Pensions Bulletin 2015/02

Will CPIH become our main measure of inflation?

This is the headline recommendation made by Paul Johnson, Director of the Institute for Fiscal Studies, in his report on an independent review of UK consumer price statistics, just published by the UK Statistics Authority (UKSA).

Currently CPIH (the Consumer Prices Index including owner occupiers’ housing costs) has its national statistics designation suspended while further work is done on how it is constructed. However, the report sets out detailed arguments why it is conceptually the best overall measure of inflation in the UK and calls for the Office for National Statistics (ONS) to move from CPI towards making CPIH its main measure of inflation for most purposes and discontinue use of the older Retail Prices Index (RPI) where possible. The report recommends the introduction of legislation governing its production and setting out the process for making major methodological changes to encourage wider use.

The report also notes that there is “an unhelpful proliferation of price indices in the UK at present” and recommends, among other things, that:

• Although the RPI cannot simply be discontinued as it is still used for many purposes (including around £470 billion worth of index-linked gilts, pension increases for many pension schemes and increases to certain taxes, benefits and regulated prices), the ONS and the UKSA should remind users that it is not a credible measure of consumer price change (see Pensions Bulletin 2013/13) and stress that it should not be used for new purposes. Its use “should be discontinued for all purposes unless there are contractual commitments at stake”
• The ONS should consult on discontinuing the RPIJ index, on the basis that although it corrects the inadequacies of the formula used in the RPI (see Pensions Bulletin 2013/02), it is still affected by the same issues with data source of the weights, population coverage and treatment of some goods which make the RPI less suitable as a measure of overall inflation
• To better inform users, the ONS should publish a set of measures on an annual basis providing more complete information on the inflation experienced by different household types and make clear what measures of income these measures should be compared to
• Various technical changes should be made to how the data is collected and the indices are constructed which, if adopted, could change expectations for future values of the different indices and the gaps between them

The report also explores the implications of continuing to publish the RPI in the long term, with no major change to the formulae used, as is currently the stated intention. In particular, it discusses the risks that the maintenance of the RPI on its current basis poses to the integrity of other inflation measures, and therefore, indirectly, for the public finances.

This report is only setting out recommendations for the UK government and regulators, rather than any firm decisions. It will now be reviewed by the National Statistician, with a formal public consultation expected in summer 2015 and a final response later in 2015.

Comment

The recommendation that the use of the RPI “should be discontinued for all purposes unless there are contractual commitments at stake” is potentially significant for pension schemes, some of which may be granting RPI-linked pension increases without a clear contractual requirement to do so.

Also, if the RPIJ index is eventually discontinued any pension schemes who have adopted it as a basis for pension increases would need to move to a different index.

If these proposals are followed through then it will certainly lead to another round of scrutiny for the wording of pension increase rules, just as when CPI shot to prominence. Trustees and employers will be checking what flexibility is in the rules at the same time as trustees consider how they can fulfil their duty to act in members’ best interests.

Pensions not yet in payment – are they safe from bankruptcy proceedings after all?

In an unusual turn of events a High Court judge has declined to follow the usual practice of agreeing with a precedent ruling previously reached in the High Court. The case of Horton v Henry concerned whether an Income Payments Order (IPO) could be made that would require a bankrupt person (Mr Henry) of pensionable age to start taking his pension for the purpose of paying off his debts.

For years it was the conventional view that pensions not yet in payment were beyond the reach of IPOs but this was thrown into doubt by the, some would say controversial, decision in Raithatha v Williamson in 2012 and uncertainty has existed since then.

In a nutshell the judge in the Raithatha case ruled that the pension benefits that a bankrupt is entitled to “merely by asking for payment”, but has not yet drawn, can be made subject to an IPO. However, in the latest case – which the judge said could not properly be distinguished from the Raithatha case – the judge “with considerable reluctance” has come to a different conclusion based primarily on consideration of practicalities about the choices available when a pension is put into payment, such as what amount of lump sum is taken, and that, in the judge’s view, the bankrupt is only entitled to the pension payment when he has made these choices, not before. The judge further considered that there is no power under bankruptcy law to require Mr Henry to elect what to do with his pension in any particular way.

We understand that an appeal to this ruling will be heard by the Court of Appeal this spring which we hope will settle the matter and provide certainty.

Comment

Certainty is required in this area in light of the forthcoming changes in April 2015. This is because if the Raithatha ruling is deemed the correct principle then this raises the prospect of bankrupt individuals with defined contribution pension savings being required by IPOs to cash out the entire pension pot as soon as they are legally able to do so. Trustees of pension schemes need legal certainty as to whether such IPOs should be followed so we hope the Court of Appeal ruling comes sooner rather than later.

Webb suggests annuitants should be given a chance to benefit from flexibility too

In a BBC interview last weekend, pensions minister Steve Webb said that plans are being drawn up at the Department for Work and Pensions that would allow those who have already retired to benefit from the flexibilities being introduced in April.

Under the plans, those who have already bought annuities would be able to sell them and use the proceeds as they wish. Although one idea is that they could approach the insurer that is providing the annuity, a potentially more attractive possibility is that a market develops in “second hand” annuities – ie the individual assigns the annuity to the third party in exchange for a lump sum and the insurer continues to make payments, but to the third party, until the individual’s death.

He did, however, add that the idea had yet to be approved by his Conservative coalition colleagues, and could not take effect from April, though he hopes to publish something more formal before the general election.

Comment

Undeniably this is an attractive idea to pensioners who currently have an annuity in payment and wish that they had had the opportunity to have benefited from the “freedom and choice” provisions being introduced from April, or otherwise wish to unwind an annuity purchase that they believe is unfavourable. But there are serious potential difficulties with this idea in practice: principally how would annuities in payment be priced “fairly” so that the annuitant gets value for money for surrendering their benefit at a price that a third party is willing to pay? And following on from this, would the next step be to permit pensioners with defined benefit pensions in payment to cash out their pensions as well? It seems unlikely that HM Treasury would be in favour of such a step due to its known concerns about the effects this would have on the gilt markets.

Watching how this idea develops, if at all, will be interesting. Steve Webb may be putting this idea out there with an eye on the General Election.

HMRC consults on some of the tweaks to tax law for 2015+ pension flexibility

With the Taxation of Pensions Act 2014 now on the statute book (see Pensions Bulletin 2014/52), HM Revenue & Customs (HMRC) has published three sets of draft regulations for a technical consultation. Comments are requested by 16 January. The regulations are intended to come into force on 6 April 2015.

Information requirements

The draft Registered Pension Schemes (Provision of Information) (Amendment) Regulations 2015 implement changes to the information requirements as a consequence of both the Finance Act 2014 and the Taxation of Pensions Act 2014 – in particular the substantial change in the tax applying to unused money purchase funds at death. The provisions:

• Impose a new requirement on scheme administrators who are transferring a “post-death” drawdown fund to provide appropriate information to the receiving scheme administrator so that they can ensure the correct tax treatment is applied to future payments (taxed or untaxed depending on the age at death, under the new regime)
• Add to the reporting requirements in connection with benefits on death that use up lifetime allowance, to include those that will count as the new “benefit crystallisation event 5C” from 6 April 2015, that is, designation into drawdown of unused funds on a member’s death before age 75 (see Pensions Bulletin 2014/47); and
• Enhance the information requirements when a scheme changes its structure or range of number of members so as to help HMRC combat pension liberation in cases where a scheme may well be set up legitimately, but later changed into one more likely to be a target of pension liberation

Transfer of Sums and Assets

The draft Registered Pension Schemes (Transfer of Sums and Assets) (Amendment) Regulations 2015 update existing regulations with the intention of preventing unintended advantage being taken of the flexibilities being introduced by the Taxation of Pensions Act 2014. (They mirror the fact that, under the Act, receiving payment from a new style “flexible annuity contract” is one of the actions that triggers a member falling under the so-called “£10K MP AA”). The draft regulations:

• Ensure that an annuity acquired on or after 6 April 2015 following the transfer of sums or assets from an annuity originally acquired before 6 April 2015, will only be treated as a lifetime annuity for the purposes of the pensions tax rules where it is issued on a “like for like” basis, ie the terms of the new annuity do not allow it to be reduced beyond the limits that applied to the original annuity; and
• Ensure that nominees’ or successors’ short-term annuities are treated in the same way as dependants’ short-term annuities, so they may only be transferred to another nominee’s or successor’s short-term annuity

The Overseas Pension Schemes (Miscellaneous Amendments) Regulations 2015

The draft Overseas Pension Schemes (Miscellaneous Amendments) Regulations 2015 amend existing regulations to ensure that the conditions a qualifying overseas pension scheme (QOPS) or qualifying registered overseas pension scheme (QROPS) must meet to enjoy tax reliefs similar to a UK-based registered pension scheme remain appropriate after the 6 April 2015 changes.

The two most important changes made are:

• That the requirement that a QOPS must use 70% of those funds attracting UK tax relief to provide an income for the individual is removed now that the Taxation of Pensions Act 2014 provides that funds of (UK) registered pension schemes can be flexibly accessed; and
• A strengthening of the current requirement to provide that in order to be able to accept transfers of UK tax-relieved pension savings free of UK tax, all QOPS will need to provide that pension benefits from the transferred funds are payable no earlier than they would be under the rules of a (UK) registered pension scheme

Other changes are made to the information requirements to mirror the changes being made for (UK) registered pension schemes, as above, and a minor change is made about the conditions to be an overseas pension scheme outside of the European Economic Area.

HMRC also intends to publish further draft regulations for comment early in the New Year covering the changes in connection with annuities that were announced at the time of the Autumn Statement (see Pensions Bulletin 2014/50).

Comment

These are just some of the many minor consequential tax law changes needed, to supplement the primary tax law and main regulations by 6 April 2015, for the new regime to work properly. (Further additions will be needed after changes (via Finance Act 2015 in the spring) to enact some of the death tax changes announced in the Autumn Statement).

Of course there are still much larger still-missing pieces of the jigsaw via the Pensions Bill still being worked on and its related regulations.

Pension Schemes Newsletter 66 confirms how tax will be deducted from 2015+ “flexible payments”

Unsurprisingly, the main focus for Pension Schemes Newsletter 66 from HM Revenue & Customs (HMRC) is pension flexibility from April 2015.

Significant space is allotted to what schemes will report to HMRC when they make flexible access payments (including the new uncrystallised funds pension lump sum (UFPLS) and withdrawals from the new flexible access drawdown funds); and to the final details of what tax schemes will deduct when making such payments. This does seem to confirm that in many circumstances the scheme will deduct more tax than is due (potentially substantially more) and the member/HMRC will later settle the correction – a cash-flow delay issue which made front page headlines when announced in outline earlier in 2014 (see section 11 of the LCP Guide to the Taxation of Pensions Act 2014 for further details).

The Newsletter also contains:

• A reminder (presumably bearing in mind the imminent 31 January 2015 deadline for submitting personal tax returns for 2013/14) that the scheme administrators of every registered pension scheme should have issued annual allowance pension statements for the 2013/14 tax year to all their scheme members who (broadly and with the usual annual allowance bells and whistles) contributed more than £50,000 in 2013/14 to the pension scheme
• A reminder for schemes operating relief at source to submit their 2013/14 annual return of individual information
• A short write-up on the draft annual allowance Order issued on 11 December (see Pensions Bulletin 2014/52); and
• An announcement that the qualifying recognised overseas pension scheme re-notification process (see Pensions Bulletin 2013/23) is being delayed until 6 April 2016

ACA publishes final report on smaller employers’ pension arrangements

The Association of Consulting Actuaries (ACA) has repeated its warning that the next government will need to review auto-enrolment policy urgently as there is a very real risk that the planned increases to minimum contribution rates from 2017 could cause financial difficulties for smaller firms and their employees, even prompting large-scale opt-outs.

This warning comes as the ACA publishes the final report of its latest survey of smaller firms (those with less than 250 employees) and their pension arrangements (see Pensions Bulletin 2014/44 for details of the findings released with the interim report).

Highlights from the final report include:

• Median employer contribution rates for those newly auto-enrolled are 1-3% of earnings, with employee contribution rates of just 1-2%
• Median employer contribution rates for those enrolled into schemes ahead of auto-enrolment are 4-5% of earnings, with employee contribution rates of 3-4%
• 56% of employers with pre-existing arrangements have kept those for existing employees, but non-joiners and new entrants are generally being auto-enrolled into multi-employer arrangements, such as NEST
• 15% of employers have closed their pre-existing arrangements, with over eight out of ten of these opting to enrol all employees into a multi-employer arrangement; and
• Most smaller employers yet to reach their auto-enrolment staging date currently provide no pension arrangements, and where they have already made a decision on auto-enrolment most intend to auto-enrol all jobholders into a multi-employer arrangement

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.