This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of December 2015 in relation to occupational pension schemes. The topics covered in this edition are:
Taxing times ahead?
Following on from various proposed changes to pensions tax announced over the course of last year, the latest draft of the Finance Bill 2016 was issued on 9 December 2015. The draft clauses of the Bill are currently subject to a public consultation which will close on 3 February 2016. The pensions provisions of the Bill:
- codify the long-trailed lifetime allowance (LTA) reduction from £1.25 million currently to £1 million from 6 April 2016. As with reductions to the LTA in the past, there will be transitional "fixed protection" and "individual protection" provisions to aid individuals that might be affected by the LTA reduction.
- remove the current legislation that permits bridging pensions with effect from 6 April 2016. HMRC will be consulting on some new legislation to clarify how bridging pensions and the new single tier state pension will interact.
- adjust how inheritance tax applies to drawdown pensions, so that inheritance tax will not arise on unused drawdown funds when a member dies. This change will be made retrospectively to take effect on and from 6 April 2011.
- introduce exceptions to the tests to check whether a dependant's scheme pension exceeds the member's scheme pension. The aim of these exceptions is to simplify the administration of dependants' scheme pensions.
HMRC also issued a newsletter in December which includes the above changes and:
- details standard wording about the changes to the LTA for schemes to adopt into their own literature should they so wish.
- details an interim process for individuals to apply for LTA protection in advance of its new automated application system going live (this should occur in July).
- provides information about which death benefit payments and flexi-access payments need to be notified to HMRC by pension scheme administrators.
- confirms that the Government is still considering responses on its recent consultation about the interaction between tax relief and pensions.
Finally, on 8 December 2015, HMRC revised the Pensions Tax Manual to reflect changes made by the Finance Act 2015 and arising from consultation on the manual.
High Court grants order to allow words to be read back into a deed
In the High Court case Re BCA Pension Plan  EWHC 3492 (Ch) the trustees of the pension fund made a unilateral application where words had been deleted in a consolidating deed which affected the operation of the pension increase rule. The deleted words had set out the periods of pensionable service in respect of which certain levels of increase were to apply.
The application was made pursuant to a procedure contained in the Administration of Justice Act 1985 (Section 48). This allows trustees to apply to the High Court for an order authorising them to take certain steps where a question of construction has arisen out of the terms of a will or trust. To make an application under Section 48, the trustees must have obtained a written legal opinion from a person who has a ten-year High Court qualification.
The judge granted the application, allowing the deleted words to be read back into the consolidating deed. He noted that, without the words which had been deleted in this re-drafting exercise, the pension increase rule would effectively become unworkable and that the mistake was self-evident and therefore capable of correction in this manner. The judge decided that members could be notified about the Order in the next scheme member communication which would be a sensible and appropriate method of communication.
The case is useful in highlighting the availability and parameters of the Section 48 procedure. The outcome was clearly influenced by the fact that the mistake was an obvious one and, without the deleted words, the pension increase rule would not work.
2016/17 Levy Rules published
On 17 December, the PPF published its levy rules for the 2016/17 levy year. The PPF approaches its levy rules with the aim of keeping things as stable as possible during each triennium. As 2016/17 was the second year of the triennium, there was very little change of any note. Minor changes included the following:
- Certificates relating to excluding mortgages from consideration in the mortgage age variable - refinance mortgages, pension scheme mortgages, rental deposit deeds and investment grade credit ratings – are to be carried forward, rather than needing to be recertified. The PPF will check that credit ratings previously certified continue to be investment grade.
- New companies are able to submit interim accounts (as long as they show at least a month’s activity).
- A lighter touch approach, where appropriate, to recertification for ABCs.
The PPF has said it will reflect further on new Financial Reporting Standard - FRS 102 - in the context of its work on the next levy triennium, commencing in 2018/19, which is already underway. As always, it encourages schemes to continue to put in place risk reduction measures (e.g. contingent assets); there is still time to do so for the 2016/17 year.
Pension Wise is moving
The Government has announced that responsibility for Pension Wise, the defined contribution guidance service, will be passed from HM Treasury to the Department for Work and Pensions (DWP) from April 2016.
The move is described as "machinery of Government change". The Government states that Pension Wise is a stronger strategic fit with DWP departmental objectives and its capability to oversee operational delivery of the service. The move was recommended by the Work and Pensions Select Committee so that the department responsible for pensions can oversee the Pension Wise service.
The change is implemented by The Transfer of Functions (Pensions Guidance) Order 2015, which has been laid before Parliament and comes into force on 1 April 2016.
Pensions Ombudsman Determination – Lennon (PO-406) – A timely reminder about limitation periods
Mrs Lennon complained that she was not told about a favourable pension transfer option when she commenced employment with her employer in 1992. In particular, she was not notified that there was a 12 month time limit to transfer her previous scheme benefits to her new employer's scheme on a "transfer club" basis or that a discretionary transfer could be made outside the 12 month period.
The Ombudsman concluded that he could not consider the complaint because it was made outside the three year time limit applying to Ombudsman complaints. He agreed that the information received by Mrs Lennon from her employer in 1992 was not sufficient to make her aware of the transfer options and, consequently, she missed the 12 month deadline. However, Mrs Lennon had been refused a discretionary transfer in 2005 and, at that point, ought reasonably to have known about the employer's failure to provide the transfer information in 1992. The three year limitation period therefore ran from 2005, some seven years before she made her original complaint in 2012.
The Ombudsman decided that, given all the circumstances, it would not be appropriate to exercise his discretion to extend the time limit. In particular, he could not provide a remedy that would, in any event, be defeated by a limitation defence in court (a court claim by Mrs Lennon for breach of contract would have expired at the latest in 2011).