7 days

7 Days is a weekly round up of developments in pensions, normally published on Monday afternoons. We collate this information from key industry sources, such as the DWP, HMRC and TPR.

In this 7 Days:

• The Occupational Pensions (Revaluation) Order 2014
• New Shared Parental Leave regulations come into effect
• Consultation on draft regulations containing technical changes to automatic enrolment
• HMRC publishes revised policies on VAT treatment of pension fund management costs and services
• Institute and Faculty of Actuaries publishes survey in relation to updated UK Corporate Governance Code
• Pension Schemes Bill 2014 to 2015 delegated powers
• FRC activities related to SORPs
• FCA policy statement on retirement reforms and the guidance guarantee
• NAPF study of life expectancy trends in DB pension scheme members
• PPI report on pension savers decision making at retirement
• TPR publishes public sector scheme administration checklists
• Bear Scotland Ltd & Others v Fulton & Others

The Occupational Pensions (Revaluation) Order 2014

Where a person leaves a final salary pension scheme before normal pension age, with a preserved pension, that pension is likely to have lost value due to inflation by the time it is put into payment.  The revaluation provisions, introduced for those who left schemes after 1 January 1986, are designed to provide a measure of protection against inflation where there is at least one full year between the member leaving the scheme and reaching its normal pension age.

This Order sets out the revaluation required (for that part of a pension in excess of the GMP rights) for people who will reach their scheme’s normal pension age in 2015.  It comes into force on 1 January 2015 and will apply for 12 months.

Pensions based on pensionable service before 6 April 2009 must be increased at least in line with the lower of, the increase in the general level of prices over the whole period of deferment or 5% per annum.  The Pensions Act 2008 reduced the 5% cap to 2.5% compound per annum for pension based on service from 6 April 2009.

Since 2010, the Secretary of State has considered CPI to be the most appropriate measure of inflation to use for this purpose.  The CPI figure for the year to 30 September 2014 was 1.2%.  It is this figure that is included in the Revaluation Order.

New Shared Parental Leave regulations come into effect

New regulations regarding Shared Parental Leave (SPL) come into force on 1 December 2014.  These aim to give parents greater flexibility in how they share the care of their child in the first year after birth.

The new rules, which apply to couples with babies due or children matched or placed for adoption on or after 5 April 2015, will allow parents to choose whether they want to share the mother’s maternity leave.

There are expected to be as many as 285,000 working couples that will be eligible to share leave from April 2015.  The changes in how maternity leave can be used aim to kick start a culture change in workplaces where fathers feel more confident in taking time off for childcare.

The position on pensions is the same as for other periods of family leave.  While an employee is being paid:

• their employer will pay pension contributions as if the employee were earning their usual salary
• he or she will pay pension contributions on the basis of the salary they actually receive.

Schemes will need to update their rules to accommodate this change.  Please speak to your usual contact at Sackers, for assistance and further details.

Consultation on draft regulations containing technical changes to automatic enrolment

The DWP have published for consultation draft regulations to implement technical changes to automatic enrolment aimed at simplifying the process for automatic enrolment into workplace pensions and reduce burdens on employers.

The measures will:

• introduce an alternative quality requirement for DB pension schemes
• simplify the requirements on employers regarding the provision of information about automatic enrolment to their employees
• create exceptions to the employer duties so that an employer is not required to enrol an employee into a workplace pension in certain situations, for example for individuals with tax protected status.

HMRC publishes revised policies on VAT treatment of pension fund management costs and services

Following two CJEU cases, HMRC issued two Briefs revising its original position on VAT and pension schemes (please see our Alert for details).

On 25 November 2014, HMRC published:

• Brief 43 (2014): VAT on pension fund management costs which confirms when an employer may deduct the VAT that is charged on services provided in relation to pension schemes
• Brief 44 (2014): VAT treatment of pension fund management services which explains the circumstances where VAT is not chargeable on such services.

Costs

In the past, HMRC has allowed employers to recover VAT on invoices for general administration fees for work commissioned by and delivered to the trustees of UK occupational pension schemes under Notice 700/17.  By contrast, investment management fees were generally not recoverable except to the extent that these costs were included on a mixed invoice (containing administration and investment management fees).  Where a mixed invoice was delivered, HMRC “by way of simplification” allowed employers to recover 30% of the VAT as administration fees.  The remaining 70% was treated as referable to investment management costs and was not recoverable.

According to Brief 43, an employer may now recover input tax in relation to the management of its pension scheme if it:

• is the recipient of the supply
• is a party to the contract for those services, and
• has paid for them.

HMRC now accepts that there are no grounds to differentiate between the administration of a pension scheme and the management of its assets.  This means there is no longer a need for any administrative simplification to deal with supplies involving both elements.  In each case the employer will potentially be able to deduct input tax if it receives the supply of services.

A transitional period will operate until 31 December 2015.  Until the end of this period, where the pension scheme receives the services, the pension scheme and the employer may continue to agree to a 70/30 split on the terms set out in Notice 700/17.

VAT Treatment of management services

In the past, HMRC did not consider pension funds of any kind to be “special investment funds” (SIFs) and therefore treated services provided in connection with all types of pension fund as falling outside the VAT exemption for fund management services.

In light of a CJEU judgment, HMRC now accepts that pension funds that have all of the following characteristics are SIFs for the purposes of the fund management exemption.  This means the services of managing and administering those funds should be, and always should have been, exempt from VAT:

• they are solely funded (whether directly or indirectly) by persons to whom the retirement benefit is to be paid (ie the pension customers)
• the pension customers bear the investment risk
• the fund contains the pooled contributions of several pension customers
• the risk borne by the pension customers is spread over a range of securities.

Where investment management or administration services are supplied to a scheme that has a number of funds, some that possess the characteristics of a SIF and others that do not, to determine the correct VAT treatment of the services in question it will be necessary to apply the rules on single / multiple supplies outlined in HMRC guidance manual, Supply and consideration.

UK legislation will be amended in due course to implement the CJEU judgment.  In the meantime, taxpayers may rely directly on EU law to exempt pension fund management or administration services in accordance with the policy outlined in HMRC’s Brief.

HMRC is still considering whether the judgment could have wider application and guidance will be issued if there are to be any further changes.  In the meantime, the exemption should be applied in line with HMRC’s current published policy.

Businesses that have accounted for VAT on pension fund management services which now qualify for exemption may claim a refund.  Claims will not be considered for periods ending more than 4 years before the date on which the claim is made.

We will publishing an Alert shortly. If you need any help or advice on this issue, please speak to your usual Sackers contact.

Institute and Faculty of Actuaries publishes survey in relation to updated UK Corporate Governance Code

The Institute and Faculty of Actuaries (IFoA) has conducted a survey of UK Listed companies to gain an understanding of the impact of the updated UK Corporate Governance Code.

Following the publication in September 2014 of revisions to the UK Corporate Governance Code and to the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, the IFoA commissioned research to explore the industry’s response to the guidance to date.

Key findings include:

• The majority of stakeholders say that they understand the revised guidance well – three quarters say that they understand the revisions either “very” or “fairly” well.
• Most companies interviewed (63%) say that they have started work on assessing the impact of the revised guidance, although a very low proportion have completed this work. Nearly a quarter have not yet started to consider the potential impact of the revisions.
• Many stakeholders think that the revisions will have little or no impact on their business in terms of their organisation’s risk management approach (78% think this), their organisation’s year-end risk or audit committee reporting process (63%) and their organisation’s risk disclosures in annual reports and accounts (62%).
• The difficulty of quantifying long-term strategic risk is widely felt to be the toughest challenge that companies will face in implementing the guidance – this is selected by two thirds of respondents.

The research suggests that the majority of companies have made a start on assessing the impact of the UK Corporate Governance Code and associated Guidance. However, companies may be underestimating the challenges of meeting the new requirements.

Pension Schemes Bill 2014-2015 delegated powers

On 28 November 2014, the DWP published an updated memorandum which identifies the provisions for delegated legislation in the Pension Schemes Bill 2014 to 2015. It explains:

• the purpose of the delegated power proposed
• why the matter is to be dealt with in delegated legislation
• the nature and justification for the parliamentary procedures proposed

Delegated legislation is usually concerned with detailed changes to the law made under powers from an existing Act of Parliament.  It is also known as secondary legislation.  Delegated legislation allows the government to make changes to a law without a new Act of Parliament.

FRC activities related to SORPs

The Pensions Research Accountants Group (PRAG) has published a Statement of Recommended Practice (SORP) for its members to help them apply accounting standards and comply with other requirements specific to pension funds.  SORPs cover the recommended accounting practices for specialised sectors that do not follow UK GAAP in the same way as a for profit organisation.

FCA policy statement on retirement reforms and the guidance guarantee

In March 2014, the Chancellor announced changes to the choices that people in DC schemes will have at retirement (see our Alert for details).  To support this people will be entitled to free, impartial, guidance on the choices they face when deciding how to use their retirement savings (known as the “Guidance Guarantee”).

On 27 November 2014, the FCA published standards for the bodies responsible for delivering the Guidance Guarantee, together with rules requiring pension provider firms to direct their customers to the guidance service at retirement.  Following consultation, the FCA has strengthened the standards to ensure that they fully meet the aims and objectives of the policy – ensuring consumer confidence and the delivery of helpful guidance for consumers.

The FCA has outlined changes to the standards including: how complaints should be dealt with; how the outcome of the guidance guarantee session should be recorded; and how those delivering the guidance should work together to ensure that all those accessing the service get a consistent outcome.

In addition, it has outlined some detail on plans for monitoring and enforcing the standards, with further guidance to be issued early next year.  There will be a thorough review of the rules in the pension and retirement area in 2015.  This is intended to ensure that consumers have the adequate level of protection following the range of reforms being introduced in the market.

The FCA has also published its annual fees consultation paper.  The paper outlines how the FCA plans to levy fees for the Guidance Guarantee.  Following initial consultation, the paper includes a proposal that financial advisers will receive a 50% reduction on the new levy.

NAPF study of life expectancy trends in DB pension scheme members

The NAPF has published research analysing 2.5 million living pensioners and 1 million deaths in an attempt to change the way DB pension schemes forecast longevity, resulting in more informed liability calculations.

The research highlights that typical assumptions (based on changes in England & Wales population longevity) do not reflect the longevity trends experienced by DB pension scheme members and also shows the pace of longevity change varies between DB schemes and between different groups of DB pensioners.

PPI report on pension savers decision making at retirement

The PPI has published a report assessing the complexity of the decisions that pension savers face.  The report explores the range of potential decisions people have when approaching, at the point of, and during retirement, and how these are likely to change once the new flexibilities for savers with DC pensions are introduced in April 2015.

TPR publishes public sector scheme administration checklists

From April 2015, TPR will be responsible for setting standards of governance and administration in public sector pension schemes.

As part of its extended role, TPR has published a series of checklists to assist those administering such schemes in assessing the effectiveness of their procedures.  The checklists cover internal dispute resolution procedures, how effectively a scheme manages its contributions and evaluating the scheme’s internal controls.

The new public sector pension schemes will come into effect from 1 April 2015.

Bear Scotland Ltd & Others v Fulton & Others

The EAT has concluded that payments for overtime which employees are required to work, but the employer is not obliged to offer (“non-guaranteed overtime”), should form part of an employee’s “normal remuneration” and therefore be included in the calculation of holiday pay.

This decision could have repercussions for the calculation of pension benefits.  Please click here for further details.