Update: pensions

In a previous article ('Feathering the nest', Solicitors Journal 20 January 2009) we looked at Personal Accounts. In summary, Personal Accounts are the government's way of introducing a form of compulsory pension provision for employees (or more accurately, jobholders) from 2012. Since then, there have been some further developments.

More detail emerges

First, some further clues have emerged as to how Personal Accounts will be introduced. These came from the Personal Accounts Delivery Authority '“ the body charged with implementing the Personal Accounts regime. Although it was always suggested that Personal Accounts were to go live in 2012, previously there was little indication of when in 2012 that would be. It now appears that this may be October 2012.

The phasing in of Personal Accounts still appears to be the favoured approach, with suggestions that larger (presumably by number of employees) employers will be the first to be required to implement automatic enrolment, with the aim that over the following year or so all employers will be automatically enrolling their employees either into the Personal Accounts Scheme or an alternative scheme that meets a specified quality test by 2013 or 2014.

Though it remains to be seen how any phasing in will be achieved, it will be remembered that the earlier employer consultation requirement were themselves phased in by reference to number of employees. It is possible that might give a clue as to how the automatic enrolment regime might be implemented.

This phasing in of automatic enrolment may be separate from the phasing in of the rate of required contributions. Depending on how the phasing in of automatic enrolment and the phasing in of contributions are dovetailed, it is possible that it will be beyond 2014 before the smallest employers will be contributing at the highest rate for its employees who have been automatically enrolled. There is also the potential issue of implementing such an arrangement, with its additional financial effects on employers, when the economic outlook is far from certain.

The detail

More recently, draft regulations have been issued for consultation by the Department for Work & Pensions setting out some of the proposed detail, and specifically the proposals for automatic enrolment. The consultation period ends on 3 June 2009.

The draft regulations cover or expand on a number of points, including the triggers for automatic enrolment, the process by which the employees are given information about their automatic enrolment, and scope for an employer to postpone automatic enrolment for up to 90 days.

To be able to postpone, the employer's scheme will have to meet a qualifying standard which, for most employers who will offer a money purchase arrangement, will require a total contribution of 11 per cent, with six per cent of that being payable by the employer. This is a significantly higher rate than would apply if there were no postponement period and the employer was to adopt the standard automatic enrolment arrangements.

The higher rate is quite deliberate on the part of the government. Put another way, it appears that there is a high price to pay in terms of higher employer contributions for any employer that wants to have the scope for postponement of membership. This could well be subject to strong comment during the consultation period.

Postponement might be useful to employers with a high rate of staff turnover and also as a way of dealing with short-term agency staff. This flexibility to postpone applies only where the employer offers its own pension arrangement, not where the employer is using the Personal Accounts Scheme.

Provision is made for the time limits within which employees must be told of the automatic enrolment arrangements that have been made for them and to deal with information for employees who are already in a suitable qualifying scheme (which seems to add an unnecessary administrative burden to employers).

Finally, some detail is provided regarding opting out by employees. This cannot occur until the member has actually been admitted to a pension arrangement. The current proposal is that there should be a 30-day window for opt out, although the actual total length of the process from being automatically enrolled to opting out can actually be up to 44 days.

The administrative requirements for opt out seem unnecessarily complex; for example, there are strict requirements about the form of opt out which cannot simply be a notice or letter from the employee. There are then specific requirements for dealing with any refunds as a result of opt out.

Considering that the consultation document, the draft regulations and associated documents runs to nearly 60 pages, the government's stated aim 'to establish the minimum level of effective regulation which secures government policy objectives without over specifying process steps, which might place unnecessary burdens on employers or the pensions industry', seems to have missed the mark.

It is expected that there will be a number of further consultation exercises/draft regulations this year, and that still leaves at least two years before implementation. That allows plenty of time for yet further complexity to be added to the Personal Accounts concept, which should have been far more straightforward.

A reminder to consult

The Pensions Regulator recently issued a timely reminder to employers about the need to consult where an employer is considering making changes that will affect future pension benefits. This requirement affects employers providing pensions by way of personal pension schemes as well as through occupational pension schemes. It applies to employers with 50 or more employees, although the government's view and an employer's general duty to his employees suggest that consultation should be carried out even if there are fewer than 50 employees.

In summary, if an employer proposes to make a 'listed change' (for example, reducing the rate of employer contributions) the affected employees must be consulted. Even if the proposal does not involve one of the listed changes, there is still a strong argument in favour (encouraged by the government) of consultation.

It is important to remember that the consultation must be meaningful, and so care must be taken that the decision to make a change is not taken prior to conclusion of consultation. The minimum consultation period is 60 days.

Personal liability of trustees

Although based on very specific (and thankfully, rare) facts, the Pensions Ombudsman did more (metaphorically) than just bare his teeth recently '“ he positively buried them deeply into some trustees.

In a recent decision (Adams & Others, the ES Group Pension Scheme and Bridge & Others 11 March 2009) the Pensions Ombudsman determined that the failure to carry out serious fiduciary responsibilities to others was such that they would be held personally liable for losses. The decision is a particularly lengthy one for the Pensions Ombudsman and runs to some 70 pages. The amounts that the Pensions Ombudsman directed should be paid by the trustees were substantial.

Although the Pensions Ombudsman was at pains to point out that he did not make the directions for payment lightly, it is still a warning to trustees to exercise their duties with the utmost care and diligence if they are to avoid a similar fate.

Qualifying Recognised Overseas Pension Scheme

An earlier article ('You can take it with you', Solicitors Journal, 3 March 2009) provided an overview of Qualifying Recognised Overseas Pension Schemes (QROPS). It mentioned that steps had been taken by some offshore pensions jurisdictions (in conjunction with HMRC) to ensure that QROPS established in those jurisdictions comply with the spirit, as well as the letter, of HMRC's QROPS regime. Guernsey was one such jurisdiction, but others too have moved to achieve a similar outcome.

The aim of the additional measures was to prevent any misuse; in particular that achieved by QROPS receiving a transfer (quite legitimately) from a UK Registered Pension Scheme, but then allowing an onward transfer of those monies received to a scheme in another jurisdiction where typically such a scheme would allow all or a substantial part of the funds to be withdrawn in cash.

In more general terms, the view of HMRC is that generous tax reliefs are given for pension savings on the understanding that the emerging funds are used for the intended purpose, namely, the provision of pension for that individual in retirement.

The measures achieve that aim. Depending on the jurisdiction involved and precisely how they have adopted the more restrictive measures to satisfy HMRC, technically it may be possible to draw a distinction between QROPS approved after the date on which the relevant jurisdiction adopted the restrictive measures (or new members admitted to an existing QROPS after that date); in practice, the responsible and established QROPS providers will always have sought to distance themselves from the few providers promoting QROPS as a means of cash extraction.

Although QROPS will perhaps have been only a limited consideration, it is interesting to ponder what part the recent eagerness by offshore jurisdictions to achieve 'White List' status had to play.

Despite these changes, QROPS still have a potentially significant and valuable part to play in financial planning for those living or moving abroad. Due diligence will still be paramount if acting for a client who wishes to transfer benefits from a UK Registered Pension Scheme to a QROPS.

On a separate note, the five tax year test for QROPS (after which the member payment charges under the Finance Act 2004 no longer apply) previously used the IR20 basis for determining whether the member had, in effect, been absent from the UK for that period. The IR20 basis has now made way for the new HMRC6 basis.