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Trustee Knowledge Update

Issue 29


Welcome to the November 2014 edition of our Trustee Knowledge Update. It aims to inform trustees about changes in the law to help them to comply with the legal requirement for each trustee (or trustee director) to have knowledge and understanding of the law relating to pensions and trusts. This edition focuses on the key legal developments over the last three months that trustees may need to be aware of.

Government (http://www.gov.uk)

Better workplace pensions: putting savers’ interests first

DWP has published several documents responding to its consultation on Defined Contribution (DC) governance including a set of draft regulations which are intended to come into force in April 2015. Trustees of DC schemes or hybrid schemes with DC sections (but not generally DB schemes with DC AVCs) need to be considering now what governance changes they may need to make.

The key issues to consider are:

  • All trustee boards will need to have a chair of trustees. Existing schemes will have 3 months from 6 April 2015 to appoint a chair if they do not already have one. 
  • The chair will have to sign off an annual Chair’s Statement on how the minimum governance standards have been met and the steps taken to ensure that trustees have the relevant knowledge and understanding to run the scheme effectively.
  • Trustees must ensure that core financial transactions are processed promptly and accurately as failure to do so could have an impact on members’ funds.
  • The scheme must not restrict the choice of who provides administrative, fund management, advisory or other services to the scheme. Provisions in scheme rules requiring trustees to use a particular individual or company to provide services will be overridden.
  • Trustees will need to understand the type and level of charges levied on members. They must also know the types and levels of transaction costs that are incurred by the different funds within the scheme.

In addition, where a scheme is used for auto-enrolment:

Trustees will need to ensure that default arrangements are designed in members’ interests and there will need to be a review of whether the default strategy remains appropriate at least every 3 years. 

  • There will be a charge cap on default arrangements of 0.75% of funds under management (or an equivalent cap for alternative charging structures). It will exclude transaction costs and costs resulting from pension sharing, complying with court orders and wind-up.
  • Schemes will not be able to contain a consultancy charge structure.
  • From April 2016 schemes cannot contain an active member discount or similar mechanism that results in higher charges for deferred members or memberborne commission payments to an adviser.

The Pensions Regulator has said that it intends to re-issue its DC Code of Practice after April 2015.

Money purchase benefits: guidance on recent changes

DWP has issued guidance on the changes to the definition of money purchase benefits retrospective to 1997 which came into force earlier this year. The guidance is aimed at helping trustees understand the consequences of the change in the money purchase definition on their scheme. Where trustees have benefits which might be affected by the changed definition (eg: cash balance benefits, underpins or internal annuities), the guidance might be helpful.

Tax (www.hmrc.gov.uk/pensionschemes/index.htm)

Guidance on “fit and proper person” test

From 1 September 2014, HMRC can refuse to register a scheme if a scheme administrator (usually the trustees) is not a fit and proper person. It may also de-register an existing scheme if this requirement is not met. As part of the process for registering a scheme, an administrator will have to complete a declaration that they are a fit and proper person. Where HMRC has doubts, it now has additional information gathering powers.

HMRC has published a list of factors that may lead to it deciding that a scheme administrator is not a fit and proper person, including where the scheme administrator:

  • does not have sufficient knowledge of the pensions and pensions tax legislation or does not employ an adviser with this knowledge; 
  • has previously been involved in pension liberation;
  • has previously been the scheme administrator of, or otherwise involved with, a pension scheme which has been de-registered by HMRC;
  • has been involved in tax fraud or has a criminal conviction relating to finance, corporate bodies or dishonesty;
  • has been the subject of adverse civil proceedings relating to finance or dishonesty/misconduct;
  • employs as an adviser a person who has been involved in pension liberation or tax avoidance;
  • has been removed from acting as a trustee of a pension scheme by the Regulator or a Court; and/or
  • has been disqualified from acting as a company director or is bankrupt.

Changes to special lump sum death benefit charge

Under current rules, a special 55% tax charge is payable by the recipient on many lump sum death benefits, in particular where the member was over age 75 or where the benefit was from DC funds and the member had already received drawdown benefits from those funds.

From April 2015, there will be no tax charge on lump sum or drawdown benefits where a member with unused DC funds dies below age 75. They will be able to pass on such funds to nominated beneficiaries. The beneficiaries can take the funds as a lump sum or an income from the scheme.

Anyone who dies with unused DC pension funds at or over the age of 75 will also be able to nominate a beneficiary to pass their pension to. The nominated beneficiary will be able to access the pension funds flexibly, at any age, and pay tax at their marginal rate of income tax.

In those cases where a special tax charge still arises (for example where a lump sum is payable after age 75), the rate will reduce from 55% to 45%.

Third Countdown bulletin to end of DB contracting-out

HMRC remains concerned that not enough schemes are starting the GMP reconciliation process required for the end of contracting-out. It is urging schemes to do so as soon as possible and reminds them that the reconciliation service may only be available until December 2018.

Draft HMRC Guidance on Taxation of Pensions Bill

The guidance has been updated (from the version reported in the last edition of TKU) to reflect the new provisions in the Taxation of Pensions Bill. There are new chapters which deal with death benefits, information requirements, overseas provisions and general changes to the law.

One of the changes which might require detailed consideration by trustees are the new reporting requirements. There are detailed requirements about what a scheme administrator must tell the member when they flexibly access DC benefits to ensure that they understand
the impact of the new DC annual allowance and their own obligations to notify other schemes. A member must tell all schemes they are in that they are subject to the DC annual allowance rules.

Trustees considering any of the DC flexible benefit provisions or the changes in the lump sums or other relaxations under the Bill may wish to refer to this guidance.

Regulator (www.pensionsregulator.gov.uk)

Changes to the scheme return

New questions will appear on the Scheme Return from December 2014. The new information required includes:

  • More recent membership details. 
  • Where a scheme was in surplus at the most recent valuation, details of the financial assumptions used.
  • Where a scheme has a Value at Risk (VaR) calculation (a common method for assessing the size and likelihood of potential risks happening over a defined period of time), information about that. If a scheme cannot provide a VaR figure, the Regulator will assess its investment risk by reference to the allocation between different asset classes.
  • Where a scheme has an asset-backed contribution arrangement in place, information relating to the structure, valuation and term of the ABC.

Legislation (http://www.legislation.gov.uk)

Pensions Act 2014 - DC vesting

The provisions in the Act which reduce the period for the vesting of DC benefits from 2 years to 30 days are intended to come into force in October 2015.

Taxation of Pensions Bill

This Bill will implement the new flexible DC regime. In addition to the provisions summarised in the last edition of TKU and elsewhere in this edition, the Bill contains the following amendments:

The serious ill health lump sum charge for over 75s will be 45% (reduced from 55%).
The trigger level of lump sums received by a member in a 12-month period for the purposes of lump-sum recycling is being reduced from £10,000 to £7,500.
Additional changes are made to the protected minimum pension age provisions so that if a member with a protected pension age transfers benefits in payment, future pension payments under age 55 will be authorised payments.

Draft Shared Parental Leave Regulations 2014

These Regulations are intended to come into force on 1 December 2014 and will apply where the expected week of childbirth is after 5 April 2015. Eligible employees will be able to share up to 50 weeks of shared parental leave and up to 37 weeks of statutory shared parental pay.

Parents can take leave consecutively or concurrently, and in several different chunks.

The intention appears to be that shared parental leave will be pensioned in the same way as maternity leave. So in very broad terms, paid shared parental leave will have to be pensioned as though the member was working normally but the member will only need to pay contributions based on what he or she is actually earning.

PPF (www.ppf.gov.uk)

The Triennium Policy Statement and 2015/16 Pension Protection Levy Consultation Document

The PPF draft levy determination for 2015/16, together with its formal response to the levy consultation for the 2015/16 to 2017/18 “triennium” has been published. The response confirms the following:

  • a new “PPF-specific” model for calculating the PPF levy which is intended to provide greater predictive accuracy in assessing insolvency risk, producing scores based more closely on financial data. The new scores are used from October 2014, with a six-month average used to calculate the levy for 2015/16;
  • a new test for Type A guarantees used to secure a levy reduction, with a requirement for trustees to confirm, having made reasonable enquiry into the financial position of the guarantor, that they are reasonably satisfied that the guarantor could, as at the date of the certificate, meet in full a certified fixed sum, having taken account of the likely impact of the immediate insolvency of all employers (other than the guarantor, where the guarantor is also an employer);
  • an adjustment for Type A guarantees to reflect the impact of the amount being guaranteed on the guarantor’s own covenant; and a levy discount (up to a maximum of 10%) for associated last man standing schemes to reflect the extent to which the arrangement genuinely spreads risk, rather than 10% as a standard discount. Schemes which classify themselves as “last man standing” will have to certify that they have received legal advice that this is correct.

The PPF will, in principle, recognise all asset types for the purposes of the levy, including asset-backed contributions (ABCs), “provided the ABC is valued in a way that reflects the value to the PPF in the event of insolvency”. The value of the ABC arrangement will be removed from the scheme assets when calculating the section 179 deficit, but a PPFspecific “ABC value” will be added back in for arrangements which meet the PPF’s requirements.

Trustees will have to certify a value for their interest in the ABC vehicle, which will be the lower of the fair value given in the scheme accounts and a stressed value for the underlying ABC assets, calculated on the assumption that all the scheme employers (and any guarantors) are insolvent. This value needs to be obtained from a professional valuer and supported by a legal opinion about the trustees’ rights under the ABC arrangement.

These proposals should mean that most ABC arrangements will now receive recognition in the PPF levy calculation. However, the requirements for professional valuations and legal opinions may be quite onerous in many cases and some structures will still fall outside the levy
entirely, such as where the ABC arrangement holds a loan note from the employer group and the assets supporting that loan note are not subject to security in the form of a fixed or floating charge.

The PPF is calling on all schemes and employers to understand the new rules and to check their new scores.


Bear Scotland v Fulton (Employment Appeal Tribunal)

This decision follows the judgment of the European Court earlier this year which considered the treatment of commission when calculating holiday pay.

The key implications from the case are that certain overtime and commission arrangements will form part of employees’ pay for the purposes of calculating their entitlement to holiday pay if these are “normal pay” for the employee in question. In other words, holiday pay calculations should not be simply based on “basic” pay – other supplementary elements may need to be taken into account.

However, the EAT ruled that an underpayment in respect of holiday pay (categorised as a deduction from wages) which is separated from the next such underpayment by a period of more than three months is out of time for a claim to be brought (subject to the reasonable practicability test).

The outcome may have repercussions for many employers when calculating pensionable pay. Where elements of additional pay such as commission or regular overtime form part of an employee’s holiday pay they may also form part of the employee’s pay for the purposes of calculating pension contributions and benefits.

If holiday pay is treated as pensionable, employers should consider the impact on the structure of remuneration and pay packages going forward as well as record keeping and payroll systems to enable data to be captured and calculations to be made. Trustees may wish to liaise with employers to establish what steps (if any) they are taking as a result of the decision and to ensure that correct contributions are being made and the right benefits paid.

On the back of the decision, the Government announced the appointment of a taskforce to review its impact. Leave to appeal has been granted to the Court of Appeal.

Hargrove v Revenue & Customs

The member appealed against HMRC’s refusal to consider his application for enhanced protection, made more than three years after the 5 April 2009 deadline. He argued that he had a “reasonable excuse” for late submission, namely that he could not reasonably have been expected to know before then that the relevant legislation applied to his deferred final salary benefits, or about the need to make a claim to protect his position. The member even called the Vice-President of the Royal Statistical Society to give evidence on his behalf about the statistical probability of a person, selecting press articles to read on a random basis, finding an article about claims for enhanced protection from the Lifetime Allowance.

HMRC argued firstly that the type of ignorance put forward could never amount to a “reasonable excuse”. However, the Tribunal disagreed: “We are not persuaded that an Appellant who had an existing scheme when changes were made to the way in which it would be taxed and who was unaware of the nuances that might apply to him should be unable to claim that he had a reasonable excuse for his ignorance.”

However, on the facts, the member did not have a reasonable excuse. The test was “whether the reasonable taxpayer with the same attributes and in the same circumstances as the Appellant would have been aware of the relevant legislation and in particular the statutory  deadline for making a claim for enhanced protection.” The member was “an intelligent person with an open and enquiring mind who is likely to be able to understand complex issues if he decides to investigate them.”

Although he had no particular expertise in pension scheme taxation, it was relevant that he knew he did not have such expertise and this should have alerted him to make detailed enquiries, instead of adopting a passive attitude and drawing uninformed conclusions about how the new legislation might apply to him. That was not a reasonable approach to take. The reasonable taxpayer in his position would have sought basic advice on becoming aware of the tax changes, either contacting the scheme administrator or a professional, or searching the HMRC website extensively to satisfy himself how the changes would apply to him and whether he needed to do anything.

Ombudsman (www.pensions-ombudsman.org.uk)

Bains – no breaches of duty in failure to award discretionary increases

The member’s pension started in 1998. In 2006 his scheme merged with another scheme following a corporate takeover. Since that date, the employer had not awarded any discretionary pension increases. The member complained against the employer for failure to award the increases and against the trustees on the grounds that the trustees of his old scheme, to whom they were successors, had failed to act in accordance with their fiduciary duties in agreeing to the transfer of benefits to the new scheme.

Complaint against the employer: The Deputy Pensions Ombudsman explained that the governing documentation gave the employer an absolute discretion as to whether to award increases. The only restriction was that it must first take actuarial advice, although there was no express requirement that the advice had to come from the scheme actuary, nor that it had to be strictly adhered to. She noted that evidence of the decision-making process had been provided and that factors which had been considered included general cost of living increases, the cost of providing pension increases, market practice, accounting implications and the number of members with pre-6 April 1997 benefits as a proportion of total membership.

The DPO accepted that in one of the three years she accepted for review (2011, 2012 and 2013) the employer did not have an actuarial report prepared, but the cost of providing discretionary increases had been ascertained by the pensions manager at trustee meetings on the basis of previous actuarial advice. In another year, in which the actuarial report produced had concluded that funding discretionary increases was “reasonable from an actuarial point of view”, the employer had still been entitled to decide against providing them.

Accordingly, the DPO held that the employer had made its decisions in respect of discretionary increases in 2011, 2012 and 2013 in accordance with the rules. There was no breach of the implied duty of good faith: the employer did not take the decision on discretionary increases in an irrational or perverse manner. It took its obligation to review discretionary increases seriously and, even if it did not consider precisely the same factors each year, based each decision made on a number of relevant factors that it had considered in adequate detail.

“If a discretion is exercised at one point in time - or even consistently for a number of years - this does not mean that the party exercising that discretion, in the absence of a contractual statement to the contrary (for example, a guarantee), has an obligation to provide similar increases in the future.”

There was no evidence to suggest any unequivocal promise or representation made by the employer to apply a certain level of increase to pension benefits.

Complaint against the trustees: The member argued that the previous scheme trustees had breached their fiduciary duties by failing to protect an established custom of awarding increases in the merger deed. However, the DPO said that there had been no established custom. The employer had absolute discretion to provide increases prior to the merger and had the same power after it. All that the merger changed was that increases to his pension would be considered by the employer under the new scheme rather than the old one.

In the absence of a formal guarantee, the fact that pensions had regularly been increased at varying rates on a yearly basis in the period prior to the merger did not mean that the regular exercise of the discretion to provide such rates automatically turned that discretion into a right.


Policyholder protection: Consultation is being undertaken which, amongst other things, proposes increased protection for policyholders in the event of an insurer failing in certain circumstances. The protection given to annuities could rise from 90% to 100%. It is currently envisaged that this change would take place around summer 2015.

Dates for diaries: Trustee training remains one of the most important ways of ensuring that trustees have the knowledge and understanding required to perform their duties. Our remaining 2015 trustee training courses are taking place on 9th June 2015 and 6th October 2015. If you have any enquiries about any of these courses or would like to reserve a place, please contact Karen Mumgaard.

If you are interested in any additional trustee or employer training, please contact Karen Mumgaard who can provide you with a list of our current training topics or discuss any particular training needs you might have.

General: For further information on our pension services, please contact Mark Grant, T: +44 (0)20 7367 2325 or your usual pension partner. Please also visit our website at www.cms-cmck.com.


Portrait of Pete Coyne
Pete Coyne