Pensions update

Publication | December 2011


This month, our update includes reports on:

  • the pensions implications of the Chancellor’s Autumn Statement which may impact on employer asset-backed contribution arrangements already in place;
  • the final version of the Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2011; and
  • the Government’s decision to allow extra time for small businesses to comply with auto-enrolment and the Pension Protection Fund’s final levy determination for 2012/13.


Pensions implications of the Autumn Statement

On 29 November 2011, the Chancellor made his Autumn Statement on the economy, in which there were three principal measures of interest relating to pensions:

  • State pension age. The increase of the State pension age to 67 will be brought forward to take effect between April 2026 and April 2028. Further changes to State pension age will be kept under review in the light of future demographic evidence.
  • Pension funds to increase infrastructure investment. The Government has signed a memorandum of understanding with the National Association of Pension Funds, the Pension Protection Fund (PPF) and a separate group representing pension plans and infrastructure, worth up to £20 billion. This will include a new investment platform to be wholly owned by pension funds.
  • Employer asset-backed pension contributions. Draft legislation for the Finance Bill 2012 was on 6 December 2011. One of the provisions is to have immediate effect and will change the tax rules for giving relief for employer asset-backed pension contributions.  In particular, groups that currently have such arrangements in place should note that the rules introduced on 29 November 2011 may have a retrospective effect and could have an impact on existing arrangements.

The publication of this draft legislation follows the Government’s announcement in the 2011 Budget to consult on such arrangements.  There have been a number of recent prominent examples of companies adopting such structures which have been popular as they allow companies to use group assets (which generate income intra-group) to address deficits in their defined benefit pension schemes. Under a typical structure, such assets are first transferred to a partnership, and then a contribution is made to the defined benefit scheme that is satisfied by providing the pension fund trustees with a partnership interest entitling them to a fixed amount of income over a certain period of time. There have been a number of high profile examples of companies adopting this structure, particularly in the retail sector where Marks & Spencer, Sainsbury and John Lewis have used intra-group properties to achieve this.

The tax analysis can be an important factor when considering the benefits of such a structure; in particular, employer companies will seek a corporation tax deduction for the upfront value of the contribution made to the defined benefit scheme, which may provide timing benefits for the group. In addition, tax relief may be sought for the subsequent income payments made to the partnership.  The Government’s view is that such income payments should be treated as discharging a financial liability, with the effect that any tax relief should be restricted to the finance charge element of any such payments.  Existing tax legislation - the structured finance arrangement rules in the Corporation Tax Act 2010 and the Income Tax Act 2007- permits this tax analysis.  However, the draft legislation published on 6 December provides that, if an asset-backed pension contribution arrangement does not fall within the structured finance arrangement rules, tax relief for the upfront contribution may be denied.

Companies that have undertaken, or are considering, any such schemes should obtain advice on the application of the draft legislation.

View the draft legislation, explanatory note and impact note on HMRC’s website.

Auto-enrolment delay - small businesses to be given extra time to comply

On 28 November 2011, Pensions Minister Steve Webb confirmed that although auto-enrolment for employees of large employers into a qualifying scheme would begin as scheduled in October 2012, small businesses will be given extra time to comply with the new regime. For these purposes, a small business is one which employs fewer than 50 people. The rate of pensions contributions is to remain unchanged at 1 per cent until all businesses have commenced auto-enrolment.

Under the revised staging date timetable, small businesses would begin auto-enrolling staff to a qualifying pension scheme in May 2015, instead of the earlier time of April 2014. The Pensions Regulator (TPR) has confirmed that it will update its guidance on staging and the phasing of contributions as soon as the Government publishes the revised staging schedule.

View the DWP statement.

Employer debt - amending regulations laid

In our June 2011 update, we noted that the Department for Work and Pensions (DWP) had published in draft form the Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2011 (the Amending Regulations) for consultation introducing a new “flexible apportionment arrangement” (FAA).

Following a consultation exercise, to which Norton Rose LLP responded, it was understood that the Amending Regulations were likely to come into force in December 2011. However, the final Amending Regulations were laid before Parliament on 15 December 2011, and they will come into force on 27 January 2012.

The Amending Regulations make the following key changes to the existing employer debt regime:

  • Introduction of a new FAA as an additional method of dealing with an employer debt. Part-payments of an employer debt will be permitted under a FAA, which will be a notifiable event and will require the consent of the scheme’s trustees.
  • Where an employer stops employing active members, the “period of grace” following the employment-cessation event when the employer must employ at least one active member to avoid triggering the debt, is increased from 12 to 24 months.
  • The notification period, during which the employer must inform the trustees that it no longer employs active members, is increased from one month to two months.

TPR intends to update its related guidance, “Multi-employer schemes and employer departures” to include material on the new FAA.

View the Amending Regulations.

View the Government’s response to the consultation.

DWP publishes consultation on auto-enrolment earnings thresholds

The DWP has published a consultation seeking views on the auto-enrolment earnings thresholds for 2012/13. The consultation paper outlines the DWP’s proposed approach for the first annual review of the auto-enrolment earnings trigger and the lower and upper limits of the qualifying earnings band. The independent Making Automatic Enrolment Work review (MAEW) considered this question in detail in 2010 and proposed that the trigger should be set at £7,475. The DWP has revisited these findings in developing the proposals to update the trigger for next year and the start of auto-enrolment.

The consultation period closes on 26 January 2012.

View the consultation paper.

DWP publishes consultation paper on dealing with small pension pots

The DWP has also published a consultation paper entitled “Meeting future workplace pension challenges: improving transfers and dealing with small pension pots”. In the light of the introduction of the new auto-enrolment regime from October 2012, the DWP has published this consultation as it feels the case for reform in this area is clear. In a statement published on 15 December 2011, Pensions Minister Steve Webb commented that as a result of frequent moves from job to job, people risk losing small pension pots. The Government’s aim is to simplify the current system which makes the transfer of pensions costly, complex and time consuming.

The consultation period ends on 23 March 2012.

View the consultation paper.

Treasury launches consultation on gender-based insurance risk factors

In our Stop Press of 1 March 2011, we reported that the Court of Justice of the European Union (ECJ) had handed down its much anticipated judgment in Association Belge des Consommateurs Test-Achats ASBL and others case (Case C-236/09). The Court chose to follow the Opinion of Advocate General Kokott and ruled that gender-based pricing in insurance contracts is unlawful. The ruling is expected to have a fundamental impact on the insurance industry in the EU, including the cost of purchasing pension annuities, where differential pricing between men and women based on actuarial factors has been widespread.

The ECJ allowed a transitional period so that gender based pricing will be invalid in relation to new contracts from 21 December 2012.

The Government has now issued a consultation on how gender may be used as a risk factor in insurance pricing in the light of the ECJ’s judgment and has issued draft regulations. The paper also seeks information to help it better understand the impact of the new requirements on both consumers and insurers.

The consultation period runs until 1 March 2012.

View the consultation paper (pdf 491.54 kb).

HMRC publishes revised annual allowance guidance

Under the new annual allowance (AA) regime, where an individual’s pension savings exceed the AA in a particular tax year, unused AA amounts from up to three previous tax years are carried forward and off-set against the excess. HM Revenue & Customs (HMRC) has announced a planned update to its online guidance following a review of its interpretation of the application of the carry forward rules in relation to the AA for the transitional years 2008/09, 2009/10 and 2010/11.

The revised text can be viewed on HMRC’s website here.

HMRC updates VAT guidance for funded pension schemes

HMRC has updated its guidance relating to the reclamation of VAT by employers and trustees of funded pension schemes. The previous version of the guidance, published in March 2002, has been restructured to make it more user-friendly and to update its technical content. The main focus of the note remains the distinction between management and investment activities. Generally, employers can claim input tax for certain management activities, but cannot claim for investment activities. The guidance contains a useful summary table of HMRC’s views on how various common activities should be attributed for VAT purposes.

Unfortunately, the guidance does not refer to the Wheels Common Investment Fund case, in which the claimants contend that European law supports their claim that pension fund trustees can recover VAT on investment management fees. In our September 2011 update, we reported that the First-tier tribunal had published details of the issues referred to the ECJ, although we are not yet aware of any hearing date having been set.

HMRC publishes Countdown Bulletin No. 5

HMRC has published the fifth issue of its “countdown Bulletin” on the abolition of contracting-out on a defined contribution basis. This edition looks at how late payments and recoveries will be made after 5 April 2015 and also addresses questions from providers of contracted-out mixed benefits schemes.

View the Bulletin.

PPF publishes draft contingent assets guidance and final 2012/13 Levy Determination

On 24 November 2011, the PPF published draft guidance in relation to contingent assets following stakeholder responses to the consultation on the 2012/13 levy determination.

Pension schemes using a group company guarantee to reduce their risk-based levy will need to be able to certify that they know of no reason why the guarantor could not meet its full commitment under the contingent asset agreement. The new requirement has been introduced by the PPF following consultation, due to its concerns that group companies which have a strong insolvency risk rating, but low net worth, were giving guarantees that would have been unlikely to have been met, if called upon. Trustees now need to provide this certification, including carrying out their own research on the guarantor. Similar checks will also be carried out by the PPF. However, the new certification is less onerous than that set out in the draft contingent asset appendix issued on 21 September 2011 (and highlighted in our October 2011 update) which required a positive confirmation that the commitment could be met.

In addition, the current definition of “associate” for the purposes of being a guarantor will be extended to allow any entity that satisfies the PPF of a sufficiently strong connection to a scheme employer to provide a contingent asset guarantee even though it is not an “associate” within the scope of section 435 of the Insolvency Act 1986.

The final version of the guidance is due to be issued later this month.

On 13 December, the PPF published the final 2012/12 levy determination, confirming the levy estimate of £500 million, the lowest to date. The year 2012/13 is also the first year of a new levy framework which is aimed at making the levy more predictable and stable. It is intended that the rules governing the new framework will be set for the next three years.

View the draft guidance.

View the final determination.

TPR publishes six principles for good workplace DC

On 6 December 2011, TPR published its six high-level principles for good design and governance of workplace defined contribution (DC) pension provision, which will form the basis of its regulatory approach going forward. This is the next step in TPR’s ongoing engagement with the pensions sector to improve standards of DC provision and ensure that the pensions sector is ready to support automatic enrolment.

The six principles span the lifecycle of a DC scheme from the design and set-up phases through to the ongoing management - including monitoring of scheme governance, accountability, scheme administration, and communications with members and are as follows:

Principle 1 - Schemes are designed to be durable, fair and deliver good outcomes for members

This principle covers the features necessary in a scheme to deliver good outcomes for members, including features such as the provision of a suitable default fund, transparent costs and charges, protected assets and sufficient protection for members against loss of their savings.

Principle 2 - A comprehensive scheme governance framework is established at set-up, with clear accountabilities and responsibilities agreed and made transparent.

This includes identifying key activities which need to be carried out, and ensuring each of the activities has an ‘owner’ who has the necessary resources to carry out the activity.

Principle 3 – Those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out.

This principle ensures that those who are given accountability or responsibility for a key governance task are able to carry this out. The principle will cover definitions of fitness and propriety for accountable parties and also conflicts of interest that may arise.

Principle 4 - Schemes benefit from effective governance and monitoring through their full lifecycle.

This principle looks at the ongoing governance and running of the scheme, including the internal controls and monitoring needed to ensure that the scheme continues to meet its objectives, and continues to be run with the best interests of its membership in mind.

Principle 5 - Schemes are well-administered with timely, accurate and comprehensive processes and records.

This principle is based on TPR’s previous work on record-keeping, looking specifically at the administration processes required in a DC scheme.

Principle 6 - Communication to members is designed and delivered to ensure members are able to make informed decisions about their retirement savings.

This includes all communications to members during their time with the scheme – from joining through to making decisions about converting their pension pot into a retirement income, including promotion of the Open Market Option.

Principles 1 to 3 are all relevant at scheme set up and therefore are most relevant to product and service providers and those advising employers on scheme selection. Principles 4 to 6 cover those activities which are likely to remain relevant through the life of a scheme and therefore could involve all parties included in scheme provision, including providers, administrators, trustees, employers and even members.

TPR believes that if schemes follow these principles in their design, set-up and ongoing operations it will help them to deliver the six elements necessary for members to receive good outcomes, which have been previously identified:

  • appropriate decisions with regards to pension contributions;
  • appropriate investment decisions;
  • efficient and effective administration of DC schemes;
  • protection of scheme assets;
  • value for money; and
  • appropriate decisions on converting pension savings into a retirement income.

View the full press release.


The Occupational Pensions (Revaluation) Order 2011

Revaluation rates for deferred pensions (excluding GMPs) in salary-related occupational pension schemes are set annually by the Government for the period since 1 January 1986 when revaluation became mandatory. The most recent order is that for 2011, which applies for the 12 months commencing 1 January 2012.

The one year Order for revaluations subject to a 5 per cent cap is 5.0 per cent, while the one year Order for revaluations subject to a 2.5 per cent cap is 2.5 per cent.

The Order also forms the basis for the Limited Price Indexation (LPI) increase for pensions in payment. The 5 per cent LPI increase will be 5.0 per cent and the 2.5 per cent LPI increase will be 2.5 per cent.

View the Order.

View the explanatory memorandum.


Nortel and Lehman Brothers - leave granted for appeal to the Supreme Court

In our October 2011 update, we reported that the Court of Appeal had upheld the earlier High Court decision in favour of TPR, ruling that the obligation imposed by a financial support direction (FSD) has a “super-priority” status, as does a subsequent contribution notice issued for non-compliance with the FSD.

It has now been confirmed that the administrators’ applications for leave to appeal to the Supreme Court have been granted, with the deadline for lodging the appeals being 14 December 2011.

Advocate General opinion on exclusion of fee-paid part time judges from the Part-Time Workers Regulations - O'Brien v Ministry of Justice (2010)  

The Advocate General has delivered her opinion on questions referred to the ECJ by the Supreme Court in relation to the exclusion of part-time fee-paid judges from protection under the Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000 (the PTW Regulations).

Mr O'Brien was a part-time fee-paid recorder until his retirement in March 2005. Part-time judges are paid pro rata to full-time judges and are entitled to all the same benefits such as maternity pay and sick pay. However, although full-time judges and salaried part-time judges are entitled to pensions on retirement under the Judicial Pensions Scheme, fee-paid part-time judges are not. Mr O'Brien complained to an employment tribunal that his exclusion from pensions entitlement was discriminatory on the basis of his part-time status.

The PTW Regulations only apply to workers and, under regulation 17, “do not apply to any individual in his capacity as the holder of a judicial office if he is remunerated on a daily fee-paid basis”. In the Advocate General's view, while there is no single concept of “worker” under EU law, a national law cannot arbitrarily exclude a certain category of individuals from the protection offered to those in an “employment relationship” by the Part-Time Workers Directive and the underlying Framework Agreement on part-time work. Assuming that part-time judges fall within the scope of the Directive, a national law which discriminates between full-time and part-time judges, or between different kinds of part-time judges in the provision of pensions, is discriminatory unless it can be objectively justified.

If a member state does seek to exclude a certain category of persons from the protection of the Part-Time Workers Directive and the Framework Agreement, it would have to establish that the nature of the relationship of those who are excluded by national law is “substantially different” from those who are not excluded.

Although the Part-Time Workers Directive and the Framework Agreement only concern the elimination of discrimination against part-time workers in comparison with full-time workers, member states cannot introduce arbitrary distinctions between various types of part-time work (in this case, salaried and fee-paid part-time workers) that infringe the general prohibition on discrimination under EU law.

The crucial factor in determining whether part-time fee-paid judges and full-time judges are comparable is whether they perform the same activity. The UK government's argument that they are not comparable because they have “different careers” is irrelevant. However, it will be for the Supreme Court to determine definitively whether they are comparable.

If the ECJ agrees with the Advocate General that the Framework Agreement and the Directive preclude discrimination between fee-paid part-time judges and other judges without objective justification, the Supreme Court will have to determine whether judges as a category are within the scope of the PTW Regulations and, if so, whether regulation 17 of the PTW Regulations can be objectively justified or must be set aside. Its decision could mean that about 6,000 part-time fee-paid judges receive retrospective entitlement to judicial pensions.

View the Advocate General’s Opinion.

High Court decision on public-sector CPI switch challenge - Police Negotiating Board v Secretary of State for Work and Pensions [2011]

On 25 October 2011, a three-day judicial review began in the High Court of the Government's decision to switch from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) as the measure for increasing public sector pensions. The claimants were Prospect, the FDA, GMB, the Police Federation, the National Association of Retired Police Officers and the Civil Service Pensioners' Alliance.

The application was based on legal advice that the shift to CPI is beyond the Secretary of State's authority under the Social Security Administration Act 1992. Lawyers representing the organisations and trade unions argued that the legislation requires the Government to measure changes in the general level of prices rather than consumer behaviour in response to such changes, which is the measure adopted under CPI. In addition, union lawyers claimed that they paid for added years on the understanding they would be increased using RPI and that the Government's stated intention of lowering the national debt through the switch is “a purpose contrary to the policy and objects of the 1992 Act”.

The decision for the High Court was not whether the move to CPI was appropriate, but whether it was lawful. Whilst the judicial review relates to increases to benefits under public sector pension schemes, it was hoped that the decision could provide some useful guidance for the approach taken by schemes in the private sector.


The High Court’s decision was handed down on Friday 2 December. The Court held that The Government’s decision to switch pension indexation from RPI to CPI is lawful. While this decision relates specifically to how pensions are calculated for public sector workers, it will also reassure employers and trustees of private sector schemes who have also changed the basis of their indexation calculations. However, it is thought likely that the unions will appeal the decision.

View the judgment.

On 30 November 2011, the Office for Budget Responsibility (OBR) published its second Working Paper, entitled “The long-run difference between RPI and CPI inflation”. The paper examines the differences in RPI and CPI inflation and looks at the prospects for the evolution of the wedge (disparity) between the two measures over the long term.

The RPI and the CPI are both designed to measure price inflation, but do so in different ways, as they each consider a different range of goods and services. In particular, the RPI includes the costs of house ownership, and tends to lead to a higher inflation measure than the CPI over the long term. The two methods of calculation also use different mathematical averaging methods and different weightings in the data employed.

The OBR’s paper suggests that the disparity between the RPI and CPI inflation measures may be even greater in future than historically has been the case, and could be as high as 1.5 per cent. This means that members who continue to receive pension benefits increased annually by a RPI-linked figure could be significantly better off in coming years.

View the Working Paper.

Deputy Pensions Ombudsman case - Foster: scheme administration: member with maximum accrued service should not have continued to contribute

The Deputy Pensions Ombudsman (DPO) upheld a complaint by a member of the NHS Pension Scheme who continued making contributions after reaching her normal retirement age of 65 in 2007, having completed 45 years’ pensionable service. Despite a provision in the scheme’s rules that a member could accrue no further pensionable service in such circumstances, the scheme administrator wrongly informed Miss Foster (F) that continuing contributions after age 65 would improve her retirement benefits. This was maladministration in reliance on which the member had changed her position and had continued to work full-time.

F complained that based on the administrator, NHS Pensions’, incorrect information, she had decided to carry on working full-time past age 65 in the false expectation of increased benefits. If she had not been misinformed, she would probably have decided to draw her pension and work part-time with more leisure time and the benefit of a similar level of income overall. She also submitted that she had incurred the additional costs of renting a flat closer to work, and for the last year before retirement had endured a three-hour round trip to and from work. F also claimed that, instead of refunding her last three years of contributions, NHS Pensions should refund her first three years and treat her pensionable service as ending on her retirement date, producing an improved pension.

NHS Pensions accepted that it had incorrectly informed F that she could carry on in the scheme. They initially offered her £250 in compensation for any distress and inconvenience. This offer was increased to £3,000 during the course of the complaint.

The DPO determined that F’s “loss of expectation” related to the difference between the benefits she actually received and those she would have had if she had been a valid active member until her retirement. This amounted to £1,446.43 more per year in pension and £4,449.30 in lump sum benefits. Her financial loss, the DPO said, was harder to determine as the sum of any part-time job and her pension was unknown. However, the DPO did consider it reasonable to take into account F’s rental, driving and other incidental costs after age 65, although she did not accept that F could receive back her first three years’ of contributions instead of her final three, as the scheme rules precluded contributory membership after age 65.

The DPO also accepted that F experienced a “significant” and “high” level of distress and inconvenience as a result of NHS Pensions’ maladministration, and that F could never buy back her missed leisure time. NHS Pensions was directed to pay F a total of £4,000 in compensation, as the DPO considered the £3,000 already offered was “inadequate”.


It is not clear from the determination how the DPO reached the figure of £4,000 as total compensation for both F’s financial loss and her distress and inconvenience. As the DPO accepted that F had changed her retirement plans in reliance on NHS Pensions’ misleading information, it is puzzling why the compensation should not be sufficient to cover F’s entire reliance loss. The lack of clarity in relation to this calculation is of concern, as it may encourage an appeal to the High Court.

View the determination.


To view update as a pdf



Peter Ford

Peter Ford