Pensions News February 2010
Inside this issue
Contingent Assets - Submission Deadline
Following consultation with the industry the Pension Protection Fund (PPF) have recently issued updated guidance to reflect the Board’s approach to contingent asset arrangements for the levy year 2010/11. The updated guidance introduces a number of key changes.
Contingent assets provide security for schemes in the event of the sponsoring employer suffering an insolvency event and so can substantially reduce a scheme’s risk-based levy bill. Schemes aiming to have the arrangements taken into account by the Board when calculating the risk-based levy payable by the Scheme must have these submitted and certified to the Board using the Board’s updated standard documentation by 5pm on 31 March 2010.
The Board will continue to recognise arrangements put in place and recognised for previous levy years, provided the arrangements are re-certified before 5pm on 31 March 2010.
The updated guidance introduces a number of key changes including; revised standard form documents for all new agreements; evidence will be required to show that the corporate benefit of entering into the agreement has been considered and established; when recertifying securities over real estate the interval between valuations has been reduced from 3 years to 15 months; and the requirement for certain entities to be domiciled in EU was extended to include Hong Kong in relation to certain types of Contingent Asset agreements. Schemes considering putting in place a new contingent asset or re-certifying an existing arrangement should commence the process as early as possible to ensure all the requirements are met in advance of the deadline.
To view the updated guidance please click here.
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Employer debt – a welcome break for employers?
In the recent case of Cemex UK Marine Limited v MNOPF Trustees Limited, the High Court decided that an “employment cessation event” did not occur in circumstances where the employer had ceased to employ active members of a scheme on 28 November 2005, but continued to employ (a) persons eligible for membership of the scheme and (b) a deferred member of the scheme after that date. It was held that the employer did not therefore trigger a statutory debt on that date, although it remained potentially liable for a statutory debt at some future date.
This case will come as a relief to some employers participating in multi employer schemes as it potentially limits occasions in the past where it might have been agreed that an employer debt had been triggered. Prior to this judgement it was thought by many that cessation of employment of active members was an “employment cessation event”.
If the judge had taken a different view on how the relevant legislation was to be interpreted Cemex, the employer, would have had to pay an employer debt of £20,282,426. Therefore, this underlines the scale of the impact this case could have on employers.
It is worth noting that the legislation in this area has changed from 6 April 2008, i.e. after the date of events in the Cemex case. Since that date an employer debt will usually be triggered where an employer in a multi-employer final salary scheme ceases to employ active members. The new definition of "employment cessation event" introduced by the Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2008 (which amended the Occupational Pension Schemes (Employer Debt) Regulations 2005) now specifically refers to an employer ceasing to employ active members whilst there is another employer employing active members. Therefore, employers employing only a few active members should make sure that no employer debt is inadvertently triggered.
Where an employment cessation event occurs, provision has been made in the 2008 Regulations for a 12-month period of grace to prevent an employer debt being triggered if there is an intention of employing at least one active member during that period.
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Attention: all Employers!
Are you an employer thinking of making changes to your pension scheme? For example, are you considering closing the scheme to new members or ceasing to allow members to accrue further benefits under the scheme or amending the definition of Final Pensionable Salary? If so, read here first. The judgments in two recent pension cases show that years down the line, failure to pay attention to detail could come back to haunt those who rush ahead with a particular course of action. Both cases concern amendments to pension scheme benefits and highlight the importance of considering and complying with the terms of a scheme’s amendment power when making amendments.
Amending the amendment power
In the first case, HR Trustees -v- German, a Deed signed in 1992 purported to alter a scheme from final salary to money purchase. The Scheme was set up in 1977 by a Deed which contained the original amendment power and a 1981 deed purported to introduce a less restrictive amendment power. The Court held that any amendment had to comply with the original amendment power contained in the 1977 deed and, although the 1992 Deed was not invalid, the Court held that an amendment could only be made with an underpin which preserved the future monetary value of the proportion of final pensionable salary which the member had accrued in respect of service before the date of execution of the amendment in 1992.
Actuarial advice
In the second case, Walker Morris Trustees -v- Masterton, the High Court held that various amendments were invalid even though this resulted in members’ benefits being scaled back. The relevant amendment power stipulated that any amendment had to be the subject of written actuarial advice confirming that members’ benefits would not be prejudiced by the amendment. Various amendments were made without obtaining the written opinion of an actuary and these were held to be invalid.
Long term consequences
These cases show that if there is insufficient attention to detail when seeking to amend this can lead to difficulties much further down the line. They act as a stark reminder always to check the terms of the amendment power before making an amendment and to ensure its terms are fully complied with. If not, there is a risk the amendment could be held to be invalid and employers may find themselves having to fund benefits they were not expecting to have to pay for or members losing entitlement they thought had accrued.
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DEADLINES TO REMEMBER
Employers and trustees should make sure they are prepared for the following:-
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6 April 2010: Minimum pension age increasing to 55
At the moment, the earliest age from which most pension scheme benefits can be drawn without attracting tax penalties is 50. This is commonly referred to as the Normal Minimum Pension Age. On 6 April 2010 the Normal Minimum Pension Age will increase from 50 to 55. This means that from 6 April 2010 most pension scheme members will not be able to take early retirement benefits before age 55. Trustees should check their scheme documents and administration arrangements to ensure they are prepared for this change.
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6 April 2011: Deadline for implementing Finance Act modifications
On 6 April 2006 (A-Day) fundamental changes to the tax regime in relation to pensions came into force. One key change was the abolition of the old system of “Inland Revenue limits” on contributions and benefits. The Finance Act 2004 Modification Regulations provide that unless the scheme has taken positive steps to change its rules to incorporate A-Day changes, existing Inland Revenue limit provisions continue to apply for a transitional period of 5 years. This transitional period expires on 6 April 2011. Changes to pension scheme documentation may be required to be made prior to 6 April 2011 to ensure that as at 6 April 2011 any old Inland Revenue limits that require to be preserved aren’t automatically erased with disastrous consequences. Plans should be put in place as soon as possible to update scheme documentation before the transitional period expires.
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1 October 2012: Start of auto-enrolment
The Government has decided that as not enough people are saving for old age, employers should auto-enrol employees into either the National Employment Savings Trust (a Government sponsored pension scheme) or another qualifying schemethat meets certain conditions. The autoenrolment requirements are being phased in over a four year period from 1 October 2012 to 1 September 2016 with larger employers (those who have 120,000 workers or more) having to comply first. Employers will be separated into bands according to size, with each band being assigned a particular monthly "staging date" from when they will be obliged to start the enrolment process. Employers need to review and make changes to their pension arrangements to ensure compliance with the new regime.
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The information contained in these articles is given for general information only, reflects the current law on the date of the article, and does not constitute legal advice on any specific matter
Contacts for Pensions News February 2010