PPF proposes to adjust its valuation assumptions
Following discussions with insurers, the Pension Protection Fund (PPF) is proposing to slightly strengthen its valuation assumptions for PPF entry and levy purposes to ensure that they remain in line with estimated pricing in the bulk annuity market. The assumptions for closed scheme and reconsideration valuations will be similarly affected.
Further detail is set out in the PPF’s consultation paper. The PPF intends to apply the revised assumption to valuations with an effective date on or after 1 May 2014.
Under the PPF’s revised approach:
- The discount rate used to value level compensation in payment reduces by 0.5% a year
- The net discount rate used to value increasing compensation in payment reduces by 0.1% a year
- The net discount rate used to value increasing compensation in deferment and accrued after 5 April 2009 increases by 0.4% a year
- Both the base mortality assumption and that for future improvements are updated and the mortality based on a member’s benefit size is adjusted; and
- The assumption for benefit installation/payment expenses is doubled
Consultation runs until 16 April.
Comment
The changes are likely to make schemes’ PPF liabilities seem a little higher, particularly for those that have a higher than usual proportion of pre-97 benefits. On average the assumption changes shouldn’t make a big difference to the PPF levy – a similar thing will happen for most schemes, so the levy scaling factors should reduce slightly as a result. But if a scheme’s employer becomes insolvent it is more likely that the scheme will fall into the PPF rather than running on outside as a “closed” scheme.
Supreme Court concludes that employer payments into a pre A-day FURBS are not subject to NICs
In what must be the last stage in a long-standing legal equivalent to Ping Pong, the Supreme Court has unanimously ruled that employer payments into a funded unapproved retirement benefits scheme (FURBS) made prior to 6 April 2006 are not subject to national insurance contributions (NICs). Although there was no doubt that they were paid for the benefit of the sole scheme member, the Court held that they did not constitute “earnings” on which NICs are paid.
In Revenue & Customs v Forde and McHugh Ltd, HM Revenue & Customs (HMRC) had imposed an employer NIC contribution liability on £163,000 paid into a FURBS during the 2002/03 tax year. Forde and McHugh Ltd (FML) appealed to the Upper Tribunal where it won; HMRC appealed to the Court of Appeal where it won (see Pensions Bulletin 2012/24). Now, it seems that FML has won in the final bout.
In its latest appeal FML employed a completely different tactic, arguing that the employer’s transfer of funds or assets in which the earner had at the time of the transfer only a contingent interest, could not constitute “earnings”.
HMRC argued that when interpreting earnings it needed to look to the payment and not what the earner received. Therefore earnings are paid to an earner both when the assets are transferred to a pension scheme to be held on trust and also when payments are made from a trust fund. The prospect of a double-counting of NICs was only averted because of a specific disregard in NIC regulations.
The Supreme Court rejected this analysis on three grounds:
- The receiving earnings twice aspect of the analysis would be counter-intuitive to “the ordinary man on the underground” – moreover it is unsupported either directly or by implication through any legislation enacted by Parliament
- Looking at what is paid, rather than what is received, denudes the word “earnings” of any meaning
- HMRC’s method of computation of the NIC liability failed to take into account the contingent nature of the benefit. So it was not right to take as the earnings the value of the assets paid into the fund. It was necessary to in effect carry out an actuarial calculation that looked at the prospective value of the assets at the individual’s retirement allowing for the possibility of his dying before then
Comment
And so we appear to have come full circle. Back in 1998 the Government decided that going forwards NICs should be applied to employer contributions to FURBS. But instead of acting through changing legislation, an announcement was made setting out a reinterpretation of what the Government thought was the correct position.
Sixteen years later this has been found to be wanting. As a direct result of this test case it seems that NICs should now be reclaimed in respect of employer payments made into FURBS between 6 April 1998 and 5 April 2006. But as the usual six-year time limit on reclaiming overpaid NICs has passed we can only hope that HMRC will be minded to facilitate such reclaims.
This may not be the end of the story, since this judgment may well open the door to other types of arrangement under which earnings are in effect deferred and subjected to a contingency as to their payment.
Law Commission proposes clarification of financial needs and statutory backing for nuptial agreements
The Law Commission has published a report which includes recommendations to clarify the law of “financial needs” on divorce or dissolution of a civil partnership, and to introduce “qualifying nuptial” agreements in England and Wales.
The report finds that the underlying law relating to responsibilities of former spouses to meet each other’s “financial needs” (through pension sharing orders for example) is not in need of reform. It does, however, recommend that the meaning of “financial needs” be clarified in guidance (potentially with formulae to calculate guideline ranges for the amounts) to ensure that the term is applied consistently even in cases where there is no legal representation.
On pre-nuptial and post-nuptial agreements, it recommends that legislation is enacted to introduce the legal concept of “qualifying nuptial agreements”. These would be enforceable contracts, not subject to the scrutiny of the courts, which would enable couples to make contractual arrangements about the financial consequences of divorce or dissolution. In order for an agreement to be a “qualifying” nuptial agreement, certain procedural safeguards would have to be met. Qualifying agreements could not, however, be used to contract out of “financial needs”.
Comment
Whilst these proposals could significantly affect the way certain divorces proceed they are unlikely to require wholesale changes to the existing pension sharing process.
1.4 million private sector employees to suffer 2016 NI contributions hike
A total of 1.4 million private sector employees enrolled in around 2,500 contracted out pension schemes will see their national insurance (NI) contributions rise when contracting out is abolished in 2016, according to research from the Office for National Statistics (ONS).
The ONS has published more detailed results from its 2012 Occupational Pension Schemes Survey (see Pensions Bulletin 2013/41) split by members’ contracted-out status. It shows that:
- Most active members of private sector defined benefit occupational pension schemes are contracted-out (1.4 million compared to 0.3 million)
- Those who are contracted-out generally pay considerably higher pension contributions than those who are contracted-in. The vast majority of those contracted-out have a contribution rate over 5%, whilst the vast majority of those contracted-in pay less than 5%
HMRC publishes its first end of contracting out Countdown Bulletin
HM Revenue & Customs (HMRC) has published the first in a series of bulletins providing information about the end of salary-related contracting out.
The Bulletin, which is aimed at pension scheme administrators and trustees, gives a helpful timeline for HMRC’s end of contracting out activities and also outlines the Scheme Reconciliation Service that HMRC is offering from April 2014. It confirms that employers should include their Scheme Contracted-Out Number (SCON) on their Full Payment Submissions when providing HMRC with contracted-out NI contributions. HMRC also alerts scheme administrators that they may be asking for information where they have not been notified of a member leaving service when it appears to them, through a break in service, that they have.
Shared parental leave and pay regulations published
The Government has published draft regulations as part of its plan to implement the new system of shared parental leave and pay in respect of children whose expected week of childbirth begins on or after 5 April 2015. Amongst other things, these regulations confirm that employees have a right to return to work after a period of shared parental leave “with the employee’s seniority, pension rights and similar rights as they would have been if there had been no absence”.
The Government confirmed how it expects the operation of the shared parental leave provisions of the Children and Families Bill to work last November (see Pensions Bulletin 2013/50). The Bill itself is awaiting Royal Assent.
Martin Clarke to become Government Actuary
HM Treasury has announced that Martin Clarke will become the new Government Actuary later this year when incumbent Trevor Llanwarne retires.
Mr Clarke is currently Executive Director of Financial Risk at the Pension Protection Fund.
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.
