Pensions Bulletin 2016/08

John Cridland to lead State Pension Age review

John Cridland CBE, former Director General of the CBI, will lead the first independent review required under the Pensions Act 2014 of the factors to consider when setting State Pension Age. Instead of the previous ad hoc arrangements under which State Pension Age has been reviewed in the past, the Act provides that a review is carried out every six years.

The Act also requires that Mr Cridland’s report will be considered by the Secretary of State for Work and Pensions alongside another from the Government Actuary in order to form the judgment as to what changes should take place. The Secretary of State must report on the outcome of this review before 7 May 2017.

The DWP’s announcement states that Mr Cridland’s review “will be forward looking and focussed on the longer term. It will not cover the existing State Pension age timetable to April 2028”. The particular terms of reference for the review were attached to the ministerial statement made by Baroness Altmann in announcing the review.

The announcement of the review has attracted huge interest in the media, some of which is quite clearly misinformed, but it is pertinent to note that the terms of reference do ask Mr Cridland to consider whether the current system of a universal State Pension Age rising in line with life expectancy best supports affordability, fairness, and fuller working lives objectives, and if not, how State Pension Age arrangements might better support these objectives.

Individuals, charities, businesses, research groups and all other interested stakeholders are invited to share their views by email. However, no timetable or process to follow is given.

Dramatic changes to pensions tax expected on Budget Day

With less than a fortnight to go before the Chancellor delivers his latest Budget, the noise about what George Osborne might do in relation to the pensions tax framework, what he should do and what he shouldn’t seems to get louder by the day.

What we are expecting is the Government’s response to the consultation launched at the Summer 2015 Budget (see Pensions Bulletin 2015/30), with our view being that there are broadly four options available (see our blog on this subject).

Rumours abound as to what precisely the Chancellor will announce, but the reality is that noone outside the Treasury knows. If the latest stories are to be believed, bold reforms may not be possible whilst tensions continue to build within the Conservative party over Europe, but it would seem that option one on our list (“Do nothing”) is unlikely. For what it is worth, our money right now is on the Chancellor introducing something along the lines of our option three (“Move to a single rate of pension tax relief”).

DWP delivers a GMP revaluation override

On 1 March 2016 the DWP laid regulations that deliver on its promise to provide a statutory modification power for schemes in relation to the GMP revaluation issue (see Pensions Bulletin 2016/07).

The regulations enable schemes which end contracting out on 6 April 2016 to modify their rules in order to be able to choose fixed rate revaluation of the GMP from when pensionable service ends. As such they may be of assistance to those schemes with restricted amendment powers or where the change cannot be made in time for 6 April 2016.

In addition to providing schemes with this power (which must be exercised before 6 April 2017), the regulations provide for such a change to have retrospective effect and for consultation with members to not be required.

The Occupational and Personal Pension Schemes (Modification of Schemes - Miscellaneous Amendments) Regulations 2016 (SI 2016/231) come into force on 6 April 2016.

DWP finalises its proposed adjustments to allow for the ending of contracting out

On 1 March 2016, following consultation on a package of what were intended to be minor and technical changes to secondary legislation to take account of the abolition of contracting out in April 2016 (see Pensions Bulletin 2015/45), the DWP laid the regulations and responded to the consultation.

The regulations are very similar to those proposed with two significant alterations:

• An adjustment to the Contracting-Out (Transfer and Transfer Payment) Regulations 1996 (SI 1996/1462) so that the current flexibilities in relation to individual transfers are not removed as a result of the ending of contracting out

• Extended time limits for those schemes which need to discharge their pension liabilities, or pay transfer values, and which cease to contract out in the 12 months preceding the ending of contracting out, but only so long as the scheme has yet to complete its reconciliation of contracted out liabilities

Of more significance are those aspects that have yet to be addressed. These include:

• Concerns that as a result of changes proposed to the above regulations, it will only be possible to make a bulk transfer of contracted out rights without members’ consent to a scheme that was formerly a salary-related contracted out scheme. This could have a significant and growing impact on scheme reconstruction work as from 6 April 2016 onwards it will not be possible to bulk transfer contracted out liabilities into a new scheme (since by definition such a scheme could not have been contracted out). The DWP had received a suggestion that schemes which were not formerly contracted out should be able to receive bulk transfers provided sufficient safeguards and protections were put in place. Whilst expressing sympathy with the issue and the suggestion, the DWP says that there is insufficient time to draft such changes in the Order. Instead it intends to consult on a solution to this issue under a further package of changes that it expects to make to legislation in 2017

• Concerns that it is currently not possible to make a transfer between a section of a scheme that was formerly contracted out on a salary-related basis and a DC section within the same scheme. The DWP intends to keep this issue on its agenda but notes that it does not have appropriate powers in primary legislation to make the changes requested

• How best to adjust the DWP’s trivial commutation rules to be consistent with HMRC’s rules. The DWP continues to promise to address this through a consultation, but there is no timing for this

• The DWP’s proposals to apply new restrictions on post-April 2016 amendments to Section 9(2B) rights. This too is promised for the future

The DWP also says that:

• It had considered placing a specific requirement on schemes so that they should inform members that the scheme had ceased to be a contracted out scheme. However, it has decided against this because the existing disclosure legislation already places a requirement on schemes to notify members which employment is contracted out and which is not

• A number of communications (including employer packs) will be published before contracting out ends informing schemes of their statutory requirements as far as making members aware of the ending of contracting out and the change in the amount of national insurance they will pay

• It will not be necessary for schemes to formally make an election to surrender their contracting out certificates

The Pensions Act 2014 (Abolition of Contracting-out for Salary Related Pension Schemes) (Consequential Amendments and Savings) Order 2016 (SI 2016/200) comes into force in stages, starting on 6 April 2016.

DWP lays order to prevent CEPs being required to be paid on the ending of contracting out

On 2 March 2016 the DWP laid an Order before Parliament whose purpose is to clarify that a contributions equivalent premium (CEP) can only be required to be paid in respect of a member who ceases to be in pensionable service with less than two years’ service and without accruing any rights.

It had come to light that it was possible to interpret current legislation as requiring schemes to pay a CEP at the point that contracting out is abolished (6 April 2016) where a member has less than two years’ service at that point. This is contrary to the policy intention as the member may remain a member of the scheme after abolition, pass the two years’ pensionable service point and accrue rights in the scheme.

The Order also makes provision in relation to the detail and practicalities of CEP payments, such as:

• Providing detail on the time limits for notification and payment of a CEP to HMRC and for refund of a CEP

• Making provision for a de minimis so that where the amount of the CEP is £17 or less, the payment does not have to be made; and

• Providing that a CEP must be paid out of the resources of the scheme or, where appropriate, the Pension Protection Fund

The Pensions Act 2014 (Contributions Equivalent Premium) (Consequential Provision) and (Savings) (Amendment) Order 2016 (SI 2016/252) comes into force on 6 April 2016.

The DWP has separately announced that this Order is the final piece of secondary legislation that it will be making before 6 April 2016 to support the ending of contracting out.

DWP follows through on simplification of the Audited Accounts regulations

The DWP has gone ahead with simplifications to the 1996 Audited Accounts and Statement from the Auditor regulations that it proposed last November (see Pensions Bulletin 2015/49).

As proposed, changes are made to the investment disclosure requirements to better align them with FRS 102 as a result of which most of the current detailed requirements are revoked. Some small changes have been made to the auditor statement aspect following comments received.

The DWP has also proceeded to exempt multi-employer schemes with at least 20 participating employers 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.

Amending regulations (SI 2016/229) making these changes have been made and will come into force on 1 April 2016.

There is a promise to respond to the reducing regulatory burdens and investment disclosure aspects of the consultation “in due course”.

PASA launches phase 2 of its GMP reconciliation and rectification guidance

The Pensions Administration Standards Association has added a further three guidance notes to its suite of material whose purpose is to provide assistance to pension schemes as they reconcile contracted out benefits and take any necessary rectification action. This follows PASA’s first three guidance notes and process map which were issued in January (see Pensions Bulletin 2016/02).

The latest guidance notes look primarily at the rectification phase. Guidance Note 4 provides an overview of the information that trustees may wish to obtain from their administrators to satisfy themselves that the reconciliation exercise is complete and to make any subsequent decisions about rectification. Guidance Note 5 covers at some length what trustees should do to correct any underpayments and deal with overpayments in a pragmatic and proportionate way. Guidance Note 6 considers special cases such as deceased members, historic transfers, pension sharing orders and commuted benefits.

New State Pension – secondary legislation finalised

Three Instruments have now been finalised, relating to the introduction of the new State Pension this April, following consideration of drafts that were laid before Parliament.

• The State Pension (Amendment) Regulations 2016 (SI 2016/227) set the starting rate of the new State Pension as £155.65 pw (see Pensions Bulletin 2016/02)

• The State Pension and Occupational Pension Schemes (Miscellaneous Amendments) Regulations 2016 (SI 2016/199) and The Pensions Act 2014 (Consequential and Supplementary Amendments) Order 2016 (SI 2016/224) make a number of technical adjustments to the legislation governing and consequential to the operation of the new State Pension (see Pensions Bulletin 2015/51)

All three instruments are identical to the drafts on which we reported earlier.

In addition, The State Pension (Amendment) (No. 2) Regulations 2016 (SI 2016/240) add a substantial new section to the 2015 State Pension Regulations, setting out how the crediting of national insurance contributions works for the purpose of building up entitlement to the new State Pension.

DWP updates its new State Pension fact sheets

The DWP has made minor adjustments to its suite of fact sheets on the new State Pension. The most significant change is that the age at which a request for a new State Pension statement can be made has fallen from 55 to 50. Such a statement sets out an estimate of the individual’s starting amount under the new system. A separate Q&A document says that those younger than 50 can also request a State Pension statement but it will be based on the current system. It also says that the new State Pension will be subject to the triple lock until 2020 (but not any Protected Payment element which will continue to rise with prices).

Latest developments in holiday pay case confirm trend to include variable pay

The Employment Appeal Tribunal has confirmed in Lock v British Gas that results-based commission should be taken into account when calculating holiday pay. In doing so it upheld the decision of the Employment Tribunal (which in turn followed on from the 2014 European Court of Justice ruling (see Pensions Bulletin 2014/24).

This is part of a strand (see Pensions Bulletin 2014/ 46) where the courts have held that various types of variable pay must be included in holiday pay.

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.