What’s on the Horizon for 2016

Welcome to the latest edition of our pensions briefing for clients. It highlights recent developments in pensions law and suggests in practical terms what schemes should be doing to deal with them. If you have any comments on this publication, just e-mail us at [email protected].

What’s on the horizon for 2016?

Now 2016 is here, we thought it would be useful to have a look at what the year has in store for pensions and what might be on the agenda for trustee meetings.

Tapered annual allowance: A new tapered annual allowance for high earners will be introduced from 6 April 2016. For those earning £150,000 or above (including the value of employer pension contributions), the annual allowance will reduce by £1 for every additional £2 of earnings down to £10,000 for earnings of £210,000 or above. For those earning less than £110,000, it is not necessary to add in employer pension contributions to see if the taper applies.

Trustees currently need to tell members if their benefit accrual in their scheme exceeds the annual allowance in any year. Unfortunately, because members will no longer all have the same level of annual allowance (as the taper may apply to some and the £10,000 DC annual allowance to others), it is difficult to see how trustees will know when they need to communicate with members. HMRC have promised more information on what they expect from trustees sometime in 2016.

Lifetime allowance: The lifetime allowance will reduce to £1 million on 6 April 2016. As with previous occasions on which it has been reduced, members will be able to apply for inpidual and fixed protection.

What is different on this occasion is that these protective regimes are not already in place and therefore members cannot apply for them before April 2016. Instead, members will be able to apply for protection at any point before they take their benefits. This means that if members are still accruing benefits or receive an augmentation or discretionary increase, it may inadvertently affect a member’s entitlement to protection. Trustees should consider whether to include something in member communications to explain this point and the possible advantages of seeking protection earlier rather than later.

Single tier state pension: The new single tier state pension will replace the existing basic and additional state pension for inpiduals reaching state pension age on or after 6 April 2016. Accrued rights under the existing system will be converted to a foundation amount under the new system and members will receive at least that foundation amount.

Trustees should consider whether there are any benefits provided by their scheme which are designed to be integrated with the current state pension arrangements and if so, whether those benefits will continue to work as originally intended. The kinds of benefits that will need to be considered include earnings offsets which are calculated by reference to the basic state pension and bridging pensions.

End of contracting-out: As a result of the introduction of the single tier pension, contracting-out will come to an end on 5 April 2016.

Where schemes have any GMPs, trustees need to ensure that they are registered with HMRC’s scheme reconciliation service before 6 April 2016. Trustees also need to consider what communications should to be sent out to members to explain the cessation of contracting-out and changes to increases on GMPs in payment in the future.

Where schemes are still contracted-out and have on-going accrual, employers have a unilateral power to amend the scheme rules to offset increased national insurance contributions. Where an employer is planning to go down this route, consideration will need to be given to any necessary changes to scheme documentation and communicating changes to members.

DC code of practice: The Regulator issued a revised draft of the DC code of practice in November 2015. The new version is due to come into force in May 2016. It will apply to all schemes providing DC benefits, including DC AVCs (although not all of it will be relevant to all schemes).

The content of the draft code was summarised in the November edition of Horizon. However there may be further changes and the Regulator has said that there will also be detailed guidance providing trustees with practical information on how to comply with DC governance requirements.

The new code should not entail significant changes for schemes that already have procedures in place to comply with the existing code. However there are some changes trustees will need to implement. This means that it would be useful to table the Code and any guidance as an agenda item for a trustees’ meeting in the third quarter of 2016, if not before. At that meeting, trustees will need to go through the new requirements and determine if they need to make any changes to their practices in relation to scheme governance and administration.

During the year, schemes with DC benefits will also need to start preparing the annual Chair’s statement to issue to members. The Regulator has said this statement should “provide a meaningful narrative” about the governance of DC benefits under the scheme. Trustees should make sure that this statement is considered well in advance of the deadline.

Disclosure: The Government is proposing that occupational pension schemes will be required to provide defined contribution members with “retirement risk warnings” before they decide what to do with their benefits. The risk warnings will be “a statement that: (i) sets out the characteristic attributes and features of all the [member’s] options, whether or not those options are available to the member under the scheme; and (ii) explains any other factors in respect of those options”. Although the Government does not intend to prescribe the detailed content of the risk warnings, it is the intention that each risk warning should include “the attributes, characteristics, external factors or other variables that increase the risk associated with how the member could access their pension savings”. There will also be a requirement that a statement should be sent to members alongside the risk warnings, informing them in a clear and prominent manner that they should have received either advice or guidance and read the risk warnings.

These risk warnings are similar to those that the Pensions Regulator suggests should be provided to members, so hopefully, if these changes are implemented, they will not result in significantly more information being given to members. However, schemes with DC benefits will need to review their member communications to ensure that they are compliant with the new requirements.

Future of pension taxation: On 16 March 2016 the Government is due to announce its plans for the tax structure of pensions and whether the current model of tax relief on contribution and tax on benefits will be retained.

In July 2015, the Government sought views on whether a fundamental reform of the pensions tax regime should be contemplated and if so, the form it might take. Possibilities suggested range from tweaking the annual and lifetime allowance to the abolition of higher rate tax relief on contributions and, at the most extreme, to removing tax relief on contributions altogether and replacing it with reliefs on all payments of pension and lump sums.

So far the Government has given little away about which option, if any, it may prefer, but it has indicated that it is willing to consider bold changes. Any change would have a significant impact on
the pensions industry.

Data protection: Further guidance is due to be issued by the Information Commissioner in relation to the transfer of personal data from the UK to the US. Trustees of schemes with employers or administrative functions in the US may currently be uncertain about how much member data they can transfer in the light of a European Court decision that the safe harbour process, which allowed data to be transferred to compliant US companies could no longer be relied upon to provide adequate security. The Commission has already provided some guidance on when data transfers to the US are possible and is continuing to negotiate a new safe harbour.

The EU is also just finalising new data protection legislation which will result in significant changes to data protection requirements in the UK, including the data protection obligations on trustees and scheme administrators. We will provide more information about this over the coming year.

Case law: We are also due to hear from the courts in relation to appeals in several interesting cases. These include:

• Horton v Henry – a trustee in bankruptcy could not call on uncrystallised pension benefits, even where a member was entitled to benefits that were not currently in payment. A Court of Appeal hearing is listed for the end of January 2016.
• IBM v Dalgleish – this case considered whether employer proposals to close the scheme to future accrual and change some early retirement terms were in breach of the employer’s duty of trust and confidence in the light of members’ reasonable expectations. It is listed to be heard by Court of Appeal by the end of March 2016.
• Heis v MF Global UK Services Limited – a service company was entitled to an indemnity from the main operating company in relation to a section 75 debt that arose when both companies went into administration. A Court of Appeal hearing is listed for May 2016.
• Briggs v Gleeds – a number of amending deeds, including one introducing a money purchase section and another closing the scheme to future accrual were held to be invalid because they were improperly executed. A Court of Appeal hearing is listed for July 2016.