Oh Mr Regulator, what big teeth you have got!

“All the better to eat you with, my dear.” And so our precautionary tale begins.

Chapter 1 – Lost in the woods

Once upon a time the Pensions Act 2004 (the Act) was introduced and it gave a variety of enforcement powers to the newly formed Pensions Regulator (TPR). For a time at least, employers and trustees alike were wary of the stick attached to non-compliance, wondering how and when TPR would strike. As the years passed, however, some began to believe that, possibly due to a lack of resources, TPR was unlikely to investigate or penalise many examples of bad behaviour. The threat of being dragged down to Brighton to explain oneself no longer led to the immediate opening of a cheque book – the assumption being that TPR would seek to “educate” the miscreant rather than take enforcement action.

As with all good fairy tales, the baddies could not prosper forever and eventually, something changed. TPR began to fight back.

Chapter 2 – Who’s afraid?

In April 2016, TPR made clear its plans to raise its profile. It began to issue fines to trustees who failed to file their scheme returns on time with a view to clamping down on non-compliance to offer greater protection for members. Following the BHS pension scheme debacle, in respect of which TPR was heavily criticised in the press, it is now appealing for extra powers to promote greater scrutiny to protect members of pension schemes. And earlier this month, to really scare everyone, it issued two press releases on consecutive days about the first criminal convictions it had obtained for failures to comply with the terms of notices requiring information/documentation to be provided to TPR which was relevant in the exercise of its functions.

TPR has the power, under section 72 of the Act, to issue a written notice requiring a trustee, manager, employer, professional adviser or any other person who holds, or is likely to hold, information relevant to the exercise of its functions to produce a document or provide information within a specified time frame. It is a criminal offence under section 77 of the Act to fail to comply with such a notice without reasonable excuse. There is an exception to the requirement to produce documents or information in relation to what are known under section 311 of the Act as “protected items”, essentially material to which legal privilege attaches.

Anecdotally, TPR seems to have been upping the ante in terms of regulatory investigations in recent months and is using its section 72 powers more freely in circumstances where voluntary co-operation would previously have been sought. This month TPR announced that it has now prosecuted a firm of solicitors (and its managing partner) and the head of a charity for failures to comply with section 72 notices. These announcements send a clear message to not only potential targets of regulatory action but also to professional advisers and all other potential recipients of section 72 notices that the obligations under the notices are to be taken seriously and dealt with accordingly.

Chapter 3 – Beware! It bites!

The first prosecution was against a firm of solicitors and its managing partner, who pleaded guilty to failing to provide the requested documents without a reasonable excuse. TPR was investigating a pension scam and had requested documents from the solicitor even though neither the solicitor nor the firm were connected with the investigation, nor had either done anything wrong. The firm provided a variety of excuses in relation to the delay in providing documents, which were eventually only obtained 9 months later after the issue of a search warrant. The court noted a lack of corporate governance at the firm and TPR made it clear that disorganisation was not an excuse not to comply and would not be tolerated. The firm was ordered to pay a £2,700 fine (plus £2,500 costs) and the managing partner was fined £4,000 (plus £7,500 costs) and both were ordered to pay a victim surcharge of £120 each.

This case serves as a stark reminder to professional advisers that, even when they aren’t under investigation themselves, they may still be requested to assist TPR and should comply without delay. Not only can failure to provide such information result in an unlimited fine, those involved can suffer serious reputational damage from being successfully prosecuted for non-compliance with the law. In addition, advisers could also face further action from their professional body. It is hard to think of a reason why an adviser would want to risk their whole livelihood in this way but equally neither negligence nor incompetence will serve as an excuse.

The second prosecution was against Mr M, the Chief Executive of a Hampshire-based charity for the disabled. Mr M, a former trustee of the pension fund, refused to comply with a request for documents for over 18 months. He claimed that, as they contained information about third parties, it would be a breach of French privacy law to hand over certain documents. He also refused to hand over bank statements as he (wrongly) believed they were covered by legal privilege and subsequently refused to provide them on the basis that they would incriminate him. As such, Mr M pleaded not guilty to an offence. Hearing evidence on French law, the court found that Mr M had no reasonable excuse not to provide TPR with the documents and that they were not covered by either French privacy law or legal privilege. Similarly, a failure to provide documents on the grounds of self-incrimination was also not an excuse. Mr M was ordered to pay a £2,500 fine (plus £4,000 costs and a £120 victim surcharge) and it has been reported that his conviction has been referred to the Charity Commission.

In a press release on Friday, TPR confirmed that intervening more frequently and acting quicker are amongst its goals for the next three years – so we may anticipate further prosecutions of this type

Chapter 4 – Seeking a happy ending

For anyone seeking to come up with a “reasonable excuse” for a failure to comply with a section 72 notice, these cases highlight the sort of excuses that will not suffice. To the extent that there is any doubt about the scope of the notice, including whether or not a document falls within the categories requested or whether the privilege exception applies, then the safest course of action would surely be to apply to the court to get that clarified (as happened in Bloom v TPR) rather than risk prosecution and the further damage that that would incur. After all, we all want to live happily ever after.

Budget resolutions and the UK general election: what does it mean for pensions?

A client asked me a pertinent question yesterday, along the lines of: “Do the pensions changes announced in the last Budget still stand given that they are not yet enshrined in legislation and Parliament is soon to be dissolved?

The short and unhelpful answer is: “It depends…”  But what exactly does it depend upon?

By way of a reminder the main pensions changes relate to a reduction in the money purchase annual allowance, a new tax charge on overseas transfers, and amendments to the tax treatment of foreign pensions.

As a start point it is helpful to consider the usual process following a Budget (but please note that this is only a summary).

  • Problem. Income and corporation tax can only be charged in a year for which a Finance Act provides that they may be charged. Given that the Budget was in March (i.e. towards the end of one tax year) and the Finance Act would not normally receive Royal Assent until the summer (i.e. after the start of the next tax year) the Government needs authority to collect taxes during the gap period (i.e. from the start of the tax year until the date of Royal Assent).
  • Solution. A series of ‘ways and means resolutions’, known as the Budget Resolutions, giving the Government the authority it needs are normally debated and passed shortly after the Budget. Once passed, Budget Resolutions have the force of an Act of Parliament but cease to have effect if the Finance Bill does not get a second reading in the House of Commons within 30 days of its publication, or if the Finance Bill does not get Royal Assent within seven months.

However, we now have a general election to throw into the equation. The Budget Resolutions will also cease to have effect on 3 May, the day Parliament is dissolved in anticipation of the election.

The current Finance Bill is the longest on record stretching to over 760 pages. Pensions may have escaped relatively lightly in this year’s Budget (for a change) but the Bill also contains a lot of complex legislation that fundamentally redefines some of the bases for taxation in the UK. With proper scrutiny of Finance Bills in recent years being a particular area of concern for both practitioners and the House of Lords Treasury Committee alike, one would hope that a Bill this weighty and important would not be rushed through in full.

What next?

A Finance Bill of some description will need to be passed before Parliament is dissolved. As a result, the current Bill is likely to be split into two (or possibly even three parts) with the first part being debated and passed very quickly to give the Government the necessary powers to continue to raise taxes and allow any other ‘uncontroversial’ provisions to become law without further debate. The Government is likely to include provisions in that first Bill that have already been the subject of public consultation and anything else the opposition parties allow. We do not yet know whether pensions provisions will form part of the legislation that is considered to be ‘uncontroversial’, and therefore enacted quickly under this ‘wash-up’ process, but the shortened (if at all) Bill is expected to complete all remaining stages of its passage through the House of Commons on a single day, next Tuesday, 25 April.

Depending on the result of the election, the excluded provisions (if any) will be represented to the House as a further Finance Bill post-election and will be debated in accordance with the more normal procedures. As a result of the election and summer recess, the timing of Royal Assent for that further Bill is unlikely before September 2017. To complicate things yet further, again entirely dependent on the result of the election, it is also possible that there could be an emergency, summer, Budget in late June or early July…

The good news is that the proposed move to an autumn Budget should reduce these types of complications in the future… assuming, of course, that proposal itself survives into the new Parliament.

Please contact your usual member of the pensions team if you need any help on what action your pension plan may need or wish to take in anticipation of the Budget changes.

Scottish court delivers Knight in shining armour to four pension plans

Ever heard the phrase “omnia praesumuntur rite esse acta”?  Me neither, until a Scottish court handed down its judgment in the case of Knight v Sedgwick Noble Lowndes.

It has been known for some time that the Scottish courts generally take a pragmatic approach to the construction of pension plan documentation. For example, in a 2010 case a Scottish court stressed that if the purported exercise of a pension plan’s amendment power is clear and put into written form, there is no need for the court to be unduly restrictive in considering whether the amendment power has been complied with. Contrast this with the approach of the English courts where, generally speaking, fairly robust evidence is required to establish compliance with the requirements of an amendment power.

The Knight case has brought this into focus again. The case concerned whether normal retirement ages had been validly equalised under four defined benefit pension plans before they subsequently transferred into another plan. The specific requirements of the amendment power under each pension plan were different but, generally speaking, amendments were to be evidenced by specified documents such as a written resolution/memorandum.  Extensive searches were undertaken in relation to each plan, but the evidence found did not “dot the i’s and cross the t’s” in relation to each amendment power.

The evidence found varied in each case but it included minutes of meetings and announcements to members, plus various other items of correspondence alluding to a decision to equalise benefits. The Scottish court relied on the maxim “omnia praesumuntur rite esse acta” (i.e. the presumption of regularity) in ruling that all four pension plans had been amended to equalise normal retirement ages from the dates on which this purportedly occurred.  In other words, the court was comfortable that there was a clear intention to equalise benefits based on contemporaneous evidence, despite the fact that key documents  relating to the exercise of the amendment powers had not been found.

Many have applauded this as a “common sense” approach from the Scottish courts. Whilst the “presumption of regularity” is a recognised maxim under English law, reported cases south of the border suggest that it has had only limited application in England to date in the pensions context. It could potentially be of assistance in a situation where there is a formal document in place but some evidence is missing as to its technical completion (such as due notice to directors of a board resolution, or proper delegation of the signatory to a resolution).  Whether it will be given greater weight in the future remains to be seen.

As ever, if you have any queries relating to this or you feel it has application to your pension plan, please contact us.

Do your pension plan rules marry-up with member expectations?

Do your pension plan rules marry-up with member expectations?

Since the Millennium it is fair to say the world has changed a great deal for defined benefit pension plans. Not least of the changes trustees have had to contend with are those in respect of survivors’ benefits. The majority of defined benefit pension plans make some provision for a pension to be paid to a surviving spouse on the member’s death and, given recent changes in legislation, it has been necessary for trustees to examine and amend survivors’ benefits for civil partners and same-sex spouses. The recent decision in the Brewster case represents another development in thinking as regards survivors’ benefits and trustees will be interested in its potential applicability to UK pension plans.

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The goalposts have been moved for DC pensions savings

The money purchase annual allowance (MPAA) affects individuals who have accessed their UK pension savings flexibly – it restricts further tax-free contributions they can make to defined contribution registered pension plans.

A change of tactics

The original MPAA introduced in 2015 was £10,000. Just two years later the Government’s response to its MPAA consultation, issued on 20 March 2017, has confirmed that the MPAA will be reduced by 60% to £4,000, with effect from 6 April 2017.

It is clear from the Government’s consultation response that the primary driver behind the change is to limit the extent to which pension savings can be recycled to take advantage of tax relief. However, the Government’s analysis shows that only 3% of over 55s pay more than £4,000 into a pension plan, so the number of people affected by the MPAA will be very small. We would query whether this change is adding unnecessary additional complexity into the already complex pensions regime, with little up-side.

Crucially, the goalposts have been moved for members who have already accessed their pension savings flexibly on the understanding that the MPAA would be £10,000. The Government has confirmed that there will be no transitional protection for these members because to apply different MPAAs, dependent upon when a benefit was last flexibly accessed, would be disproportionately complex, both operationally and in relation to disclosure requirements. However, we are already seeing some trustee boards facing communication challenges where members have accessed their pension benefits flexibly as a result of being notified of those flexibilities by the trustees.

It is also clear that the new MPAA introduces another round of administrative complexities and cost for pension plans as booklets, information and education documents/websites will have to be updated.  Members who have already accessed their benefits flexibly may not be aware of the MPAA change and trustees may want to consider notifying these members so they are not caught out by the reduction in the MPAA.

An own goal?

There is likely to be a rush before 6 April to use the £10,000 allowance by people who had not been considering such high contributions previously. This perhaps defeats the purpose of the legislation as this will cause a tax cost to the Government rather than a tax saving in the short term.

In the spirit of the game

Finally, we would query whether reducing the MPAA is sending the right message to savers. More people are retiring in a more flexible way, supplementing their reduced working with withdrawing their pension benefits. The new legislation will make it harder for members who wish to continue pension savings for the future, should the opportunity arise for them do so after they have accessed their pension savings flexibly. Is this fully in line with the spirit of “freedom and choice”?

As ever, if you need any advice on how this issue affects your pension plan, please contact us.

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.