Annual Allowance information obligations and Scheme Pays 2015/16 (and 2016/17)
An update slipped helpfully into HMRC’s Pensions Tax Manual on 27 May completes the picture for schemes’ statutory obligations in relation to the practical operation (information provision, payment of tax charges) of the Annual Allowance (AA) for 2015/16 and 2016/17 onwards (ie alongside the tapered AA regime and for the transition period into that regime). The following is a summary, with the rules being driven by the individual’s Pension Input Amount (PIA) in the scheme.
- For 2015/16 AA information and 2015/16 AA charges:
If the sum of a member’s PIA in the scheme for their “pre- and post-alignment 2015/16 mini-tax years” exceeds £80,000, or if their PIA for the “post-alignment mini-tax year” alone exceeds £40,000, the scheme must send the member a Pension Savings Statement (PSS) proactively (and include the member in the Event Report to HMRC)
If the sum of a member’s PIA in the scheme for their “pre- and post-alignment 2015/16 mini-tax years” exceeds £40,000, the member has a right to demand Scheme Pays from the scheme (this is the “new” news, and is of course subject to the two other standard conditions – see Comment below)
- For 2016/17 AA information and tax charges:
If the sum of a member’s PIA in the scheme in the 2016/17 tax year PIP exceeds £40,000 the scheme must send a Pension Savings Statement (PSS) proactively (and include the member in the Event Report to HMRC) and the member has a right to demand Scheme Pays (subject to the other two standard conditions)
Importantly, the conditions governing the issue of the PSS and the right to demand Scheme Pays are (as ever) on a per scheme basis. Also, although HMRC has not explicitly stated this, a consistent reading of the law is that where a member has a right to use Scheme Pays in 2016/17 or later as above, this is solely to help with the AA charge arising in respect of that part of the PIA in that scheme for the tax year in excess of £40,000 – not that in excess of the member’s personal tapered AA on which the actual charge will be based.
Comment
The law in this area is now very complex to read, so it is helpful that HMRC’s guidance now (nearly) covers all bases. Many schemes will currently be working on putting together 2015/16 PSSs, with the statutory deadline for the required “proactive” ones being 6 October. As already commented (see Pensions Bulletin 2016/10), the group that needs to be sent 2015/16 PSSs proactively is reasonably focussed. And, as for previous tax years, we now know that a member who made savings in just one scheme and incurred a 2015/16 AA charge will be able to demand help meeting all the charge using Scheme Pays (if they wish, and subject to the two standard conditions that always apply; that the member’s overall AA charge for the tax year exceeds £2,000, and the member make an irrevocable election for Scheme Pays within the deadline). As has been the case in the past, they are less likely to qualify for a right to Scheme Pays if they have been making savings in more than one scheme (because one or more of the per-scheme PIAs may be below the £40,000 threshold).
For 2016/17 onward, in a world where individuals have personal AAs that could be well below £40,000, while the law may seem neatly symmetric, the real life picture is rather more chaotic. As noted in Pensions Bulletin 2016/20 the Scheme Pays policy chosen by HMRC involving a hard-coded £40,000 qualifier, in a world in which individuals may have much lower personal tapered AAs (which in fairness was HMRC’s only option) means many of the individuals who have a 2016/17 AA charge will not be able to demand help from Scheme Pays. And many of those who can demand Scheme Pays may find they only have a right to demand it in respect of a relatively small part of their charge.
Of course, rather than have some very unhappy members, some employers/trustees may decide to go further than the bare statutory minimum, whether that be providing PSSs more widely and/or permitting Scheme Pays irrespective of whether the member has a statutory right and extending the amount beyond their statutory right.
PPF sets out its direction of travel for the 2018/19-2020/21 levy rules
The Pension Protection Fund has published an information paper providing some useful insight on the road it intends to travel as we move towards the “third levy triennium” – the three year period starting on 1 April 2018. It shows that the PPF intends to focus on developing its insolvency risk model, primarily to improve its predictability.
Areas likely to be covered include:
- Using credit ratings, where available, and industry-specific scorecards for regulated financial services entities and possibly for the financial services sector
- Options to manage the impact of changes to accounting standards (FRS 102 in particular) on scores through changes to pension scheme deficits reported in accounts
- Improving the two small accounts scorecards along with the not-for-profit scorecard; and
- Combining the “large and complex” scorecard with the “independent full” scorecard population and then possibly splitting by turnover
There is also likely to be limited work in areas beyond the insolvency risk model, focussing on:
- The treatment of investment risk – in particular the objective of consistency between standard and bespoke investment risk stresses
- Guidance and requirements in relation to certifying deficit reductions
- The operation of the regimes for certifying contingent asset and asset-backed funding structures; and
- The potential for simplifying requirements for smaller schemes, in relation to the above areas or more generally
The PPF intends to consult formally on its proposals either later in 2016 or early in 2017, but welcomes comments on the scope of its work before then. Changes to the levy rules for 2017/18 are likely to be very limited.
Comment
The PPF is right to focus on its insolvency risk model as it is the key arbiter in ensuring that the distribution of the overall levy bill remains broadly fair. We welcome this early sight of the work that it intends to undertake.
Pensions Ombudsman to extend its participation in appeals
Building on the statement contained within this year’s annual report (see Pensions Bulletin 2016/28), the Pensions Ombudsman has now set out some further information on its revised approach to appeals against its determinations.
The current practice of participating only in those appeals which raise questions affecting the Ombudsman’s legal jurisdiction or internal procedures will now be extended, with the support of the DWP. Appeals that could be participated in now may include where the decision could have a wider impact on the pensions industry, such as pension liberation or auto-enrolment, or where there is a significant concern over access to justice and participation is necessary to properly present and argue the points.
Comment
We wait to see whether this announcement yields significant results. Although it seems that it has been driven in part by the Royal London case (see Pensions Bulletin 2016/07), there may be only so much that the Ombudsman can or should rightly do, in joining an action at the High Court. Where interpretation of the law ends up on the wrong side of the public interest, it is our legislators that must act.
Pensions Regulator refreshes its Prohibition orders statement
The Pensions Regulator has published an updated statement that explains the policy it will adopt in exercising the power to prohibit a person from being a trustee of a trust-based scheme and revoking such prohibitions.
Under section 3 of the Pensions Act 1995, the Regulator has the power to remove trustees if its Determinations Panel is satisfied that they are not a “fit and proper person”. Some changes to this power were made as a result of the Pensions Act 2014 and this, amongst other things, appears to have resulted in the need to update the statement. It replaces that issued on 25 June 2013 (see Pensions Bulletin 2013/27).
Comment
Once more, this statement gives a useful insight into the standards expected of trustees in order to remain “fit and proper”, along with a clear statement of those situations where disqualification is automatic.
More rumblings from Europe on pan-European personal pension schemes
The slow moving juggernaut that is EU policy development on bringing about a single market for personal pension schemes continues to roll, with the latest development being the launch, by the European Commission, of a further consultation.
Notwithstanding EIOPA’s advice, which has recently been delivered to it (see Pensions Bulletin 2016/28), the Commission is now looking to widen the range of possible options and those consulted. Potential obstacles to the uptake of personal pension products are sought along with views on how to best address them. The consultation is also intended to help the Commission analyse the case for an EU personal pension framework.
An online questionnaire is supplied in three parts – aimed at individuals, consumer organisations and stakeholders respectively – and the consultation closes on 31 October 2016.
Comment
With the announcement of this consultation, the likelihood of seeing a proposal for a Directive later this year must surely have receded.
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.
