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LATEST NEWS - Pension Planner

FCA final rules on information prompts in the annuity market


Summary

The Financial Conduct Authority (FCA) has issued a policy statement containing the final rules on implementing information prompts in the annuity market.

The changes require firms to inform consumers of the benefits of comparing quotations from different providers and, where appropriate, switching provider before a potential purchase.

The rules require firms to include certain information when communicating an annuity quotation to a consumer as part of pre-sale disclosure. This should show the difference between the provider's own quotation and the highest guaranteed quotation available on the open market.

Firms affected by these changes will need to ensure compliance from 1 March 2018.


Key dates

FCA consultation paper (CP16/37) issued on 25 November 2016.

Consultation period closeed on 24 February 2017.

Policy statement containing final rules (PS17/12) issued on 26 May 2017.

Firms affected by these changes will need to ensure compliance from 1 March 2018 


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British Airways PLC v Airways Pension Scheme Trustee Limited: trustees acted properly in amending the scheme to allow discretionary pension increases and in awarding increases


Summary

The trustees acted properly in using their unilateral power to amend the scheme to allow discretionary pension increases and in subsequently deciding to award increases.

Background

The rules of the Airways Pension Scheme provided for annual increases to be paid based on statutory orders.  The power of amendment stated that no amendment could be made that (among other things) would have effect of changing the purposes of the scheme.

In 2010 the Government switched from RPI to CPI for statutory pension increases. In response, the trustees used their unilateral power of amendment to introduce a new rule 15 allowing them to award discretionary annual increases.

The employer challenged both the exercise of the power of amendment and the subsequent decisions by the trustees in 2013 under amended rule 15 to award additional pension increases.

Judgment

Morgan J found in favour of the trustees on all points, except that one purported exercise of amended rule 15 was invalid because no effective date was determined.

The amendment to the pension increase rule was valid and effective; it was not beyond the scope of the power to amend or an abuse of the power to amend. The power to amend was unilateral.  The employer's position was relevant but it did not have a veto, regardless of whether the scheme was in surplus or deficit. The amendment did not offend the restriction in the objects clause of the scheme preventing “benevolent or compassionate” payments, nor did it have the effect of changing the purposes of the scheme. The trustees actively and genuinely engaged with the decision-making process in deciding to amend the rule and were not guilty of unlawful pre-determination.

The subsequent decision to award discretionary increases was also valid, for the same reasons as the amendment was found to be. The Court also found that the trustees had regard to all relevant factors (including the employer's wishes and interests and its funding commitments, the position of the Pensions Regulator, and the potential cost) and had not taken into account any irrelevant considerations.


Key dates

19 May 2017


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Pensions Regulator: annual funding statement


Summary

The Pensions Regulator has issued its annual funding statement, aimed primarily at schemes undertaking valuations with effective dates from 22 September 2016 to 21 September 2017. Points to note include the following.

  • The Regulator expects that market conditions mean that many schemes are likely to show larger funding deficits than projected in their previous valuation. Its analysis suggests, however, that 85-90% of schemes have employers who are able to manage the deficits and so do not have long term sustainability issues.
  • The Regulator comments that all schemes are expected to put contingency plans in place in the event a downside risk materialises. Where schemes find themselves in a worse funding position than expected, trustees should implement their contingency plans to recover their funding position and to mitigate against further downside risk. Trustees should agree their contingency plan with the employer in advance and should ensure that it is legally enforceable.
  • When setting discount rate assumptions, trustees should take robust advice and should document clearly the rationale for any change or, where the same method is retained, why they consider the method remains prudent.
  • The Regulator plans to take a tougher approach to schemes which fail to submit their valuations on time.
  • Schemes have been segmented according to their risk profile (including any increased deficit which could arise in future because of the scheme's investment strategy) into four groups:
    • Strong / tending to strong employer; strong technical provisions and recovery plans which are not unduly long: as a minimum, trustees should continue with the current pace of funding and should not extend their recovery plan without good reason;
    • Strong / tending to strong employer; weak technical provisions and long recovery plans: trustees should seek higher contributions now to mitigate against future risks;
    • Weak employer but trustees assume a strong covenant because of strong group companies, though no formal support in place: trustees should seek legally enforceable support and should take every opportunity to reduce risk to an appropriate level or secure additional funding.
    • Weak employer at risk of being unable / already unable to support the scheme adequately: further action is expected of trustees of stressed schemes – please see below.

Stressed schemes

  • The Regulator estimates that approximately 5% of schemes in the group covered by this annual funding statement are stressed.
  • Trustees of stressed schemes will be expected to demonstrate to the Regulator that they have taken appropriate measures to reach the best possible funding outcome, including that:
    • the scheme is closed to future accrual;
    • they have tested the strength of the employer covenant, including considering the effect of any dividends paid or due to be paid;
    • they have sought to maximise non-cash support from the employer and, where applicable, the wider group;
    • they have identified risks to the scheme and taken steps to control these;
    • where the rules allow, they have considered whether the scheme should be wound up.

Dividends

  • The Regulator comments that where an employer's total distribution to shareholders is higher than deficit reduction contributions to the pension scheme, the scheme should have a relatively short recovery plan, underpinned by an investment strategy which does not rely excessively on investment outperformance. Where this is not adhered to, the Regulator warns that it will consider opening an investigation.

Key dates

Annual funding statement issued on 15 May 2017. 


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EMIR: extension of pension schemes exemption


Summary

The European Commission has adopted a proposal to extend the exemption for pension schemes from central clearing requirements for over the counter (OTC) derivative transactions for a further three years. The proposal also will enable the Commission to extend this exemption by an additional two years.

The extension follows a report published by the Commission in November 2016 which commented that clearing solutions which enable pension schemes to post non-cash assets as variation margin were unlikely to be available in the foreseeable future.

Background

A new European regulation on over the counter (OTC) derivatives, commonly known as the European Market Infrastructure Regulation (EMIR), has introduced new requirements including an obligation to clear trades through a central counterparty (CPP). A CCP acts as an intermediary between the two parties to the trade, so that each party has a separate contract directly with the CCP. By guaranteeing the performance of both parties' obligations, clearing trades through a CCP reduces credit and counterparty risk.

Currently, to comply with the central clearing obligations pension schemes would have to source cash. The Commission has recognised that pension schemes often do not hold significant amounts of cash or liquid assets, so compliance could be costly and have a negative impact on pensioners' income.


Key dates

European Commission published a legislative proposal for a Regulation to amend EMIR, plus a factsheet with Q&As on the proposal on 4 May 2017. 


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Mrs Y: trustees not required to inform retired member of changes to normal pension age or transfer calculation factors


Summary

The Ombudsman found there was no duty on the trustees to continue to inform retired members of changes to normal pension age or calculation basis for transfers; a claim by ex-spouse of a retired member that this might be relevant to couples who were divorcing was rejected.

Background

Mrs Y complained that she was misinformed regarding the age at which she would be able to access an unreduced share of her ex-husband's pension, on obtaining a pension sharing order. Mrs Y claimed that they went ahead with their divorce in 2015, having relied on information provided by the scheme in 2004 that she could receive an unreduced pension at age 63.5 (earlier than the normal pension age of 65).

 Mrs Y also claimed that the Cash Equivalent Transfer Value (CETV) quote sent on 30 March 2015 was invalid, as the basis for calculations had changed by April 2015, after she had received the quotewith the result that, once the pension sharing order had been implemented, the final CETV calculations were lower. She claimed she should have been informed of this change.

Determination

The Ombudsman dismissed the complaint.

The scheme had no duty to notify Professor Y of the change to normal pensionable age in 2011, as he had retired 14 years before the change was implemented. This information was stated on the March 2015 quotation's covering letter and was readily available on the scheme's website. The scheme was also not obliged to inform Professor Y that the basis for CETVs was changing, because the initial March quotation had stated it was only an illustration, and would be recalculated when the Decree Absolute (finalising the divorce) was granted by the court.

The trustees had a fiduciary duty to ensure the scheme was being managed in accordance with the scheme rules, which includes ensuring the calculation basis for transfers was suitable. 


Key dates

Determination issued 22 March 2017


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Pension Schemes Act 2017: power to override contract terms


Summary

In addition to provisions concerning master trusts, the Pension Schemes Act 2017 also contains an amendment to paragraph 6 of schedule 18 to the Pensions Act 2014, to permit regulations to override terms in a "relevant contract".  A relevant contract is defined as a contract between the trustees or managers of a "relevant scheme" and a service provider in relation to the scheme. 

A relevant scheme is defined in regulations to be an occupational pension scheme which provides money purchase benefits (or, where a scheme provides money purchase and non-money purchase benefits, the scheme so far as it relates to those benefits), except for executive pension plans or certain small schemes.  Schedule 18 of the 2014 Act already enables regulations to override provisions of a relevant scheme.

At Third Reading of the Bill in the House of Commons, the Under-Secretary of State for Pensions (Richard Harrington) explained that the government intends to use the provision, along with existing powers, to make regulations to cap early exit charges and ban member-borne commission in some occupational pension schemes.


Key dates

The Pension Schemes Bill received Royal Assent on 27 April 2017 to become the Pension Schemes Act 2017.  

Section 41 (power to override contract terms) came into force on 27 April 2017.


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Pension Schemes Act 2017: authorisation of master trusts


Summary

The Pensions Schemes Bill, which provides for the authorisation of master trusts, has received Royal Assent to become the Pension Schemes Act 2017.  Many details of the new requirements and procedures will be set out in regulations.

Definition of master trust scheme

An occupational scheme will be a master trust scheme if it:

  • provides money purchase benefits (whether or not it also provides other benefits);
  • is used, or intended to be used, by two or more employers;
  • is not used, or intended to be used, only by connected employers; and
  • it is not within a specified category of public service pension scheme.

Comments have been made that the definition is wide enough to catch defined benefit non-associated multi-employer schemes (NAMES), where the schemes provide money purchase additional voluntary contributions (AVCs).

In Committee in the House of Lords, an amendment which would have allowed NAMES schemes to be excluded from the definition of "master trust" was rejected. Instead, the government stated that it intends to use power under section 40to disapply all or part of the master trust provisions in relation to mixed benefit schemes where the only money purchase benefits provided are AVCs. However, it is not clear whether NAME schemes will still have to comply with the requirements for authorisation, including meeting the authorisation criteria (please see below).

Authorisation of master trust schemes

  • A master trust may only be operated if it is authorised by the Pensions Regulator.
  • A person will be "operating" a master trust if s/he:
    • accepts money from employers or members (or prospective employers or members) in respect of fees, charges, contributions or otherwise in respect of the scheme; or
    • enters an agreement with an employer in relation to the provision of pension savings for employees or other workers.
  • When considering an application for authorisation, the Regulator must decide whether it is satisfied that the scheme meets the "authorisation criteria", which are that:
    • the persons involved with the scheme (including the person who established the scheme, the trustees or manager, anyone with power to vary the scheme or to appoint or remove a trustee or manager, the scheme strategist and scheme funder) are fit and proper;
    • the scheme is financially sustainable;
    • each scheme funder meets specified requirements (please see below);
    • the scheme's systems and processes are sufficient to ensure the scheme is run effectively; and
    • the scheme has an adequate continuity strategy.

Scheme funder

  • A master trust will be required to have a "scheme funder", which must be a separate legal entity.
  • The scheme funder must also only carry out activities that relate directly to master trust schemes in relation to which it is a scheme funder (or prospective scheme funder).  This requirement was amended as the Bill passed through Parliament: as originally drafted a scheme funder could operate in relation to one scheme only.  In addition, a regulation making power was added, enabling the Secretary of State to make exceptions to the requirement.  In debate in the House of Lords, the Under-Secretary of State explained that, for example, a scheme funder which carried out activities other than those relating to the master trust might be required to disclose additional information in its accounts, so that activities relating to the master trust would be distinct from its other lines of business.  Where the scheme funder is part of a corporate group, disclosure may be required about the group's structure to the extent that it affects the financing of the master trust.  
  • In Report Stage in the House of Lords, an opposition amendment was passed to require the Secretary of State to provide for a funder of last resort, to manage any cases where the scheme does not have sufficient resources to cover the costs of running the scheme after a triggering event (please see below).  This clause was subsequently removed in the House of Commons.

Financial sustainability

  • When considering the financial sustainability of the scheme, the Regulator must be satisfied that the scheme has sufficient financial resources to meet the costs of setting up and running the scheme, and also of complying with duties following a "triggering event" (please see below). The scheme's resources must also be sufficient to cover the costs of running the scheme after a triggering event occurs for a period the Regulator considers appropriate for the scheme (between six months and two years). In Committee in the Lords, the government stated that when determining whether a master trust is financially sustainable, the Regulator may take account only resources relating to the money purchase part of a the scheme.
  • The scheme's continuity strategy must address how members' interests will be protected if a triggering event occurs and must set out the administration charges which will apply.

Triggering events

Triggering events for the purposes of the Act include:

  • the Regulator giving a warning notice or determination notice relating to the withdrawal of the scheme's authorisation, or a notice that the scheme is unauthorised; 
  • a scheme funder undergoing an insolvency event, being unlikely to continue as a going concern, or terminating its relationship with the master trust; 
  • a decision being made to wind up the master trust;
  • an event occurring which will or may result in the master trust being wound up; or
  • the trustees deciding that the master trust is at risk of failure.

Continuity options

  • When a triggering event occurs, the trustees must comply with any notification requirements and must pursue one of two "continuity options". 
  • Continuity option 1 must be followed when the Regulator has made a final decision to withdraw authorisation of the master trust or has issued a notice that the trust is unauthorised. In other cases, the trustees must decide whether to pursue continuity option 1 or 2.
  • Under Continuity option 1, the accrued rights of members must be transferred to one or more other master trusts (or to an alternative scheme meeting prescribed requirements), subject to members' statutory transfer rights. Details about how continuity option 1 is to be pursued must be set out in regulations.
  • Under Continuity option 2, the triggering event must be resolved. The trustees must notify the Regulator when they consider that the triggering event has been resolved and the Regulator must in turn notify the trustees of whether it is satisfied that this has happened.

Existing master trusts

  • Existing schemes falling within the definition of master trust must either apply for authorisation within six months of the prohibition on operating an unauthorised master trust coming into force (known as the "commencement date") or must give notice to the Pensions Regulator that the scheme will be wound up.  The Regulator may extend the six month period by up to six weeks if it is satisfied that the trustees have good reason to need an extension.
  • Some provisions of the Act apply from the date of Royal Assent (27 April 2017). These include provisions concerning: the definition of "master trust"; triggering events; notification requirements; and powers of the Regulator to request information.
  • Where a triggering event occurs on or after 20 October 2016 (the date the Bill was published in Parliament) but before the commencement date (when the prohibition on operating an unauthorised master trust has effect), the trustees must notify the Regulator of the triggering event within seven days of the occurrence of the triggering event.
  • In contrast, where a triggering event occurs after the commencement date, the time limit for giving notification will be set out in regulations.

Key dates

The Pension Schemes Act 2017 received Royal Assent on 27 April 2017.  Certain provisions (including the definition of a Master Trust scheme and notification requirements)  have effect from Royal Assent.  Other provisions will come into force on a day or days decided by the Secretary of State.

Initial consultation to inform regulations is expected in autumn 2017, followed by formal consultation on draft regulations in early 2018.

the authorisation requirement and associated regulations are expected to apply from October 2018.


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Finance (No 2) Bill 2016-2017: removal of reduction in money purchase annual allowance


Summary

Following the announcement of the general election to be held on 8 June 2017, the Finance Bill was fast-tracked to ensure that it would be passed before Parliament was dissolved.  This involved stripping out certain provisions, including those which would have reduced the money purchase annual allowance from £10,000 to £4,000.

Background

The Finance (No 2) Bill 2016-2017 was issued in March 2017, following consultation on draft legislation at the end of 2016. At the same time, HM Treasury issued a response to consultation on reducing the money purchase annual allowance (MPAA).

Key points in relation to the reduction MPAA include the following.

  • The government has confirmed that the MPAA will be reduced from £10,000 to £4,000 from 6 April 2017. The Finance Act 2004 will be amended accordingly.
  • Calls for the reduced MPAA to apply only to member contributions have been rejected. The government points out that salary sacrifice is commonly used to allow increased employer contributions and has confirmed that the reduced MPAA will apply to pension savings in aggregate.
  • The government has also rejected calls for transitional protection for individuals who accessed benefits flexibly before the proposed reduction in the MPAA was announced on 23 November 2016. 
  • The government intends to ensure that the MPAA remains at a level that does not impact on the future development of auto-enrolment.
  • The reduced MPAA will apply only when pension benefit have been accessed flexibly and will not be extended to drawing defined benefit (DB) benefits or using defined contribution (DC) funds to purchase a non-reducing lifetime annuity (plus tax free lump sum). Where DC savings have been accessed flexibly, the alternative annual allowance will apply to any DB accrual in respect of the same individual.
  • The government will consider concerns that individuals may fail to notify schemes that they have flexibly accessed pension benefits with the pension industry.

Key dates

The Finance (No 2) Bill 2016-17 received Royal Assent on 27 April 2017.  

The provisions for reducing the money purchase annual allowance were removed on 26 April 2017.

A response to consultation on reducing the money purchase annual allowance (MPAA) was issued on 20 March 2017.

The reduction in the money purchase annual allowance was to have had effect from 6 April 2017.


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Finance (No 2) Bill 2016-2017: removal of employer-arranged advice provisions


Summary

Following the announcement of the general election to be held on 8 June 2017, the Finance (No 2) Bill was fast tracked to ensure that it would be passed before Parliament was dissolved.  This involved the removal of some provisions from the Bill, including provisions concerning employer-arranged pension advice.

Background

The Finance (No 2) Bill 2016-2017 was issued in March 2017, following consultation on draft legislation at the end of 2016. In relation to employer-arranged pensions advice, key points include the following.

  • The provision of "relevant pensions advice" valued at up to £500 per year and given to employees, former or prospective employees will be exempt from income tax.
  • Where an individual has more than one employer or former employer, the individual may receive up to £500 of relevant pensions advice from each employer/former employer.
  • Relevant pensions advice must be advice or information in relation to:
    • the individual's pension arrangements; or
    • the use of the individual's pension funds.
  • Relevant pensions advice must be provided either:
    • to an employer's employees generally (or generally to employees at a particular location); or
    • generally to all an employer's employees who meet the ill health condition or who are within five years of normal minimum pension age (or their protected pension age, if lower).


Key dates

The Finance (No 2) Bill 2016-17 received Royal Assent on 27 April 2017. 

Provisions concerning employer-arranged advice were removed on 26 April 2017.


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Contracting-out: final transfer regulations


Summary

The DWP has issued final regulations to allow the transfer of pensions in payment which include guaranteed minimum pensions (GMPs) and / or section 9(2B) rights to schemes which have never been contracted-out, in limited circumstances. The regulations were finalised following a short consultation.

The draft regulations were issued to amend existing legislation which provided that pensions in payment which include GMPs / section 9(2B) rights could only be transferred to a scheme which has formerly been contracted-out. In contrast, transfers of deferred members' contracted-out rights can be made with consent to a scheme which has never been contracted-out.

As amended, the Contracting-out (Transfer and Transfer Payment) Regulations 1996/1462 will allow transfers of GMPs / section 9(2B) rights to a scheme which has never been contracted out when all of the following conditions are met:

  • the member has consented in writing;
  • the member has must acknowledge in writing that benefits under the new scheme may be of a different amount and in a different form to benefits under the transferring scheme and that the new scheme has no statutory obligation to provide a survivor's benefit; and
  • the transferring scheme is in a PPF assessment period or a regulated apportionment arrangement (RAA) has been entered into in relation to the scheme.

Transfers of contracting-out rights without consent

The DWP has confirmed that it will consider the issue of bulk transfers of contracted-out rights without consent to schemes which have never been contracted-out later in 2017.


Key dates

Consultation and draft regulations issued on 10 April 2017. Consultation ended on 23 April 2017.

Consultation response issued on 27 April 2017.

The Contracting-out (Transfer and Transfer Payment) (Amendment) Regulations 2017/600 in force on 3 July 2017.


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Pensions Regulator: corporate plan 2017/2020


Summary

The Pensions Regulator has published its corporate plan for 2017/2020. Aspects of the Regulator's work which receive particular mention include:

  • "TPR Future" – work intended to design and deliver a sustainable approach to regulating all types of occupational pension schemes for the next five to ten years.';
  • Completing the roll out of the remaining stages of auto-enrolment;
  • Preparing for the authorisation of master trusts; 
  • Simplifying and providing greater clarity in the Regulator's communications;
  • More proactive and better targeted interventions in relation to funding of defined benefits schemes;
  • Driving up standards of stewardship, focussing on professional trustees and chairs, following up from its work on the 21st Century Trustee in 2016;
  • pension scams and data security.


Key dates

Corporate plan published on 21 April 2017. 


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Employer debts: new deferred debt arrangement and technical changes


Summary

The DWP has issued a consultation paper and draft regulations to introduce a new option for dealing with section 75 debts where an employer in a multi-employer scheme undergoes an employment cessation event.

As a reminder, an employment cessation event will occur in relation to an employer in a multi-employer scheme if the employer ceases to employ an active member at a time when another employer (other than a defined contribution employer) continues to employ at least one active member. A debt under section 75 Pensions Act 1995 becomes due from the employer which underwent the employment cessation event.

Under the new option, to be known as a "deferred debt arrangement", payment of the section 75 debt arising on an employment cessation event may be deferred. Instead, the employer will continue to be treated as if it employed an active member, including remaining liable for to pay contributions under the scheme specific funding regime and retaining responsibility for its share of any orphan liabilities.

The deferred debt arrangement will sit alongside existing options to manage employer debts which arise when an employer in a multi-employer ceases to employ an active member.

Trustees must give notice of a decision to enter a deferred debt arrangement, and of any decision to terminate such an arrangement, to the Pensions Regulator.

Conditions for a deferred debt arrangement

A deferred debt arrangement can take effect where an employment cessation event has occurred in relation to an employer (or would have occurred if the employer had not immediately entered a period of grace) and the following conditions are met:

  • The trustees' have given their written consent.
  • The funding test under the OPS (Employer Debt) Regulations 2005 (applicable in relation to scheme apportionment arrangements, flexible apportionment arrangements and withdrawal arrangements) must be met. This means that the trustees must be reasonably satisfied that, when the arrangement takes effect, the remaining employers will be reasonably likely to be able to fund the scheme so that after the applicable time it will have sufficient and appropriate assets to cover its technical provisions.
  • The scheme is not in a PPF assessment period or being wound up and the trustees are satisfied that the scheme is unlikely to enter a PPF assessment period in the 12 months after the deferred debt arrangement takes effect.

Ending a deferred debt arrangement

A deferred debt arrangement will be terminated if:

  • the deferred employer employs an active member of the scheme;
  • the deferred employer chooses to trigger a section 75 debt, subject to the trustees' consent; or
  • the deferred employer undergoes an insolvency event or commences voluntary winding up.

A deferred debt will also terminate in the following circumstances, in which case the employer will be treated as having undergone an employment cessation event (meaning that an employer debt will become due):

  • the deferred employer restructures;
  • the scheme ceases to employ any active members (and so undergoes a "freezing event"); or
  • the trustees give notice of termination to the employer, being reasonably satisfied that:
    • the employer has failed to comply with its obligations under the scheme funding regulations; or 
    • the deferred employer's covenant is likely to weaken in any other way in the next 12 months.

Other technical amendments

The draft regulations also make certain other technical amendments to the employer debt legislation, including the following:

  • Change of employer's legal status: reg 2(3A) of the OPS (Employer Debt) Regulations 2005 will be amended to clarify that where, for example, an employer which is an unincorporated charity changes status to become an incorporated company without any other changes, no employer debt arises.
  • Period of grace: an employer which has temporarily ceased to employ an active member but which intends to employ an active member in the future must currently notify the trustees within two months of the cessation. This period will be extended to three months.
  • Former employers: regulation 9 of the OPS (Employer Debt) Regulations 2005 will be amended to clarify that a "former employer" includes an employer who ceased to employ active members as a result of the "freezing event".

Key dates

Consultation paper and draft regulations issued on 21 April 2107.

Consultation period ends on 18 May 2017.

The draft Occupational Pension Schemes (Employer Debt) (Amendment) Regulations 2017 expected in force on 1 October 2017.


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Thales UK Limited: construction of rules referring to RPI did not allow a switch to another index to be made


Summary

The High Court held that, on the construction of the references to RPI in the rules on pension increases in two sections of the scheme, the employer/trustees were not able to select an alternative index to RPI.

Background

The CARE section of the rules stated that if the compilation of the RPI is "materially changed", the principal employer, with the trustees' agreement, "will determine the nearest alternative index" to be applied.  In the TOPS section, the rules stated that if RPI is revised to a new base or "otherwise altered", subsequent variations would be on a basis determined by the trustees having regard to the alteration.

Judgment

The High Court held that although RPI had "materially changed" and "altered" as a result of the introduction of UKHPI, the "nearest alternative index" (for the CARE section) was still RPI; and for the TOPS section, the "basis determined by the Trustees having regard to the alteration" had to be RPI.


Key dates

31 March 2017


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Dutton v FDR Ltd: Court of Appeal prefers employer's interpretation of effect of amendment to pension increase rule


Summary

The Court of Appeal decided that the effect of amendments made to the pension increases rule in 1991 were that the pre 1991 element of a pension in any given year had to be increased by the greater of two separate retrospective calculations of cumulative increases since retirement, on the basis of the pre and post 1991 rule.

Background

A deed of amendment dated 20 June 1991 which changed annual pension increases from 3% to the lesser of 5%/RPI was valid prospectively but in breach of the proviso to the amendment power for benefits accrued for pensionable service prior to 20 June 1991.  The High Court decided that this meant that, as argued by the trustees, the pre-20 June 1991 element of pension had to be increased by the greater of 3% per annum and 5%/RPI on each anniversary of the start of the pension.

Judgment

The Court of Appeal upheld the employer's appeal and decided that pensions should be increased annually by the greater of the two retrospective calculations of cumulative increases since retirement, at the lesser of 5%/RPI and at 3%.

This interpretation was in accordance with Foster Wheeler v Hanley in that it did the least interference to the integrity of the scheme as modified.


Key dates

29 March 2017


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Financial Advice Market Review (FAMR): progress report


Summary

HM Treasury and the Financial Conduct Authority (FCA) have issued a report on progress towards implementing the 28 recommendations in FAMR's final report issued last year. Points to note in relation to employers and workplace pension provision include:

  • The FCA and Pensions Regulator have issued a draft factsheet to set out what help employers and trustees can provide on financial matters without being subject to regulation.
  • A subgroup of the Financial Advice Working Group has created a guide for employers to support their employees' financial well-being. It is hoped that the guide will be fully available later in 2017.
  • Legislation to allow payment of a pensions advice allowance came into force on 6 April 2017.
  • Work on a pensions dashboard is underway, with a prototype of the dashboard having been created.


Key dates

Progress report issued on 11 April 2017.

FAMR final report published in March 2016.

FAMR launched 2015, in response to concerns that the market for financial advice was not working well for consumers.

A review of the outcomes from FAMR will be conducted in 2019.


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Early exit charges: draft regulations


Summary

The DWP is consulting on draft regulations to impose a cap on early exit charges in money purchase occupational schemes (or in relation to money purchase benefits in mixed benefit schemes) for members who wish to access the pension freedoms. Power to restrict charges is included in the Pensions Act 2014, as amended by the Pension Schemes Act 2017.

(The draft regulations will also extend the ban on member-born commission to charges under existing contracts (please see separate entry)).

The cap on "early exit charges" will apply to charges imposed on members (aged between 55 and their pension age when seeking to take benefits under their scheme, convert their benefits into different benefits under the scheme or to transfer benefits to a different pension scheme which they would not face if they carried out the same transaction at the agreed pension age for their scheme.

The cap on early exit charges from occupational schemes will be:

  • for existing members at 1 October 2017: 1% of the value of the benefits being taken, converted or transferred (to be calculated in accordance with guidance issued by the Secretary of State); and
  • for members who join their scheme on or after 1 October 2017: 0%, that is a complete ban.

Compliance

Service providers must confirm in writing to the trustees or managers of a relevant scheme that they are complying with the restrictions on early exit charges within one month of:

  • 1 October 2017 or, if later,
  • the date on which the service provider becomes a service provider in relation to the scheme.

Personal pensions and stakeholder schemes

A similar cap on early exit charges applies to stakeholder and personal pension schemes. The Financial Conduct Authority (FCA) brought rules containing the cap into force on 31 March 2017.

Background

In the 2016 consultation and response to consultation, the DWP explained that:

  • Market value adjustments (MVAs) and terminal bonuses will not be included in the cap. However, the DWP commented that where there is a guarantee or "reasonable expectation" of a terminal bonus being paid, then for the purposes of the cap on charges, this should be treated as forming a part of the total value of the member's pot.
  • Charges associated with accessing one of the options for drawing benefits will not be "early exit charges", if they would apply whether the member was accessing the option at the scheme's agreed pension age or earlier.
  • It was not intended to require that the exit cap be disclosed to members, but this will be kept under review.

Key dates

Consultation paper and draft regulations issued on 5 April 2017. Consultation closes on 31 May 2017.

The draft Occupational Pension Schemes (Charges and Governance) (Amendment) Regulations 2017 expected in force on 1 October 2017. The 2017 regulations will amend the Occupational Pension Schemes (Charges and Governance) Regulations 2015.

The Pension Schemes Act 2017 received Royal Assent on 27 April 2017, with the amendment to para 6, sch 18 Pensions Act 2014 in force from this date.

The DWP consulted on capping early exit charges in May 2016 and issued a consultation response in November 2016.


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Member-borne commission: draft regulations


Summary

The DWP is consulting on draft regulations to ban member-borne commission payments in relation to contracts entered into before 6 April 2016. Payments which are made before 1 October 2017 will not be affected. However, ongoing commission payments (trail commission) under existing arrangements will be banned from 1 October 2017.

This is the second phase of the DWP's ban on member-borne commission - a ban on member-borne commission under new arrangements (or under existing arrangements which are varied or renewed after 6 April 2016) has been in force on 6 April 2016.

Power to restrict charges is included in the Pensions Act 2014, as amended by the Pension Schemes Act 2017.

The ban on member-borne commission in existing arrangements seeks to align with the Financial Conduct Authority (FCA) rules on banning commission in workplace schemes.

Application

In relation to new and existing contracts:

  • The ban on member-borne commission applies in relation to occupational pension schemes which provide money purchase benefits and which are being used as a qualifying scheme for auto-enrolment purposes in relation to at least one jobholder.
  • The ban applies to all members (whether active or deferred) who are, or were, employed by the employer for whom the scheme is being used as an auto-enrolment qualifying scheme.
  • For multi-employer schemes, the ban applies only to members who are current or former employees of an employer who is using the scheme as an auto-enrolment qualifying scheme.

Compliance and application of extended ban

  • Since 6 April 2016, trustees have had to confirm to service providers that a scheme they are managing is a money purchase auto-enrolment qualifying scheme within three months of the later of:
    • 6 April 2016;
    • the date the scheme becomes used as an auto-enrolment qualifying scheme; or
    • the date the service provider is appointed in relation to the scheme.
  • The extension of the ban to existing contracts will start to apply to a service provider six months from:
    • 1 October 2017 or, if later, 
    • the date it is notified by the trustees that the scheme is a money purchase scheme used for auto-enrolment. 
  • Service providers must give written confirmation to the trustees or managers that it is complying with the ban on member-borne commission:
    • In relation to contracts entered into on or after 6 April 2016, within one month of the ban applying; or
    • In relation to contracts entered into before 6 April 2016 and not subsequently varied or renewed, within six months of the ban applying in relation to those contracts.


Key dates

Consultation paper and draft regulations issued on 5 April 2107. Consultation closes on 31 May 2017.

The draft Occupational Pension Schemes (Charges and Governance) (Amendment) Regulations 2017 expected in force on 1 October 2017. The 2017 regulations will amend the Occupational Pension Schemes (Charges and Governance) Regulations 2015 (the "2015 Regulations").

The Pension Schemes Act 2017 received Royal Assent on 27 April 2017, with the amendment to para 6, sch 18 Pensions Act 2014 in force from this date.


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Pensions Regulator: guidance on DB investment


Summary

The Pensions Regulator has issued new investment guidance for trustees of defined benefit (DB) schemes.  Areas covered include the following.

DB investment governance

  • Where possible trustees, employers and their advisers should follow a collaborative approach and should communicate regularly about notable developments relevant to the scheme's investments.
  • Trustees should ensure that their investment governance structure allows effective decisions to be made in a timely manner.
  •  It is important that the terms of contractual arrangements and fund documents in place with investment managers and advisers are reviewed (including legal review) and negotiated as appropriate to ensure that the functions outsourced are being carried out with the best interests of beneficiaries in mind, and by people with the right expertise.
  •  Trustees may find it helpful to consider their investment decisions in order, from those most likely to impact future outcomes to the least.  This consideration may help trustees to decide which decisions to retain and which to delegate.

Investing to fund DB

  • The trustees' investment strategy is a key part of integrated risk management and should be considered alongside the employer covenant and funding level.  Where the employer covenant is expected to weaken, trustees should consider what action to take.
  • Trustees may find it helpful to develop and maintain a set of beliefs about how investment markets work and which factors lead to good investment outcomes.  Where trustees develop a set of investment beliefs, their investment strategy should then reflect those beliefs.
  • Where trustees believe a long-term factor (such as climate change or corporate governance) to be financially material, the factor should be taken into account in the trustees' investment decision making.
  • Trustees are encouraged to have a journey plan which is appropriate and proportionate to their scheme's circumstances.
  • The risk of future investment underperformance is particularly relevant for mature schemes, where the value of the assets held is expected to decline over time.
  • Trustees should take their scheme's need for cash into account and are encouraged to develop a cash flow management policy.
  • Trustees' use of models should be proportionate to the risks relevant to their scheme.  As a minimum, the Regulator expects trustees to complete some scenario or sensitivity analysis.

Matching DB assets

  • Trustees should understand the purpose of their matching assets and the risks they introduce, so they can adopt appropriate strategies to manage these risks.  Trustees should also understand the principal characteristics of the liabilities or cash flows they are trying to match.

DB growth assets

  • Trustees should understand the risks their growth assets are taking to seek return and should manage those risks appropriately, for example through diversification, hedging and governance arrangements.

Implement a DB investment strategy

  • Trustees should understand and manage the risks associated with implementing an investment strategy, including operational risk and risks to the security of their assets. 
  • Where relevant, trustees should understand their scheme's exposure to collateral movements and should develop and maintain a collateral management plan.
  • The Regulator considers it good practice for trustees to obtain legal and investment advice on their managers' fund documentation and, where appropriate, explore negotiating investor protections. 

Monitoring DB investments

  • Trustees should focus on and monitor the key drivers which change their scheme's funding level and investment performance and should take action when necessary.
  • The Regulator advises that a dashboard giving an overview of key monitoring statistics may help trustees with their monitoring of the scheme's investments.  The dashboard should be focussed on information which the trustees will find useful and on which they are able to take action if appropriate.

Key dates

Guidance issued on 30 March 2017.


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Pension Protection Fund: schemes without a substantive employer


Summary

Following consultation, the Pension Protection Fund (PPF) has issued a new rule for calculating the risk-based levy for schemes which:

  • have separated from their previous substantive employer or whose employer has undergone an insolvency event;
  • are running on and are seeking to pay benefits purely from scheme assets (or have established a new scheme to run on and pay benefits solely from scheme assets, perhaps with a modified benefit structure); and
  • have entered into an ongoing governance arrangement.

In drawing up its proposals, the PPF assumed that any arrangement for the separation of a scheme from its sponsoring employer would include appropriate controls over the scheme's operation and winding up in the event of poor investment performance. 

Having reviewed the consultation responses, the PPF has decided to apply the proposals set out in the February 2017 consultation for the 2017/2018 levy year.  The PPF has committed to consulting further on the methodology for calculating the levy before the finalisation of rules in 2018/2019.

Key points are as follows.

  • The PPF believes that its standard approach to calculating the levy, which includes assessment of the insolvency risk of the sponsoring employer, is inappropriate for schemes which have no substantive sponsor.
  • Failure of the scheme's investment strategy is the primary risk which PPF levy payers would face in relation to such schemes.
  • Calculation of the levy will be based on a commonly used pricing model for assessing put options, as the PPF views the risks of put options as most closely comparable to the risks posed by schemes without a substantive sponsor.
  • The amount of a scheme's levy will be subject to an underpin of the amount which would be due under the PFF's standard rules, assuming that the scheme was sponsored by the weakest possible employer.
  • Annual testing of the scheme's funding level, long-term sustainability and its ability to afford to pay the levy would be expected.  If the PPF's criteria are no longer met, the scheme must be wound up, triggering a PPF assessment period.
  • The proposed rules will apply to schemes that continue without a sponsoring employer as a result of arrangements put in place between 1 January 2017 and 31 March 2018.  The PPF has reserved the right to recalculate the levy in respect of a scheme within the scope of the new rule, where the scheme's levy for 2017/18 has previously been calculated on the standard basis.
  • Although schemes which entered into arrangements before 1 January 2017 are outside the scope of the new rules applicable for the 2017/2018 levy year, the PPF has not ruled out including such schemes within the rules at a later date.  The PPF has committed to further consultation, if it considers it appropriate to extend the scope of the rule.

Key dates

Consultation issued on 21 February 2017. 

Policy statement and new rule issued on 30 March 2017, to apply to 2017/2018 levy year.

Further consultation expected before finalising rules in 2018/2019.


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Baugniet v Capita Employee Benefits Limited : High Court upholds appeal on maladministration claim


Summary

The High Court upheld an appeal against the Pensions Ombudsman's determination of a complaint about the service credit a member was given when he transferred the value of a personal pension which had been built up during previous employment to the teachers' pension scheme. The case was sent back to the Ombudsman for reconsideration, to be dealt with as a complaint raising an allegation of negligence causing financial loss.

The Court also commented that the upper limit of compensation for maladministration not infringing a legal right and falling short of being very exceptional should be increased from £1,000 to £1,600.

Background

In May 2011, Scottish Widows (SW) provided transfer values. In August, the administrators of the teachers' pension scheme (TP) received the member's completed transfer-in form together with SW's transfer values. On 17 August, TP provided him with an incorrect estimated service credit. On 27 September 2011 the member sent TP a second transfer valuation from SW and on 30 September 2011 TP sent a new service credit estimate and transfer documentation.

On 26 October 2011 the member sent documentation to TP, but on the same day the government approved revised guidance on the discount rates used for calculating cash equivalent transfer values (CETVs), and the Government Actuary's Department advised that work on the operation of those values should be suspended with immediate effect. On 3 November 2011TP received the transfer funds from SW.

After the suspension was lifted, new factors for CETVs came into effect and the member was advised of his service credit which was significantly less generous than the credit that would have been awarded had the transfer been completed before 26 October 2011.He complained to the Pensions Ombudsman who agreed that TP's delays constituted maladministration and awarded £750 as compensation for non-financial injustice. However, the Ombudsman declined to award further compensation, having concluded that the member was partly responsible for the delays that had occurred: he became a teacher in 2010 so could have requested a transfer sooner and delayed posting of transfer documentation at the end of September 2011.

Judgment

The High Court upheld the member's appeal (except in relation to one claim about the right to informed consent).

The Ombudsman had failed to consider causation properly: whether it was more likely than not that "but for" TP's conduct, the member would have obtained the service credit he had asked for before 26 October 2011. Had this consideration been given to his complaint, the outcome would, in all probability, have been very different.

TP's conduct fell below the standard of reasonable skill and care to be expected of an ordinary pensions administrator and owed to the member in connection with his proposed transfer. On the evidence, it was highly probable, if not certain, that but for TP's delay, he would have obtained the full service credit before the government-imposed suspension came into effect.

The case was sent back to the Ombudsman for reconsideration, to be dealt with as a complaint raising an allegation of negligence causing financial loss.

The High Court commented that the upper limit of compensation for maladministration not infringing a legal right and falling short of being very exceptional had been set at £1,000 in a case decided in 1998. Having regard to inflation, the Ombudsman should consider increasing the limit to £1,600.


Key Dates

Date of Judgment: 20 March 2017


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Pensions Regulator: revised definition of professional trustee and draft monetary penalties policy


Summary

The Pensions Regulator has issued a consultation paper and draft policy on monetary penalties. The consultation also covers a revised description of a "professional trustee". In the Regulator's response to its 21st century trusteeship discussion paper it explained that it intends to make greater use of its powers, including its power to impose monetary penalties, where there have been wider governance and administration failings.

Description of "professional trustee"

The Regulator's proposed description of a professional trustee is "any person, whether or not incorporated, who:

  • acts as a trustee of the scheme in the course of the business of being a trustee; 
  • is an expert, or holds themselves out as being an expert, in trustee matters generally."

Trustees who receive financial compensation for their work (beyond reimbursement of expenses) will not automatically be considered professional trustees. The Regulator will be less likely to consider a remunerated trustee to be acting in the course of the business of being a trustee if:

  • they are or have been a member of the scheme (or a related scheme), or employed by a participating employer (or an employer in the same group);
  • they do not act, or offer to act, as a trustee in relation to any unrelated scheme.

The Regulator expects trustee boards have regular assessments of the value any remunerated trustees bring to the board.

Monetary penalties

The consultation paper sets out a proposed penalty framework with three band levels of increasing severity of penalties:

  • Band 1: up to £1,000 for individuals and to £10,000 in any other case;
  • Band 2: up to £2,500 for individuals and £25,000 in any other case;
  • Band 3: up to £5,000 for individuals and £50,000 in any other case.

The Regulator gives examples of breaches which might fall within each band:

  • Band 1: failing to submit the scheme return;
  • Band 2: failing to provide members with a statutory money purchase illustration (SMPI) within the required timeframe;
  • Band 3: reimbursing a trustee out of scheme assets in breach of legislative restrictions.

When deciding the level of penalty to apply, the Regulator will consider a number of factors, including whether the person is a professional trustee; acts in a professional capacity in relation to the scheme; or has expertise in an area relevant to the breach.

Where the Regulator does not consider an individual to be a professional trustee, it may, on a case by case basis, take into account any relevant expertise the individual has (or holds him/herself out as having) when deciding whether to impose a monetary penalty and the amount of such a penalty.


Key dates

Consultation paper and draft monetary penalties policy issued on 23 March 2017.

Consultation closes on 9 May 2017.


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GMP equalisation: response to consultation


Summary

The DWP has issued a response to its consultation in November 2016 on its proposed methodology for equalising guaranteed minimum pensions (GMPs) and on draft regulations amending various aspects of contracting-out legislation.  The DWP comments that some concerns raised by the pension industry in responses to the consultation require further consideration and it does not expect to take them forward before autumn 2017. 

Areas covered in the response include the following.

GMP equalisation

  • The DWP has emphasised that the methodology proposed in the consultation is not the only method by which schemes can equalise for the effect of GMPs.  It considers that it is for trustees to decide what, if any, action is needed to provide equal pension benefits. 
  • The DWP has rejected calls to provide a statutory safe harbour for schemes which use the proposed methodology.  It intends to consider other methodologies with the GMP working group.
  • The DWP will consider further concerns raised in the consultation process, including: treatment of GMPs which have been transferred or bought out; whether backdating payments more than six years is unnecessary; and whether interest should be added to back payments.
  •  Where data is unavailable, the DWP expects schemes to rely on HMRC records in the first instance.  It will consider suitable approaches with the working group for situations where HMRC data is inconclusive.
  • In relation to conversion of GMPs, the DWP agrees that the definition of conversion should include survivors.

 

Contributions equivalent premiums (CEPs)

  • The new regulations will give HMRC discretion to extend the notification and payment periods for CEPs, which would otherwise have fallen outside the current legislation.  The changes are intended to help schemes complete the GMP reconciliation process.
  • Updated online guidance for administrators is expected in spring 2017.

Amending rules of former contracted-out schemes

  • The DWP has decided that proposed amendments to reg 17 of the OPS (Schemes that were Contracted-out) (No 2) Regulations 2015/1677, which concerns alterations of rules in relation to section 9(2B) rights, need further consideration before taking forward.  Any proposed amendments would not be implemented before autumn 2017.

Circumstances in which inherited GMP is payable

  • The DWP has incorporated a minor change into the draft regulations, to clarify when a GMP is payable to a widow, widower or surviving civil partner.

Fixed rate revaluation of GMPs

  • The DWP has accepted GAD's recommendation of 3.5% as the new rate of fixed rate revaluation of GMPs for members leaving pensionable service after 5 April 2017. 

Review of Occupational and Stakeholder Pension Schemes (Miscellaneous Amendments) Regulations 2013/459

  •  Concerns had been raised that regulation 3 of these regulations could potentially result in more generous benefits being provided by a scheme after its rules had been altered than the scheme had originally provided under the reference scheme test.  The DWP intends to consider whether further changes to legislation are required.
  • The DWP believes that further consideration is needed of concerns relating to actuarial certification of amendments to contracted-out schemes.  Any changes to legislation would not be implemented before autumn 2017.

Transfers from former contracted-out schemes to schemes which have never been contracted-out

  • The DWP has acknowledged the pension industry's concerns about bulk transfers without consent to schemes which have never been contracted-out.  It hopes to consult on any proposed changes by autumn 2017.


Key dates

Consultation response issued on 13 March 2017.

The Occupational Pension Schemes and Social Security (Schemes that were Contracted-out and Graduated Retirement Benefit) (Miscellaneous Amendments) Regulations 2017/354 in force on 6 April 2017.

The DWP intends to notify interested parties in the pension industry when it is in a position to give a more definitive timeline for publishing guidance and, potentially, amending legislation, concerning GMP equalisation.


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Auto-enrolment: technical changes


Summary

The DWP has issued a response to consultation and finalised regulations to amend the auto-enrolment requirements for new employers who fall outside the auto-enrolment staging timetable.  The regulations make two changes:

  •  Where an employer first pays PAYE income in respect of any worker on or after 1 October 2017 and the auto-enrolment duties do not already apply to that employer, the trigger date for  the  auto-enrolment duties to apply will be the day the first worker starts employment. 
  • Post-staging employers will be able to postpone auto-enrolling their workers for up to three months by giving the workers a notice which meets prescribed requirements, including specifying the "deferral date" from which the auto-enrolment requirements will apply.


Key dates

Consultation paper and draft regulations issued 10 February 2017.

Consultation response issued on 10 March 2017.

The Employers' Duties (Implementation) (Amendment) Regulations 2017/347 in force on 1 April 2017.


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Pension Protection Fund: schemes without a substantive employer


Summary

The PPF has consulted on a new rule for calculating the risk-based levy for schemes which no longer have a substantive sponsor following an agreed restructuring of the sponsoring employer's pension arrangements.  In drawing up its proposals, the PPF assumes that any arrangement for the separation of a scheme from its sponsoring employer will include appropriate controls over the scheme's operation and winding up in the event of poor investment performance.   Key points are as follows:

·         The PPF believes that its standard approach to calculating the levy, which includes assessment of the insolvency risk of the sponsoring employer, is inappropriate for schemes which have no substantive sponsor.

·         Failure of the scheme's investment strategy is the primary risk which PPF levy payers would face in relation to such schemes.

·         Calculation of the levy will be based on a commonly used pricing model for assessing put options, as the PPF views the risks of put options as most closely comparable to the risks posed by schemes without a substantive sponsor.

·         The amount of a scheme's levy will be subject to an underpin of the amount which would be due under the PFF's standard rules, assuming that the scheme was sponsored by the weakest possible employer.

·         Annual testing of the scheme's funding level, long-term sustainability and its ability to afford to pay the levy would be expected.  If the PPF's criteria are no longer met, the scheme must be wound up, triggering a PPF assessment period.

·         The proposed rules will apply to schemes that continue without a sponsoring employer as a result of arrangements put in place between 1 January 2017 and 31 March 2018.  The PPF has reserved the right to recalculate the levy in respect of a scheme within the scope of the new rule, where the scheme's levy for 2017/18 has previously been calculated on the standard basis.

 


Key dates

Consultation issued on 21 February 2017. 

Consultation closed on 16 March 2017.


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Auto-enrolment: qualifying earnings band for 2017/18


Summary

The auto-enrolment qualifying earnings band for 2017/18 will be £5,876 to £45,000, increased from the previous band of £5,824 to £43,000.


Key dates

The Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2017/394 in force on 6 April 2017.


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Taxation of overseas pensions: Spring Budget and Finance (No 2) Bill 2016-2017


Summary

The Finance (No 2) Bill 2016-2017 has been issued, following consultation on draft legislation at the end of 2016. Proposals in relation to overseas pensions were announced in the 2016 Autumn Statement and draft legislation was issued at the end of last year. Key points include the following.

  • 100% of foreign pensions (instead of 90%) will be brought into tax for UK residents, to the same extent as benefits from domestic pension arrangements.
  • Lump paid to or in respect of UK residents from overseas arrangements will be subject to UK tax in the same way as payments from registered pension schemes.
  • Specialist pension arrangements (known as "section 615" schemes) for individuals employed abroad will be closed to new saving.
  • Lump sums payable to former UK-residents from funds in overseas arrangements which have benefitted from UK tax relief will remain subject to UK tax for 10 years after leaving the UK (increased from five years at present).
  • The eligibility criteria for a non-UK scheme to qualify as an overseas pension scheme for the purposes of UK tax will be updated, by removing the requirement for 70% of transferred funds to be used to provide the member with a lifetime income; and by bringing the pension age test in line with registered schemes.
  • The introduction of a 25% "overseas transfer charge" on transfers to qualifying recognised overseas schemes (QROPSs) is covered in a separate entry.


Key dates

Spring 2017 Budget delivered on 8 March 2017.

The Finance (No 2) Bill 2016-17 had its first reading in the House of Commons on 14 March 2017.

The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) (Amendments) Regulations 2017/398 in force on 6 April 2017.

HMRC Newsletter 85, which contains information on the tax changes to overseas pensions, was updated on 21 March 2017.


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Pension Protection Fund: long service cap


Summary

The DWP has issued a response to consultation and finalised regulations. The regulations and amendments to the Pensions Act 2004 will bring into force the increased PPF compensation cap for members with long service. Details include the following:

  • Members with more than 20 years' pensionable service will benefit from a 3% uplift in the compensation cap for each year above 20 years, to a maximum of double the cap. 
  • Individuals with long service who are already receiving PPF compensation will see their payments increased, with the uplift applied from 6 April 2017 to the cap which originally applied to that individual's compensation. 
  • The DWP has confirmed that schemes already in an assessment period on 6 April 2017 will not have to reflect the long service cap. If the scheme comes out of an assessment period and is wound up outside the PPF, the benefits provided also do not need to reflect the long service cap.
  • The regulations have been amended to make clear that where an individual has accrued pension entitlement in their own right, plus a pension credit in the same scheme, the two entitlements should be kept separate and separate compensation caps should apply when calculating PPF compensation.
  • The regulations have also been amended to clarify that the pensionable service is to be treated cumulatively where an individual has more than one period of pensionable service under the same scheme.

Money purchase lump sum discharge

  • The amount of money purchase benefits the PPF may discharge as a lump sum will be increased from £2,000 to £10,000, to align with changes to HMRC rules on lump sums.


Key dates

Consultation response issued on 13 March 2017.

Relevant provisions of the Pensions Act 2014, amending the Pensions Act 2004, in force on 6 April 2017.

The Pension Protection Fund (Modification) (Amendment) Regulations 2017/324 in force on 6 April 2017.

The Pensions Act 2014 (Pension Protection Fund: Increased Compensation Cap for Long Service) (Pension Compensation on Divorce) (Transitional Provision) Order 2017/301 in force on 6 April 2017.


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Tax charge on transfers to QROPS


Summary

The Spring Budget announced a new "overseas transfer charge" of 25% on transfers to qualifying recognised overseas schemes (QROPSs) where the transfer is requested on or after 9 March 2017. Key points are as follows.

  • The charge will apply unless one of the following applies.
    • The member is resident in the country where the QROPS is based.
    • The member is resident in the European Economic Area (EEA) and is transferring funds to a QROPS based in another EEA country.
    • The QROPS is an occupational pension scheme (or a public service pension scheme) and the member is employed by a participating employer in the scheme.
    • The QROPS is a pension scheme of an international organisation and the member is employed by the international organisation at that time.
  • To decide if the overseas transfer charge applies, schemes will have to ask the member for information about the transfer. If the member does not supply the information and the transfer is made, the scheme must automatically deduct the 25% charge.
  • If the member's circumstances change within five years of the transfer, the tax charge may become payable (or refundable).
  • From 6 April 2017, payments out of funds transferred to a QROPS will be subject to UK tax rules for five years after the transfer, regardless of where the member is resident.
  • The scheme administrator of the registered pension scheme and the scheme manager of the QROPS will be jointly and severally liable for payment of the charge.
  • An overseas scheme cannot be a QROPS unless the manager undertakes to HMRC that it will operate the new charge. Existing QROPSs must give the undertaking by 13 April 2017 or they will automatically cease to be recognised by HMRC.


Key dates

Spring 2017 Budget was delivered on 8 March 2017.

A policy paper and guidance on the overseas transfer charge; and a policy paper on the qualifying recognised overseas pension schemes regime were issued on 8 March 2017.

The Finance (No 2) Bill 2016-17 had its first reading in the House of Commons on 14 March 2017 and contains provisions in relation to transfers to a QROPS.

HMRC Newsletter 85 was updated on 21 March 2017.

The tax charge on transfers to QROPSs will apply to transfers requested on or after 9 March 2017.

The tax charge on payments from funds transferred from the UK to a QROPS in the previous five years will apply from 6 April 2017.


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Master trusts: Spring Budget


Summary

The government announced as part of the Spring Budget that it would amend the tax registration process for master trust schemes to align with the Pension Regulator's new authorisation and supervision regime.  HMRC indicated in Newsletter 85 that it will provide further updates on the implications for scheme administrators as work progresses. 


Key dates

Spring Budget delivered on 8 March 2017.

HMRC Newsletter 85 updated on 21 March 2017.


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Amending the definition of financial advice: consultation response


Summary

HM Treasury has issued a response to its consultation on changing the definition of financial advice. The consultation followed findings from the Financial Advice Market Review (FAMR), whose final report was issued in March 2016, that firms were limiting the amount of guidance they were giving consumers for fear of unintentionally straying into providing financial advice. The review also found that for consumers with relatively straightforward needs the cost of taking regulated advice could outweigh the benefits – and that these individuals in particular could benefit from high quality detailed guidance.

Following consultation, the government has decided to change the definition of financial advice as follows.

Unregulated firms

  • For unregulated firms, the definition of "advising on investments" in article 53 of the Regulated Activities Order (RAO) will continue to apply. As at present, an unregulated firm will be giving advice without proper authorisation if it "advises on investments" as set out in the RAO.

Regulated firms

  • The definition of financial advice for regulated firms will be changed to align with the EU definition in the Markets in Financial Instruments (MiFID) directive. Following the change, a regulated firm will only be giving advice when it makes a personal recommendation.
  • Regulated firms will be exempt from the authorisation requirements when carrying out activities under article 53, except where they are making a personal recommendation.
  • EU guidance on what constitutes a personal recommendation will apply to the new UK definition of financial advice for regulated firms. The consultation response points out that recommendations to hold a product (that is, not to sell an existing holding) will count as financial advice. In addition, a personal recommendation can be made implicitly - for example, by saying "people like you buy this product".

Key dates

Consultation paper issued in September 2017.

Consultation response issued 28 February 2017.

New definition expected to have effect from 3 January 2018. The FCA is expected to consult on and issue new guidance before the new definition comes into force.


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Knight v Sedgwick Noble Lowndes: presumption of regularity meant schemes had been equalised despite lack of evidence of formalities


Summary

A Scottish court applied a presumption that documents have been properly executed and found that retirement ages in the four schemes had been equalised and the Barber window closed.10 February 2017.

Background

The trustees and principal employer of a scheme to which four separate schemes had been transferred started proceedings against the defendants for negligence in relation to an alleged failure to advise on amendments to equalise.  The Court had to decide as a preliminary issue whether the Barber window had in fact been closed in each scheme.

Judgment

The court applied the presumption of regularity and ruled that normal retirement ages in the four schemes had been validly equalised at 65 in 1993/94.  There was sufficient evidence of compliance with the necessary formalities through surrounding documents such as member announcements and minutes of board of directors of the employer. 

As a result, no loss had arisen and the proceedings could be dismissed.


Key dates

10 February 2017


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Danvers v Revenue and Customs Commissioners: loan to individual who transferred pension fund to a SIPP was an unauthorised payment


Summary

The Upper Tribunal confirmed that a loan to a former pension scheme member who had transferred his pension to a SIPP on the understanding that the loan would be made was an authorised payment.

Background

The claimant, then aged 41, transferred about £35,000 from his pension schemes to a registered SIPP.  Shortly after, he signed a loan agreement under which he would receive an £18,000 loan from G Loans Ltd.  He agreed that the SIPP would invest in KJK preference shares and the loan would be repaid from his SIPP fund.

Judgment

The loan was an unauthorised payment under the Finance Act 2004 because it was a "payment" from the SIPP; it was made "in connection with an investment acquired using" assets held by the SIPP.  The investment in KJK was inextricably linked to the loan.


Key dates

10 January 2017


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Green paper on Defined Benefit (DB) pensions


Summary

The DWP has issued a green paper considering the future of defined benefit (DB) pension schemes. The paper explores concerns with the funding and regulation of DB schemes, although its main conclusion is that there is not a significant structural problem with the regulatory and legislative framework.

The paper considers evidence and suggested changes in relation to four broad areas:

  • Funding and investment;
  • Employer contributions and affordability;
  • Member protection; and
  • Consolidation of schemes.

Key points are as follows.

Funding and investment

  • In relation to discount rates for valuing liabilities, the paper concludes that it is not clear that the rates used are overly pessimistic. 
  • The paper asks whether shorter valuation cycles should be introduced for high risk schemes, with valuations required less often for schemes presenting low risk (and asks how low and high risk should be determined).
  • The DWP would like to explore possibilities for schemes to make more optimal investment decisions and to mitigate any barriers to using alternative asset classes.
  • Further research will be commissioned on the quality of trustees' investment decision making.

Employer contributions and affordability

  • The DWP is not persuaded that there is a general problem with affordability for the majority of sponsoring employers of DB schemes. It expects that the vast majority of members will receive their  benefits in full.
  • The DWP recognises that some schemes are "stressed", with employers paying very substantial deficit repair contributions which may not be sustainable long term. It comments that proposals put forward so far to relieve the pressure on stressed schemes and employers would have significant drawbacks and could raise moral hazard issues. It has asked for further feedback.
  • While the DWP does not believe that there is a case for across the board reductions in DB benefits, it may be appropriate to change arrangements for stressed schemes and sponsors to help preserve jobs while delivering a good deal for members. It comments that how stressed employers should be identified and in what circumstances easements should be allowed would be key.
  • The DWP considers that there may be a case for rationalising indexation of pensions in payment. However, it points out that proposals to make pension increases conditional on a measure of affordability would raise a moral hazard risk of employers having an incentive to allow funding levels to worsen.

Member protection

  • The DWP considers that a blanket requirement to obtain clearance in relation to any planned corporate actions would be disproportionate. It comments that if a regime of compulsory clearance were to be introduced, then a high threshold should be set for the circumstances in which clearance would be required. 
  • In relation to the Regulator's information-gathering powers, options considered include creating a duty for all parties responsible for a scheme to cooperate with the Regulator; and giving the Regulator power to interview relevant parties.
  • The government is interested in exploring the case for giving the Regulator stronger powers to safeguard members' benefits and has asked for views.

Consolidation of schemes

  • The DWP considers that there is a strong case for supporting greater voluntary consolidation. It is not convinced that compulsory consolidation would be a proportionate response. It has asked for comments on legal or regulatory barriers preventing meaningful consolidation.
  • The DWP has concluded that it would not be appropriate for government to design and run "superfund" consolidation vehicles. However, it has asked whether government should introduce structures or incentives to encourage the pension industry to develop new consolidation vehicles.
  • The paper suggests that a legislative requirement could be introduced for trustees to state explicitly what they are doing to consolidate and to reduce costs. Alongside this, the requirement for a chair's statement could be extended to apply to DB schemes and the DB sections of hybrid schemes.
  • The DWP has asked whether the rules for paying winding up lump sums (WULSs) should be widened, for example to allow schemes to partially wind up in order to pay WULSs.

Key Dates

Green paper, "Security and Sustainability in Defined Benefit Pension Schemes", published on 20 February 2017.

Consultation closes on 14 May 2017.


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Dr S: overstatement of pension quotation was not an augmentation of benefits or anti-franking


Summary

A member who received two overstated pension quotations was not entitled to payment of the overstated amount; there was no evidence that the company requested the benefits to be augmented or any act of anti-franking by the trustees.

Background

In 1984 and 1996, Dr S received quotations of his annual pension from the scheme. In 2014, he received a lower pension quotation at age 65 than stated previously and was informed that those figures had been overstated.

Dr S sought payment of the higher pension quoted; he argued that the 1984 letter and his response constituted a contract and the higher pension quoted in 1984 was a conscious act of anti-franking at a time when the fund was financially healthy. He also suggested that the option provided in the 1984 letter to purchase an annuity or to "buy out" his benefits (which was not previously allowed) was in fact the trustees augmenting his benefits.

Determination

The Ombudsman partially upheld the complaint. The criteria for a legal contract had not been met and there was no evidence to suggest the company requested Dr S's benefits to be augmented, as required by the scheme rules. The option to buy out the benefit with an insurance company is not an increase to benefits and in offering it to Dr S, the trustees were not offering to augment.

His argument that the scheme had been in a good financial position at the time of leaving was not enough to assume that an augmentation was awarded. The anti-franking legislation did not come into force until 1 January 1985, after Dr S had left membership of the scheme, meaning that the legislation change did not apply to him. The rules specify that the pension payable will not be lower than GMP, suggesting that franking will not be used. 


Key dates

Determination issued 5 January 2017.


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Pensions Advice Allowance: response to consultation


Summary

Final regulations have been made to allow schemes to pay a pension advice allowance from April 2017.  The final regulations follow a response to consultation, which reported strong support for the introduction of the allowance.  Detailed points are as follows.

General

  • Withdrawal of up to £500 from a pension pot to pay for retirement advice will be an authorised payment for tax purposes. 
  • The allowance may be drawn from defined contribution (DC) pension funds and from hybrid funds with a money purchase or cash balance element. 
  • The Government intends to review the level of the allowance as part of the three year review of the Financial Advice Market Review (FAMR). 

Retirement advice

  • "Retirement advice" is intended to include consideration of other factors, including the individual's other assets, which may be relevant to their retirement planning.  It is not intended to cover advice on non-retirement matters, such as inheritance tax planning.  The allowance may be used for implementation and administration costs associated with the advice given.
  • The allowance must be spent on advice which is "fully regulated".  The consultation response points out that advice on some types of occupational pension schemes is not fully regulated. 
  • The allowance must be paid direct from the pension arrangement to the adviser.

Lifetime limit

  • The allowance will be restricted to £500 per use.  An individual may access the allowance up to three times in their lifetime (using up to £500 each time), with no more than one use in any tax year.
  • There will be no age restriction on using the allowance. 

Taxation

  • The withdrawal from the individual's pension fund will not be subject to tax, regardless of the level of the individual's income in the tax year. 
  • Using the allowance will not be a benefit crystallisation event for lifetime allowance purposes, nor will it affect an individual's ability to take 25% of their remaining pension funds as a pension commencement lump sum.

Employer arranged pension advice

  • Employers will be able to arrange pension advice for their employees worth up to £500 free of tax.  Salary sacrifice will be allowed in relation to employer arranged advice.  The tax exemption will also apply if the employer reimburses an employee for pension advice arranged by the employee.
  • The pension advice allowance may be used alongside employer arranged advice.

Compliance

  • Providers and trustees will not have to report the numbers of times individuals use the allowance.  Instead, individuals will have to declare that they have not used the allowance more than three times in total.  The response comments that providers and trustees should consider making individuals aware that there could be a 55% tax charge if they are found to have misused the allowance.

Position of trustees

  • The regulations do not  require trustees or providers to allow deduction from members' pots to pay the allowance.  The response comments that it will be for providers and trustees to determine whom they do business with and that there is no barrier to offering members a tie-in arrangement with a third party adviser.  It adds that the Pensions Regulator is expected to release a fact sheet in early 2017 which will clarify that, generally, trustees will not be liable for advice given by a third party.
  • The government has rejected calls for a statutory override to enable scheme rules to be amended to provide for payment of the advice allowance, but says it will consider any new evidence at the three year review.

Key dates

Consultation response issued on 8 February 2017.  (Original consultation issued on 30 August 2016).

The Registered Pension Schemes (Authorised Payments) (Amendment) Regulations 2017/397 in force on 6 April 2017.

HMRC is expected to publish guidance on the pensions advice allowance shortly after it comes into force.


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Brewster: requirement for written nomination in addition to evidence of relationship for the payment of survivor's pension was marital status discrimination under the European Convention on Human Rights which was not justified


Summary

The Supreme Court allowed an appeal from the Northern Ireland Court of Appeal and held that a provision in the Local Government Pension Scheme that required an unmarried cohabitee to be nominated by the member before the death in order to be entitled to receive a survivor's pension was a breach of Article 14 of the European Convention on Human Rights (discrimination) as it was discriminatory on the basis of marital status. The nomination requirement did not apply to members who were married or in a civil partnership.

Background

The regulations of the Local Government Pension Scheme (LGPS) governing the payment of survivors' pensions to unmarried partners required the member and unmarried partner to satisfy various conditions (such as living together as man and wife or as if civil partners; financial dependence or interdependence) and also that the partner had to have been nominated by the member before the death. The requirement for nomination was absolute; there was no discretion for the trustees.  The conditions were clearly satisfied in this case (the parties were engaged, had lived together for 10 years and had bought a property together) but there had been no nomination so the LGPS refused to pay a survivor's pension.

The survivor brought a judicial review claim which was upheld by the High Court but this decision was overturned by the Northern Ireland Court of Appeal.  

Judgment

The appeal was upheld. The requirement for nomination should be disapplied and the applicant paid a survivor's pension.

The test for the purposes of Article 14 was whether the nomination requirement was "manifestly without reasonable foundation".  The requirement was unjustified. It added nothing to the independent process whereby the survivor had to show the necessary longstanding relationship/financial dependence. For married couples or civil partners, the wishes of the member did not have to be ascertained or stated, so there was no objective justification for that requirement to apply to unmarried partners.


Key dates

8 February 2017


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Auto-enrolment: exception for 2016 lifetime allowance protections


Summary

The exceptions from the auto-enrolment requirements are being extended to include individuals with fixed protection 2016 or individual protection 2016.  Where an employer has reasonable grounds to believe that a jobholder has one (or both) of these protections, the employer will have a discretion whether or not to auto-enrol the jobholder into a qualifying scheme.


Key dates

The Occupational and Personal Pension Schemes (Automatic Enrolment)(Amendment) Regulations 2017/79 in force on 6 March 2017.


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Mr Y: administrators required to compensate SIPP member pro rata for causing unnecessary delays in transfer


Summary

Scheme administrators required to pay compensation to a SIPP member who suffered actual financial loss owing to delays caused by the administrators in the transfer between SIPPs.

Background

Mr Y complained that delays caused by the two scheme administrators facilitating a transfer of his pension rights from the transferring scheme SIPP to the receiving scheme SIPP resulted in financial loss of nearly £14,000.

Once Mr Y's transfer request was submitted, the transferring administrator recorded the transfer on the electronic transfer system, ORIGO, as "in progress." The receiving administrator inquired due to a lack of response; the transferring administrator stated the transfer was not suited for the ORIGO system and only then sent the required documents to the receiving administrator to process manually. This first delay amounted to 23 working days.

From the date of receiving the forms for completion, the receiving administrator took 13 working days to send the discharge form and letter of authority to Mr Y.

By the time the transfer payment was sent to the receiving administrator, the delay caused Mr Y a financial loss of £13,917.

Determination

The Deputy Pensions Ombudsman (DPO) upheld the complaint; both administrators were responsible for the delay.

The DPO directed the two administrators to recalculate the compensation amount and pay it into Mr Y's receiving scheme SIPP. The compensation was split between the two pro rata. The transferring administrator was to pay more as they were solely responsible for the first delay and the receiving administrator responsible for the second delay. 


Key dates

Determination issued 16 December 2016.


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Mr E – member entitled to late payment of pension commencement lump sum despite unauthorised payment


Summary

Trustees were wrong to deny member Pension Commencement Lump Sum (PCLS) re-calculation on basis of costs and tax charges that would be incurred.  

Background

In 2012, Mr E requested early retirement and was given the options of a full annual pension or a PCLS with a reduced annual pension. Mr E chose the latter and his benefits were put into payment. In March 2014 an error was discovered that the link to final pensionable salary had not been maintained.

The administrator informed Mr E in May 2015 that his benefits quoted in 2012 had been understated; he would receive an equivalent higher pension and a back payment rather than an additional PCLS and reduced annual pension. Mr E requested what his entire pension benefits would have been had they been correctly calculated in 2012, in particular his PCLS. The administrator did not provide this, citing HMRC rules on timescales for paying PCLS, fees for the calculation and tax charges. The trustees argued that they should not pay for any personal tax liabilities applying to Mr E as this would be against pension legislation and inequitable to other scheme members and the ongoing funding position of the scheme.

Determination

The Pensions Ombudsman upheld the complaint. It was maladministration on the part of the trustees; there was a fundamental misunderstanding of the salary link dating back to 2005, which ultimately impacted the benefits of Mr E. It is unreasonable of the trustees to suggest that Mr E should pay a tax liability when the mistake was directly caused by the trustees' misinterpretation of the scheme rules. There is no evidence HMRC will impose a penal tax charge on the scheme or Mr E.

The Ombudsman directed the administrator to re-calculate the PCLS with interest that would have been payable to Mr E in December 2012. If Mr E opts to proceed on the basis of the re-calculated amount, the trustees were directed to pay any difference between this and the actual amount he received. The trustees were also required to pay any related charges, such as any unauthorised payment charges and the cost of carrying out the calculation. If Mr E chooses the additional PCLS, the administrator must reach an agreement with him regarding repayment of overpayments since May 2015.


Key Dates

Determination issued 23 November 2016.


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Mrs E – trustees not required to pay trivial commutation lump sum to estate of the recipient of spouse's pension


Summary

The estate of a deceased member was not entitled to receive a trivial commutation lump sum benefit, as the member had not signed the option provided by the trustees before her death.

Background 

In September 2015, Mrs E received a letter from the trustees with an option to take a trivial commutation lump sum benefit or to continue receiving her existing spouse's pension. She died shortly after and the payments of the spouse's pension ceased. The estate sought payment of the lump sum, claiming that, had she been capable, she would have signed the option to take it. The estate argued that the trustees had not considered the member's unexpected death and that had she lived beyond her diagnosis, power of attorney would have been sought and the lump sum payment would have been signed for.

Determination

The Ombudsman dismissed the complaint; without Mrs E's signature confirming her decision, the trustees, the estate nor the Ombudsman were cable of determining what she would have chosen prior to her diagnosis. Where there is no power of attorney in place and instructions from a member do not exist, the trustees should not be requested to make assumptions on behalf of the member. It was not a death benefit and there was no obligation on the trustees to pay it to the estate.


Key dates

Determination issued 30 November 2016.


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Pension Protection Fund (PPF): compensation cap


Summary

The PPF compensation cap for 2017/18 has been set at £38,505.61, increased from £37,420.42 for 2016/17.


Key dates

The Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling and Compensation Cap) Order 2017/50 in force (in relation to the compensation cap) on 1 April 2017.


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Pension Protection Fund: updated FAQs for 2017/18 levy


Summary

The Pension Protection Fund ("PPF") has issued some FAQs in relation to the 2017/18 risk-based levy. Points to note include the following:

  • Where revised (originally known as "restated") company accounts are produced, Experian will recalculate the insolvency score if the accounts are filed before the end of February 2017. If the revised accounts are filed on or after 1 March 2017, Experian and the PPF have discretion over whether to recalculate scores.
  • Non-sterling accounts will be converted to sterling as at the balance sheet date of the most recent accounts. 
  • Experian will accept accounts not published in English, if they are accompanied by a translation and auditor's certificate confirming that the translation is accurate. 
  • Before submitting an accounting standard change certificate, companies should test whether the requested adjustment will actually impact the Mean Score or Levy Band, as analysis suggests that most adjustments will not.

Key dates

22 December and 16 January 2017 – updated FAQs issued

28 February 2017 – deadline for submission of revised accounts for guaranteed recalculation of score

31 March 2017 – finalised levy determination is due


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European reform: revised IORP II Directive formally adopted


Summary

On 8 December 2016, the European Council formally adopted the revised Directive  on Institutions for Occupational Retirement Provision (IORPs) which regulates occupational pension schemes across the EU with 100 or more members. The revision of Directive 2003/41/EC aims to reinforce the role of IORPs as institutional investors and to give better protection for scheme members and beneficiaries. 

Solvency rules

·         The review was originally intended to bring the IORP Directive more closely in line with the insurance sector directive, Solvency II, through the introduction of scheme solvency capital requirements. However, following representations from the UK pension industry and others, it was decided that developing Union level quantitative solvency requirements would not be practical (see recital 77).

Cross-border schemes

·         The requirement for cross-border schemes to be fully funded has been retained. Where full funding is not met, the regulatory authorities of the home Member State must require the IORP to immediately draw up appropriate measures and implement them without delay in a way that members and beneficiaries are "adequately protected" (article 14(3)). 

Cross-border transfers

·         The provisions governing cross-border transfers have not changed since the March 2014 version of the draft Directive (when they were largely rewritten to clarify the processes involved and the authorisations required) (article 12).

Governance

·         The list of key functions which IORPs must have in place (risk management, internal audit and, where applicable, actuarial) was expanded in the March 2014 version of the draft Directive to include internal control and compliance. The internal control function must include at least administrative and accounting procedures, an internal control framework, and appropriate reporting arrangements. (See articles 20 and 21.)

·         Schemes are required to have a risk management function in a manner appropriate to the scheme's size and internal organisation, as well as to the nature, scale and complexity of its activities (article 25).

·         IORPs will be allowed to outsource key functions or other activities to third parties, in accordance with requirements set out in the Directive (article 31).

·         Schemes must be effectively run by at least two persons.  However, Member States may allow a scheme to be run by only one person, on the basis of a reasoned assessment by national authorities (article 21(6)).

·         A scheme's written policies on key functions to be reviewed at least every three years (article 21(3)).

·         Schemes will be required to prepare a risk evaluation at least every three years, or without delay following any change in the scheme's risk profile (article 28). 

·         The requirements for what the risk evaluation must cover now include assessments of the effectiveness of key functions.

Fit and proper person requirement 

·         Persons who effectively run a scheme or carry out key functions must be of good repute and integrity ("proper") and must be "fit" meaning, for individuals who effectively run the scheme, that their "qualifications, knowledge and experience are collectively adequate to enable them to ensure a sound and prudent management of the [scheme]" (article 22). 

Remuneration policy

·         Schemes must be required to have a remuneration policy to cover those who effectively run the scheme, holders of key functions and also "other categories of staff whose professional activities have a material impact on the [scheme's] risk profile" (article 23).

·         As in the March 2014 version of the Draft Directive, the public disclosure of the remuneration policy is no longer a requirement, although it must be disclosed to members and beneficiaries.

Disclosure: pension benefit statements

·         IORPs will be required to give every member a "pension benefit statement" containing key information at least annually.  The earlier requirement that the new pension benefit statement should be printable on no more than two A4 sheets of paper has been replaced with a requirement that the statement should be a "concise document" (article 39).

·         The statements may be provided electronically but must be provided in hard copy on request.

·         Key information which must be provided includes information on:

o    full or partial guarantees under the scheme and, if relevant, where further information can be found;

o    pension benefit projections including, where projections are based on economic scenarios, a best estimate scenario and an unfavourable scenario;

o    accrued entitlements or accumulated capital;

o    (where applicable) a breakdown of the costs deducted by the IORP in the previous 12 months;

o    for defined benefit schemes, information on the funding level of the scheme as a whole.


Key dates

White Paper "An Agenda for Adequate, Safe and Sustainable Pensions" published 16 February 2012.

Draft Technical Specifications QIS of EIOPA's Advice on the Review of the IORP Directive: consultation paper issued 15 June 2012.

EBA, EIOPA and ESMA's Joint Consultation Paper on its proposed response to the European Commission's Call for Advice on the Fundamental Review of the Financial Conglomerates Directive, issued 14 May 2012.

Quantitative Impact Study launched 16 October 2012.  Memo from European Commission issued 23 May 2013.

Proposal to revise the IORP Directive (covering occupational pension schemes) issued 27 March 2014.

Revised version of proposed Directive issued on 17 September 2014.

A draft report on the proposal for a revised IORP II Directive was issued in July 2015.

The Council of the EU approved the revised IORP II Directive on 30 June 2016.

On 24 November 2016 the European Parliament adopted its first-reading position on the proposal for a Directive of the EP and of the Council on the activities and supervision of institutions for occupational retirement provision (recast) (IORP II).

On 8 December 2016 the Directive was formally adopted by the Council, without further amendments. The Directive was published in the Official Journal on 23 December 2016 and will enter into force 20 days later.

Member States will have until 13 January 2019 to transpose it into national law.


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