Pensions Outlook Newsletter – Winter 2019

21st January 2019

In this Winter edition of Pensions Outlook we consider the following issues in the pensions and benefits arena:
  • Some key dates for 2019
  • PPF changes on contingent assets – trustees’ need to urgently review security arrangements already in place
  • SSAS’s and tax traps
  • LGPS focus: payment of “exit credits” at the end of admission agreements
  • GMP equalisation update
  • Brexit update
  • Decision from Supreme Court on switching from RPI to CPI.

We continue to help employers and trustees on a range of pension issues and are engaged in a number of interesting pensions projects for clients. We work across our offices in Southampton, London, Reading and Cardiff.

If you have any questions on any of the matters that we cover, please contact Rupert Graham-Evans or another member of the Pensions Team.

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Some key dates for 2019

In the next 3 months:

  • The Government’s consultation on so-called “superfunds” closes on 1 February. The proposals include strict conditions for transferring to one of these funds which is likely to mean that they are unattractive or unavailable to many schemes and sponsors;
  • Applications for authorisation as a master trustee have to be made by 31 March. TPR are expected to take about 6 months to deal with the applications from existing funds. Once this authorisation regime is fully up and running employers will only be able use those with authorisation (or a group personal pension arrangement). This may be a relevant issue for employers and automatic enrolment;
  • The minimum level of contributions for automatic enrolment increases from 6 April with an overall minimum of 8% and a minimum employer contribution of 3%. Depending on current levels of contributions, earnings recognised for this purpose, etc. employers may need to consult about these changes but will in any event need to make sure that payroll changes are implemented.

Contact Adrian Lamb to find out more information about these key dates.

PPF changes on contingent assets – trustees need to urgently review trustee security arrangements already in place                             

Re-execution required for certain Type A and B contingent assets. Urgent action may be required for levy reduction purposes.

The PPF published revised standard forms for contingent assets in January 2018.  For the levy year 2018/19, the new standard forms had to be used for any new arrangements executed on or after that date. However, previous arrangements could be certified or recertified without moving to the new versions.

In December 2018, the Pension Protection Fund (PPF) published its final determination for the levy year 2019/20.  The new determination sets out a different approach. Schemes with any Type A (parental guarantee) and Type B (security over an asset) contingent assets that include a fixed sum maximum amount element will need to re-execute their contingent asset arrangements, using the new standard form agreements if they wish to obtain levy credit. The re-executed versions must be certified by 31 March 2019 and hard copies must reach the PPF by 5pm on 1 April 2019, provided that all the necessary information has been entered on Exchange by midnight on 31 March. Urgent action will therefore need to be taken by some schemes, allowing sufficient time for the preparation and execution of all documentation, including the legal opinion.

Explore what action needs to be taken by getting in touch with John Hamilton.

SSAS’s and tax traps                                                    

Where a small pension scheme known as a ‘SSAS’ is used to provide retirement benefits for directors or senior employees, the trustees need to watch out for what might seem like tax traps. Once the trustees fall into a trap like this, it might prove difficult or impossible for them to climb out of it, and the trustees may well be faced with a substantial tax charge.

By way of an overview, a SSAS, or small self-administered scheme, is a type of pension scheme which tends to be set up by a small or medium size company for their directors or senior employees. A SSAS is run by trustees, who are also members of the scheme, and has fewer than 12 members.

Many small and medium size companies use a SSAS because funds in a SSAS can be invested in the company which set it up, where those funds are then used to provide retirement benefits, in a tax-efficient way. For example, a SSAS often holds premises which are then leased by the SSAS to the company which set it up.

The small and collegiate nature of a SSAS means that a scheme like this tends not to have the often substantial professional support and oversight of much bigger pension schemes for an entire workforce or in large organisations. This can prove a challenge in the operation of a SSAS.

Clearly, for example, trustees of a SSAS do need to be mindful of the tax rules which apply to pension schemes. To state the obvious, where trustees do not follow the tax rules, tax charges can arise, and those charges can be at substantial rates of 40% or 55%. The tax rules are complex, as you would expect, and where schemes lack proper professional support, traps and pitfalls lurk, into which trustees can unwittingly fall.

We have seen several examples of this happening, where a payment by a SSAS does not satisfy the tax rules. Often that occurs where a company, in reality, only uses a SSAS for the purposes of its wider business, and not for retirement benefits. The many and complex conditions in the tax rules exist to protect the policy that tax concessions are granted for funds which are ultimately used to provide retirement benefits, rather than for a company which only uses a SSAS for its business.

The message here is for trustees of a SSAS to be careful to follow the tax rules, and to use professional support on an ongoing basis.

Find out more about small pension schemes and how we can help by speaking to by Sean McNulty.

LGPS focus: payment of “exit credits” at the end of admission agreements

On 14 May 2018, amendments to Regulation 64 of the Local Government Pension Scheme Regulations came into force.  In broad terms, the result of the amendments is that where an employer ceases to participate in the LGPS, the Administering Authority is required to obtain:

  • a revised actuarial valuation of the liabilities in respect of benefits in the LGPS for that employer’s current and former members of the LGPS; and
  • a revised rates and adjustments certificate showing whether a payment is due from the departing employer to the LGPS (an “exit payment”) or whether a payment is due from the LGPS to the departing employer (an “exit credit”).  If an exit credit is payable to a departing employer, it must be paid within 3 months of ceasing to participate unless otherwise agreed.

The amendment was a fairly significant departure from the previous position where a departing employer could not recover any “surplus” (the now-named “exit credit”) from the LGPS.  We are aware of exit credits having been paid to departing employers since the changes came into force notwithstanding some initial commentary as to whether the actuarial calculations might limit exit credits.  An area that is open to question is what the Administering Authority’s views on the payment of an exit credit would be where the commercial agreement (typically entered into with the Local Authority but not in its capacity as Administering Authority) contained a risk share or pass-through cost arrangement – there are potentially a myriad of different possible costing / pricing arrangements and Local Authorities are likely to draw such arrangements to the attention of the Administering Authority where an exit credit is payable to a departing employer in these circumstances.  On the face of it, as currently drafted, the Regulations require the exit credit to be paid irrespective of the underlying commercial agreement and to alter that position will require legislation.  Employers that participate in the LGPS should plan for their departure from the LGPS and consider whether the commercial contracts they have entered into, contain any provisions dealing with cost or risk sharing and also, although unlikely for older contracts, whether they deal with exit credits.

Discover more about LGPS by getting in touch with Ron Burgess.

GMP equalisation

The High Court answered the long standing question on 26 October 2018, namely whether pension scheme trustees must adjust the non-GMP benefits (called the “Excess”) so that the totality of scheme benefits for male and female members with the same earnings, age and periods of pensionable service are the same.

This decision was justified on the basis that scheme benefits are the same as pay, and the principles of equal pay for male and female employees as derived from principle of European Law.

The inequality at stake here is derived from how the GMP rules themselves operate.

The decision indicates that there are various options for trustees to implement equalisation in relation to GMPs, some of which involve the agreement of the principal employer.

Trustees will need actuarial advice on the best and most appropriate methods to effect GMP equalisation. Factors like the quality of GMP data and the likely agreement of the principal employer might impact on the choice of the equalisation method.

Specific advice will be needed to develop trustee policies on the payment of transfer values from the scheme. Should the trustee pay a partial transfer value in all cases or operate different policies for statutory and non-statutory transfers ? Will receiving schemes allow more than one transfer of benefits? Will the transferring trustee get a statutory discharge? Can the trustees rely on scheme forfeiture clauses to limit the look back period for the calculation of GMPs or should they look back and adjust benefits for all pensionable service relating to the GMP?

Trustees will want to ensure members are kept up to date with good communications.

For actuarial advice contact Rupert Graham-Evans.

Brexit – impact on employer covenant

Trustees of DB schemes should continue to attempt to monitor the impact of Brexit on their schemes. Before the referendum in 2016 many trustees have already undergone de-risking of their investment strategies to switch investments to bonds to reduce volatility in investment performance. Brexit has caused a fall in bond yields which will lead trustees to reconsider their investment strategies, including whether such a reliance on bonds is still appropriate. Some schemes may consider re-risking to maximise investment performance for the fund and match their liability profiles.

Trustees should monitor the strength of their employer covenant, and ask specific questions of the principle employer to ascertain whether Brexit will have a material impact on its trading performance and its finances, which will be material to the employer covenant. Much will depend on what type of Brexit the UK has, including whether there is to be Brexit at all. This is all very unclear politically but trustees should use Brexit to re-engage this covenant monitoring process, which should be a key feature of their role as trustees, to protect the security of member benefits.

Find out how we can help trustees by contacting Rupert Graham-Evans.

Decision from Supreme Court on switching from RPI to CPI

On 7 November 2018 the Supreme Court in the Barnardo’s case gave its ruling on whether the trustees of the Barnardo’s DB scheme could legitimately switch from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) as a measure of calculating pension increases. Both RPI and CPI are valid price indexes used to measure inflation. CPI is thought to be less generous and is now used as the statutory basis for the revaluation of pension benefits for early leavers, and is also used now for public sector pension schemes established under legislation.

Barnardo’s wished to switch to CPI for the calculation of pension increases to save costs for the scheme.

The decision of the Supreme Court was based on the construction of the meaning of RPI in the Barnardo’s scheme rules, which referred to the RPI itself or “any other replacement adopted by the Trustees without prejudicing Approval“.  The Supreme Court upheld the previous decision of the Court of Appeal, which decided that this wording did not allow the trustees to select CPI as an alternative inflationary index to calculate pension increases. In that sense the Court decided that the word “replacement” means an index which actually replaces RPI and is then adopted by the trustees. There can be no switch of index on this basis, as the RPI is still in existence.

This decision does strike a blow to trustees and sponsors of DB schemes who wish to switch to CPI for pension increases. It seems harsh in the light of the fact that the CPI is so widely used in the pensions context to calculate scheme liabilities. This decision does also force home the importance of considering the bespoke requirements of each DB pension trust. In that sense it is key to review the precise terms of the pension scheme deed and rules if any change in this area is to be contemplated. A change may still be possible but it depends on the construction of the pension scheme rules.

Discover more about switching from the RPI to the CPI in calulating pensions by speaking to Rupert Graham-Evans.