Pensions Regulator gives its covenant guidance a complete makeover
The Pensions Regulator’s guidance on what trustees of defined benefit schemes should be doing to assess and monitor employer covenant – the employer’s legal obligation and financial ability to support the scheme – has been given a thorough updating in a 65 page document published today.
There has been a need for some while to refresh the Regulator’s initial guidance published back in November 2010, but Assessing and monitoring the employer covenant goes beyond the necessary adjustments to take account of the settling of the Regulator’s material on DB funding (including the Code of Practice) last year.
As one would expect in “regulatory guidance”, the Regulator has more to say by way of emphasis and clarification than in the accompanying Code. This is usefully drawn out through numerous examples, each illustrating key concepts and relevant covenant issues, with many setting out the “facts” before going on to give the “guidance”.
The document is also well sign-posted with key points for consideration drawn out at various stages.
The Regulator asks that all DB scheme trustees read “at a glance” and Section 1, neither of which should contain any surprises. Section 2 is required reading for those trustees who assess the employer covenant themselves, whilst the remaining two sections on monitoring the covenant and taking action and improving scheme security should be relevant to all DB scheme trustees.
Finally, there are some useful new appendices – one for trustees of DB schemes sponsored by not for profit organisations and the other for trustees of non-associated multi-employer schemes.
The guidance is the first in a promised series of guides for trustees of DB schemes to help them apply the DB funding code of practice. Later this year, the Regulator intends to produce further guidance to help trustees navigate the DB code, including guides on integrated risk management and investment strategy.
Comment
As before, this is a challenging read, but has a much more practical flavour to it than its November 2010 counterpart. This is not surprising. When the Regulator’s guidance was first published, employer covenant was a relatively new subject – for trustees and the Regulator. The persistence of DB deficits over the last five years has meant that the vast majority of DB trustees have had to develop a good understanding of the strength of those who stand behind the scheme. Likewise, the Regulator has built up its knowledge through engaging with a number of schemes.
Given that the Regulator’s material on DB funding has made clear that covenant is the starting point when applying an integrated approach to DB funding risk management, this latest guidance is a welcome resource.
Tapered Annual Allowance – ACA queries need for salary sacrifice add-back
The Association of Consulting Actuaries has written to HMRC pointing out what it sees as flaws in the Summer Finance Bill in relation to the £110,000 threshold income measure used to determine whether or not an individual is subject to next April’s tapered annual allowance.
The Finance Bill provides that threshold income is (broadly) all income assessable to income tax, after netting off by any relievable pension contributions made by the individual and usually ignoring any pension accrual funded by the employer – but with an add-back of employment income given up for pension provision by way of salary sacrifice or flexible remuneration arrangements if made on or after 9 July 2015.
In relation to the phrase “made on or after 9 July 2015”, the ACA letter records that HMRC has given confirmation to the ACA that the principles enunciated in a 2010 HMRC letter still apply– in other words, broadly, that if the employee is required each year to agree to the salary sacrifice continuing, any such agreement made on or after 9 July 2015 will trigger the add-back. By contrast, a continuing arrangement (without the need for further agreement from the employee) will not trigger the add-back.
The ACA notes the complexity this will cause, puts forward an argument as to why it is unnecessary to achieving the Government’s aims and so requests that the add-back provision is removed from the Finance Bill in its entirety.
Comment
Any changes to the Bill draft will need to wait for the reconvening of Parliament in September – and timetabling then may mean an answer to the ACA’s request might not be known until mid-October.
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.
