The Finance Act 2004 (Registered Pension Schemes and Annual Allowance Charge) (Amendment) Order 20XX – Sackers response to consultation

Background

HMRC is consulting on draft legislation and related amendments to the Registered Pension Schemes Manual (RPSM), with a view to making a number of changes to the annual allowance legislation following the changes in the Finance Act 2011, to help ensure that the annual allowance rules work as intended.

A key element of this is to address an issue around the payment of transfer values between registered DB pension schemes in certain circumstances, and the possibility that this may result in a Pension Input Amount (PIA), which we understand was not the original policy intention.

In this response:

• General comments
• Relevant percentage (Art. 11)
• Block transfer conditions (Art. 15)
• Scheme pays (Art. 16)
• Late retirement uplifts and the deferred member carve-out
  

General comments

We welcome the draft Order, which seeks to make technical improvements to the pensions tax legislation (Finance 2004, as amended by the Finance Act 2011), to ensure that the legislation works as intended.

In our view, the draft Order broadly achieves this, subject to some possible adjustments, which we set out below.

Relevant percentage (Art. 11)

The draft regulations include a new definition, “relevant percentage”, which is intended to mirror changes introduced for the lifetime allowance in the Finance Act 2013.

Is it intended that the reference to “RPI-related rate” will include RPIJ?  We are aware of a number of schemes that have already started, or which are considering, using this measure for revaluing benefits.

Block transfer conditions (Art. 15)

Adjustments of closing value

The following comments relate to the proposed amendments to section 236, which relate to the amount to be added to the PIA in the transferring scheme and subtracted in the receiving scheme when there is a block transfer of sums or assets between the schemes.

While new section 236(4A)(a) defines the amount to be added to the closing value, sub-paragraph (b) of both Condition A (s.236(4A)) and Condition B (s.236(5A)) refer to the “value” of the benefit, rather than an amount.  As such, it is not clear how the value of the benefits is converted into an amount of pension to be added to (or deducted from) the closing value.

Sub-paragraphs (c) of both Condition A and condition B state that the amount of the reduction / increase should be “equal (or virtually equal)” [our emphasis].  In our view, the phrase “virtually equal” lends itself to a very narrow interpretation.  Given that the intention of this draft legislation is to clarify how the current legislation applies, with a view to facilitating block transfers, it would be helpful if the reference allowed more flexibility, for example by replacing “virtually equal” with the words “not materially different”.  In our view, this would fit the policy intention and give sufficient flexibility in terms of the adjustment, without leading to AA distortions.  We note that the proposed new RPSM page 06107095 states that “virtually equal” in effect means “not materially different”.  If this is the intention, then the legislation should say so.

More than one period of service

It is worth noting that the new provisions would not assist in all circumstances.  By way of example, under the definition of “block transfer” in (5C), such a transfer must relate to “all of the sums or assets” relating to an individual’s rights under “the arrangements under the pension scheme from which the transfer was made […]”.  [our emphasis]

A block transfer does not require all of a scheme’s assets to be transferred-out.  However, for any individuals who have more than one period of service within the same scheme it would not be possible, under the provisions as drafted, for rights relating to just one period of service to be transferred as part of a block transfer.  Whilst perhaps not a common occurrence, this is an issue we have encountered in practice in connection with business reorganisations where, for a small number of members, only rights relating to service with a departing employer have been transferred out as part of the bulk transfer, leaving behind rights relating to service with another group company that continues to participate in the scheme.

Scheme pays (Art. 16)

The provisions relating to scheme pays appear to be sensible.  However, we have one comment relating to members approaching retirement.

Depending on when the Order is made, there is a risk that individuals who incur an AA charge, relating to a PIP ending in the tax year after the one in which all their benefits crystallise, may lose the right to elect for scheme pays.  Has HMRC considered this?

Late retirement uplifts and the deferred member carve-out

There is a further issue, not addressed in the present consultation, but which could usefully be reviewed whilst related changes are being made.  This is the question of late retirement uplifts in the context of the deferred member carve-out.

The occupational pensions (DWP) legislation on preservation requires trustees to be “reasonably satisfied” that, when a deferred member with “short service benefit” takes his or her pension at an age which is later than the age from which short service benefit is payable (usually “normal pension age”), the total value of the pension is at least equal in value to what would have been paid at the age from which it is payable.

HMRC guidance in the RPSM states that “the carve-out for deferred members can be read to encompass the late retirement actuarial enhancements […] provided that the scheme rules on late retirement uplift have not changed so as to provide a greater uplift since 14 October 2010 and that the enhancement factor applied can be expressed as a percentage.”  The guidance here is helpful.

However, we are aware from a number of clients that the treatment of late retirement uplifts can be problematic in terms of the annual allowance legislation, and that the HMRC guidance does not assist in all circumstances.

For example, we are coming across a number of schemes that have not implemented the requirements of the preservation legislation properly, and which have not applied late retirement uplifts when they ought to have done.  As such, their rules will not have reflected the correct requirements of the preservation legislation as at 14 October 2010.  It would appear that, if they correct their rules now, any late retirement uplifts would count towards the member’s annual allowance, whereas they would not have done had the rules been correct from the outset.  This does not seem very satisfactory.

We note that proposed new RPSM page 06107215 includes a note which flags that late retirement increases under Chapter 1 of Part 4 of PSA 1993 are not “relevant statutory increases” for the purposes of amendments being made by the Order.  The reason given is “because schemes must first provide for late retirement uplifts before the legislation can apply, so the increases do not occur solely as a result of the statutory provisions”.  We do not understand this statement.  Regulation 11 of the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991 requires that when a late retirement pension is paid as an alternative to short service benefit, then it must be equal in value to short service benefit.  This requires schemes to provide for late retirement uplifts where deferred members who left before their normal pension age postpone taking their pension.  The legislation is not overriding, but schemes are required to amend their rules to comply with it.

In addition, the distinction as to when late retirement uplifts can be ignored and when they must count for annual allowance purposes can appear arbitrary.

In our view, it would be helpful to have a wider exemption for late retirement uplifts which aim only to maintain actuarial value.  We do not see why, from a policy perspective, these should count for the purposes of the annual allowance, in particular where they are required for the purposes of complying with preservation (but also more widely).