EPB Pensions Bulletin: 17-06-10

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EPB Pension Bulletin

17 June 2010

Headlines:


Regulator issues draft guidance on monitoring employer covenants

The Pensions Regulator is consulting on draft guidance to help trustees monitor their employer’s covenants.

Broadly, the strength of an employer’s covenant is determined by its legal obligation and financial ability to support the pension scheme. The Regulator states that its draft guidance “sets out standard practice which [it] expect trustees to follow in assessing, monitoring and taking action on employer covenant”.

The consultation closes 7 September 2010.

The consultation document is also accompanies by internet based learning tools for trustees and a short guide for employers.

http://www.thepensionsregulator.gov.uk/press/pn10-10.aspx

http://www.thepensionsregulator.gov.uk/strength.aspx

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Regulator outlines expectations for trustees during transfer exercises

The Pensions Regulator is calling on “trustees to play a more active role in guarding against transfers which may not be in members’ best interests”. For example the Regulator expects trustees to “take responsibility” to ensure that employers offering transfer incentives (or carrying out other benefit modification exercises) “structure the exercise so that members have the information and access to impartial advice”.

Over the summer, the Regulator is expected to consult on revised guidance on transfer incentives, and other situations in which members are asked to consider substituting or converting their benefits. This will replace the current inducements guidance and will aim to adopt a principles-based approach to the issue.

http://www.thepensionsregulator.gov.uk/press/pn10-09.aspx

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Exemption allows third parties to communicate with employees about pensions

The Financial Services and Markets Act 2000 (Financial Promotions) (Amendment) Order 2010 (the 2010 Order) has come into force, allowing certain third parties (who are not authorised under the financial services regime) to communicate with employees in relation to group personal pension schemes or stakeholder pension schemes.

Legislation generally prohibits non-authorised persons to, “in the course of business, communicate an invitation or inducement to engage in investment activity” (unless an authorised person approves a communication).

The 2010 Order provides an exemption to third parties that are contracted with the employer (or persons acting on the third party’s behalf and contracted with them). Other conditions must also be satisfied.

Before the 2010 Order came into force, there was already an exemption for employers in relation to group personal pension schemes or stakeholder pension schemes. The new exemption for third parties is intended to cover employers who have outsourced their pensions administration arrangements.

These changes are long awaited - HM Treasury first consulted on this in March 2006 and then consulted again in 2008! For background see our website for EPB bulletin 10 October 2008 and 30 September 2008.

Follow this link to access the 2010 Order: http://www.opsi.gov.uk/si/si2010/uksi_20100905_en_1

Generally, there are tight legal restrictions on what employers can communicate to its employees about its pension scheme. For general guidance see the Pension Regulator’s and Financial Services Authority September 2009 note: Talking to your employees about pensions (http://www.fsa.gov.uk/smallfirms/resources/factsheets/pdfs/tprfsa_guide.pdf).

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Correcting Event Reports for previous tax years – 1 July deadline quickly approaching

Trustees and administrators may need to act quickly (perhaps as soon as 1 July) if they wish to reduce the tax charges that their pension scheme will be required to pay for unauthorised payments they reported in previous tax years.

Both the pension scheme and member are required to pay a tax charge if a pension scheme makes a payment, which is not authorised under the Finance Act 2004, to a member. However, the scheme can reduce its tax charge (scheme sanction charge) by up to 25% if the member has paid their own tax via self assessment tax returns.

In the past, there have been difficulties with schemes being able to claim the reduction in the scheme sanction charge - for example, because the scheme relied on the member to provide evidence that they had paid their own charge (members have little incentive to provide such information). Because of this, HM Revenue and Customs (HMRC) has not raised scheme sanction charges since 6 April 2006.

HMRC to start raising charges - Between 1 July and 30 September 2010, HMRC will start to raise the scheme sanction charge for unauthorised payments that were reported (through an Event Report) in the 2006/2007, 2007/2008 and 2008/2009 tax years.

Good news - If HMRC has already been notified of the unauthorised payments in previous tax years it will automatically allow the 25% deduction to the scheme sanction charges (even if the member has not provided information about the tax they have paid).

Action point 1 – However, trustees and administrators may need to review and amend previous Event Reports before HMRC raises the scheme sanction charge. This is because some previous payments were unauthorised at the time they were reported but are now retrospectively treated as authorised because of changes to legislation (e.g. pensions and lump sums paid in error and death benefits paid to some dependants - Authorised Payment Regulations 2009 (SI 2009/1171); Taxation of Pension Schemes (Transitional Provisions) (Amendment No. 2) Order 2009 (SI 2009/1989)). Correcting these reports should remove the scheme’s liability for these unauthorised payments.

Action point 2 – HMRC comments that even though it is not raising the charge until July/September 2010, schemes should consider making a payment on account to stop any further interest for late payment accruing (the scheme sanction charge is payable by 31 January following the end of the tax year that the charge arose).

Action point 3 – Schemes may also want to inform members that they may recovery tax paid on payments that were unauthorised when paid to them but are not taxable because of retrospective changes. HMRC says that self assessment tax returns should be amended.

Going forward – To make it easier to reduce the scheme sanction charge for the current tax year and future tax years, the scheme can ask the member to complete a mandate giving authority to withhold, from the unauthorised payment, an amount equivalent to the tax that the member will have to pay. If the member completes the mandate, the scheme will be able to deduct the amount from the unauthorised payment and send it to HMRC. The advantage to the member of completing the mandate is they will not have to provide details of the tax charge on self-assessment tax return and will, therefore, have nothing further to do. The advantage for the scheme is that it should make it easier for them to get reductions in their scheme sanction charge. HMRC will raise the scheme sanction charge taking into account the amount the scheme deducted and sent to HMRC.

The new mandate form is voluntary and HMRC comments that: “If the member does not want to sign a mandate then the normal rules will apply and the member will have to account to HMRC for the tax on their Self Assessment tax return.”

See HMRC’s newsletter 40 for more information and to access the mandate form: http://www.hmrc.gov.uk/pensionschemes/ps-newsletter40.htm

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Regulator aims to achieve “step change” in record keeping standards

The Regulator has updated its guidance on improving record keeping standards in pension schemes, which it recommends schemes adopt as an “essential tool” within their internal controls system. It has also issued its response to its February 2010 consultation on the proposed changes.

In February 2010 the Regulator consulted on updating its January 2009 guidance after its research revealed “no evidence of marked improvement in administration practices since the guidance was issued” – see EPB bulletin 19 February 2010 on our website.

The Regulator has now confirmed that it intends to “strengthen its approach to achieve a step change in this area”. To this end the new guidance contains, among other things, targets for data accuracy and a deadline (December 2012) to achieve these standards for some types of data.

The Regulator will report again in 2011 on the take-up of its updated guidance and its effectiveness in addressing problems it has identified.

http://www.thepensionsregulator.gov.uk/press/pn10-08.aspx


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Regulator updates its winding up guidance

The Pensions Regulator has updated its 2008 guidance on winding up and issued its response to its consultation on the draft version of this guidance.

The guidance makes suggestions to help trustees and others meet the Regulator’s expectation that they complete at least the “key activities” within 2 years when winding up an occupational pension scheme.

http://www.thepensionsregulator.gov.uk/press/pn10-08.aspx


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Regulator changes its Trustee Register criteria

The Pensions Regulator has changed how it assesses some of the judgment-based conditions on whether trustees should be acceptance onto the Trustee Register.

The Regulator comments that the primary purpose of this register is to “provide a pool of appropriate trustees from which the regulator may make appointments”.

The following documents are now on the Regulator’s website:

  • a response to its consultation on the Register; 
  • guidance on how it will assess the judgment-based conditions;
  • new application forms; and 
  • guidance on completing the new application forms.

The Regulator has said that it is contacting those trustees currently on the Trustee Register to invite them to re-submit their application in the new format by 31 July 2010. Alternatively, trustees will be given the opportunity to step down from the Register.

Only applicants that meet the Regulator’s new criteria will be accepted on the Register or, if already on the register, allowed to remain on it.

http://www.thepensionsregulator.gov.uk/trustees/independent-trustee-register.aspx

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PPF levy year 2010/2011 and 2011/2012 – reminder of 30 June 2010 deadline

Trustees are reminded that 5.00pm, 30 June 2010 is the deadline for submitting: 

  • for the Pension Protection Fund (PPF) 2010/11 levy year, final certification of full block transfers that have taken place up to and including 31 March 2010;
  • for the PPF 2011/12 levy year, final certification of partial block transfers that have taken place up to and including 31 March 2010.

The PPF comments that it is their “general policy to enforce deadlines strictly, even where the [PPF] Board has discretion in the matter, and missing them may have adverse consequences for schemes”.

For other PPF deadlines, see its website: http://www.pensionprotectionfund.org.uk/levy/howthelevyworks/pages/datadeadlines.aspx

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Pensions client seminar, 1 July 2010 - register now

If you would like to register for our pensions technical seminar on Thursday, 1 July 2010 please email magdalena.flynn@freshfields.com.

The seminar will take place 9.00am to 10.00am but breakfast will be served from 8.30am.

Our seminar will aim to give you a practical understanding of: 

  • Two new easements that employers can use during corporate restructurings to manage pension scheme debts that can arise under section 75 of the Pensions Act 1995.

We will be discussing if these easements will be helpful to employers, how they compare to tried-and-tested strategies for managing section 75 debts and the role of trustees if employers choose to use these new tools. 

  • What action may be needed to retain employers’ right to scheme surpluses (and maybe other payments).

Employers may need to ask trustees to pass a resolution before 6 April 2011 to retain the scheme’s power to make payments to employers. We will explain why early action may be needed and the potential consequences of failing to do so. 

  • Legal and practical issues to consider if using “buy-ins” to manage pension scheme liabilities.

Buy-ins can be an attractive and effective way in which employers and trustees can tackle significant (and highly volatile) deficits and risks in their defined benefit pension scheme. We will provide an overview of the legal and practical issues that should be considered when preparing for a buy-in. 

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If you have any questions about the content of EPB bulletin or if you have trouble accessing any of the hyperlinks, please contact Magdalena Flynn.

Freshfields Bruckhaus Deringer is not responsible for the content of external internet sites which link to this site or which are linked to from it.

The information contained in EPB bulletin is not intended to be a comprehensive study and should not be relied on or treated as a substitute for specific advice on individual situations.