05 Dec 2017

Pensions Snapshot - December 2017

Linkedin

This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of November 2017 in relation to occupational pension schemes. The topics covered in this edition are:

 

DB scheme VAT recovery - HMRC confirms continuation of current rules

HMRC has updated its internal VAT manual (the Manual) in relation to when an employer can recover VAT on services provided to its defined benefit pension scheme. The Manual confirms that the current rules on recoverability of VAT will continue to apply in future. They were originally intended only to remain in force as a temporary measure until the end of 2017.

This means that VAT for administration service costs will, generally speaking, continue to be recoverable by the employer. In addition, VAT for investment service costs will continue to be partially recoverable by applying a 30/70 split. This allows an employer to reclaim 30% of VAT if the trustees provide a mixed invoice from a single firm for administration and investment services.

However, the Manual now provides a more detailed description of what HMRC considers to be administration or investment services. This might allow a more accurate split of services which results in more effective VAT recovery than can be achieved by the 30/70 split.

The Manual refers to a range of alternatives which effectively require the employer to be included in the contractual arrangements governing the provision of the investment services. For example, an employer could enter into a tripartite contract with the trustees and the investment service provider which meets minimum requirements. However, it may prove difficult to construct a contract which meets competing legal and regulatory requirements and there may be associated conflict of interest and corporation tax complications.

Other options are mentioned in the Manual, including a commercial arrangement (whereby the trustees are engaged by the employer to run the scheme) or the use of VAT grouping (whereby a corporate trustee is added to the employer’s VAT group). There are likely to be associated tax and operational issues with all of these alternative options.

So, after three years of uncertainty, HMRC seems to have come full-circle. On the plus side, it appears to have reached a landing which allows employers and trustees to proceed with some certainty when considering the most effective way to recover VAT.

 

Autumn Budget 2017: pensions announcements

The Autumn Budget was delivered on 22 November and contained few surprises for those in the pensions industry. Many of the pensions-related announcements had been previously confirmed by the Government. The key changes announced by Philip Hammond were as follows:

  • The lifetime allowance will be increased in line with CPI from April 2018, rising to £1,030,000 for the 2018/19 tax year.
  • The basic state pension and the new state pension will both be increased by 3% in April 2018, with the basic state pension rising by £3.65 per week and the full new state pension rising by £4.80 per week.
  • The Government will include a power in the Finance Bill 2018 for HMRC to register and de-register unauthorised master trust scheme and schemes with a dormant company as a sponsoring employer.
  • With effect from April 2019, the Government will "modernise" tax relief for employer premiums paid into life assurance products or some overseas pension schemes. This means that the relief will be extended to cover policies where an employee nominates an individual or registered charity to as a beneficiary.
  • The Pensions Regulator is going to "clarify" guidance on how trustees can include investment in assets with long-term investment horizons (such as venture capital, infrastructure and other illiquid assets) in a diverse portfolio. This proposal forms part of a package of measures aimed at supporting long-term investment.

 

Trustees potentially required to apply for a "legal entity identifier"

All "legal entities" which are party to financial transactions involving, amongst other things, shares, bonds, collective investment schemes and derivatives must obtain a legal entity identifier (LEI) by 3 January 2018; a unique code which is used to identify a legal entity that is a party to a financial transaction. This is due to new reporting requirements imposed on financial institutions and investment managers under the Markets in Financial Instruments Directive (Directive 2014/65/EU) (MiFID II).

An LEI is designed to assist with transparency and the prevention of financial fraud in relation to financial transactions by allowing all parties participating in a transaction to be identified.

An occupational pension scheme may fall within the definition of ‘legal entity’ and so may need an LEI. Investment firms will not be able to provide investment services to a scheme that does not have an LEI (and should have one). For example, it will not be able to execute trades on behalf of the scheme from 3 January 2018.

Whether or not an occupational pension scheme needs an LEI will depend on the scheme's investments and trades. Trustees should therefore speak to their investment managers to establish if the scheme already has an LEI and, if not, whether they need one. Assuming an LEI is required, trustees could ask the investment managers to help them obtain one, particularly as investment managers can make bulk LEI applications at a discounted rate. Applications must be made using the London Stock Exchange's UnaVista platform and there is a fee of £115 plus VAT.

We anticipate significant numbers of legal entities needing an LEI and so the application should be made as soon as possible ahead of the 3 January 2018 deadline.

LEIs are only valid for a year and so will need to be renewed by pension schemes on an annual basis at a cost of £70 plus VAT per year.

 

Pensions cold-calling – draft legislation likely in 2018

Draft legislation to ban pensions cold-calling will be published in early 2018. The proposed ban will include texts and e-mails as well as unsolicited phone calls. The Financial Guidance and Claims Bill (the Bill), currently working its way through Parliament, now includes provisions for the proposed new single financial guidance body to advise the Secretary of State for Work and Pensions to ban pension cold-calling if it considers a ban would be conducive to its functions. However, the Government has indicated that it would prefer to introduce the ban via direct legislation rather than wait for the more cumbersome mechanism under the Bill to take effect.

 

GDPR and pensions schemes: what do trustees need to do?

For those of you who may have missed it, we recently released a podcast focusing on the impending General Data Protection Regulation (GDPR) and how it will affect trustees of occupational pension schemes in their role as data controllers. The podcast provides practical tips on actions trustees might take to ensure compliance with the GDPR requirements. Click here to listen.






Linkedin

KEY CONTACT

Mark Catchpole

Mark Catchpole
Partner

T:  +44 20 7809 2059 M:  +44 7767 624 975 Email Mark | Vcard Office:  London

Naeem Noor

Naeem Noor
Senior associate

T:  +44 20 7809 2092 M:  +44 7785 464 458 Email Naeem | Vcard Office:  London