements and Local Authorities are likely to draw such arrangements to the attention of the Administering Authority where an exit credit is payable to a departing employer in these circumstances.  On the face of it, as currently drafted, the Regulations require the exit credit to be paid irrespective of the underlying commercial agreement and to alter that position will require legislation.  Employers that participate in the LGPS should plan for their departure from the LGPS and consider whether the commercial contracts they have entered into, contain any provisions dealing with cost or risk sharing and also, although unlikely for older contracts, whether they deal with exit credits.

Discover more about LGPS by getting in touch with Ron Burgess.

GMP equalisation

Decision from Supreme Court on switching from RPI to CPI

On 7 November 2018 the Supreme Court in the Barnardo’s case gave its ruling on whether the trustees of the Barnardo’s DB scheme could legitimately switch from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) as a measure of calculating pension increases. Both RPI and CPI are valid price indexes used to measure inflation. CPI is thought to be less generous and is now used as the statutory basis for the revaluation of pension benefits for early leavers, and is also used now for public sector pension schemes established under legislation.

Barnardo’s wished to switch to CPI for the calculation of pension increases to save costs for the scheme.

The decision of the Supreme Court was based on the construction of the meaning of RPI in the Barnardo’s scheme rules, which referred to the RPI itself or “any other replacement adopted by the Trustees without prejudicing Approval“.  The Supreme Court upheld the previous decision of the Court of Appeal, which decided that this wording did not allow the trustees to select CPI as an alternative inflationary index to calculate pension increases. In that sense the Court decided that the word “replacement” means an index which actually replaces RPI and is then adopted by the trustees. There can be no switch of index on this basis, as the RPI is still in existence.

This decision does strike a blow to trustees and sponsors of DB schemes who wish to switch to CPI for pension increases. It seems harsh in the light of the fact that the CPI is so widely used in the pensions context to calculate scheme liabilities. This decision does also force home the importance of considering the bespoke requirements of each DB pension trust. In that sense it is key to review the precise terms of the pension scheme deed and rules if any change in this area is to be contemplated. A change may still be possible but it depends on the construction of the pension scheme rules.

Discover more about switching from the RPI to the CPI in calulating pensions by speaking to Rupert Graham-Evans.