In the space of only 15 days, the Pensions Regulator (TPR) has published three major consultation papers - on longevity assumptions, conflicts of interest and winding up. It did at least have some help with the third of these as the consultation was issued jointly with the Department for Work and Pensions (DWP) and the Pension Protection Fund (PPF).
The first (and probably most controversial) was the consultation on longevity assumptions published on 18 February 2008.This consultation document sets out TPR’s views on how trustees should choose the mortality assumptions to be used in scheme funding valuations.The first half of the consultation is on draft guidance to assist trustees in choosing their assumptions, in particular mortality assumptions, and should be valuable to trustees in setting out the sorts of issues that trustees should be considering. However, it is the second half of the consultation that has aroused concern.TPR is proposing to set a new trigger for regulatory scrutiny where a scheme uses an assumption for future mortality improvements of less than the long cohort projection or where the assumed rate of future improvement tails off to zero. Based on its first analysis of recovery plan data published last September, over 99.5% of schemes would have triggered on these criteria. It is also proposed that these triggers should apply to valuations with an effective date from March 2007 onwards, meaning that many valuations which have already been signed off or are close to being signed off are now likely to trigger.The consultation closes on 12 May 2008.We hope that TPR is braced for the inevitable avalanche of responses.
The second of the three consultations is on the almost equally thorny subject of conflicts of interest.This consultation paper contains draft guidance setting out five key principles for pension scheme trustees. In particular,TPR stipulates that trustees should have a regularly reviewed formal documented policy on identifying,monitoring and managing actual or potential conflicts of interest and that it is essential for the scheme's legal advisers to review and advise on this policy.The guidance also covers how trustees should identify conflicts of interest, and how they should evaluate, manage and avoid them. Finally, the draft guidance contains some guidelines for trustees as to how they should manage potential conflicts on the part of their advisers as well as their pensions manager. This consultation closes on 30 May 2008.
Last (and probably least for most trustees) is the consultation on winding up issued by TPR, DWP and the PPF on 3 March 2008.This sets out these organisation's expectation that the key activities of a pension scheme wind-up should be completed within no more than two years.There will be increased regulatory scrutiny where this timescale is not met and TPR may use some of its statutory powers, such as directing trustees to take particular steps.TPR has also published some draft good practice guidelines on avoiding delays in winding up pension schemes.The deadline for this consultation is 15 April 2008.
These three consultations are not the only publications issued by TPR since our last Technical Bulletin. On 31 January 2008, TPR published guidance to assist employers offering a contract-based defined contribution (DC) scheme. This covers in particular the theme of ‘employer engagement’, i.e. the ways in which employers might choose to be involved in the governance of their scheme, for example by setting up a management committee to review the operation of the scheme.At the same time, TPR also published an update on DC schemes setting out the activities it had undertaken so far and its plans for future guidance in relation to DC schemes.
Not content with producing nearly 200 pages of consultation, guidance and update over the last two months, TPR has also found time to impose its first Financial Support Directions after Sea Containers Ltd withdrew its appeal. Sea Containers Ltd has now reached an agreement in principle with the trustees of its pension schemes.
Significant changes to financial reporting in pensions proposed
A cross-European accounting group, Pro-active Accounting Activities in Europe (PAAinE - pronounced PAIN) issued a discussion paper on financial reporting in pensions at the end of January. The paper was driven by the Accounting Standards Board. The most significant proposal is that a risk-free rate (i.e. government bonds) should be used to discount the liabilities, leading to a very significant increase in liabilities compared to the current AA corporate bond rate. The discussion paper also proposes that the actual return on assets should be used in the profit and loss account rather than the expected return on assets, which could lead to significant volatility. One piece of good news for employers is the proposal that future salary increases should be ignored when calculating balance sheet liabilities.
The consultation closes on 14 July, but there are already signs of dissent even amongst the standard-setters. Sir David Tweedie, the Chairman of the International Accounting Standards Board (IASB), has been reported as saying that the ASB paper had gone further than the IASB probably would have done. On 27 March 2008, the IASB published its own discussion paper on its preliminary views on amendments to IAS19.
No Big Surprises for Pensions from Mr Darling
Alastair Darling’s first budget contained very little for pension schemes. This may largely be welcome news given the major changes to pensions that we have seen in previous budgets, particularly the introduction of the new ‘simplified’ pensions tax regime in 2004 and the U-turns on investment in residential property in 2006 and on alternatively secured pensions and pensions term assurance in 2007, not to mention a whole stream of so-called ‘technical improvements’ to the A-Day pensions tax regime.
There are however two developments worthy of mention in this year’s Budget.The first is that the rules on trivial commutation will be eased. Until now,members could only convert their small pensions into cash where their total pensions across all schemes were less than 1% of the lifetime allowance (currently £16,000).This meant that members might be unable to convert a tiny pension in one scheme into cash because they had a large pension elsewhere.This would mean that members would be forced to take their benefits as a tiny annual pension (or even in some circumstances it might mean that they could not draw their benefits at all).The Budget has now announced that members with pensions in occupational pension schemes of less than £2,000 in value will be able to take their pensions as cash irrespective of their benefits in other schemes.This easement only applies to occupational pension schemes. However, the Budget also indicates that there may be further easements for ‘small stranded pots’ although it is not currently clear how these will be defined.
The second major development will deal with certain payments that are currently classed as unauthorised and hence attract substantial tax penalties.An example is pension payments that continue after a member’s death where there is no pension guarantee (for example, where the scheme is not immediately informed of the member’s death). These are classed as unauthorised payments and, if over £250, are subject to tax of up to 70%. The proposed changes will make these (and similar payments) authorised and taxable in the same way as normal pension income.
Other Recent Developments
Anti-money-laundering: The latest anti-money laundering regulations require that trustees who are ‘acting by way of business’ need to register with HM Revenue and Customs (HMRC) in order to continue acting as trustees. HMRC have recently extended the deadline for registration to 31 May 2008 and have announced that they will issue revised guidance on who needs to register.Any trustees concerned about whether they need to register should consider taking legal advice.
FRC levy: The Financial Reporting Council has consulted on its plans for the 2008/9 levy. It proposes to set this at £3 per 100 members for schemes with more than 1,000 members.
PPF developments: The PPF has published its final determination on the 2008/9 levy.There are very few changes to the draft determination, although there is a change to the treatment of certain Type A contingent assets where the guarantee involves a fixed monetary amount. Separately, the PPF has published a consultation on its assumptions for s179 (PPF levy) and s143 (PPF entry) valuations.The effect of its proposals will be to reduce s179 liabilities, although, given the PPF’s aim of raising a stable levy for the next three years, this only means that the scaling factor will rise to make up for it. Finally, the PPF has indicated that it is looking again at whether investment risk should be considered as part of the calculation of the risk-based levy.
Financial Assistance Scheme (FAS) developments: Draft regulations have been published that will ensure payments for affected members at the 90% level as soon as possible. In addition, six schemes whose employers were solvent at the time the scheme started to wind-up, but where a compromise deal was reached with the trustees, have been taken into the FAS. The Government has also announced that it will not appeal to the House of Lords over the Court of Appeal’s decision that it was wrong to ignore the recommendations of the Parliamentary Ombudsman with regard to the compensation it should consider making to FAS members.
Personal Accounts: The Personal Accounts Delivery Authority has published a consultation on the options for the charging structure for personal accounts which closes on 22 April 2008. The legislation for the next stage of personal accounts is continuing its progress through parliament. Thoreson Review: The Thoreson Review has now issued its final report on ‘money guidance’ or generic financial advice.Whilst its focus is much wider than just pensions, it will have particular implications on the guidance to be made available when personal accounts are introduced.
Priority order on wind-up: A recent case (Alexander Forbes) found that active and deferred members with an unfettered right to take their pension should be treated as pensioner members for the purpose of the pre-2005 priority orders, even though they had not already retired.
Consultation requirements: with effect from 6 April 2008, the requirement to consult members on certain changes to their pension schemes will apply to employers with more than 50 employees.
Countdown for Enhanced and Primary Protection: individuals who are planning to rely on primary or enhanced protection of their pre A-Day benefits now have only one year to submit their forms before the deadline of 5 April 2009. Please contact us if you would like further information or advice.
This bulletin is intended to provide a brief summary of current issues and action should not be taken as a result of this bulletin alone. For further information please contact your usual Punter Southall contact.
© 2008 Punter Southall Group Ltd. All rights reserved. This bulletin is intended to provide a brief summary of current issues and action should not be taken as a result of this bulletin alone.
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