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Forward, though I canna see...

18 February 13

Likely legal developments in 2013 affecting pensions

by Iain Talman

Actuaries attempt to predict the future from past experience, for example telling you how many people of a given number will die over a period. A Sicilian actuary will give also names and addresses. So we may look at 2012 not as a historical retrospective, but for clues for the future.

Auto-enrolment under the Pensions Act 2008 is among the biggest news, but thankfully my colleague June Crombie covered that (Journal, November 2012, 36). 2013 may see a decision on conditions for a hybrid scheme as a qualifying alternative.

The state pension, as a white paper sets out, is to move to a flat rate. This ends the option for employers to use an occupational pension scheme to contract-out their employees from the earnings related portion of the state second pension – because there will not be one.

The basic weekly state pension from April 2013 will be £110.15 (single) and £176.15 (a couple).

The Test-Achats case [2011] 2 CMLR 38 (briefing: Journal, May 2011, 47) now requires insurers to provide annuities on a gender-neutral basis. There appears nothing yet, in the relevant directive or otherwise in European law, that requires this to apply to pension schemes themselves: earlier cases have allowed gender-based factors where objectively justifiable (Neath v Hugh Steeper [1994] IRLR 91), though one suspects the requirements for justification may become more rigorous.

The Pensions Regulator is consulting on whether to permit smoothing of financial data in actuarial calculations required under the Pension Act 2004, Part 3 (i.e. for defined benefit schemes).

The European Commission is considering a new directive, based on Solvency II for the insurance industry, which some people fear will have cataclysmic effects on retirement provision, the CBI predicting a cost to employers of £350bn and destruction of 180,000 jobs.

We are likely to see continued de-risking of pension scheme investments, going for security rather than growth or income, which, of course, comes at an opportunity cost; and perhaps also de-risking in legal and governance, i.e. being more aware of legal and governance exposures. We may see more investments into infrastructure, debt or equity.

Pension scheme provision is inevitably shaped by taxation. Following the Autumn Statement, draft Finance Bill 2013 material has been published. The annual allowance of tax relievable pension contributions is lowered yet again, from £50,000 to £40,000, which causes a problem for money purchase schemes, but also a real problem where there is a spike in accrual (and accordingly in value) in a defined benefit scheme. The lifetime allowance is reducing from £1,500,000 to £1,250,000, with some transitional arrangement (“personalised protection”) for those already at the margins of the limit.

The draft legislation also addresses some perceived anomalies in (1) the current fixed protection 2012, (2) bridging pensions, and (3) “family pension plans”; and makes changes in relation to qualifying recognised overseas pension schemes. These take effect from April 2014.

In response to criticism of the drawdown limits under a money purchase scheme where a member has not yet purchased an annuity, the Government is raising the capped drawdown limit from 100% to 120%, giving pensioners with these arrangements the option of increasing their incomes.

We continue to await a CJEC ruling on the application of VAT to various pension administration charges.

The combination of over-regulation, over-expectation and scary investment markets has rendered defined benefit schemes unsustainable. The alternative money purchase scheme has been seen as leaving members and their dependants with transparently inadequate benefits. The Government is seeking an alternative, referred to as a defined ambition scheme, where the risk will be shared. The shape of this is not yet clear. Consultation continues.

Due to the woeful administrative state of many schemes falling into the Pension Protection Fund, the Pensions Regulator has begun a campaign to have schemes smarten up their act over data-keeping. Improvements were due to have been made by the end of 2012. The Regulator will focus on improving solvency, governance and standards of administration, as well as preparations for auto-enrolment. More broadly, Warren J (a frequent adjudicator in pensions disputes) on 6 December publicly called into question whether trust law was still the best vehicle to underpin pension schemes.

“Fair Deal” is to be changed to allow transferring employees to stay in their public sector scheme. The Procter & Gamble case [2012] EWHC 1257 (Ch) (briefing: Journal, August 2012, 27) is to be appealed, it appears.

Public sector pensions will move from final salary to career average by the Public Sector Pensions Bill.

The Pension Protection Fund (in effect a mutual protection fund for defined benefit schemes) has confirmed its September proposals for the 2013-14 levy, and has decided how guaranteed minimum pensions should be equalised before a scheme enters the Fund.

Further, or indeed any, proposals for the simplification of private pensions may not be expected in 2013 or any time soon. Perhaps we will at least find out what the basic concept of “money purchase” means.

Iain J S Talman, partner, DWF Biggart Baillie

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