Royal Assent for the Summer Finance Bill
George Osborne’s second Finance Bill of 2015 completed its parliamentary stages last week and received Royal Assent on Wednesday this week. Insofar as the pension tax changes are concerned, it is little altered from when the Bill was introduced in July (see Pensions Bulletin 2015/32), other than to correct some obvious errors (see Pensions Bulletin 2015/44).
Therefore, the pension tax aspects of the Finance (No. 2) Act 2015 can be summarised as follows:
- The introduction of a tapered annual allowance for high earners, applying from 2016/17 – sadly with the complexities relating to salary sacrifice retained
- Aligning pension input periods for all to tax years from 2016/17, and consequential transitional changes to the annual allowance test for 2015/16 (potentially impacting savings made as far back as 7 April 2014); and
- Changes to the tax rates applying to taxable death lump sums, as planned for in the Freedom and Choice announcements in 2015 and to the tax applying if a death lump sum is paid “late”
Comment
With the Finance (No. 2) Act 2015 we see the bedding into law of yet more extraordinary complexity in pension taxation. See LCP's News Alert for more detail on how the tapered annual allowance and the 2015/16 transitional annual allowance test work (and Pensions Bulletin 2015/44 for the ACA letter reported in a previous Bulletin for guidance on some points on salary sacrifice).
The practical scoping and communications work we have been doing on this since the Budget confirms how truly difficult it will be for higher earners to work out what pension provision they can build up without triggering extra tax charges.
HMRC has yet to publish the secondary regulations that will deal with the practicalities of implementation, such as what changes will be made to the obligations on schemes to provide information and “scheme pays” facilities – we expect those in draft in December. December is also the time when HMRC will publish the draft legislation to put in place the Lifetime Allowance reduction (and associated protections) from 6 April 2016.
DWP proposes a number of changes to pension regulations
In the first significant legislative move of Baroness Altmann’s pensions ministry, the Department for Work and Pensions has published a consultation document covering a number of pension law topics.
Changes to the audited accounts regulations
In a welcome simplification the DWP proposes to amend the 1996 Audited Accounts and Statement from the Auditor regulations. Currently, these require occupational pension scheme accounts to include detailed investment disclosures, but much of them are now out of date, particularly in the light of the new financial reporting framework introduced by FRS 102 and the updated pensions SORP.
Accordingly, the DWP is suggesting that most of the detailed investment disclosures are revoked, but that scheme auditors provide a statement that the accounts have been prepared in accordance with FRS 102 and the pensions SORP and note any material departures from them. The DWP states that it has been advised by the Pensions Research Accounting Group that this could save schemes between £3m and £5.5m pa with an estimated average saving of £4.25m pa.
The DWP also proposes that multi-employer schemes with at least 20 participating employers be exempted from the requirement for their auditors to provide a statement on whether, in their opinion, contributions have been paid in accordance with the scheme’s schedule of contributions. The work involved has the potential to be disproportionately burdensome for large multi-employer schemes, with the DWP implying that other requirements are now in place which can more cost-effectively address the concern that schemes receive the agreed contributions in a timely manner.
No change to the law in response to Law Commission work on fiduciary duties
The DWP has responded to its February consultation on whether or how pensions law should be amended in the light of the Law Commission’s work on fiduciary duties in the investment chain (see Pensions Bulletin 2015/10).
The suggestions in this were that the Occupational Pension Schemes (Investment) Regulations 2005 should be amended so as to more clearly reflect the distinction between financial and non-financial factors in setting investment goals and to require trustees to comply with (or explain why they have not) the Financial Reporting Council’s Stewardship Code regarding engagement between asset managers and companies.
The DWP has concluded that amending the regulations about financial vs. non-financial factors would not necessarily lead to greater clarity for trustees. The DWP also thinks that it is clear from the responses received that there are concerns that requiring trustees to comply (or explain why not) with the Stewardship Code may not be the most appropriate way to encourage trustees to consider whether and how to engage with companies to promote their long term success. Rather, in both of these important areas the DWP thinks that these are areas where guidance may be more effective than legislation and therefore no changes to the regulations will be made at this stage.
New disclosures on investments mooted
In the light of the continuing work on transaction cost disclosure (see Pensions Bulletin 2015/10), the DWP seeks views and evidence on how better disclosure of information about how schemes’ investments are made could be achieved. In particular, the DWP asks how easily the following information can be made available on request to members and prospective members, their spouses, beneficiaries and recognised trade unions:
- The selection, monitoring, retention and realisation of investments (including information about the companies that funds are invested in)
- The stewardship of investments (including how voting rights associated with investments are used); and
- The selection, appointment and monitoring of investment managers and other agents to whom powers are delegated
The DWP intends to combine the evidence it receives with work it is currently doing on charges and costs transparency, in order to make the “best assessment of what additional disclosure is needed”. It appears that amendments to the 2013 Disclosure of Information regulations are envisaged to improve the investment information which is to be made available to members.
Changes to the Charges and Governance regulations
Some legislative tidying up is also proposed to the Charges and Governance Regulations 2015 applicable to money purchase occupational pension schemes (see Pensions Bulletin 2015/08). They are to be amended so that for multi-employer group schemes:
- It is put beyond doubt that all types of multi-employer group schemes are excluded from the additional governance requirements. Normal corporate activity should not bring the scheme into scope unless the scheme promotes itself as being open to unconnected employers
- There will no longer be a requirement for the chair of NEST to be appointed within the set time period of three months
- A person or deputy chair appointed by the trustees may sign the governance statement if there is no chair in place
- In order to make it easier for these types of scheme to comply with the governance arrangements, where there are provisions in trust deeds or rules which conflict with the key requirements for the majority of trustees to be “non-affiliated” and for there to be at least three trustees, these provisions will be overridden. This does not include NEST as it is not covered by the additional governance requirements
- Although the current exclusion for schemes established under statute will expire from April 2016, such schemes are to have up to six months from April 2016 to comply with the requirements that there should be a majority of non-affiliated trustees and that there should be at least three trustees
Reducing regulatory burdens
Finally, and possibly most interestingly, the minister states that she wants to know about “any requirements in legislation that make life needlessly difficult…. and do not benefit members…” and invites respondents to tell her “about burdens you would like us to consider reducing in order to make life easier for trustees and schemes”. However, the paper goes on to explain that reductions in burdens will always have to be weighed against other factors, such as the impact on members’ accrued rights and the security of pensions generally, whether the change supports the Government’s overall agenda for pensions, and the value of change compared to any burdens of implementation.
Consultation ends on 9 December 2015.
Comment
We have been waiting for some time to see how the DWP legislation machine would get moving after the General Election and now we have an idea.
The accounting changes seem practically-minded. Not all will agree with the non-legislative approach to the outstanding Kay/Law Commission issues but at least we do have a clear direction of travel defined.
And, intriguingly, we have an invitation to put in bids for regulatory reform. It seems like these must be in within three weeks.
State Pension Statements now show impact of contracting out
The Department for Work and Pensions has responded to criticism of forecasts of the new State Pension by introducing a “Contracted-out Pension Equivalent” (COPE) in statements that will be issued going forwards.
Being contracted out can be a significant cause of the forecasted state pension being much less than the full rate (currently provisionally estimated as being £151.25 per week). The COPE is an estimate of the amount of the old additional State Pension that the individual will not receive due to being contracted out. As such, it feeds directly into the forecast of the new State Pension. We understand that Q&As about COPE will be included in December’s Countdown Bulletin from HMRC.
The DWP has also updated its State Pension statement leaflets. That relating to those over 55 who will reach State Pension Age after 5 April 2016 now makes reference to the COPE. Amongst other things the leaflet says that the COPE amount will be paid as part of the contracted out workplace or personal pension scheme and is not normally identified separately.
Comment
This is a sensible move from the DWP’s perspective. But it is important for recipients of these forecasts to remember that the COPE is a DWP calculation for the purpose of forecasting the new State Pension and does not imply that contracted out schemes will deliver it instead, other than indirectly through the normal operation of their scheme rules.
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.
