Pensions advice allowance – three is the magic number

Let’s start with the small print…

From April 2017 it will be possible for individuals to take regulated financial advice and to have up to £500 deducted from their defined contribution (DC) pension pot and paid over directly to a financial adviser. This is for regulated “retirement financial advice”, defined as “advice in respect of the person’s financial position, including their pension arrangements and the use of their pension funds”.

The pensions advice allowance (PAA) can be used by current and former members of any age, including those in receipt of a pension. An individual can use the PAA three times in their lifetime but not more than once in any tax year.  The PAA will be an authorised payment for tax purposes and the Government says that it will not affect an individual’s ability to take up to 25% of the remaining funds as a tax free cash lump sum when the benefits are taken.

The advice does not have to be provided on a face to face basis.

Which pension plans are affected?

The PAA can be taken from any DC pension pot – including from additional voluntary contribution arrangements. Many defined benefit plans offer a money purchase AVC facility, so this new legislation affects most pension plans. However, it will only be available if the pension plan rules allow it.

Employer-arranged advice

From April 2017 the Government is also increasing the income tax exemption around employer-arranged pension advice from £150 to £500 where an employer pays for or reimburses the cost of the advice. The scope of the advice that can be provided will be wider than before and there is nothing to stop this being used in conjunction with the PAA so that the member can benefit from £1,000 of tax advantaged advice.

Considerations for trustees

Trustees of pension plans with DC pots should consider whether they wish to offer the PAA to members, seek advice on whether rule amendments are required and consider whether they will place any restrictions on it. Trustees may, for example, choose to limit the choice to a specific firm of financial advisers and perhaps seek a fee reduction for members at the same time. Trustees should also guard against advice scams by unscrupulous “advisors”, where members could be encouraged to agree to their DC pots being charged whilst not actually receiving valuable advice. The Pensions Regulator is expected to release a factsheet in the near future confirming that trustees will not generally be liable for advice given by a third party.

Individuals using the PAA will be required to declare that they have not used the PAA more than three times in total but trustees are still expected to operate basic due diligence to prevent misuse. For example, if an individual uses the allowance more than three times in relation to the same pension plan, trustees should either not execute the withdrawal of money or report it to HMRC as an unauthorised payment. This means that trustees will need to keep records of members using the PAA.

Next steps

It is difficult to estimate how popular this option will be amongst members but we anticipate that financial advisers will publicise it as it is likely to generate business for them. Trustees should be prepared for questions in the short term and should add this issue to a forthcoming agenda for discussion. Please contact any of our pensions team for advice.  

 

 

 

Ctrl+Alt+Delete. Companies House reporting framework reset – trustee companies take note!

We blogged in March and June 2016 about the new requirements for UK limited companies (including trustee companies, whether limited by shares or guarantee) to identify “persons with significant control” (PSCs).  This requirement came in force on 6 April 2016.  It was coupled with a requirement to notify Companies House of any PSCs, alongside your confirmation statement (formerly known as the annual return), when your first confirmation statement is due after 30 June 2016.

Confirmation statements are normally due a year after you filed your last annual return, and they must be filed within 14 days of that date.  Trustee companies with confirmation statement due dates between now and the end of June should act now to identify their PSCs and put plans in place to ensure this filing requirement is complied with.  In the case of trustee companies supported by their employer’s in-house corporate team, this may simply be a case of them adding this to the rest of the confirmation statements that need to be submitted for the group.  This should, however, be confirmed with the employer.  In the case of employers who do not have such functions, or trustee companies limited by guarantee which are not part of the employer’s group structure, someone should be assigned specific responsibility for this task.  It is important to note that failure to maintain a PSC register or submit a confirmation statement on time could result in the trustee and/or trustee directors being liable to criminal sanctions and/or a fine.

If you would like to discuss how to identify the PSCs of your trustee company, or how to go about filing this information at Companies House, please get in touch with your usual Squire Patton Boggs contact.

 

New tax charge for overseas pension transfers

Trustees and pensions administrators should revise their transfer processes following an announcement in the UK Spring Budget designed to “tackle abuse of foreign pension schemes”.

What’s the issue?

In summary, where a member makes a formal request to transfer pension funds to an overseas pension plan the transfer will be an authorised payment provided that the overseas plan satisfies HMRC’s requirements – such pension plans are known as Qualifying Recognised Overseas Pension Schemes (QROPS). On and after 9 March 2017 transfers to a QROPS will be subject to a new tax charge of 25% unless an exemption applies.

The list of exemptions can be found in HMRC’s guidance and include circumstances such as: the member is resident in the same country as the QROPS receiving the transfer; the member is transferring to his employer’s occupational pension plan; the member resides in the EEA and the QROPS is in another EEA country.

Note that this is a new “special” tax for which the member and the trustees are jointly and severally liable. The trustees (or in reality, the pensions administrators on behalf of the trustees) should deduct the tax before making the transfer and pay it over to HMRC. This new tax should not to be confused with the charges that relate to unauthorised payments and associated scheme sanction charges – these still apply where the transfer is not to a QROPS.

Update transfer processes

In practical terms this means that trustees should ensure that their transfer processes are updated to reflect the new requirements, including:

  • Ensuring that sufficient information is gathered from the member to be able to check whether a tax charge should apply or whether the transfer falls under one of the exemptions. If the member does not provide the necessary information, then the tax charge must be applied.
  • Verifying that the overseas scheme is on HMRCs list of Recognised Overseas Pension Schemes within 24 hours of the transfer being made (more on this below).
  • Deducting the 25% tax charge where this is due and paying it to HMRC.
  • Providing to the member, the manager of the overseas plan, and HMRC details of the transfer and whether the overseas transfer charge applies. Taxable transfers also need to be reported on the Accounting for Tax Return.

Undertakings from overseas arrangements

In order to remain on HMRC’s list of Recognised Overseas Pension Schemes the manager of the QROPS must provide an undertaking to HMRC that the pension plan will operate the new overseas transfer charge and pay this to HMRC when due. Existing QROPS will be deemed to meet this qualifying requirement until 13 April 2017 – after this date if the required undertaking has not been provided the pension plan will automatically cease to be a QROPS on 14 April 2017. HMRC plans to suspend its list of Recognised Overseas Pension Schemes from 14 April and publish an updated list on 18 April.

It is worth noting that the tax charge can also apply to subsequent transfers from one QROPS to another but this is dependent on the member’s circumstances and it does not involve the UK pension plan once the original transfer has been discharged.

The truth, the whole truth, and nothing but the truth

There is always a possibility that members may be economical with the truth in an attempt to avoid a tax charge. Therefore, if trustees execute the transfer in good faith, having conducted the necessary due diligence, and it subsequently transpires that they have been misled into believing that no tax was payable, they can apply to HMRC to be discharged from their liability.

Trustees needing advice on how this affects their pension plan or help to assess the implications for any individual transfer should speak to one of the Squire Patton Boggs pension team.

Budget 2017 – silence is golden on UK pensions!

The pensions industry can breathe a sigh of relief after the Spring Budget passed by with very little change to concern it.

The only mentions of pensions (and some of these were in the accompanying briefing papers rather than the speech itself) were:

  • A 25% charge on transfers to overseas pension plans (QROPS) effective immediately (exceptions will apply),
  • Confirmation of the reduction in the money purchase annual allowance to £4,000 from 6 April 2017 (previously announced in the Autumn Statement),
  • The tax registration process for master trusts will be amended so it is aligned with the Pensions Regulator’s authorisation process.

The Budget is perhaps most notable for what it did not include. Thankfully the Chancellor avoided a potential pensions and social care banana skin. It was widely trailed that extra investment would be found for social care and also that there could be further reductions in the tax relief available for pension saving. It is pleasing that Mr Hammond proceeded with the former and not the latter. To have moved forward with both polices would have been logically flawed.  Encouraging workers to save into pensions, is about giving them financial independence and security in retirement. Someone with a decent pension is best placed to self-finance any social care needs that they may have in later life. Discouraging pension saving would have resulted in more individuals becoming more reliant on the state during retirement which would in turn have increased the government’s social care bill.

It is reassuring that, at least for now, pension tax relief is largely untouched. However, many pundits suggest that the Chancellor sees this as having been an interim Budget and he is holding back the big changes for the first of his Autumn Budgets later this year.

From one ‘Green’ to the next – the evolution of DB pensions

The UK Government has issued its Green Paper on the future and sustainability of DB pensions, with consultation closing on 14 May 2017.  Despite its 99 pages, the main conclusion is that the system isn’t broken:

Whilst recognising that the system may not be operating optimally in all areas, our main conclusion is that there is not a significant structural problem with the regulatory and legislative framework.”

And, despite the starting point of the Work and Pensions Committee, it was refreshing to see the comment that:

The overarching view of virtually all stakeholders is that the regulatory regime for DB pensions is satisfactory, and that the funding regime sets a fair balance between the interests of the members and those of the sponsoring employers (though it was recognised that many employers are paying more for their DB pensions than expected when the schemes started).”

Also noteworthy was the comment that the DWP considers that there is insufficient evidence to say that DB plans generally are unaffordable.

The DWP is at pains to highlight that the aim of the Green Paper is to inform a debate, rather than suggest that any particular options are viable or desirable.  That said, the DWP does go on to offer views on the viability or desirability of various options put forward.

The paper focusses on the following four areas:

  • Funding and investment,
  • Employer contributions and affordability,
  • Member protection,
  • Consolidation of DB pension plans.

Much of the paper responds to the proposals made by the Work and Pensions Committee following its call for evidence in December 2016.   It also contains a wealth of background information and, if you ever need any statistical analysis about pretty much anything to do with defined benefit pension provision, the Green Paper would be the place to start.

Proposals made by the Work and Pensions Committee, which the Government favours, include:

  • Suspending indexation where the employer is stressed and the plan is underfunded: however this might involve  a “moral hazard” risk where some employers see an opportunity to allow the funding level of their plan to deteriorate in the hope of reducing their liability to inflation-linked benefits,
  • Granting greater investigative powers to the Pensions Regulator, such as the power to require parties responsible for pension plans to attend for interview,
  • Giving the trustees powers to request information from the employer that is reasonably required for the operation of the plan,
  • Small plan consolidation on a voluntary basis (but not through an arrangement run or financed by a government body, as suggested by the Work and Pensions Committee)

Proposals from the Work and Pensions Committee that found less favour in the Green Paper (but on which the Government seeks views) include:

  • Shortening the valuation period to 9 months,
  • The provision of a general statutory override to allow plans to switch from RPI to CPI,
  • Increasing the Regulator’s power to wind up a plan,
  • Making clearance compulsory in very limited circumstances – this has the potential to make turnarounds more difficult and UK business less competitive generally,
  • The “nuclear deterrent” of punitive fines – any such proposal, if implemented, would need to be clearly defined and time limited.

As part of its discussion in relation to small plan consolidation, the DWP floats the idea of requiring all DB plans to produce a Chair’s statement similar to that produced by a DC plan, which reports on administration and investment costs but which also states whether or not the trustees have considered the possibility of consolidation.  On the funding and investment side, the Government said that it would be interested to hear views on whether some employers and trustees were taking a cautious investment approach after careful reasoned decision making, or whether sub-optimal decisions were being taken as a result of existing legislation being too restrictive.

Whilst there has been some criticism that the Green Paper doesn’t go far enough (Steve Webb comments that “This must be one of the ‘greenest’ Green Papers in living memory”) we are pleased to see that the Government recognises that for the most part the legislation that is in place does strike the right balance between all stakeholders but that, as is always the case, there may be some room for further fine tuning.

We are responding to the consultation and if you would like us to include your views or would like any more information on how the proposals could affect your pension arrangements, please contact me or one of our other pension team members.

And so it begins … the 2017 shareholder spring

As we recently reported, 2017 is the year when most FTSE100 companies will be putting their new remuneration policies to a shareholders’ binding vote, against an increasingly hostile background of criticism of the size and complexity of directors’ pay packages.

For the early starters in the FTSE100, there have already been casualties.  Imperial Brands withdrew the resolution to approve a new remuneration policy at its AGM in early February, saying “A considerable number of shareholders supported the policy during consultations, but over time views changed and in these circumstances we believe the right course of action is for the Board not to seek shareholder approval for the new policy”.  It will have to fall back on its existing policy.

Thomas Cook received a 21.7% vote against its new remuneration policy.  Shareholders also voted 22.5% against the remuneration implementation report and 32.7% against the introduction of a new 2017 Strategic Share Incentive Plan.  According to the guidance on directors’ remuneration reporting issued by the GC100 and Investor Group, any vote over 20% should be viewed as “substantial” and in such a case the company should report the measures it has taken to address shareholder concerns.  Good as gold, the company added to its announcement of the AGM results an explanation of what it considered was the issue (“there remain concerns about the level of information around the possible strategic objectives and the size of the maximum potential award” under the new plan) and the action it would take (not to use the new plan in the coming year and to consult fully with major shareholders about its rationale and strategic objectives).

There was also a 15% vote  (reportedly from Standard Life) against the re-election of each of the directors on the remuneration committee, an action forewarned in publications by Hermes, Institutional Investor Services and the Pensions and Lifetime Savings Association.

David Cummings from Standard Life recently said on the Today programme that chairs of remuneration committees are “too obsequious” when it comes to CEO pay and that shareholders must signal more clearly that they are not happy.  Investors must work together to try to limit pay rises because if not, the Government is likely to introduce more Draconian measures, which will be far less flexible.  The week before, the chairman of the FRC, Win Bischoff, said that if Theresa May is talking about tackling excessive pay, to prevent legislation, shareholders will have to be much more prescriptive on remuneration and take their stewardship role more seriously.

Contrast this with recent statements on behalf of the Investment Association, which says it is sinking under the weight of submissions from companies of new remuneration policies and plans, expecting it to rubber stamp them before they are put to shareholders.  Investors have made noises for some time about wanting consultations with companies to be about wider strategy, rather than being hijacked by remuneration.

There seem to be a lot of potentially conflicting issues here, suggesting that there might be another “interesting” AGM season ahead ….

Avoidable headache caused by GMP revaluation – do you have a contracting-out hangover?

With Christmas and New Year parties well and truly over, and whilst trying to recall last year’s events, hopefully you will have remembered that contracting-out on a defined benefit basis was abolished with effect on and from 6 April 2016. Since then it has been a roller-coaster nine months (not just for pensions) so you would be forgiven for forgetting that trustees only have until 5 April 2017 to pass a resolution to prevent a GMP revaluation underpin arising.

The general position for GMP revaluation prior to 6 April 2016 was that section 148 revaluation was used whilst a member remained in contracted-out employment, and trustees of plans had a choice between using section 148 revaluation or fixed rate revaluation when an individual ceased to be in contracted-out employment prior to GMP age. As detailed in our earlier client alert, regulations now require GMP revaluation to be calculated on the section 148 basis until the member leaves pensionable service. However, many pension plan rules will not reflect the new legislation and will still provide for a switch to fixed-rate revaluation to occur at the cessation of contracted-out employment.  If such a plan had active members immediately before 6 April 2016, and those active members ceased to be in contracted-out employment on that date but remained in pensionable service, there could now be a clash between the plan rules and legislative practice. In these circumstances, particularly if a plan uses fixed-rate revaluation after a member leaves, there is a risk of an underpin arising from 6 April 2016, where the affected members could potentially be entitled to GMP benefits revalued by the higher of the GMP revaluation provided by the rules and the GMP revaluation required by the revised legislation.

This is not an insurmountable headache: there is a remedy to the problem via use of a statutory power available to trustees to resolve to amend their plan’s GMP rules to prevent the underpin arising. The power allows trustees to amend rules retrospectively to 6 April 2016, but must be exercised prior to 6 April 2017.  To alleviate this particular symptom, we therefore recommend that the best remedy is action before the deadline.

There are some additional hangovers from the abolition of contracting-out which trustees and employers will need to consider if they have not done so already.

First, prior to 6 April 2016, members and employers of a contracted-out plan paid a lower rate of National Insurance contributions (NICs).    If members of a formerly contracted-out plan were in active pensionable service on 6 April 2016, there will now be additional liability for both those members and employers in the form of increased NICs.  It is possible (under statute) for employers to unilaterally amend their plan rules to increase employee contributions to pension plans and/or adjust future benefit accrual, to offset the additional costs to employers of increased NICs. The statutory power must be used before 6 April 2021 and requires a 60-day consultation period with members.

Second, trustees should also check that their plan’s rules do not stipulate that certain increases to GMPs must be paid from the plan if they are not paid by the State. Prior to 6 April 2016, increases on pre-1988 GMPs and on post-1988 GMPs in excess of 3% p.a. were effectively covered by the State as part of the increases paid on the state second pension, but ceased to be so following the abolition of contracting-out. Generally speaking, it is rare that plan rules expressly provide that such increases must be paid from the pension plan, but trustees would be wise to check the position.  Likewise, trustees may wish to check what has been told to members in communications and plan booklets about increases on pre-1988 GMPs and on post-1988 GMPs in excess of 3% p.a.

We recommend a contracting-out rules review, particularly if the plan uses fixed-rate GMP revaluation, and an early remedy: it’s always best to avoid a headache where possible.

 

 

 

Roses are red, Violets are blue, Working or grandkids? What will you do?

What have Pierce Brosnan, Whoopi Goldberg, Donny Osmond, Kiefer Sutherland, Sarah Palin, Jim Carrey, Charlie Sheen and Priscilla Presley all got in common?  They all became grandparents before the age of 50.  They are not alone.  Many new parents have parents who are still of working age.  And as the goalposts for the state pension age keep moving it’s likely that there will be more and more grandparents in employment.

Valentine’s Day is already upon us, so what is the Government doing to “share the love” and help grandparents be part of their grandchildren’s first few months?

In the March 2016 budget, George Osborne announced that the Government would extend shared parental leave to working grandparents by 2018.  Some employers, such as Santander, have already introduced this as an employee benefit, allowing all employees who are new parents to share their parental leave with their parents as well as their partners. When this becomes law, employers and trustees will need to make sure that their pensions policies and plan rules are not at odds with the new requirements.

How will extending shared parental leave to grandparents work in a pensions context?  The Government’s consultation paper on this is still awaited, but it is likely that it will operate as an extension of the current form of shared parental leave.  Under the existing rules, during any period of paid shared parental leave the employee pays pension contributions calculated on the amount of pay actually received, whilst the employer calculates its pension contributions by reference to the employee’s former unreduced salary.  Under the existing rules for shared parental leave, there is no requirement for either the employer or employee to make pension contributions during a period of unpaid shared parental leave.

It’s not clear how popular grandparent leave will be – to date, there hasn’t been much take up of shared parental leave.  This may be because many employers provide the statutory minimum in respect of shared parental leave whilst continuing to offer enhanced maternity terms, meaning that the latter proves to be a more financially beneficial option for new families.

Time will tell whether the extension of shared parental leave to grandparents will result in a greater take up.  In the meantime, if music be the food of love, play on…

That Was the Year That Was: challenges in 2017 for remuneration committees

Before the 2017 AGM season gets into full swing seems an opportune time to look back at what happened in the executive pay sphere during 2016 and forward to the challenges that remuneration committees face this year.

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When should pension trustees flex their shareholder muscles?

In January 2017 the Pensions and Lifetime Savings Association (PLSA), as a representative body for pension funds, published its amended Corporate Governance Policy and Voting Guidelines.

The PLSA observes that many of its members hold equity stakes in UK companies as part of their investment portfolio and have a clear interest in promoting the success of those companies.

The policy document has been prepared following consultation with PLSA members and seeks to help pension funds:

  • engage with investee companies in order to maximise the long-term returns on pension schemes’ assets; and
  • ensure that the board and management of these companies are held accountable to shareholders.

The main themes of the policy document are around corporate leadership, accountability and remuneration. Please see the article on our corporate blog site for more information.

 

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